Understanding Your Investments Statements

October 15, 2019 | Craig Dale, CPA, CA, CFP, TEP


Clarifying book value, market value, performance and taxes on your investment statements!

Welcome back to the blog!

In addition to working with clients on investment and wealth management, I write a quarterly blog on tax tips and tidbits. In this edition, I address a common question that I get almost weekly from clients, how much has my investment really grown? It doesn’t sound like rocket science, however, it is so often assessed or measured incorrectly, specifically in respect of managed funds, that I think it is important to clarify a few things.

So let's start with the basics

Okay, so let’s start with a simple scenario.

A client invests his hard-earned savings in a managed fund and subsequently receives an account statement. Typically, two things jump out on the statement, the book value and market value. Often, the investor assumes the difference represents the investment return.

It sounds logical and straightforward, right?

However, this is not actually how much money the fund has made and leads to incorrect conclusions regarding performance. So how do you calculate investment growth, specifically with a managed fund? Well before we get there, let’s take a closer look at what a few of these terms on your statement actually mean.

Book value is the adjusted cost base for tax purposes, not the original amount invested, and includes the initial amount invested less withdrawals plus reinvested distributions.

More to come on distributions shortly…

Market value is the value of an investment at a specific point in time, how much it is worth.

Investment return is comprised of two parts, earnings such as interest and dividends and capital appreciation, or the growth in value of the investments over time.

Impact of distributions on book value

Okay, so let’s get back to distributions.

A distribution is a combination of earnings and realized capital gains when a business is sold for a higher price than it was purchased. A distribution can be received as either:

     1. A cash payment; or

     2. A reinvestment in more units or shares.

If an investor chooses to automatically buy more units by reinvesting distributions, the book value increases with each distribution. Increases in book value are a good thing as they decrease the future capital gain when the managed fund is eventually sold. However, a high book value often gives a false impression that a fund hasn’t performed well. Therefore, book value is an inaccurate measure of how managed funds have performed as it doesn’t reflect the net amount invested.

How about an example?

So let’s walk through a simple example. In this example, we’ll use Mike as our hypothetical managed fund investor.

  • Mike invested $25,000 3 years ago in a single fund for simplicity.
  • Mike received distributions of $1,250, $2,000 and $1,750 over the 3 years totaling $5,000.
  • Mike reinvested the distributions and bought more units of the fund as he didn’t require the cash.
  • At the end of 3 years, Mike’s book value is now $30,000 ($25,000 + distributions).
  • His investment grew in value over this time as well, and as such, it is now worth $32,500.

Mike looks at his investment statement, it reports the book value and market value. Mike takes the difference between these and he concludes his growth is $2,500, or 2.75%! Mike might then think that he made a lousy investment with a 2.75% compounded return, however, this is incorrect in this case.

Mike needs to use his net invested amount as a comparison to market value. Unfortunately, the net investment amount isn’t reported on an account statement. In this example, Mike’s net invested amount was $25,000. If this is subtracted from the market value of $32,500, the investment growth is equal to $7,500, or 9.15%!

Not an insignificant difference, right?

Alternatively, if Mike had invested directly in a dividend-paying stock as opposed to a managed fund, the same principles apply where the dividends are automatically reinvested to buy more shares instead of receiving them in cash.

So let's recap

Book value is important.

It is helpful for tax purposes as it determines if an investor is in a gain or loss position on their investment to assess the tax liability. However, if the objective is to assess return, book value is NOT a useful measure and is often misleading as it doesn’t provide an accurate representation of total return. If you want to assess investment return, refer to the previously outlined example or the illustration below:

Perceived Return (Incorrect)

Actual Return (Correct)

This information may not appear on your monthly or quarterly statement, however, actual return will be included on your annual statement and can be provided on request. If it is still unclear, I’d be happy to walk you through your statements and performance.

I can be reached at craig.dale@rbc.com or 604.981.6681.

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