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Yielding to FSA on bond fund ad campaigns

There was a barrage of advertisements in the Isa season that has just closed extolling the virtues of equity income and bond funds. The latter appears to have been more successful. According to figures from the Investment Management Association, corporate bond funds outsold equity income funds by six to one in February.

But following a guidance note issued by the FSA last week, fund firms will no longer be able to market their bond funds in the same way as they have for many years.

As part of its drive to standardise the way that financial products are promoted, the FSA is stipulating that all ads must give equal prominence to a fund&#39s gross redemption yield as well as its running yield.

Currently, fund groups tend to make the running – or income – yield the main feature of an ad, with the redemption yield given as an afterthought in the small print. They do this because the running yield is usually the higher figure – gross redemption yields have to take into account all charges. Although the guidance will stop this, fund managers question whether investors will find the ads clearer and easier to understand.

New Star Asset Management marketing director Rob Page says: “The guidance will certainly make the ads more consistent and we applaud the FSA for its efforts to standardise financial information. But we do wonder whether it will improve investors&#39 understanding of the product and make things clearer.”

According to IFAs, many investors do not grasp how bonds work and have little idea what yields really are, so doubling the amount of information that they do not understand is unlikely to improve clarity.

Nevertheless, many believe that, as yields are really the only basis for fund companies to promote bond funds, the FSA should make them include both figures to give a more accurate reflection of the product.

Hargreaves Lansdown investment manager Ben Yearsley says: “Quoting both yields is helpful – it shows a truer picture of a portfolio. Obviously, this assumes that people are going to hold their funds until redemption – which many are probably not going to do – but investors should be given as much information as possible.”

In fact, some IFA&#39s such as Alan Steel Asset Management consultant Alan Adam, believe the regulator should have acted earlier. Adam says: “It is typical of the FSA. It knows bonds have been oversold and is trying to dampen them down. But it is too late. Both yields should always have been given equal space. This has happened at least 18 months later than it should have.”

But it is also, according to some bond fund managers, going to make it much harder for them to market funds. A source in one major fund group says: “It is going to make it very difficult for bond houses to run ads with a big headline figure. It does pose a question about how a lot of companies will market their funds in the future.”

The main difficulty is that gross redemption yields and running yields can bear little relation to one another. Jupiter&#39s distribution fund, for example, has a running yield of 5.25 per cent and a gross redemption yield of 3.45 per cent.

The reason is that the fund is invested 65 per cent in corporate bonds and 35 per cent in equities. The gross redemption yield therefore only takes into account two-thirds of the fund, while the running yield represents the income of the whole fund.

In future, however, it seems as though Jupiter would have to market the fund using both figures side by side. Potentially, this could create confusion for investors and make Jupiter&#39s fund look less appealing than others which have similar gross redemption and running yields. But not everyone believes that increasing the amount of information in the main body of an ad will be detrimental to investors.

Bates Investment Services head of investments James Dalby says: “I think it is good news and will help promote financial education. Investors will see both figures and be forced into finding out why there are two yields. Their knowledge of the product would improve. For too long, fund managers have been able to do whatever they want.”

Although fund groups have had their wings clipped in choosing which yield to promote, they are still free to take charges from under-lying capital instead of from income – a move which allows them to display a hig-her running yield.

According to Isis Asset Management, half of all bond funds now adopt this approach. The guidelines will not be a deterrent to this, although there are other areas that will be affected.

One is a measure forcing fund firms to mention in the main body of the text the fact that gross redemption yields are a prediction and not guaranteed. The other is that the FSA will view yields quoted on the assumption that the fund is 100 per cent invested in bonds where, in fact, some is invested in cash as misleading.

Whether these new measures will work is open to question. Investors – and consumers in general – are becoming more sophisticated but improvements are coming at a glacial pace. The FSA is trying to aid this process through its conduct of business rules, which stipulate that ads must be “clear, fair and not misleading”.

Its new measures go some way to addressing the misleading problem – giving equal weight to both yields could be construed as fair but whether it has made any strides towards clearer advertising is another matter altogether.


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