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Isis warning on charge danger in yield search

Isis Asset Management is warning investors to beware of being stung

by charges to their underlying capital by choosing bond funds purely

on the basis of headline yield.

Income bond fund manager James Foster says investors frequently make

the mistake of selecting the fund with the highest yield, often

without realising that the annual charge is being taken from their

underlying capital.

Foster says that this practice has long been frowned upon but he

believes that falling bond yields have prompted many product

providers to adopt this method quietly instead of taking charges from

the income generated from the fund&#39s portfolio. He believes that half

of all UK bond funds now charge from the underlying capital.

With such an approach, Foster says companies can advertise their

funds as having a higher headline rate because the yield is not net

of charges. As the income method is net of charges, he says fund

managers&#39 headline rates look worse – giving investors the impression

that they are getting a poorer deal.

Foster fears that it will be years before most investors grasp the

distinction between the two methods.

He says: “We are now in a position where an increasing number of

funds are promoting themselves with income or running yields that are

significantly in excess of the redemption yields on offer. Even with

increased media scrutiny of the issue, it is still likely to be years

before the average investor understands the difference.”

Baronsworth Invest-ment Services director Colin Jackson says: “It is

particularly worrying to see that nearly half the country&#39s managers

now take their charges from capital. Adopting this &#39sleight of hand&#39

approach could well become a major issue a few years hence.”

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