Understanding managed distributions

Managed distribution programs provide the potential for:

• Higher and smoother distribution levels vs. traditional fixed income strategies²
• Attractive regular distributions from equity and alternative investment strategies which may offer higher total return opportunities

Managed distribution programs are typically used for closed-end funds that expect capital appreciation to comprise a meaningful portion of the fund’s return, such as those with equity or alternative investment strategies. These programs seek to convert a fund’s expected long-term total return into attractive regular distributions. 

Closed-end fund managed distribution programs are designed to facilitate regular, relatively consistent distributions to shareholders, typically by:

1. Estimating a fund’s long-term total return (both income and long-term appreciation, net of expenses)
2. Setting a regular monthly or quarterly distribution amount intended to match the fund’s total distributions to its total return over time

The hypothetical example below shows how this may work over a one-year period.¹

What is the source of each regular distribution?

Each regular distribution is typically set based on the portfolio’s historical and expected long-term return (appreciation and investment income net of expenses), and may include any or all of the following sources:

• Net investment income (dividends and interest, net of certain expenses)
• Realized capital gains (long- or short-term)
• A return of fund capital, which may consist of shareholders’ initial principal plus portfolio appreciation that has not yet been realized as a capital gain, if any

Any time a distribution includes realized gains or fund capital, a fund must give shareholders a written notice (called a 19a notice) of estimated distribution sources.

At the end of the fund’s tax year, the actual distribution sources are calculated and sent to shareholders via 1099-DIV tax forms.

The goal: attractive regular distributions from a variety of investment strategies

What else is important to know about managed distribution programs?

Shareholders should compare a fund’s distribution rate on net asset value (NAV) with its total return on NAV, over various time periods.

• If total return equals or exceeds the distribution rate on NAV, the program has successfully preserved the fund’s capital while paying out fund income and appreciation via regular distributions. Any return of capital represents fund appreciation that has not yet been realized as a capital gain.
• If total return is less than the distribution rate on NAV, some or all of the distribution represents return of capital that includes part of the shareholders’ principal.
• It is likely that a fund will experience both cases (distributions both greater than, and less than, fund return) during an extended time period. The goal is typically to have the overall distributions roughly correspond to returns. If they do not, fund managers may change the distribution amount to better align fund distributions with the fund’s actual return.