Question about difference b/w Vanguard's Global All Cap Acc. and Income funds

[smurf50]

If I look at the performance of these two funds, although the Acc. version is a few pounds more expensive per unit, the performance is identical as far as I can see.

If the Acc. version is constantly reinvesting dividends, and the Income version isn't, wouldn't we expect to see a gradual divergence of the value: the Acc. fund chart trending more upwards over time compared to the Income chart? The bar chart view of growth/loss is almost identical - a .1% delta in just one of the years.

I think I must be looking at it wrongly as I can't see any benefit of the Acc. fund - why not take the dividend income then and reinvest it manually and actually buy more units?

Help understanding this basic question appreciated!

 

[smurf50]

Thanks all for your detailed responses. So although the charts look like equal growth, the price of the Acc. Units has gradually increased relative to the income units. That makes sense although i don’t see that difference in relative growth in the performance charts. So is it possible to judge if one is ‘better’ overall that the other (assuming dividend income was reinvested)?

 

[sand12341112]

@smurf50 The income fund pays the dividends as cash into your Vanguard account whereas the accumulation fund reinvests them into the fund for you. This doesn't impact the performance of the funds so it makes sense that they're very similar.

 

[smurf50]

@sand12341112 Thanks ForestGrump. That helps - I was mixing two things - the value of my pot and the fund itself. How would I expect to see the reinvestment then, in terms of impact on my pot? I use Vanguard itself and can’t see any evidence of new units being bought. I thought I’d see some small transaction relating the dividend getting reinvested somehow. Any idea on this?

 

[sand12341112]

@smurf50 The difference will be that if you had the income version you would see your cash amount increasing over time.

Imagine you have £110 invested in the accumulation fund and £110 in the income fund and that each fund has only 10 stocks worth £11 each.
On a certain day, each stock pays a £1 dividend.
Your income fund is now worth £100 and you have £10 cash.
With the accumulation version, the fund will invest the £10 of dividends by purchasing 10% more of each stock. You're not getting more units in the fund, but you are getting more underlying shares. You then end with £110 in the fund and no new cash.

 

[micro1984]

@smurf50 To add to @sand12341112 you can see this from the NAV price of the fund.

Both versions cost £100 per nominal unit when launched in 2016. Imagine you invested £100 then.

With the income version your £100 would now be worth £155.42. But you would have received dividends along the way.

With the accumulation version you would now have £172.27 worth of the fund.

 

[sashieng]

@smurf50 When looking at charts, check if they are including and income, as that would likely make the performance similar.

The actual unit value is irrelevant as it depends on the amount under management and the number of units in existence.

 

[julia736]

@smurf50 The reason it's "more expensive per unit" is that both versions of the fund started out at the same price - might typically be £1, £10 or £100 per share, whatever the fund manager decides when they set up the fund.

When Vanguard are setting up a fund they probably lend the fund £1,000,000, and get the fund to issue them - let's say - 100,000 shares or units. The fund uses the £1,000,000 to buy the assets required to track the index - Microsoft, Apple, Johnson and Johnson, or Shell and BP if it's the FTSE 100. Now Vanguard owns 100,000 shares in a fund which owns £1,000,000 of assets (until the assets change in price, of course) and it sells those shares to retail investors. Once those 100,000 shares have been sold I think the find deals with intermediaries, who get the right to issue new shares in the fund in exchange for supplying Vanguard with shares in the underlying asserts.

But I digress…

On day 1, shares in accumulation and distributing versions of the fund are both worth £10.

When Apple issues dividends then those are divided between the two classes of the fund, and the money that belongs to the distributing fund holders is probably put into a bank account which pays out quarterly. The Apple dividends that are paid out to the accumulating version of the fund are used to buy more underlying assets - i.e. someone with the accumulating version of the fund now owns more underlying assets and their units off the fund are now more valuable.

Imagine the fund is issued on day 1 at £10 per unit and you buy £100 of the accumulation version and I buy £100 of the distributing version. If you looked into the holdings of the fund (S&P 500), we each own £7 of Apple stock. Let's say that, by coincidence, the next day Apple gives out dividends - now you own £7.50 of Apple stock, because the dividends have been reinvested, and I own £7 of Apple stock and 50p in cash. The value of the accumulating fund must go up to reflect the fact that it reinvested that 50p in Apple and now owns £7.50 of Apple stock per 10 units.

Hope this makes sense.