Underpinning all this is the industry’s commitment to the principle that information provided to investors should be clear, fair and not misleading.
We have seen good progress in firms adopting the guidelines but we are in a transition phase, with some firms adopting them before others. Until all funds use the guidelines, investors and advisers should take care when comparing funds. Nor should it be forgotten that firms are not under any obligation to publish yield data. What the IMA guidelines do ensure is that if funds use the terminology in the guidance, they follow the definitions and calculation methods specified.
A complication in the transition phase is that the new information is not uniformly available in the press, on data websites or from data providers. It is hoped that in the next few months, information will start to be published in the press, facilitating comparisons. What are the changes?
Equity funds making dividend distributions will move to showing historic yield. Distributions made or declared in the previous 12 months are expressed as a percentage of the mid-market unit/ share price on the yield date and if a fund’s expenses are charged to capital, this must be disclosed.
Bond funds which make interest distributions will offer two yields – the distribution and underlying yield – to replace running and redemption yields. The distribution yield reflects the distributions an investor can expect to receive in the next 12 months expressed as a percentage of the mid-market price of the fund on the yield date. The underlying yield allows yields to be compared on a consistent basis. It eliminates differences caused by funds’ policies for recognising expenses and what they will distribute. Where a firm charges a fund’s expenses to capital or distributes bond coupons instead of effective interest, the distribution yield will be higher than the underlying yield and will constrain capital growth to an equivalent extent.
Once the transition phase is over, there should be more information to understand and compare yields. Until then, direct comparisons may be misleading.
Mona Patel is head of communications at the Investment Management Association