Data Warehousing and Business Intelligence

17 June 2012

Distribution Yield vs Underlying Yield

Filed under: Business Knowledge — Vincent Rainardi @ 2:03 pm
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If we look at a fixed income investment such as high yield bond funds or high income equity funds on Fidelity, HL or Morningstar websites, sometimes we wonder what’s the difference between Distribution Yield, Historic Yield and Underlying Yield. One of the best people explaining this is NFU mutual (link), whereas the authoritative source in the UK is Investment Management Association (IMA, link, link)

  • Historic Yield is last 12 months, for equity funds
  • Distribution Yield is next 12 months, for bond funds
  • Underlying Yield is next 12 months, for bond funds, including the purchase price and expense.

Distribution Yield is useful for comparing between funds. This is what is planned to be given to the shareholder as dividend in the next 1 year, calculated based on the fixed interest payments of the bonds that the fund has.
Underlying Yield is better for measuring the income from the fund, because it takes into account the annual management charge.

Example1: a bond fund with distribution yield of 5.8% (this is the total dividend that should be given to shareholder in 1 year) has an annual management charge of 1.5%, so the underlying yield is 4.3%

Example2: an equity fund with historic yield of 3.5% (this is what has been given as dividend to the fund shareholders in the last 1 year) has an annual management charge of 1.7% so the “real yield” is 1.8%

Bond funds have another type of yield: yield to maturity, which the amount the fund receives from the bonds it holds. It is declared as 6 months rate.

For example: the fund has only 1 high yield bond, with 8% coupon. The yield to maturity is 3.923% because (1+3.923%)^2 = 1.08

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