How To Read a Fund Factsheet Right
Interpreting a fund factsheet correctly to make a better-informed investment decision
In this article, I will discuss the key information in a fund factsheet and highlight some of the nuances you need to pay attention to when examining a factsheet to evaluate a fund.
Firstly, what is a fund factsheet?
A fund factsheet is a document provided by a fund manager to summarize the key features of a mutual fund it manages.
What is a mutual fund?
A mutual fund is a form of collective investments that pools money from various investors and invests that money in financial securities such as stocks, bonds, money market, or a combination of those, to achieve a certain investment objective. The last part of the description is important: “to achieve a certain objective”. I will explain why so later.
Why do you invest in a mutual fund?
There are different ways to approach your investments. A mutual fund is one of them. It is an easy way for a beginner investor as you outsource the investment decision to a professional. Seasoned investors may choose to invest in a mutual fund to enter a specific market segment that is not easy to enter such as emerging markets or has an active tilt such as a sector focus.
How to read a fund factsheet
A fund factsheet is the first thing you should look at when you evaluate a fund. It provides a snapshot of the fund including its investment objectives, size, inception, historical track records, risk, and portfolio characteristics. In this article, we will take a look at two factsheets, one for an Equity fund, and one for a Bond fund. Factsheets, of any investment asset classes, have many sections in common. The difference lies mainly in the Portfolio Statistics.
Equity Fund Factsheet
We use the Fidelity Global Financial Services Fund as an example for the Equity fund factsheet.
- The top left corner provides a basic overview of the fund: name of the fund manager, reference currency (or the base currency of the fund), fund size, and fees. Note there are two types of fees: sales charge at the initial investment of 5.25% which you pay to an intermediary such as a broker or a bank, and annual management fee of 1.5% which you pay to the fund house every year. Some funds charge at the time of withdrawal and some offer no-load charges. Do check out to be sure.
- Fund size indicates the establishment or popularity of the fund. A size too small may mean a lack of investor interest or a short time in existence. A size too big, although gives a sense of stability, may pose a challenge to the fund manager to find attractive investment opportunities.
- Investment objective: this is important to read and understand. Different funds have different objectives. Some provide long-term capital growth on an absolute basis, some aim to preserve your capital with a few percentages above a risk-free rate(such as the 3-month T-bill yield), and some aim to beat a benchmark. This section provides an idea if the fund’s objective is in line with yours or not. You should also bear it in mind to assess if the fund’s investments are aligned with the stated objective. For example, if the objective states the fund aims to preserve your capital, but you find out that it invests 3% of its AUM in private equity, that should raise the alarm.
- The next important section is the historical performance record. It is typically presented in a table, a chart, or both. Be sure to check on the periods displayed. The longer the period shows, the more informative it is. Hence, since launch performance is the best indicator. However, do note the period the fund is in existence. If it happens to exist in a good period such as the years of 2010 and 2019, the return since launch is very good. But that does not tell you much about the value add of the fund. You need to do a comparison, either with a relevant benchmark or with other funds. If the fund returns 30% in the period, which is good by itself, but the S&P returns 31%, it does not add much in value.
- One more important point when it comes to performance is that performance presented is gross of fees or net of fees. Simply speaking, gross of fees performance is return before the fees such as management fees and custody fees. Net of fees performance is the net return you as an investor bring home. In this example, the footnote says returns are NAV/NAV basis, which means it is net of fees returns. In this factsheet, Fidelity also calculates your return after deducting the 5% sales charge, and in different currencies.
- Some funds present a comparison against a benchmark, such as this fund. Some don’t. Do check what the benchmark is used and whether it is a relevant one.
- Fund exposures: a fund factsheet also presents typically two kinds of exposures: geography and sector. The geographic exposure gives you an idea of where the underlying investments are located, and the sector exposures to which industries the fund is exposed. This information indicates how diversified or concentrated the fund is. For example, the selected Fidelity fund has a high concentration in the US (58%) and the Financials sector (86%). This fund is a Global Financials fund. That explains its high holdings in the Financial sector, and in the US, which is a major component of the index. Take note of this to ensure you are comfortable with the exposures and be able to assess the potential impacts of market events on your fund.
- The next section I would like to mention is Portfolio Statistics. In this example, this section is named “Measures”. This section gives you an idea of the fund’s investment risks, including its volatility (in the form of standard deviation), beta (its correlation with the index), Sharpe ratio (a risk-adjusted return ratio), Price/Earnings, and Price/Book. More detailed interpretations of these metrics will be devoted to another article.
- A fund typically has different share classes for different currencies and different groups of investors (retail and institutional). Have a look at this section to see if it offers a share class in your preferred currency.
Bond Fund Factsheet
A bond fund factsheet shares many common sections as an equity fund factsheet. The main difference is in the portfolio statistics as a bond fund has its fixed-income characteristics such as duration, maturity, and yield.
Take the Blackrock Fixed Income Global Opportunities Fund as an example.
Many sections in this factsheet are the same as in the Fidelity Equity Global Financials fund described above, such as Key Facts, performance, top holdings, and sector exposures. The difference is the fixed income characteristics such as Duration, Yield to Worst, and Standard Deviation in the Portfolio Statistics section.
- Duration measures the interest rate sensitivity of a bond fund. 1.97 years indicates that if the interest rate goes up by 1%, the fund will go down by 1.97%.
- Yield to worst refers to the yield under the worst possible scenarios, usually when the bonds with callable options in the fund are called.
- Standard deviation indicates the volatility of the fund. A 3Y standard deviation of 1.58% is considered rather low. It means that in the past 3 years, the fund return goes either up or down by 1.58% roughly 68% percent of the time. This is a historical measure and it is dependent on the period it is measured.
Conclusion
This article does not aim to deep dive into the portfolio metrics presented in a factsheet. Those will be discussed in-depth in another article. I hope the information here helps you gain a better understanding of the key basics of a mutual fund and be aware of the important points to look out for when you evaluate a fund to invest in.
