Ever wondered why when you look at different information sources for a particular fund's yield they all come up with different figures? The fact is, there are many different ways of calculating a yield, and no set industry standard on how it should be done for funds, investment trusts or exchange traded funds (ETFs). Asset managers are not even compelled to publish a yield figure if they do not wish to, although some fund fact sheets go as far as stating what kind of yield they are quoting, and some even have the methodology in the footnotes. But some fact sheets just state 'yield,' so it is not immediately clear how it was calculated.
And as a yield calculation relies on share price, which is constantly changing, even if a yield is calculated in the same way the figures will differ if the calculations were made at different times.
Bond funds, meanwhile, tend to quote different yields to equity funds, because of the different nature of their underlying assets.
Open-ended funds
The Investment Management Association (IMA), the trade body that represents the UK investment management industry, has tried to introduce some uniformity by introducing guidelines on which yields open-ended funds should use on their fact sheets and websites for equity and bond funds, and how to calculate them.
The IMA says equity funds should quote the historic yield, as follows, and the term 'historic yield' should not be used for yields based on other methodologies. Where charges are taken out of capital rather than income this should be indicated because the yield will look more generous if this is the case, while the fund's growth will be held back.
Historic yield
| Use | Where a manager wishes to quote a yield, it should be the historic yield. If the manager believes that the historic yield is unrepresentative or there is insufficient historical data available to calculate it, an alternative forecast yield may be calculated and quoted. In such cases, it should be clearly disclosed that the quoted yield is not the historic yield. |
| Frequency of calculation | As a minimum, quoted yields should be recalculated as soon as practicable following each distribution declaration. |
| Suggested wording | "The historic yield reflects distributions declared over the past 12 months as a percentage of the mid-market unit price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions." |
| Disclosures | Where the manager's policy is to charge expenses to capital, this fact should be disclosed prominently and the impact on the yield should be stated: "[A portion of] The fund’s expenses are charged to capital. This has the effect of increasing the distribution(s) for the year... and constraining the fund's capital performance to an equivalent extent." |
Source: IMA
However, if a fund's portfolio has changed since the quoted yield calculation was made, the figure will no longer reflect what the fund holds and what it may deliver going forward, says Adrian Lowcock, senior investment manager at Hargreaves Lansdown. The time period over which it is calculated can also have an effect because certain dividend days may be included or omitted depending on the exact time period.
Sometimes managers use a projected yield, but this draws on analyst or fund manager projections which are not always correct.
Dividends are also subject to tax, although this depends on each individual's situation, so yields normally reported on fund fact sheets are gross, before the effect of tax in the hands of the individual. "This is because each investor will be subject to tax at a different rate, depending on whether they are on a higher rate, basic rate or no rate," says Jorge Morley-Smith, head of tax at the IMA.
However, holding funds within an individual savings account (Isa) or self-invested personal pension (Sipp) can help mitigate this.
For bond funds the IMA says the distribution yield and underlying yield should be used consistently and these terms should not be used for yields based on other methodologies.
Distribution yield
| Use | All funds investing predominantly in bonds, either directly or indirectly, should quote the distribution yield. |
| Frequency of calculation | Quoted yields should be recalculated at least monthly. |
| Suggested wording | The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charge and investors may be subject to tax on distributions. |
| Disclosures | Where the distribution yield is the same as the underlying yield, this fact should be stated: 'The distribution yield is also the underlying yield for this fund.' |
Source: IMA
Underlying yield
| Use | When the distribution yield is higher than the underlying yield, the underlying yield should be shown with equal prominence to the distribution yield. |
| Frequency of calculation | Quoted yields should be recalculated at least monthly. |
| Suggested wording | The underlying yield reflects the annualised income net of expenses of the fund (calculated in accordance with relevant accounting standards) as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charge and investors may be subject to tax on distributions. |
Source: IMA
Some managers, such as Invesco Perpetual, go over and above this and also publish a running yield and redemption yield as well. The running yield estimates expected cash income into the fund from coupons of current bond holdings and, where applicable, dividends from current equity holdings.
The redemption yield estimates the annualised total return: in addition to expected cash income, it includes the amortised annual value of unrealised capital gains/losses of current bond holdings, calculated with reference to their current market price and expected redemption value.
Investment trusts
For investment trusts there is no set method of calculating the yield. "But the AIC is aware that there are a variety of figures in the marketplace and this is an area we are going to review over the next year," says Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC).
Some investment trust managers present yields on a historic basis, net of income tax credit, while others present a yield based upon the current financial year, includnig estimated dividends yet to be paid.
How do our funds do?
Even within a small selection of funds such as the IC Top 100 Funds you see variations in terms of what is reported on fund fact sheets.
Equity income fund Trojan Income (GB00B01BP176) quotes a "net yield (historic)," in line with IMA guidelines, as does Artemis Income (GB0006572464).
M&G Global Dividend (GB00B39R2M86) does not state a yield on its fact sheet, although this is available on its website. It does not say what kind of yield it is although makes clear that since 1 April "all charges and expenses are being taken from capital, in alignment with the income-focused objective of the fund. Taking charges and expenses from capital will increase the amount of distributable income although the fund's capital growth will be constrained by a similar amount."
In our bond fund selection M&G Optimal Income (GB00B1H05155) includes a distribution yield, as suggested by the IMA, and a gross redemption yield on its fact sheet. A footnote explains that: "Yields shown are net of fund expenses. They do not include any preliminary charge and investors may be subject to tax on distributions. They are based on a snapshot of the portfolio on that day. The distribution yield reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the price of the fund as at the date shown. The distribution yield is also the underlying yield for this fund."
This is also the format used for M&G Corporate Bond (GB0031957102), M&G Strategic Corporate Bond (GB0033828020) and M&G UK Inflation Linked Corporate Bond (GB00B3WZMB82) funds. M&G International Sovereign Bond's (GB0031288912) fact sheet does not include a yield, although a distribution yield can be found on M&G's website.
Henderson Strategic Bond Fund (GB0007495293), meanwhile, reports underlying and distribution yields with footnotes to explain, in line with IMA guidelines.
L&G Dynamic Bond Trust (GB00B1TWMJ68) only states a distribution yield.
Among investment trusts, Edinburgh Investment Trust (EDIN) and Perpetual Income & Growth Trust (PLI) state a net dividend yield on their daily fact sheets (supplied by Morningstar), which the footnotes say is "calculated by dividing the current financial year's dividends (this will include prospective dividends) by the current price".
The monthly fact sheet only quotes a 'dividend yield' and does not specify what this is.
City of London Investment Trust (CTY) quotes a yield which its footnotes explain is "calculated by dividing the current financial year's dividends per share (this will include prospective dividends) by the current price per share, then multiplying by 100 to arrive at a percentage figure".
Aberdeen Asian Income Fund (AAIF) and Murray International (MYI) quote an unspecified yield on their monthly fact sheets, but the daily fact sheet (also supplied by Morningstar) provides a net dividend yield, as explained in the footnotes as above.
See next week's issue for the situation with ETF yields.
