New Rules for Advertising Mutual-Fund Yields May Confuse Investors

Another of the new government rules covering mutual funds took effect Friday, and industry officials are worried that the regulation may cause some confusion until investors get used to it.

The new rule governs advertising of mutual-fund yields, a measure of what might be described as a fund’s “earning power.” And it requires funds to use a standard formula to arrive at the yield numbers listed in ads and sales literature.

In addition, funds have been required since May 1 to use standard methods for calculating “total return”--a measure that includes share price movement as well as dividends and interest payments.

Together the new rules, approved earlier this year by the Securities and Exchange Commission, will bring a level of uniformity heretofore unknown in mutual-fund advertising.

The SEC’s goal was to provide investors with the kind of data that would allow them to make meaningful comparisons between funds.

Until now, fund advertising has had to be accurate, but funds have been given considerable latitude in choosing time periods and other variables to use in formulating their ads. Not unexpectedly, funds have tended to select the ones that make them look best, with the result that many funds in every category have been able to advertise themselves as top performers.

Investors who already hold fund shares, however, may notice some discrepancy between advertised yields under the new regulation and what they actually receive in distributions.

These differences could arise for several reasons.

First, under the new SEC rule, yield can include only dividends and interest earned by the fund. Distributions can include short-term capital gains realized by the fund from sale of assets from its portfolio or from sale of options on its assets.

Second, there can be timing differences. The SEC rule requires that yield be based on dividends and interest accrued by the fund over a recent 30-day period. Distributions, however, aren’t necessarily based on the same period, and even if they are, distributions may not match the accrued income for the period.

Finally, there may be accounting differences. The SEC specifies the accounting method that funds must use in yield calculations, but other methods are acceptable in calculating distributions. For example, the Investment Company Institute, a mutual fund trade group, notes that the SEC requires that when funds buy bonds at more or less than face value, a portion of these premiums or discounts must be included in the yield calculations. However, “generally accepted accounting principles” do not require such inclusions.

The new uniform yield numbers will be helpful to investors in income funds, but they should be careful not to lose sight of total return figures. Bond prices move in the opposite direction from interest rates, depressing share prices even as yields rise.

Many shareholders last year found that though their funds had yields of 12% or more, rising interest rates pushed share prices down so much that their total return for the year was zero or less.