How to read fund factsheets: a beginner's guide
Making investment decisions for your Isa or pension can be daunting. There seems to be a lot of information available to find suitable funds, but little guidance to help the average investor navigate their way through it. The fund factsheet is a good place to start.
Outlined below are some tips on how to read a fund factsheet and, where helpful, access other information readily available online. As in other walks of life, better investment decisions often arise from undertaking careful research.
For this exercise I have assumed we're checking out an actively managed standard UK Equity Income Oeic (Open Ended Investment Company), rather than a tracker or exchange traded fund.
It's important to point out that this is not just about finding the fund that has performed the best (which you can find out using our comparison tool to the right); it's about tracking down a fund that is most appropriate for your needs and one that you think has the best chance of delivering the performance you want.
Even disinterested investors know the phrase 'past performance is no guide to the future', and of course this is right. But a careful review of past performance is vital to learning about the fund.
Is the past performance shown on the factsheet the fund manager's entire track record? The current fund manager may have only been running the fund for a year, in which case any performance pre-dating this (whether good or bad) is irrelevant.
The absolute level and type of outperformance are equally important. Don't just look at one, three, five and 10-year numbers, look at it in discrete periods. For instance, has the manager consistently outperformed or has it been very lumpy? How has the fund performed when the Footsie is falling and when it is rising?
Most factsheets will show discrete relative performance periods, but website tools allow you to select different time periods covering contrasting market conditions. Fund performance should be compared to both the stock market and peer group, and there are plenty of internet sites that enable the latter.
Understanding fund risk is crucial and most factsheets show risk numbers. There are various measures of risk, but volatility (or standard deviation) is an important one. At a minimum, compare the fund's volatility to the stock market.
If the fund's volatility is 10 per cent and the stock market's is 15 per cent, then very broadly you can assume your fund is about two thirds as risky as the stock market. And, all other things being equal, you are likely to get about two thirds of the return.
Most factsheets will show you the fund's main holdings and in what countries or sectors it invests in. But investors have different tastes: for example, some prefer well-known, solid blue chips while others like the excitement and volatility of small caps.
Looking at this in more detail, ask yourself, are these the sorts of companies I would like to invest in? Are these the kind of sectors I'd like to invest in? How many companies do I want to hold? Most funds will have at least 25 holdings but some have more than 100.
All other things being equal, generally the more stocks in a fund, the less risky it is - but it's also likely to produce a lower return.
Finally, how much cash does the manager hold? Do you want your manager to sit on some cash if he feels it's the right place to be, or be fully invested in the stock market?
Remember you're giving your money to someone else to manage (and potentially lose!). Understand as much as you can about the manager. Often there will be a short bio on the factsheet but if not, google the name.
How long have they been managing money? What's their background and past experience? If you can, find out about the rest of the team. Does the fund manager have an impressive number two?
Other important factors include costs and yield. Costs include the management fee and ongoing fund charges (OFCs). These will vary by sector, so compare them to other funds. Past performance is all net of fees but that doesn't mean you shouldn't have a view on what you're willing to pay.
Yield equates to how much you're likely to be paid as a dividend. Yields can change, but most funds have a history of dividend payments which can help you form a view on their size, frequency and growth.
In summary, fund factsheets contain an impressive amount of information, much of which may not be obvious to the self-investor. By checking the factors listed above and making intelligent use of online information it's possible to reach an informed decision about the suitability of a fund, which is about much more than the fund's past performance.
It can be a time-consuming exercise though, so investors with larger portfolios may be better served by using the services of investment specialists who can 'look under the bonnet' of many funds to identify the best ones.
Andrew Summers is head of collectives at Investec Wealth & Investment.
We make every effort to ensure our beginner's guides are kept up-to-date. However, in the constantly shifting environment of investment and financial services, occasions may arise where elements of a guide become out-of-date. Please double-check the facts before taking any important financial decisions.