Investment performance for a security negatively impacted by dividends/capital gains

Jonathan

I noticed that my security performance report (quicken out of the box) is negatively impacted by dividends and lt/st paid in cash. The day before the distributions where made, my security report showed 9.07% average annual return. The day after the cash distributions, the report showed 5.52% average annual return. I recorded these transactions as CGSHORT, CGLONG, and DIV. How can i record a cash transaction to avoid this incorrect report?

Jim_Harman

@Jonathan

As I implied in my post above, try subtotaling the report differently. If you have selected just the one security, try including "No security (includes cash)" in the security selection. Click on Show Detail to see what transactions are included in the calculations.

Also if the distribution was yesterday, remember the market was way down, so that will affect the reported results compared to the day before.

To avoid confusion, let's focus on one measure at a time. "Return". "Return (%)", "ROI (%)", and "Avg. Annual return (%)" are all computed differently.

Jonathan

Hi, thanks for the information. I did the show detail, and the numbers work out. So i was incorrect in my assumptions regarding the report calculations being in error.

NotACPA

Am I correct that you're talking about Mutual Funds? The way that the accounting for a MF works is that ANY distribution (CG long or short, or any Div) reduces the quote/price of the fund.

That's because before the distribution, the fund held the underlying securities and cash … and after the distribution the fund holds securities and less cash. So, the report is actually correct.

If you want to see it differently, include the cash that you received to determine the ending value of the overall investment(s).

Tom Young

I'm not sure that it is incorrect, though it may be.

The report's calculations rest on 3 things: the balance at the beginning of the period, cash flows in and out during the period, and the balance at the end of the period. So there's distinct differences between the report generated on the "day before" and the report generated on the "day after": cash flows, time period, and ending balance.

Typically a security's price declines with a cash distribution - dividend or capital gains - as the security is "less valuable" having distributed the cash. And other factors play into a security's price after the distribution which can accentuate or ameliorate the expected decline. The report takes all this into account when making its calculations, and the calculations are pretty simple math.

That said, Internal Rate of Return calculations can be misleading with irregular cash flows and changes in the sign of the cash flows, so it's not "perfectly" reliable, and you do have to understand its limitations.

Jim_Harman

This is the Investment Performance Report, right?

How is the report subtotaled? If it is subtotaled by Security, Quicken is ignoring the cash from the distributions. You can see the numbers that go into the IRR calculation if you click on Show detail. This is a bug in the report, see this discussion

https://community.quicken.com/discussion/7957836/investment-performance-report-overall-total-erroneous-calculations

Jonathan

Hi thanks for your response. The fund is Yacktman and it is a mutual fund. Yes, i realize the price goes down after distributions, however, i am still receiving value from the fund that is not reflected in the quicken standard investment performance reports. The "Return 1-Year" column reports $12,744 just before the distributions and $7000 after the distribution. That is certainly misleading - "Returns" should report cash distributions.

If the distributions where reinvested, then the investment report (average annual return) would reflect that value. This appears to be a limitations of Quicken. For example, performance reports from Yacktman, Morningstar reflects the performance the security.

Jonathan

Question for NotACPA, you mentioned: "If you want to see it differently, include the cash that you received to determine the ending value of the overall investment(s)" I am not sure how best to do that… Unless, i need to perform the calculations myself based on an Investment transaction report.

Jim_Harman

@Jonathan

As I implied in my post above, try subtotaling the report differently. If you have selected just the one security, try including "No security (includes cash)" in the security selection. Click on Show Detail to see what transactions are included in the calculations.

Also if the distribution was yesterday, remember the market was way down, so that will affect the reported results compared to the day before.

To avoid confusion, let's focus on one measure at a time. "Return". "Return (%)", "ROI (%)", and "Avg. Annual return (%)" are all computed differently.

Boatnmaniac

Are the time periods being used by Morningstar and in the Quicken report identical? Quicken will report annualized returns and if the holding period in Quicken is less than a year it will extrapolate the actual performance for that actual holding period out to 12 months which can be inaccurate. The shorter the holding period in Quicken the more inaccurate the returns information in Quicken.

Also, if there were changes made to the holdings in Quicken from buys, sells, add shares and remove shares during the reporting period, this can easily result in returns differences between Quicken and Morningstar.

Instead of using Morningstar for comparison, it might be better to see what the brokerage is reporting for performance since that will provide the best correlation of data with Quicken. I have found that, unless my holdings in Quicken are for very short time periods, the returns in Quicken and the returns in my online brokerage account often do not exactly match each other but they are pretty close to each other.

Jonathan

Hi, thanks for the information. I did the show detail, and the numbers work out. So i was incorrect in my assumptions regarding the report calculations being in error.

Jim_Harman

Thanks for confirming. Note that Quicken's calculations for Avg. Annual Return should match the XIRR function in Excel