Retail investors face a disadvantage when selecting funds because they lack direct access to fund groups and managers to discuss underlying strategies before purchasing units.
Often, the information on fund factsheets is crucial, as it is the only up-to-date information available to them, meaning their decisions can be dependent on what they find in these monthly updates.
Although fund factsheets vary wildly, with some providing only limited and insufficient information, there are certain details investors must ensure are available before buying and should be cautious if they are not.
Meera Hearnden, investment director at Parmenion, said: “It’s difficult to make a judgement on whether or not to buy or sell a fund on the factsheet alone, but it’s a start for any investor to get an initial flavour of how the fund’s performed and its positioning, to then do further research.”
Cost disclosure
Fees are critical to the performance of any fund, as higher costs can eat into returns. Therefore, investors need to know exactly how much they will be charged and ensure it is appropriate.
As a result, a fund’s ongoing charge figure (OCF), annual management cost (AMC) and any additional costs such as performance fees or transaction costs should be clearly listed on the factsheet, with explanations of how they are applied.
Hearnden said: “One thing that isn’t provided but should be is how these fees compare to the sector average. This would really separate the wheat from the chaff and hopefully drive fund managers to be more competitive. It would also highlight if the fund is truly offering value for the risk-adjusted returns offered.”
Performance
‘Past performance is no guarantee of future results’ is one of the industry mantras. Yet, investors ought to know how the fund has performed historically to assess the manager’s skills and to put it in the context of the macro-environment.
Hearnden said: “The key question for any investor to ask is ‘what has driven that performance’. It’s easy to rule out a fund based on poor one- and three-year performance, but that could be because a fund’s style has been out of favour, for instance, and it could be on the cusp of a turnaround so it might be a mistake to rule it out purely on that basis. Alternatively, a period of very strong performance should also lead to further questions on whether that is sustainable going forward.”
Here, relevant benchmarks are a must. If a value fund is benchmarked against a broader market index, for example, it will have struggled over the long term versus a growth-heavy index, but may have performed well relative to its peers and a value orientated benchmark.
She added that she would like risk metrics to be included on factsheets alongside performance. While it isn’t the norm, they would enable investors to understand how the performance has been achieved on a risk-adjusted basis.
Top 10 holdings
A fund’s top 10 holdings can provide insight into the strategy, such as the manager’s investment style and the portfolio's level of concentration.
For example, an investor seeking a value strategy might be deterred by a top 10 holdings list filled with highly valued US tech stocks, while another looking for growth may avoid a fund dominated by high street banks and oil companies.
Similarly, a high level of concentration might be seen as either desirable, indicating active management, or undesirable, representing increased risk. Additionally, the top 10 holdings could reveal specific securities that investors might wish to avoid.
Worryingly, however, sometimes even this basic amount of detail is lacking, with some fund groups preferring other options such as top overweights and underweights relative to a benchmark, or listing the names without their weightings.
Nick Wood, head of fund research at Quilter Cheviot, said: “If an investor is relying on the factsheet for their ultimate investment decision, then being aware of the top 10 holdings, whether they match the investment strategy and how concentrated the portfolio is are all important to understanding the risk of the portfolio and how it might fit with other investments.”
Sector and regional breakdowns
Sector and regional breakdowns can reveal significant geographical or sectoral biases that an investor might find uncomfortable.
Hearnden argued that sectoral and regional positioning should be compared to the fund’s most relevant benchmark. This comparison would allow investors to evaluate how actively the fund is positioned and to understand the associated risks.
She said: “For example, a fund with over half the portfolio in just two sectors would raise eyebrows on diversification, or indeed a global fund with a high percentage in emerging markets would also lead to questions around risk.”
Fund features
Other key details such as fund size, launch date, and manager’s appointment date are crucial for assessing the fund’s liquidity, evaluating its historical performance and determining how much of this performance is attributable to the current manager.
Yield (if applicable) and the benchmark are also important, as they enable investors to calculate the amount of income they can expect and assess whether the fund is adding value compared to a tracker.
Hearnden concluded: “For bond funds you might want to include duration and the credit rating of the fund. This may be little bits of information but can amount to something useful when used together to form a view of the fund.”
Presentation and formatting
Lastly, while perhaps a strange thing to consider, monthly factsheets are an essential element of their marketing and therefore fund groups should make sure they are well presented and easy to understand. However, this is not always the case.
Wood noted that some factsheets are crammed with tables, numbers, charts and text that are difficult to read or understand. This can be more detrimental than helpful for retail investors.
He said: “These are public facing documents and as such, time and effort needs to be spent making them look appealing to investors and provide the critical points in a genuinely informative and engaging way.”