HL Guide To Fund Prices, Savings and Yields
HL Guide To Fund Prices, Savings and Yields
HL Guide To Fund Prices, Savings and Yields
Prices & Savings when more money is entering the fund than exiting the fund. This is nor-
mally the case as the number of units in a fund usually increases over time.
Funds fall into two main categories – unit trusts and open-ended invest-
ment companies (OEICs). They share many characteristics, for example If the opposite is true, and more money is exiting the fund than entering
both are normally priced once per day. The price is based on the net asset the fund, the manager may decide to price the fund on a ‘bid basis’. This
value (NAV) of the underlying holdings divided by the number of units or uses the ‘cancellation price’ as the starting point. This is the price the man-
shares in issue. Dealing for both types of fund takes place on a forward- ager receives when cancelling units by selling the underlying holdings.
pricing basis, which means that a buy or sell instruction is placed at the
next available valuation point. For this reason investors do not know the The bid price is set as the cancellation price, and the bid-offer spread add-
price they will pay or receive until after the deal is completed. ed to this to give the offer price. In effect the manager is reducing the initial
charge – note that the difference between the cost of creating units and the
Unit trusts and OEICs are both ‘open-ended’, which, normally speaking, offer price has reduced to 3.9%. The prices are calculated as follows (again
means that if more investors are buying units than selling, the manager with creation price at 100p for ease).
‘creates’ new units. If the opposite is true, the manager ‘cancels’ units in
the fund. In the above example, a full saving would reduce the price the investor
paid to the creation price, 100p. It appears as though our saving has re-
Unit trusts and OEICs differ in the way prices are displayed, and the way duced, but it is in fact still a full saving. In effect what has happened is that
charges and discounts operate. the manager has moved both the bid and offer prices downwards relative
to the creation price. This can have the effect of shifting the fund’s dealing
Please remember the value of investments can fall as well as rise, so you costs from those purchasing units to those selling units. This makes sense
could get back less than you invest. when there are more sellers than buyers, and protects investors remaining
in the fund.
Unit Trusts
Most unit trusts are ‘dual-priced’ – they have an offer (or buying) price, Maximum offer price = 105.5p
and a bid (or selling ) price. The difference between them is known as the
maximum saving =
bid-offer spread, and is made up of the initial charge, the difference be-
tween buying and selling price of the underlying holdings, and other costs Offer price = 103.9p
bid-offer spread = 6%
incurred by the fund (for example stockbroking commission and Stamp
Duty).
5.5%
Normally, the prices are calculated as follows. The manager starts with the Creation price = 100p
‘creation’ price, which is the cost of creating a new unit. This includes the
price of the underlying holdings which need to be purchased, plus all other
dealing costs borne by the manager. The initial charge is added to the crea- Bid price = cancellation price 98p
tion price to give the offer price, and the bid-offer spread subtracted from
the offer price to give the bid price. Here is a simple example - for ease we
have assumed that creation price is 100p.
OEICs
OEICs normally have one price for buying and selling, although some OE-
Offer price = 105.5p ICs are priced in the same way as unit trusts. The initial charge is simply
added to this single price when shares are purchased. Again we offer sav-
bid-offer spread = 6%
initial charge
ings on the initial charge so you pay a lower price than investors who buy
with no saving. Where we offer a full saving on the initial charge, buyers
=5.5%
tion price, and won’t entirely eliminate the bid-offer spread. In this exam-
ple, a full 5.5% saving would reduce the price paid to 100p; a 5% saving
=5.5%
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Investors Guide - Fund Prices, Savings and Yields
Funds denominated in ply pay out the interest it receives from the underlying holdings. Any
future capital gain or loss on the price of the bonds held by the fund is
a foreign currency not factored into the yield calculation.
Most funds are denominated in sterling. However, where a fund is denom- (ii) The effective method:
inated in a foreign currency we calculate the sterling price and display it In addition to paying out the interest it receives from the bonds in its
on our website. To ensure consistency, the sterling price for all funds is portfolio, a fund that distributes using the effective method will also
calculated at 4pm on each UK business day and is based on the prevail- take into account the fund manager’s estimate of any future capital
ing exchange rates at that point. The price you pay when you deal will gain or loss on the underlying bonds before making payments to in-
be determined by the exchange rate applied by the fund manager at the vestors.
point your fund is valued (the ‘valuation point’). If the exchange rate we
use differs from that the fund manager applies, because the exchange rate For example:
has moved between the valuation point of your fund and 4pm, or for any A fund buys a bond for 96p that is due to redeem at 100p in a year’s time.
other reason, then the price displayed on our website may be slightly dif- In that time the bond will also pay interest of 5p. Over the next year the
ferent from that arrived at by the fund manager on any given dealing day. fund will therefore receive a total return of 9p for every 96p invested: 5p
The price for funds denominated in foreign currencies that are displayed interest and 4p capital growth.
on our website should therefore be viewed as indicative only.
Calculating the yield using the coupon method:
Yields, by contrast, offer an indication of what you might receive, but Please note, these are examples only; they consider one bond in isolation.
they are not guaranteed. There are two reasons for this: In practice, a fund will hold a mixture of bonds, many of which will not
be held to their redemption date, and some of which might default. There
Firstly, yields are based on the income paid over the last year (for equity are therefore many different factors which, taken together, will ultimately
funds) or a snapshot of the assets held at any one time (for bond funds). determine an investor’s net income.
Over time the fund manager will change the underlying holdings to try
and maximise returns and so the income paid will vary too. The fund If the fund’s AMC is taken from income, its effect will be included in the
manager will be keen to improve the level of income each year or at least distribution yield, but not if the AMC is taken from capital. To see the
maintain it, but there are no guarantees that this will be achieved. effect of the AMC in these cases, it is necessary to look at the Underlying
Yield.
Secondly, there is no guarantee that companies will pay the same level
of dividends to their shareholders year-on-year. Hopefully they will pay Underlying Yield - The Underlying Yield is calculated in much the same
more, but they could pay less or even none at all. Similarly a company way as the effective method for the distribution yield. It therefore includes
could default on an income payment for a corporate bond. the effect of any future capital gain or loss, assuming bonds are held to
redemption. Unlike the Distribution Yield, it will always include the effect
It is also important to note how the Annual Management Charge (AMC) of the fund’s AMC, regardless of whether those charges are taken from
is paid. Charges can either be made against the capital of a fund or the income or capital.
income received. Where charges are made to capital it means the fund
can pay a higher level of income, but it reduces capital growth potential. Therefore, if a fund makes distributions on an effective basis and its AMC
is taken from income then the Underlying Yield will always be the same
Finally, please remember that capital values of stock market investments, as the Distribution Yield.
as well as yields, can fall as well as rise and therefore you could get back
less than you invest. Other methods of calculating bond fund yields
You might also see two other yields quoted. These are more common for
There are number of ways that yields are calculated; the method used will offshore funds.
differ depending on whether the fund invests in shares or bonds and its
distribution policy. Running Yield - This figure is calculated by looking at the income that
may be expected to be paid over the next twelve months by the bonds
Funds Investing in Shares held, and dividing this by the current unit price. It will include the effect
Historic Yield - The Historic Yield is calculated by looking at the income of the fund’s AMC only if the charge is taken from income. It is therefore
the fund has paid over the last year and dividing it by the current price. exactly the same as the Distribution Yield calculated using the coupon
method (see above).
For example:
Income paid by each unit over the last year: 4.2p Gross Redemption Yield - The Gross Redemption Yield is calculated in
Current price of each unit 100p almost exactly the same way as the Underlying Yield (see above). It there-
Historic Yield = 4.2 ÷ 100 = 0.042 or 4.2% fore takes account of any future capital gain or loss, assuming the bonds
in the portfolio are held to redemption, and always includes the effect of
Funds Investing in Bonds the fund’s AMC whether it is made against income or capital.
Distribution Yield - The Distribution Yield is an estimate of the income The principal difference between the Gross Redemption Yield and the Un-
that may be expected to be paid over the next twelve months divided by derlying Yield is that whereas the Underlying Yield calculates the future
the current unit price. Funds can make distributions in one of two ways: capital gain or loss using the purchase price of each bond, the Gross Re-
demption Yield uses the current market price.
(i) The coupon method:
If the fund makes distributions using the coupon method it will sim- 0317