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How distributions affect total returns   By Michael Chou Senior Investment Analyst

For non-profit entities such as Congregations, Church organisations and charitable entities, distribution payments from investments play a key role in providing the funding to keep the lights on and further missional activities.  A distribution is a payment that can be made to investors out of the profits made by an investment fund. Throughout the financial year, a diversified fund earns income in the form of dividends from equities, coupon payments from fixed income investments and cash, as well as foreign income if the fund invests internationally. These distributions can be paid out to investors monthly, quarterly, half yearly or yearly, depending on the fund.  Instead of taking distributions from the fund and spending them on operational requirements, investors can also opt to reinvest some or all of their distributions, which can make a difference to total returns.  For illustrative purposes, we have used the example of the capital growth and dividend income an investor would receive by investing in the UFS Ethical Conservative Balanced Fund over a five-year period. The table below shows three different investors who each invest $1 million in the fund in May 2019 for a 5-year period.    Effect of distribution payments on total returns    Investor 1:  Withdraw distributions  Investor 2:  Reinvest 50% distributions  Investor 3:  Reinvest all distributions  Distributions received  $234,726  $125,630  0  Closing balance  $1,000,554  $1,126,979  $1,266,767  Total return  $1,235,281  $1,252,609  $1,266,767  Total return (annualised)  4.32%  4.61%  4.84%  Source: UFS  Data period: 31 May 2019 - 31 May 2024.    Investor 1 chooses to withdraw all fund distributions over the investment timeframe. At the end of the 5 years, this investor has received $234,726 in distributions from the fund and has received an annualised return of 4.3%.  Investor 2 decides to reinvest half of their distributions throughout the investment term. While they receive lower total distributions ($125,630), their annualised return was better than that of investor 1, at 4.6%, or 1.7% better-off cumulatively compared with a full withdrawal.  The third investor opts to reinvest all their fund distributions and at the end of the investment term their $1 million investment has grown to $1,266,767, an annualised return of 4.8%. This is an excess cumulative return of 3.2% compared with a full withdrawal.  This investor has benefited from sacrificing their distributions to purchase additional units in the fund and they have also benefited from the effects of compounding (earning interest on their interest) throughout the investment term on capital market performance. As a result, they have achieved the best total return of all the investors.  It is important to note that if these investors were invested in a fund with a higher allocation to growth assets such as shares and property, the difference in their returns may be even more pronounced.  Which option is best for your organisation? Deciding whether to withdraw distributions or reinvest them is very much dependent on your organisation’s investment strategy and long-term goals.  If you are primarily concerned with drawing an income stream to pay employees, fund missional activities and meet operational expenses, withdrawing distributions to pay these expenses may be the best option.   It is important to note, however, that distributions are not guaranteed amounts and can fluctuate from one quarter to the next. Another option is to withdraw a set amount each quarter. That way your operating expenses are met and some of your distributions can be used to increase your initial investment. Uniting Financial Services offers this option for all three of its ethical investment funds.  If you are an investor who wishes to grow funds for a long-term goal, such as an upgrade to a Church or manse, while also drawing income to meet expenses, you may consider reinvesting some of your distributions. This strategy also has the added benefit of helping your initial investment to keep pace with inflation.   In the case that your investment strategy is strictly long-term and you are hoping to build a safety net for your organisation or invest for a future goal, reinvesting all distributions can help to maximise your total return, as shown in the example above.    How UFS can assist If you would like to discuss your investment objectives or have further questions, we are here to help. You can get in touch by emailing contactus@unitingfinancial.com.au    Important information: The Uniting Financial Services (UFS) unregistered managed investment schemes are available for investment only to wholesale investors. Prospective wholesale investors who wish to invest via our unregistered managed investment schemes can access the Information Memoranda for these any of these funds on the UFS website. While the information in this email has been prepared with all reasonable care, UFS accepts no responsibility or liability for any errors, omissions or misstatements however caused. No action has been taken to register or qualify these products or otherwise permit a public offering of these products in any jurisdiction outside Australia. Past performance is not indicative of future performance.    

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  Important for you to know Financial services are provided by The Uniting Church (NSW) Trust Association Limited ACN 000 022 480, ABN 89 725 654 978, AFSL 292186 (“UCTAL”) and by The Uniting Church in Australia Property Trust (NSW) ABN 77 005 284 605 (“UCAPT”) (together and separately “Uniting Financial Services”), for The Uniting Church in Australia, Synod of NSW and the ACT (“Synod”), under a s.911A Corporations Act 2001 (Cth.) authorisation and pursuant to APRA Banking Exemption No. 1 of 2021 and ASIC Regulatory Guide 87 and ASIC Corporations (Charitable Investment Fundraising) Instrument 2016/813 exemptions. Uniting Financial Services® is a registered trademark of UCTAL used with permission of UCAPT. None of The Uniting Church in Australia, UCAPT and UCTAL is prudentially supervised by APRA. Therefore, investments with or contributions to these Uniting Church organisations will not receive the benefit of the Financial Claims Scheme or the depositor protection provisions in the Banking Act 1959 (Cth.). All financial services and products are designed for investors who wish to promote the religious and charitable purposes of Uniting Financial Services and The Uniting Church in Australia and for whom profit considerations are not of primary importance in their decision to invest. The information on this page has been prepared without considering your objectives, financial situation or needs. You should, before acting on it, consider its appropriateness to your circumstances or refer to the relevant disclosure document. Loan applications are subject to credit approval. Interest rates are subject to change. Fees and charges may apply. 

Kindly note that the information on this webpage is only intended for wholesale, professional or sophisticated investors (as defined in the Corporations Act). Please do not refer to this webpage if you are not one of these investors. Uniting Financial Services is not providing any personal advice or recommendation regarding any financial products described or referred to on this webpage. Prospective investors should make their own enquiries and should seek all necessary financial, legal, tax and investment advice. Past performance is not indicative of future performance, all information contained on this wepbage is current at the date of publication, however may be subjected to change without notice.