By Kira Nickerson The headline yield on most bond funds will drop as fund management groups move to...
By Kira Nickerson
The headline yield on most bond funds will drop as fund management groups move to conform with a standard yield calculation developed by Autif.
As of 1 September fund management companies must give equal prominence to gross redemption yields as well as running income yields within all their marketing literature.
Both the income yield and redemption yield will have to reflect the impact of all charges in the new industry-wide standard calculation.
Autif, along with the support of the FSA, has created the standard so consumers can better understand the nature of the product relative to others in the market.
Anne McMeehan, director of communications at Autif, said: "The yields currently used by some groups in their advertising may be open to criticism, which can only tarnish the industry's reputation as a whole if such criticism is subsequently found to be valid."
In the past the presentation of yields has created some confusion, McMeehan said.
For example, advertisements can present a fund with a yield of 8.6%, whereas the redemption yield, often found in small print, is much lower.
A committee set up by Autif, which has been working on the project for six years, has concluded that investment houses are to use a market value for the yields weighted by the individual portfolio value of each bond.
For example, on a portfolio with two bonds, one yielding 5% and the other 10%, both are weighted at 50%.
Using a calculation of 50% of 5% and 50% of 10% the average yield is 7.5%. This then produces a crude income and redemption yield, which are subsequently adjusted for all management charges, exit fees, expenses and dealing costs in order to produce an income and redemption yield for disclosure.
Yields will normally be quoted to the nearest 0.1% although 0.05% is permissible.
Theo Zemek, head of retail fixed income at M&G, said: "The standard being introduced is very stringent and it will make the effect of charges on funds very obvious by showing their effect on both redemption and income yields. This will reduce the headline yield for most funds."
Both income and redemption yields must subtract charges.
However, for redemption yield the charges will be based on the assumption that the investment is over a 10 year period, therefore a 3% initial charge is subtracted as 0.3%.
Yield figures quoted in the FT and other such publications will now be the gross redemption yield after all charges, before tax has been deducted.
Implementation of the new calculation should appear in all new marketing material and advertisements by 1 September and yields should be recalculated at least once a month.
Fund report and accounts, key features documents and other marketing documents with a relatively long shelf life would need to reflect the new yield requirements at the next reprint or by 31 January 2001 at the latest.
The new standard will effect bond funds which are included in the UK corporate bond, UK other bond, UK gilt and global bond sectors.
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