Analyzing mutual fund performance isn't easy

MUTUAL FUNDS Yields: Which figures do you use?

June 30, 1991|By WERNER RENBERG | WERNER RENBERG,(C) 1991, Werner Renberg

Now that the second quarter is over, you'll soon be seeing figures from mutual fund data services that will tell you how your funds have performed. In a few weeks, the funds will be sending you shareholder reports that should explain the factors behind the figures.

If you're invested in a bond fund for current income or are thinking about investing in one, you'll probably check on its yield as well as its total return (that is, price change plus dividends).

Don't be surprised if you see different percentages for the same fund, all intended to show its dividend rate.

And don't panic if, along with the numbers, you see different terms in addition to yield, such as "annualized distribution rate," "standardized 30-day yield," "30-day annualized yield," "30-day SEC yield," "current dividend rate at NAV (net asset value)," or "current dividend rate at POP (maximum public offering price)."

The explanation for this apparent confusion lies in rules issued in 1988 by the Securities and Exchange Commission for standardizing the funds' calculation and promotion of yields. The rules, requiring all bond funds to calculate yields according to the same complicated, SEC-supplied formula, were intended to prevent funds from reporting yields that were misleading to investors or not comparable with those of other funds.

Data services and others, however, don't have to comply. Many of them, including Lipper Analytical Services (which The Sun uses), have stuck to their traditional distribution rates.

The only figure the SEC permits funds to call yield is the net investment income per share during a base period, divided by the maximum offering price on the last day of the period.

Net investment income must reflect not only recent interest income minus expenses, but also the amount by which the prices of all bonds in a fund's portfolio will rise or fall, by the time they mature, from their current market values to their face values.

The designated base period is the latest 30 days. Income during this period must be annualized.

The maximum offering price is the price at which you can buy shares: the net asset value for no-load and back-end-load funds and the NAV plus sales charge for front-end load funds.

The resulting yield would differ from the distribution rate used by data services and others. That rate uses only actual distributions for the latest 12 months and the latest NAV.

The size of the difference depends on the trend in interest rates, the composition of a fund's portfolio and the load, if any.

To see an example of how far apart the two may be, look at the table, which provides data for Merrill Lynch's High Income Portfolio, one of the top long-run performers in the "junk bond" fund group as of March 31. As a fund with two classes of shares, it gives us a useful contrast between the data for front- and back-end load funds.

The SEC-based yields were high largely to reflect the potential appreciation of selling securities at discounts from face value.

Lest investors be too tempted by high yields based on its own formula, SEC asked managers of junk bond funds to advise shareholders of the risks associated with such investments. Merrill Lynch complied, stating, in part: "Current yields do not necessarily reflect the income stream that may be received in the future."

Note that dividends of a back-end load fund are lower than those of an identical front-end load fund.

That's because the former usually has higher expenses, including the so-called 12b-1 distribution fees out of which brokers are compensated in the absence of a front-end load. In the case of the Merrill Lynch fund, the 12b-1 fee for the Class B shares is 0.75 percent of average net assets.

Because bond funds should not be bought on the basis of yield alone, the SEC in 1988 also required funds to cite total returns for the latest year, five-year and 10-year periods (after adjustment for sales charges), along with yields, in sales literature or advertising.

If all the numbers confuse you, bear these points in mind:

* Whether you take your dividends or reinvest them, check on a fund's total return over time to see how consistently it performs and whether its portfolio is so risky that losses in principal significantly offset its income, resulting in reduced returns.

* No matter how they're calculated, yields for funds with low expenses are higher than for those with high expenses, all other things being equal.

* A small difference (of, say, half a percentage point) between the SEC-based yield and the distribution rate can be expected because of the different methods of calculation. It shouldn't upset you. But if you see a large difference, find out why.

* For a front-end load fund, a yield based on the public offering price is more significant than one based on its NAV. The significance diminishes after the first year the shares are held.

To simplify your analysis, you can limit yourself to no-load funds. An example of how rates can vary, depending on the data used in calculations.

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