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MUTUAL FUNDS

Mutual funds receive periodic dividends from some of the securities held in their portfolios, and they may also have capital gains from securities that have been sold. As these dividends and capital gains accumulate, the NAV (Net Asset Value) of the fund's shares increases by the amount of the dividends and capital gains being held. (NAV is the total assets owned by the fund divided by the shares outstanding.) Periodically (anywhere from monthly to annually, depending on the fund) the fund will make a "distribution" of these capital gains and dividends to the fund's shareholders, meaning that they are paid to shareholders.

On the day of the distribution the money being distributed is no longer a part of the fund's assets and therefore has to be deducted from the NAV. From the shareholder's point of view it is a "net zero" transaction, because the amount of the distribution remains in his/her account, and the value of the account doesn't change, BUT the fund's NAV will be reduced by the amount of the distribution -- the shareholder now owns the distributed assets, not the mutual fund.

For example, on 12/10/93 the NAV of Fidelity Magellan dropped by $4.18 to $69.36. The closing NAV was the net result of a $0.15 increase in the value of the stock held by the fund (added to NAV), and a distribution of $4.33 (subtracted from NAV). The account value of a shareholder owning one share of Fidelity Magellan on the day before the distribution was $73.54, which was the NAV of one share. On the day of the distribution, that same account was worth $73.69, which was the NAV of one share ($69.36) plus the $4.33 distribution. The shareholder  normally has the option of either having the distribution paid directly to him/her or having it reinvested into the fund, in which case the number of shares in the account would increase from 1.000 to 1.062.

If you are charting a mutual fund, you have to adjust previous data so that the chart makes sense. Otherwise, a day like the one described above would show Fidelity Magellan making a major down move, penetrating support and flashing warning signals. To adjust mutual fund data for distributions, multiply prior data by a factor that will reduce it proportionately. To calculate this adjustment factor, we subtract the amount of the distribution from the prior day's NAV, and divide the result by the prior day's NAV.

Example: Prior Day NAV = 10.00; Distribution = 1.00.

(10.00-1.00)/10.00 = Adjustment Factor of 0.9

In this example all prior data will be multiplied by 0.9.

Unfortunately, mutual fund distribution amounts are not available in the data feed, and StockCharts.com does not make historical data adjustments for mutual funds EXCEPT for Rydex, ProFunds, and Fidelity Select mutual funds, which we track manually.

STOCKS

What about stocks? A dividend actually a distribution and has the same effect on the price of a share of company stock as a distribution has on the NAV of a mutual fund share - in the newspaper you will notice that the amount of the dividend has been subtracted from the share price on the ex-dividend date. Do we also adjust all historical data for the stock? StockCharts.com, who supplies our data and charts, does; however, most charting sites do not.

There are cases where a company (not a mutual fund) will execute a transaction that necessitates the adjustment of previous stock prices due to a distribution. For example, at this writing (12/13/93) Litton is in the process of spinning off one of its operations, Western Atlas, into a new company. As I understand it, Litton shareholders will receive a distribution of approximately one share of Western Atlas for each share of Litton. This should be handled in the same manner as mutual fund distributions.

This difficult thing with stock distributions is determining the exact amount of the distribution. The easiest way I have found is to get a full quote online on the Ex-dividend date (the date on which the distribution has been effected and the stock is being traded at the new price). Check the prior day's closing price -- it will normally have been adjusted for the distribution -- then subtract it from the unadjusted closing price in your database. The result should be the correct amount of the distribution.

Sometimes the quote systems do not pick up the distribution correctly, so an alternate method of finding it is to check the newspaper to see if there was a "when issued" version of the stock -- normally found below the regular stock quote and identified by a "wi" next to the quote. A "when issued" stock is a tracking stock used to show the value of the new stock as it will be when it is issued to replace the old stock after the distribution.

You adjust historical stock data for distributions the same way you do with mutual funds (described above).

Finally, stock split is also a form of distribution -- additional shares are distributed to shareholders. Normally this is done in a straight forward manner, such as a 2 for 1 split. In this case the shareholder receives one additional share of stock for each share held. The effect is that the value of all shares is reduced by half (multiply historical data by 0.5). To determine the adjustment factor for a stock split, divide the old number of shares by the new number of shares. Example: The factor for a 3 for 2 split is:

2 / 3 = 0.66666

How to Get Information About Distributions

Now that you know how to handle distributions, your biggest problem will be in actually finding out that a distribution has occurred.

STOCKS: There are a number of newsletters and web sites that report stock splits. I recommend www.theonlineinvestor.com for a free newsletter and web site lists. I also recommend the the CBOE web site -- get on their mailing list and you receive detailed information on splits and distributions for optionable stocks.

MUTUAL FUNDS: I am not aware of any online quote system that reports or adjusts the prior day NAV for mutual fund distributions, so, if you own a mutual fund and notice that it takes an unexplainable dive one day, call the fund company or check the quote in the next day's newspaper.

Some data services do report mutual fund distributions on the day they occur. For example, Dial/Data reports the distribution in the "open interest" field of the quote record. If you are trying to track large numbers of mutual funds, you will need to be sure you are getting this data and make the appropriate adjustments to your historical data, or your charts will be totally worthless.

iSHARES: Distributions for iShares are usually made once a year and may be quite large like mutual fund distributions, so you can't ignore them like you can a dividend. Unfortunately, iShares distributions are not reported in the quote systems, nor do data services report them like they do mutual fund distributions. I was not even able to get the information from my broker. I recommend that you check www.ishares.com for information on how to get the information in a timely manner without having to check the newspaper every day.

HOLDERS: Distributions for Holders are normally handled in the same way as stocks, so you can track them down the same way you would a stock distribution. The CBOE mailing list has been particularly useful in this regard.