I think something gets lost in discussions about whether a fundâs distribution is âsustainableâ: what do we actually consider a pretty damn good long-term return? â In my ERP post, I talked about using the risk-free rate plus the equity risk premium as a starting point for expected stock returns. The estimate I discussed came out around 9% nominal, before inflation. That isnât a ceiling or a guarantee, but it gives us somewhere to start when thinking about what an investment might reasonably deliver. â https://www.blossomsocial.com/posts/Equity-Risk-Premium-9percent__POST-1788217798809-T6cHd7D9_t00uBlccemcq8jzT â Different exposures and strategies deserve different assumptions. If we expect substantially higher returns, though, there should be an explanation for where that additional return comes from and why it should persist. â Warren Buffett is an interesting reference point here. Heâs widely regarded as the greatest investor of all time, and from 1965 through 2025, Berkshire compounded at 19.7% annually, compared with 10.5% for the S&P 500 with dividends included. Sustaining roughly 20% for that long is the kind of result that earned him that reputation. â https://www.berkshirehathaway.com/2025ar/2025ar.pdf â That gives some perspective on casually assuming 20%, 30%, or more as a long-term total return. â Those returns can obviously happen. They can happen for several years. But if weâre building long-term expectations around them, there needs to be something supporting that assumption. Maybe a manager adds alpha, meaning returns beyond what an appropriate benchmark or risk model would explain. Maybe leverage increases expected returns, or thereâs some other advantage. â And even an established advantage doesnât guarantee substantial alpha forever. Compounding the annual returns in Berkshireâs report over the 22 years from 2004 through 2025 gives approximately 10.5% annually, compared with 10.7% for the S&P 500 including dividends. That isnât a formal calculation of alpha, but it shows how much closer Berkshireâs more recent returns have been to the market, despite its extraordinary lifetime record. â This connects back to competition. Sometimes when people say a fund manager needs to âstabilize the NAV and maintain the yield,â it sounds like the fund operates in a silo, where producing enough return is primarily a matter of choosing the right settings. â But thereâs someone on the other side of each trade. Option buyers are paying for rights that have value. Other managers are looking for the same attractive opportunities. If an advantage is accessible and repeatable, more capital can pursue it and reduce the future reward. â That doesnât impose a hard cap on anyoneâs returns. It does make a large, persistent edge something we should explain rather than assume. â Which brings me back to high distributions. â In my High Yield post, I talked about why NAV erosion and distribution cuts arenât inherently bad on their own. A fund could deliver a perfectly decent total return while its NAV declines because it distributes substantially more than it earns. â https://www.blossomsocial.com/posts/High-Yield__POST-1787186691972-RSs7aPx2_t00uBlccemcq8jzT â You can take that to an extreme mathematically. Start with $100 and distribute 99%, leaving $1. Then distribute 99% of that dollar, leaving one cent. You can keep taking a fraction of a positive balance indefinitely, even as the amounts become vanishingly small. â The NAV has almost completely disappeared, but you havenât lost almost all your money. In this simplified example, you received it back as cash. Before costs and taxes, there was no investment gain or loss. â Thatâs why NAV erosion alone isnât enough information. â This ties into @matt.41âs recent question about what a sustainable distribution would be for HHIS. Suppose, hypothetically, HHIS yielded 23%. The percentage alone doesnât tell us whether the fund can maintain its dollar payments or support someone spending them while preserving their capital. â If we mean earning a 23% total return year after year, though, weâre expecting more than Buffettâs roughly 20% lifetime annualized return. That doesnât make it impossible, but it brings us back to the question: what would allow the strategy to sustain a result that extraordinary? â Letâs set aside any negative opinions or âCC hateâ you might encounter and focus just on total return and what we reasonably expect it to be. When someone like me questions whether a strategy is sustainable, thatâs the concern: whether its expected total return can support the spending and capital preservation someone is counting on. â If a fund earns 9% but distributes 60% of its starting NAV, the difference has to come out of its NAV. A falling NAV or an eventual distribution cut can be exactly what weâd expect, even while the fund delivers a perfectly decent total return. â As I covered in âSeparating the Variables: The Concrete Version,â reinvesting a percentage of the distributions isnât enough information either. Spend half of a 10% distribution and youâre withdrawing 5% of the portfolio. Spend half of a 20% distribution and youâre withdrawing 10%. â Same reinvestment rule, twice the withdrawal rate. Whether either is sustainable still depends on the strategyâs total return and risk. â https://www.blossomsocial.com/posts/Separating-the-Variables-2-The-Concrete-Version__POST-1787842873351-Y6LX3ulN_t00uBlccemcq8jzT â Thereâs also a separate issue with âstable.â I wouldnât treat XEQT as a stable place for a house down payment needed in the short term, and the same concern applies to income funds with meaningful stock-market exposure. Regular cash payments donât make the capital supporting those payments stable. â Someone who understands these relationships may reasonably prefer a high-distribution structure. The concern Iâm focusing on is the long-term expectation attached to it. We can disagree about what a strategy will earn, but thatâs where the discussion needs to happen, because the distribution rate canât answer that question for us. â It feels like every week we end up with another post about the discourse itself instead of the actual investing questions and trade-offs worth discussing. I hope this comes across as a respectful and useful breakdown for people who are curious. Thereâs plenty of room for different preferences, and I think understanding the assumptions behind them makes for a much more valuable conversation.
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5 Comments
le bib@le_bib ¡ 8h
23% would compound $100,000 into $3,127,919,531 in 50 years. Yes that's $3.1B or 3,100 millions. That's how absurd expecting 23% is
Twenty-five And Invested@25andinvested ¡ 9h
Im leaving a comment for the algos. I have nothing to add
Mr Financial@mr.financial ¡ 8h
Really enjoyed this breakdown kar.... I especially liked the distinction between distribution and total return. Of course they don't mean the same. The Buffett comparison really puts those 20%+ return expectations into perspective. Great thought-provoking post as always! You are the Blossomer of deep thought that I just love.
Canadian Investor@canadianinvestor ¡ 9h
Stanley Druckenmiller achieved an annualized return of approximately 30% over his 30-year career managing Duquesne Capital, with no losing calendar years from 1981 to 2010. So you just have to be one of the absolute best investors in history, and you too can crush it. đ
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