Important points to note

In terms of income and how this is distributed to investors, there are two types of class in a fund available to investors: ‘Income’ and ‘Accumulation’ classes.

• Income classes pass on the income received by the fund to the end investors of income classes. Income distributions to investors are made at predetermined intervals, typically annually, semi-annually, quarterly or monthly.
  • Income classes may also be described as ‘Distribution classes’ – it means the same thing.
  • Income received by a fund can be inconsistent, change significantly and is not guaranteed. The composition of a fund’s portfolio changes over time. Companies aren’t legally obliged to pay dividends. Tax rules can change and differ across countries, affecting the actual income received by a fund that has investments in multiple countries. Bonds may mature or be called early (redeemed) , which means that the interest income stream from that bond will cease and the fund manager will be required to find alternative investment opportunities. Therefore, the amount of income investors will receive will vary.
    
• Accumulation classes instead reinvest the income received so the fund’s capital can grow further. The way this works is that income is ‘credited to the fund’s capital’, meaning that it becomes part of the capital value of the fund. In practice, the value of each accumulation unit or share increases as a result, but the number of accumulation shares/units remains unchanged.

What is distributable income?

Some funds may first charge certain fund-related taxes and expenses to the income received by the fund. In this case, ‘distributable income’ is the income left after covering these taxes and expenses. This income is then made available for a distribution to investors holding income classes or crediting to capital, in the case of accumulation classes.

Some funds may instead charge fund-related expenses to capital, thereby maximising the amount of distributable income available. In other funds, the treatment of expenses may differ across classes and investors are encouraged to refer to the relevant fund’s prospectus on how fund-related expenses are treated.

When is income distributed?

Different income classes can have a different frequency of income distributions, e.g. annually, semi-annually, quarterly or monthly. The frequency of distributions will align with distribution periods. At the end of a distribution period the amount of income available is determined. The last day of the distribution period is also known as the ‘record date’ and is stated in the prospectus. The actual record date may move forward from what is stated in the prospectus if the scheduled date would have fallen on a weekend or bank holiday.

The shares are said to go ‘ex-dividend’ on the next business day after the record date.

‘Ex dividend’ refers to the time period between the end of the accounting period and the payment of the distribution relating to that accounting period. If investors sell a fund before the ex-dividend period, they will not be entitled to receive the payment. If they sell during the ex-dividend period they will still be entitled to receive the payment.

For income classes, any income available is paid out to investors on or before the relevant ‘income allocation date’ - this can also be referred to as the payment date.

As an example, an investor holds shares in a biannual distributing income class. Typical dates could be as follows:

Interim

• Start - 1 May
• End - 31 Oct
• Ex-dividend - 1 Nov
• Pay - 31 Dec 

Final

• Start - 1 Nov
• End - 30 Apr
• Ex-dividend - 1 May
• Pay - 30 Jun

What is income equalisation?

New investors should not be entitled to receive a share of the fund’s income which arose before the investor bought their units. However, if a new investor invests buys income shares between distribution dates, before the next ex-dividend date, they will still receive the full distribution at the end of the current period, the same amount as an existing investor, even though the new investor was only invested for part of the period for which the distribution relates.

In this case, on the first distribution following the purchase of shares they will receive an ‘equalisation payment’, alongside the income distribution.

This equalisation payment represents the value of the accrued income at the time of purchase, and effectively represents a return of original capital back to the investor, rather than a distribution of income. This equalisation amount is not subject to income tax. The equalisation payment is a deduction from the base cost of the units for capital gains tax purposes. This payment is the same for all investors who bought shares in this distribution period, rather than based on the date of each purchase.

The investor’s distribution voucher at the end of the first distribution period should show the amount of the returned equalisation payment.

What is income yield and how is it measured?

‘Income yield’ is the income an investment has generated (or is expected to generate) over a period, expressed as a percentage.

There are several ways of calculating income yield:

Backwards-looking measures

How much income has been generated in the past

Historic yield

• The historic yield reflects distributions declared over the past 12 months as a percentage of the price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions
• It is typically used for funds that invest in company shares.

Dividend yield

• The dividend yield reflects dividends declared over the past 12 months, as a percentage of the price of the fund, as at a particular date.
• It is typically used for investment trusts which invest in company shares.
• Investors should note that investors may be subject to tax on their dividends.

Forward-looking measures

How much income is expected to be generated in the future

Distribution yield

• The distribution yield reflects the amount that may be expected to be distributed over the next twelve months as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charge and investors may be subject to tax on distributions. The distribution yield is not an indicator of the future performance of the fund.
• It is typically used for bond funds.

Underlying yield

• The underlying yield reflects the annualised income net of expenses of the fund (calculated in accordance with relevant accounting standards) as a percentage of the mid-market unit price of the fund as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any preliminary charge and investors may be subject to tax in distributions. The underlying yield is not an indicator of the future performance of the fund.’
• The underlying yield is calculated in the same way as the distribution yield but is net of charges and therefore lower than the distribution yield.
• It is typically used for bond funds.

Yield to worst

• The yield to worst is a portfolio characteristic that reflects the lowest potential yield based on the current price of securities within the portfolio under the assumption there are no defaults and adjusted for the yield of derivatives (where applicable), hedged into the share class currency. The yield to worst is not an indicator of the future performance of the fund.
• It is typically used for bond funds.
• Investors should note that investors may be subject to tax on their distributions.