Unitisation - Income vs Accumulation units explanation please

[iambic]

I thought I had grasped the concept of unitisation & have applied it (as described on the Monevator website) to my portfolio since I started investing.

I read a post recently though where someone referred to "unitisation of income units" (or something similar to that). A quick search & re-reading the guidance on the http://lemonfoolfinancialsoftware.weebly.com/unitising-a-portfolio.html page led me to the definitions below about dividend reinvestment.

With accumulation units
...
dividend income received and retained in the portfolio increases the price of each unit but has no effect on the number of units
...
With income units
...
dividend income received and retained in the portfolio increases the number of units owned, but does not affect the price of each unit
...

For my own portfolio, it's all accumulation funds apart from a couple of ETF's. I've always assumed that since I reinvested the ETF dividends (usually by buying more of an accumulation fund as they generally weren't enough to cover the cost of a whole unit of an ETF), the money never left my account so I didn't increase the number of units owned in my unitisation spreadsheet; the dividends just increased the overall price per unit. Reading the above though, I'm unclear as to whether ETF's count as "income units" because they pay out dividends.

Could someone clarify for me the difference between income & accumulation units please?

Many thanks, iambic

[Alaric]

Could someone clarify for me the difference between income & accumulation units please?

In the context of unitisation, It isn't anything to do with what investments you have, but how you manage them.

Suppose you hold an ISA on a platform which accumulates dividends in a cash account which you only ever reinvest. Suppose also that the only new money is the annual contribution. It would seem most natural to run this as accumulation units, since the only time you change the unit totals are when you put the new money in.

Now suppose that you hold a taxed account the old fashioned way with certificates. You receive dividend payments from the registrar either by cheque or direct to your bank. Either way you are as likely to spend the dividends as reinvest them. I think you would run that as Income units as otherwise you would need to calculate a price every time you received a dividend.

Depending on how rigorous you wanted or needed to be, having Accumulation units in your assets when running your personal reporting as Income could be a reporting headache. You have to do it in taxed accounts anyway.

[staffordian]

Income units assume all dividends are paid out, so if you in a reinvesting of dividends stage of portfolio growth, then think of dealing with those dividends as a two stage process.

First, "withdraw" the cash, then second, use that cash to buy new units, at whatever the current unit price is, which is calculated as follows:

Portfolio value prior to purchase of new units (the value should not including the cash you have just withdrawn) divided by the number of units.

It follows that from a common starting point, with identical numbers and values of units on day one of unitisation, if income is reinvested then the inc units will increase in number relative to the acc units and the acc units will increase in value relative to the inc units.


I do both acc and inc unitisation because although I'm currently reinvesting, at some stage I shall withdraw income.

[monabri]

I don't differentiate between the two. If money is added to or withdrawn from the portfolio, I simply increase or decrease the number of units based on the prevailing current unit price.

- If I want to withdraw money from the portfolio, I simply cancel units.

- If I add money, I 'buy' units at the current unit price. (number of units increases but the unit value is unchanged).

[staffordian]

I don't differentiate between the two. If money is added to or withdrawn from the portfolio, I simply increase or decrease the number of units based on the prevailing current unit price.

- If I want to withdraw money from the portfolio, I simply cancel units.

- If I add money, I 'buy' units at the current unit price. (number of units increases but the unit value is unchanged).

Then to me, it sounds like you are simply using the acc unit model?

[iambic]

Thanks everyone, I think I'm understanding this better now & think I've been taking the correct steps when reinvesting dividends.

Good to know I can trust my unitisation number after all (although correcting a minor error & finding I've got a better return than I thought would always be welcome of course )