Reading a fund factsheet

A fund factsheet is a short standardised document containing the information required to assess whether a fund does what you want, at a cost you accept.

The objective

Where to start.

The stated investment objective and policy, which describes what the fund is trying to do and the constraints it operates under.

Whether it aims to track an index or to outperform one, which is the fundamental distinction.

The benchmark, if any, and whether it is appropriate — a fund benchmarked against an index it does not resemble is difficult to assess.

And any restrictions: geographic, sector, capitalisation or exclusion criteria.

The holdings

What you actually own.

The number of holdings, which indicates concentration.

The top ten holdings and what proportion of the fund they represent — a broad index fund may have a substantial share in its largest holdings if the underlying market is concentrated, which surprises people who assumed diversification.

Sector breakdown.

Geographic breakdown, which may differ substantially from the fund name.

Currency exposure.

And for bond funds: credit quality distribution, duration and yield.

The costs

Where several numbers appear.

The ongoing charge figure or equivalent, covering management and administration.

Transaction costs incurred within the fund, disclosed separately in some jurisdictions.

Any performance fee and how it is calculated.

Entry and exit charges, which are uncommon in modern retail funds and still exist.

And note that platform charges are additional and are not on the factsheet.

Performance

Which is the part everyone reads and which tells you least.

Discrete annual returns are more informative than cumulative figures, since cumulative returns can be dominated by one exceptional year.

Comparison against the benchmark over multiple periods.

For index funds, tracking difference against the index, which indicates how well the fund does its job.

And the regulatory warning, which exists because past performance is a weak predictor of future performance and is nonetheless the primary basis of most retail selection.

The risk indicators

Which are summary measures.

A risk indicator scale, typically running from low to high, which is standardised in some jurisdictions and is a crude summary.

Volatility, generally annualised standard deviation.

Maximum drawdown, where shown, which is the largest peak-to-trough fall — arguably the most useful single risk figure since it describes what actually happened.

And for active funds, tracking error and active share where disclosed.

The structural details

Which matter practically.

Fund size, since very small funds may close and force a disposal.

Launch date, since a short history limits assessment.

Domicile, which affects tax treatment for holders in different countries — this catches people holding funds domiciled somewhere with unfavourable treatment for their residence.

Share class, since the same fund frequently has several with different costs and minimum investments.

Accumulating or distributing.

Base currency and whether hedged share classes exist.

And the replication method for index funds: physical, sampled or synthetic.

The documents behind it

For anything you are seriously considering.

The key information document, which is standardised in several jurisdictions and includes cost and risk illustrations.

The prospectus, which is long and which contains the actual rules the fund operates under.

The annual report, which includes the full holdings and the auditor's report.

Most people will not read the prospectus, and skimming the key information document takes minutes and is worthwhile.

The questions to answer

Before buying.

What does this fund hold, actually?

How does it fit my existing holdings, and does it duplicate them?

What does it cost in total, including platform charges?

What is the worst it has done, and would I have held it through that?

Why this fund rather than a cheaper broad alternative?

And what would cause me to sell it, which is worth deciding before buying.

The red flags

Which appear on factsheets.

High charges with a portfolio closely resembling the benchmark.

A benchmark that is inappropriate or absent.

Very high concentration in a small number of holdings without that being the stated objective.

A very small fund size.

Complex structures that are not clearly explained.

Performance fees with no high-water mark.

And a strategy you cannot explain to someone else after reading the document, which is a reasonable test for any investment.

General information only, not investment advice. Investments can fall in value and past performance does not indicate future returns. Consult a regulated financial adviser.