OOP Basis and Dividends, Return of Capital in cash account

[CeSinge]

Hello,

I tried hard, but can't figure out this one:
In a CASH account, when I add money, it's added either by a purchase or a redemption, or a transfer in/out of cash. In this case, shares and value (of the cash account) increase or decrease, and so does the OOP Current Basis. Normal: the basis changes because I added cash. OOP Current Gain and Yield do not change, because adding cash does not mean a gain.

However, when cash is increasing within the cash account itself, by a Return of Capital, a Dividend, an Interest Income or an Account Fee (negatively), in my view, the OOP Current Basis should not change. It apparently does: Shares, Value and the OOP Current Basis change all in the same way. To me, however, the OOP Current Basis should not change, and consequently, OOP Current Gain and OOP %Gain should increase or decrease.

And as a result, financial interest from Cash is not reported as Gain or Yield in the cash account.

Problem is: I know that usually the problem is me and not FM...

Happy new year to you, Mark !

[Mark]

Hi CeSinge,

How are you recording this distribution in cash? If you record it as a reinvested distribution, your OOP cost should not change. You didn't receive any money, nor add any out of pocket, so it should stay the same.

[CeSinge]

Mark,
To take cash dividends as an example:
Sub-Portfolio: Cash. Investment: "(Cash) Scottrade Cash" (marked as the cash account for the corresponding Scottrade investment account.
Data register -> New -> Distribution. Type Dividend, Reinvested = Yes. Value 1000 = Shares 1,000 x Price 1.
In this case, for the cash account, Shares, Value, and OOP Current Base increase by 1000. OOP Current Gain, OOP Current % Gain: unchanged. Yield: Increases by n.

So OOP Current Base does change, where I also think it should not.

[Mark]

Hi CeSinge,

How exactly are you viewing that the OOP basis is increasing after entering this reinvestment?

[CeSinge]

In the Portfolio Editor I have one SubPortfolio 'Cash' that contains, grouped together, all the cash accounts of my accounts. On the right side, the columns can be selected. In my case, I have Name, Symbol, ... Shares, Value, OOP Current Gain, OOP Current Basis, OOP Current %Gain, Yield...

In the data register, Data type/All transactions, I add a new (test) Distribution as described above. If I add a big reinvested dividend there, I immediately see Shares, Value, OOP Current Basis and Yield increase in the Portfolio Editor behind it.

In this example, I added a $2,000 dividend, as shown. Before doing this, Shares, Value and OOP Current Basis were at $6006.61

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Okay, interestingly, I just realized this is not the case for cash accounts in my base currency (Euro). I did not realize this earlier because most of my investments are in USD, even tough, living in Europe, my base currency is EUR. For a cash Euro account, Shares, Value, OOP Current Gain, OOP Current %Gain and Yield do increase, but OOP Current Basis does not. That is what I would expect.

[Mark]

Hi CeSinge,

I'm not sure why the OOP Cost is increasing. Can you create a small portfolio containing only this 1 cash investment and your exchange rate investments that still reproduce this problem? If so, please create a backup using "File / Backup..." and email this *.FMB file to me. I'll send you an email address you can use. Can you also verify what version you're using?

[CeSinge]

Okay, I sent you a test portfolio. It contains only a cash account. Here is a more precise way to reproduce this issue.

1. In the cash account, Data Register. New/Distribution. Don't change anything, but just fill in '100' for shares. Nothing else. <OK>.
The behavior is correct. Shares, Value, OOP Curr %Gain, Yield increase as it should. 100 'shares' are added. OOP Current Base did not change.

2. Edit this transaction exactly the same way: Data Register, double click on the line. Just and only replace the 100 shares by 200. <OK> Nothing else. All values are still OK. I understand this is not the way it should be done (the 'cash' price for the day is now 0.50), but I try to show the issue.
It seems that whatever you do with this new transaction is OK.

3. Now edit an existing transaction, like double click on the Interest Income of 10/31. Replace shares 0.01 by 100. Nothing else. Hit <OK>.
Toast. The behavior is incorrect, as I described in this thread.
It seems if you modify an existing dividend (or similar), you have the problem. If one creates a new one it's OK.

[Mark]

Hi CeSinge,

Thanks for the sample files. I see what you are describing, and the issue is because of the difference between OOP Current Basis and OOP Historical Basis. The Current one is only the cost of your remaining shares, but the Historical one includes all prior gains/losses, and shows the net basis since inception. In your case you were selling the shares reinvested, so they are no longer part of the current basis, but the gains/losses would be shown for the historical basis. You can think of it as once you've sold those reinvested shares, the benefits realized are no longer part of the Current basis, only the Historical basis. For example, see the attached example investment file.

I've re-created a similar situation to what you were experiencing, but simplified it to make it easier to understand. You can see this example starts off buying 10,000 shares. You get a reinvested distribution for 100 shares, buy 20,000 more shares, and then sell 11,000 shares. When you sell these 11,000 shares, you are selling them in a FIFO order, so you sold all the original 10,000 shares, plus the 100 reinvested shares, and 900 of the 20,000 purchase. Your remaining balance is 19,100, and your historical OOP basis is 19,000, but your current OOP basis is 19,100. For all those 19,100 shares (from the 20,000 buy), you did pay 19,100 for those shares. However, over the life of the investment you only have 19,000 OOP, which is what the Historical basis shows.

You can experiment with this example. For example, if you change the sell to 9,000 shares, you will still own the reinvested shares, and you will see the OOP Current basis more like you were originally expecting.

So, the reason some of your reinvestments were changing the OOP Current Basis is that depending on when/how many shares, if they were ending up being sold as of the current date, they are being considered only in the Historical basis, and not in the Current basis.

[CeSinge]

Mark,
Let me first wish you a very successful year 2013!

Thank you for your detailed explanation. I really took some time to study it, and I now understand the principle and the difference. I can calculate the OOP Historical Basis and Gain. However, while I understand the process to calculate the OOP Current Basis, I fail to figure out the formula by which it's calculated. Is there a formula for it? Or does your program really also iteratively go through the transactions, one at a time, in the same way as what one would do manually?

I reproduce your example in a little Excel spreadsheet, attached. It uses named cells and formulas, so it's easy to understand. But I can't figure out a formula for the OOP Current Basis after a Redemption.

And then I will try to understand the same for Distributed cash distributions... I don't like to work with things I do not fully understand.

[Mark]

Hi CeSinge,

Thanks for the well wishes, Happy New Year to you as well.

There is no formula as you're using in that Excel spreadsheet. The way it is calculated it is by figuring out which shares are still owned on the current date, and then determine how much was spent acquiring those shares. It uses the FIFO accounting method to determine which shares are owned on the current date. It is done on a transaction by transaction basis. Let's walk through the sample CashTesting.dat file I posted as an example:

On 12/5/12 the redemption of 11,000 shares sold all of the 10,000 shares from the 1/1/12 purchase, plus all 100 shares of the 9/18/12 reinvestment, plus 900 shares of the 12/1/12 purchase. So, you are left with 19,100 shares from the 12/1/12 purchase. The cost to acquire those specific 19,100 shares was $19,100 since that purchase was done at a price of $1/share. So, the OOP Current basis is $19,100.

The OOP Historical basis is $19,000, since that looks at your overall OOP cost since inception, not just for the currently owned shares. The $19,000 comes from $10,000 + $20,000 - $11,000 = $19,000. Note, there is no $100 in this equation, since that was not OOP money.

[CeSinge]

Thank you again. Actually, I did understand the process based on your example and previous explanation, but I imagined there was a one step formula for the Current Basis calculation. As you clearly indicate, this is not the case.

I will now play further with the examples you provided to understand the exact use of one and the other.
I kind of wonder where one can learn these things, if not from a more or less financial background.