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Money System: Technical Analysis Question (MZA vs FAX)

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Lucid Tech

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This relates to the Money System mentioned towards the back of Unscripted, and how to perform due diligence on quality of cash flows.

This will compare two examples (at least one is mentioned in the book): BlackRock MuniYield Arizona (MZA) and Aberdeen Asia-Pacific Income Fund Inc (FAX). Both are closed end funds that pay dividends monthly.

My question relates to the different types of distributions and whether this can give insight to the overall health of the fund.

This first screenshot is the allocation of monthly distributions (dividends) to the shareholders of FAX. There's a balance of income, gains, and return of capital.

The second screenshot is the allocation of MZA. All of the distribution amount is considered Income.

From a tax perspective, return of capital is great since it's typically tax free (i.e. your own capital being returned to you).

However, seeing so much capital being returned in FAX makes me question the overall health of the fund. Is it not performing as well as anticipated? Is the reason so much of this is "return of capital" that they are not making as much profit as needed?

Conversely, seeing all of MZA's distributions categorized as Income makes me conclude that it is doing as well as, or better than, expected. As in, all of its holdings are performing very well so there's no need to return any capital.

I don't have much experience with this so I may be completely missing something.

Anyone more experienced than me care to weigh in?
 

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MJ DeMarco

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However, seeing so much capital being returned in FAX makes me question the overall health of the fund.
Good catch.

This is why I haven't owned FAX for at least 3 years.

Once ROC started happening more and more, I got out. That usually happens when the income from the fund can't meet the distribution level. Instead of lowering it (that scares people even more) they do a ROC.

I don't fully understand the math behind it, but for me, it's more of a conceptual thing that I usually perceive as a concern.

Conversely, seeing all of MZA's distributions categorized as Income makes me conclude that it is doing as well as, or better than, expected.
Yes, and that's why I go in and out of that fund, for now.

Things can always change though, like interest rates.
 
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Good catch.

This is why I haven't owned FAX for at least 3 years.

Once ROC started happening more and more, I got out. That usually happens when the income from the fund can't meet the distribution level. Instead of lowering it (that scares people even more) they do a ROC.

I don't fully understand the math behind it, but for me, it's more of a conceptual thing that I usually perceive as a concern.



Yes, and that's why I go in and out of that fund, for now.

Things can always change though, like interest rates.

Thanks for weighing in and glad to see confirmation of my theory.

That 8%+ yield is tantalizingly juicy, but dangerous.
 

cottonbuds

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From a tax perspective, return of capital is great since it's typically tax free (i.e. your own capital being returned to you).
Not exactly sure whats going on with this fund, but wanted to point out that a ROC does affect your taxes. It effectively reduces your cost basis (new cost basis of shares = original cost basis - ROC) and thus you will have higher taxable gains when/if you finally sell your shares. This wont affect you obviously if you hold the shares in a IRA.
 
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Not exactly sure whats going on with this fund, but wanted to point out that a ROC does affect your taxes. It effectively reduces your cost basis (new cost basis of shares = original cost basis - ROC) and thus you will have higher taxable gains when/if you finally sell your shares. This wont affect you obviously if you hold the shares in a IRA.
Agreed, it does affect the capital gains when the shares are sold and gains are realized. I was referring to the tax treatment on the monthly distributions themselves. Generally, they aren't taxable as it's considered part of your original investment simply being returned to you.
 

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True. This link may help you figure out the ROC vs dividend stuff.
https://funds.eatonvance.com/includes/loadDocument.php?fn=6348.pdf
Thanks this is very helpful.

For others who are reading, here is a summary from that page:

"So if the tax character of a fund’s distributions cannot be relied upon to reveal whether or not a fund has earned its distributions, how can a shareholder determine this important information?

It’s actually quite simple, and requires only information that is readily available to every fund shareholder. Look at the change in a fund’s NAV per share (net of distributions) over the course of a year: if NAV has increased, the fund earned more than it distributed. If NAV has gone down, the fund distributed more than it earned. Said differently, if a fund’s total return based on NAV has exceeded its distribution rate for the year, it earned its distribution. If not, the opposite. Pretty straightforward, right?"

NAV does seem to be declining year-over-year, so there is some cause for concern.
 

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