A fund fact sheet gives an investor a snapshot of how a fund has performed, where the money is invested and what the risk profile of the fund is.
It also sets out the trustees of a unit trust, as the fund manager who operates the trust is only responsible for the investment decisions. So how does one read a fund fact sheet?
The performance of a fund, which is normally recorded as net of fees, could be given in two ways, according to Niël Hougaard, analyst and portfolio manager at Autus Fund Managers.
Cumulative performance shows the fund’s total performance over a specified period, for example one, three or five years or since the fund was established.
Annualised performance provides the fund’s returns as an annual equivalent, or how the fund performed over a period of time as if it was only for a 12-month period.
An important factor when gauging a fund’s performance is to measure it against something. For this, unit trusts use benchmarks, Hougaard explains.
“It is important that the choice of a fund’s benchmark reflects the mandate of the fund,” he says.
This means that the benchmark should display how the mandate would most likely perform in the absence of any active involvement from the portfolio manager, he adds.
For example, a unit trust that is primarily invested in stocks should use a suitable equity index as a benchmark.
It is also important that the unit trust achieves its objective, which is stated separately on fund fact sheets, Hougaard says.
If a unit trust’s aim is to grow capital over the medium term (between three and five years), it should achieve that over the specified period.
Outperforming a benchmark may not necessarily indicate that it has achieved its underlying aim, he adds.
Another important indicator for unit trusts is the level of risk that the managers of the fund are taking.
“I tell clients that ‘risk’ means that they could possibly lose money,” Hougaard says.
There are two types of risk of which to take cognisance, he explains. Absolute risk refers to the possibility that an investor could lose money, while relative risk means the unit trust could possibly perform less strongly than its benchmark.
Those investors with a low tolerance for risk, typically older people, should generally invest the bulk of their money in fixed-income type assets, such as bonds, the money market or cash.
People with a higher tolerance for risk, mostly younger folk, generally put more of their money into stocks and other equity-like assets.
Different measures for determining risk exist and some of these are reported in the monthly fund fact sheets.
The standard deviation of a fund’s performance indicates how volatile the performance of the fund may be over any given 12-month period, Hougaard explains.
The Sharpe ratio of a fund shows the performance of the fund relative to this volatility, he explains.
“Typically, the higher the risk, the higher the return,” Hougaard says.
This is an excerpt from an article that originally appeared in the 14 January 2016 edition of finweek. Buy and download the magazine here.