okay so it seems most indexes do not account for dividends, does not that make the index easy to beat…
you invest in the real stocks but you get dividends, while the “return” of the index itself only shows the asset appreciation, what am i missing?
Some indices provide total returns data , which just means the dividends are re-invested in the same securities , so generally there is no cash distribution . Since the index does not pay taxes , this is a painless operation for the index
okay so how about when we compare the performance of an asste manager to an who is supposed to follow the index, however the index does nota ccount for dividends, would it not be very likely that he will outperform it
firstly not all companies pay dividends and for the ones that do the dividend is a small part of the quarterly return . Also if it is a price weighted index , a dividend distribution would reduce the price of the stock and hence its weight in the index . The contribution returns is reduced as a result. If the asset manager was tracking the price weighted index , he would have to follow suit , so effectively he would have to re-invest the dividend proportionately among all the stocks by their prices , and not into the same stock . So it depends . It is not a simple question even conceptually and certainly taxes do not make it any easier to understand
It also depends on your active/passive strategy.
If it’s a passively managed account you would do whatever the index does in regard to dividends.
If it’s an active strategy you could reinvest dividends even if the index doesn’t, but more likely you would use the excess cash to invest in the securities you have the most confidence in. those may be the stocks that paid dividend or they may be different.
thanks for the valuable comments, i want to give a simple scnario to help me get this
say the index was only one stock, and it is valued at 100, the stock paid a div of 10, and thus its price dropped by 10
thus the return to the index will be -10% without dividends,
a manager who is following the index however earned +10% because he got the dividend, now it appears that most indexes do nothing to adjust for dividends…
now say this index does, how would the adjustment go ?
Great question. The index numbers in news most likely exclude the dividends(good for fund managers), transaction cost and tax(bad for fund managers). But the incentive fees charged by fund managers may be based on gross-of-returns, which excluded all the transaction costs, license fees, and etc. Not sure about the withholding taxes, and custodian fees. Dividends, short-term and long-term capital gain taxes are also different…
The manager actually earned 0% because stock is worth $90 and dividend(cash) is $10 (active return would be 10%). And as Tulkuu points out transaction costs and taxes take their cut, and don’t forget about the cash drag - these all effect the performance of portfolios. So the actual active return would be diminished from the entire 10%.
This is not to say that reinvested dividends cannot produce some active return over a benchmark that does not reinvest them. However, it sounds like this may be a systematic bias that would persist in your portfolio/benchmark relationship and there may be a better quality benchmark out there for you.
damn calculation mistake, done something similar just a couple of days ago. thanks
Perhaps the outperformance of value funds is attributed to the dividend payments? But this is not the answer from CFAI.
What’s the explanation of value stock anomaly in SS03? Need to review again.
i am not sure what is value stock anomaly, i am in the back of the pack, so right now the view is the same, i see finninijaz, cpks, and your a**… if your not the lead dog the view never changes
but could you be refering to that fact that stocks are expected to revert to the mean and that is why buying stocks with low p/e might pay
Man, value stocks/ETFs are my favorites. This anomaly crap is in Schweser slides, no explanation, but the instructor might talk about it. CFA (p35) says something in vague…