The four letters of the prescribed formula, why it differs from the distribution yield, and what it leaves out.
The 30-day SEC yield takes a fund's net investment income for the last 30 days, divides it by shares outstanding times the offering price, and annualises it with semiannual compounding: 2 × [((a − b) / (c × d) + 1)6 − 1]. For an illustrative loan fund earning $3.45 million in a month against $0.410 million of expenses, on 50.4 million shares at $9.85, the SEC yield is 7.46 per cent, against a trailing distribution yield of 6.29 per cent. Neither figure deducts a single default.
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The formula is prescribed for US mutual fund advertising so that funds quote yield on one basis. Each input has a precise meaning, and most disagreements about a fund's yield come from reading one of them loosely.
| Input | Value |
|---|---|
| a: income earned, yield basis | $3,450,000 |
| Expenses before waiver | $452,000 |
| Adviser fee waiver | $42,000 |
| b: expenses net of waiver | $410,000 |
| c: average shares entitled to distributions | 50,400,000 |
| d: maximum offering price, no load | $9.85 |
| Distributions per share, last twelve months | $0.62 |
SEC yield = 2 × [ ((a − b) / (c × d) + 1)6 − 1 ]
Excel: =2*(((A2-B2)/(C2*D2)+1)^6-1)
Step 1, net income. 3,450,000 less 410,000 is $3,040,000 for the month.
Step 2, the base. 50.4 million shares at $9.85 is $496,440,000, which is the fund's value at the offering price.
Step 3, the monthly rate. 3,040,000 / 496,440,000 is 0.6124 per cent.
Step 4, annualise. Compound six months, 1.0061246 = 1.037309, subtract one and double: 7.46 per cent. Multiplying the monthly rate by twelve would give 7.35 per cent; the prescribed formula compounds to a semiannual basis, so it reads slightly higher.
| Measure | Value | What it reflects |
|---|---|---|
| Gross income yield, before expenses | 8.49% | What the portfolio earns |
| 30-day SEC yield, with waiver | 7.46% | Last month's net income, annualised |
| 30-day SEC yield, unsubsidised | 7.36% | The same without the fee waiver |
| Distribution yield, trailing twelve months | 6.29% | What was actually paid, over the current price |
Expenses take 1.02 points off the gross yield, consistent with an expense ratio of about 0.99 per cent net. The waiver is worth 0.10 of a point; when it expires, the unsubsidised figure is the one to use.
The SEC yield is 1.17 points above the distribution yield. In a loan fund that gap usually means the coupons have reset upwards faster than the distribution has been raised, or that loans bought below par are accreting towards it. The SEC yield looks forward from last month; the distribution yield looks back over a year. When base rates are falling, the order reverses.
| Offering price d | SEC yield | Monthly income a | SEC yield |
|---|---|---|---|
| $9.50 | 7.74% | $3,000,000 | 6.34% |
| $9.85 (base) | 7.46% | $3,200,000 | 6.84% |
| $10.00 | 7.35% | $3,450,000 (base) | 7.46% |
| $10.20 | 7.20% | $3,700,000 | 8.09% |
A falling NAV raises the SEC yield, because the same income is divided by a smaller price. A fund whose loans are being marked down can therefore show a rising yield for the wrong reason.
Reading the SEC yield as an expected return. It counts interest as if every borrower pays. With an illustrative 3.00 per cent annual default rate and a 35 per cent loss given default, expected credit losses are 1.05 per cent a year, and the yield an investor can expect falls to 6.41 per cent before any price move. That is the same gap between displayed and earned that runs through what a floating-rate loan fund actually returns.
The second mistake belongs to the person computing it: using coupon cash for a. If this fund counted only the $3,180,000 of coupons received and ignored $270,000 of discount accretion, it would report 6.79 per cent. The rule computes income from yield to maturity precisely so that two funds holding the same loans at different prices report the same yield.
The Credit Investor takes a loan fund, three BDCs and an interval fund from the yield on the screen to the return actually earned, and the free workbook for this case carries every vehicle's income stack.
The SEC yield annualises the last 30 days of net investment income, computed on a yield basis; the distribution yield divides the last twelve months of payouts by the current price. In a loan fund whose coupons have reset upwards, the SEC yield can lead: 7.46 per cent against 6.29 per cent in the illustrative case, a gap of 1.17 points.
The same calculation with expenses before any fee waiver or reimbursement. In the illustrative fund, a $42,000 monthly waiver lifts the yield from 7.36 per cent to 7.46 per cent. Waivers are often temporary, so the unsubsidised figure is the better guide to what the fund will earn once they end.
No. It assumes every holding pays its interest. With an illustrative 3.00 per cent annual default rate and 35 per cent loss given default, expected credit losses are 1.05 per cent a year, so a 7.46 per cent SEC yield corresponds to about 6.41 per cent expected, before any change in the fund's price.
This article is one calculation from The Credit Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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