Distribution policy for funds or share classes of funds
Points to note regarding the distribution policy for funds which may make regular dividend payments
- Funds are not obliged to distribute dividends. Different funds adopt different dividend policies which would have different impact on the value of the funds.
- A fund may offer different classes of shares which may have different dividend policy, for example, distributing share classes and accumulation share classes
- A regular dividend payment from a fund to investors does not imply that there will be a positive return to them.
- Investors should take care to find out, among other things, where the dividends come from. Dividends paid out of a fund's capital amount to a return or withdrawal of part of an investor's original investment. This in turn may have an adverse impact on the fund's net asset value or reduce the fund's capital available for future investment.
Are funds obliged to distribute dividends?
Different funds have different dividend policies and not all funds are obliged to distribute dividends. Some funds may not distribute dividends at all and they may retain and reinvest the distributable income in lieu of distributing dividends to investors. The rate and amount of dividend payouts as well as the frequency of dividend declaration vary from fund to fund. Some funds may offer dividends regularly, for example, on a monthly, quarterly or a yearly basis. It is however common that the dividend policy of a fund would provide that the fund and/or its investment manager may declare and/or pay dividends (if any) at their absolute discretion. In such cases, investors should note that there is no assurance or guarantee to the investors as to the rate of dividend distribution nor will that dividend be paid regularly or at all. Investors should refer to a fund's dividend policy for further details.
Will managers regularly make dividend payments for distributing share classes of a fund?
A fund may create and issue more than one class of share. Different classes of shares of a fund may have different dividend policy. Some funds may create and issue "distributing share classes" that aim to offer dividends (if any) regularly, for example, on a monthly, quarterly or a yearly basis subject to the discretion of the management company ("Discretionary Distribution Share Classes").
For Discretionary Distribution Share Classes, investors should note that payment of dividends may or may not be made by the fund subject to the discretion of the fund manager(s) as disclosed in the offering document. In addition, unless otherwise specified in the offering documents, there is no assurance or guarantee to investors as to the rate of dividend distribution. Investors should refer to the dividend policy relating to the relevant Discretionary Distribution Share Classes in the funds’ offering documents for further details.
If a fund makes regular dividend payments, does that imply a positive return on my investment?
When a fund pays out dividends or a regular income, you should take care to find out, among other things, where these payments come from, i.e. what is the composition or sources of the dividends/income. Some funds may pay out dividends that are not from net distributable investment income. In particular, investors should be aware that a regular dividend payment (i.e. a positive distribution yield) from a fund to investors does not imply that there will be a positive return to them. Also, investors should take note that, often the regular dividend payouts rates are targets set by the fund and are not guaranteed.
Regarding the source of dividends, can a fund pay dividends out of its capital? What does it mean if the fund states that it may pay dividends out of gross income?
So long as the governing law and the constitutive documents of the fund allow, a fund may pay dividends to the investors out of the fund's capital. Payment of dividends out of the fund's capital (i.e. not from the fund's net distributable investment income) amount to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment. Any distribution involving payment of dividends out of the fund's capital may result in an immediate decrease of the net asset value of the fund. This may reduce the fund's capital available for future investment and lead to a decline in the value of your investment over time.
The governing law and the constitutive documents of a fund may also allow the fund to charge or pay its fees and expenses to or out of the fund's capital. The fund or the investment manager may therefore pay dividends out of gross income while charging or paying all or part of the fund's fees and expenses to or out of the capital of the fund, resulting in an increase in distributable income for the payment of dividends by the fund. Thus, the fund may effectively pay dividends out of capital. In this case, the associated risks and potential impact on investors resulting from the payment of dividends by a fund out of its capital mentioned above also apply.
How do I know if investing in a fund that makes regular dividend payments is right for me? How can I check out a fund's dividend policy?
Investors should properly assess their own investment needs and objectives before deciding to invest in a fund. Investors are reminded to read the relevant offering document (including the key facts statement) of a fund before making any investment decisions. If the offering document of the fund discloses that information regarding the compositions of the dividends (i.e. the relative amounts paid out of net distributable income and capital) are available by the investment manager / the Hong Kong representative of the fund and on the fund's website (if any), investors should also obtain and read the relevant information for proper assessment before investing into the fund. You should consult your distributor, intermediary or financial adviser for details of a fund's dividend policy and the associated risks and the suitability of the fund for your individual investment needs before you decide to invest.
You can find the offering documents of funds authorized by the SFC by searching the List of Investment Products on the SFC's site.