The bonds will invest mainly in fixed-interest securities issued by the Government or commercial companies. As such, they earn fixed income yields.
Autif, the trade association of unit trust managers, recommends that fund managers should advertise more than the guaranteed tax-free income their portfolios will earn - a figure known as the distribution yield.
Autif wants funds to quote with at least equal prominence the redemption yield, which includes income and also fluctuations in the capital value of the individual bonds between now and the date they mature. These fluctuations reflect differences between the price at which the bonds were issued or bought by the fund, and the price at which they will mature and be redeemed.
Many existing portfolios contain bonds that were issued when interest rates were higher than now. The fixed interest they earn now looks very attractive so they are now valued above par. They will therefore lose some value by redemption and the redemption yield will tend to be a touch lower than the distribution yield.
But the Personal Investment Authority, which regulates the rules, has failed to give Autif's recommendation the force of its authority, and a number of funds are emphasising the distribution yield and playing the redemption yield down or not referring to it at all.
Likewise, some funds take an initial charge that reduces the capital value and therefore the redemption yield, while others charge against the income, which reduces the distribution yield. Some funds levy annual management charges against the capital value of the fund, which also depletes the redemption yield, but maintains the distribution yield.
Others take the charge against the income, which maintains the capital value but reduces the distribution yield. Funds will publicise the yield that best suits their book.
There is no absolute right way, of course, but investors should be aware of the principles involved and press for information on both yields before they buy.Reuse content