How to Read a Fund Factsheet Without Falling for the Marketing

If you’re a fund and/or ETF investor, you’ll be familiar with fund factsheets. These fund summaries are designed to inform investors, but it’s also well-known that marketing teams often use them to present their funds attractively.  

Here’s how to separate the useful information in fund factsheets from the flattering performance charts and polished investment stories that can monopolise investors’ attention… 

The Secret About Fund Factsheets  

Here’s the thing with fund factsheets: a well-presented fund factsheet can make almost any investment look compelling. 

The combination of a photograph of the manager in a suit and tie, a carefully chosen performance chart and several reassuring phrases about ‘disciplined processes’ or ‘high-conviction opportunities’ can create the impression of experience and expertise.  

Behind this marketing gloss, the information that matters to investors may be de-emphasised.  

Facts like: what the fund owns, what it costs, how much risk it takes and whether its stated performance is meaningful. 

The Order of Information is Important 

With this knowledge in mind, the best way to handle fund factsheets is to read them in the right order, while giving appropriate weighting to the key pieces of information. 

Where to start? 

It’s generally best to start with a fund’s investment objective, rather than the presented fund returns. 

What does the fund invest in? 

What result is it seeking?  

What is the period over which it expects to achieve that result? 

When considering objectives, words such as ‘income’, ‘capital growth’, ‘capital preservation’ and ‘absolute return’ are not interchangeable. 

Consider the difference between the Vanguard Australian Shares Index ETF (ASX: VAS) and the Betashares Global Sustainability Leaders ETF (ASX: ETHI).  

VAS seeks to track the S&P/ASX 300 Index before fees, expenses and tax. This is a relatively broad Australian index which extends beyond large caps to include the mid-cap universe. 

ETHI tracks a specialised index of global companies that satisfy the fund’s climate and responsible-investment screens. This is a global index with an ethical screen which aims to generate its performance responsibly. 

Both are equity ETFs, but they provide access to portfolios with materially different objectives. 

So, before considering performance, focus on the role a fund is intended to perform. 

A growth fund should be judged as a higher risk exposure rather than a defensive holding.  

An income fund should be assessed for its longer-term track record of raising its distributions rather than merely because its latest distribution was unusually high.  

A sustainability fund should be assessed on its actual screening and portfolio-construction rules. 

Different goals, different roles. 

Focus on Longer-Term Performance 

Of course, most investors focus on fund performance at the get-go. That should be the next thing on your list. 

Just make sure you’re focusing on meaningful performance numbers which provide a useful gauge of a manager’s skill. 

That means focusing on the longer-term data rather than the short-term numbers. 

This is because a strong one-year return may reflect an unusually favourable starting point, a concentrated exposure to one successful sector or a temporary currency movement. It tells you what happened over the past year, but not necessarily whether a fund’s process is repeatable. 

In our article entitled ‘Should you invest with a manager enjoying a purple patch?’, we discussed the dangers of investing based on very strong short-term performance, and what ensued in the case of the ARK Innovation Fund. The lesson was that being cautious after strong short-term fund performance is generally in investors’ best interests.  

Hence, it’s important to compare a fund’s three, five and, where available, ten-year figures.  

It’s also worthwhile checking further details for context regarding those numbers: 

1. Determine whether returns are shown before or after fees (gross or net).
   
   Professional fund managers should be presenting their fees net of fees because this is the return their investors actually receive. 

2. Check whether distributions have been reinvested in the return calculation.
   
   In most cases, they will have been. This is the standard industry approach. 

3. Double-check the dates the performance figures cover.
   
   A factsheet published this month may still contain figures from the previous quarter. 

Check the Benchmark 

Next, check the benchmark. 

A fund’s benchmark should fairly resemble its investable universe.  

For example, an Australian large-cap fund might reasonably use the S&P/ASX 200 or S&P/ASX 300 as its benchmark.  

A global sustainability strategy, however, may use a customised ESG index rather than a broad global equity benchmark.  

But if a global fund is using an Australian index as its benchmark, that’s a warning signal worth paying attention to. 

ETFs deserve scrutiny on this front too.  

Their objective is generally not to beat the benchmark, but to track it before fees and costs. A persistent return gap versus their chosen benchmark may indicate overly high management costs, transaction expenses, tax effects or tracking error. 

Check Out a Fund’s Holdings  

It’s time to look under the hood. 

A fund’s holdings tell you what it owns. 

Most funds publish their top ten holdings in their fund factsheets. Read these alongside their combined weight. A top-ten weighting of 20%, for example, is indicative of a far more diversified portfolio than one of 60%. 

Also, look for overlap with investments you already hold. An investor may own several differently branded global ETFs and be repeatedly exposed to the same large US technology companies. This is particularly relevant given the long-term dominance of US big tech in most global portfolios.  

Sector and country weights are equally revealing. A global fund may be dominated by the US market. An ‘income’ strategy may depend heavily on banks. A sustainable portfolio may have substantial exposure to technology because its screening process excludes carbon-intensive industries. 

Read Beyond the Risk Label 

Next, it’s time to make yourself Head of Risk. 

Fund factsheets typically present risk as a number or risk band.  

Treat this simple view of risk as a starting point, rather than a complete diagnosis. 

A volatility-based label won’t fully reveal a fund’s concentration, leverage, credit quality, currency exposure or the difficulty of selling underlying assets during a stressed market. These issues may well require further digging during your due diligence process. 

At the same time, it’s worth reading the risk data presented in fund factsheets. 

A fund’s maximum drawdown is a commonly stated figure which shows you how far a fund fell from its peak (known in the industry as the high-water mark) during its largest sell-off. That’s useful context.  

For example, if a fund fell 25% during the Global Financial Crisis and that was its maximum drawdown, that’s confirmation it’s a relatively defensive fund. In contrast, a maximum drawdown of 65% during the same event reveals a fund that’s much more exposed to downside risks. 

Don’t make the mistake of assuming those major drawdown events won’t recur in the future. At some point, they should be expected as a normal (and healthy) part of the investment journey. 

Include All the Fees 

Fees next. 

The headline management fee may not be the total cost of investing in a managed fund. 

Depending on the product, investors may also face performance fees, transaction costs, expense recoveries and a buy-sell spread.  

ETF investors can incur brokerage and the gap between the market bid and offer prices. 

Check the Inception Date & Whether the Returns are Real or Simulated 

‘Since inception’ is one of the most widespread and accepted phrases in fund factsheets. 

A fund launched immediately before a strong market recovery may display an impressive result despite having a limited track record.  

A ten-year-old index may have a much longer history than the ETF that tracks it. 

For example, Vanguard’s Australian Shares Index ETF began in May 2009, while its equivalent unlisted Australian Shares Index Fund dates to June 1997. The strategies are related, but the vehicles don’t have identical operating histories. 

Check whether the presented performance chart represents the fund, an index, a back-tested strategy or another share class.  

And a word of warning: simulated results can illustrate how a methodology might have behaved, but they are not the same as returns delivered with real investor money. 

Understand What Liquid Means 

Checking liquidity is also worthwhile. 

An ETF trading on an exchange is generally easier to buy and sell than an unlisted fund with monthly or quarterly withdrawals.  

That doesn’t mean every ETF is liquid though. Look at the bid-offer spread, trading activity and liquidity of the underlying assets.  

This is particularly important during sell-offs. An ETF can continue trading during market stress while its price falls well below its net asset value.  

During periods of severe dislocation, the ability to sell may remain available, but only at an unattractive price. 

For unlisted property, private credit and private-market funds, check redemption windows, notice periods, withdrawal limits and the manager’s power to suspend redemptions. Open-ended doesn’t necessarily mean available on demand. 

Don’t Ignore Portfolio Turnover 

Finally, check out a fund’s portfolio turnover. 

This indicates how actively securities are being bought and sold. 

For example, a fund turnover rate of 70% indicates an average holding period of 1.4 years. 

High turnover may be essential for a strategy, particularly for hedged or geared strategies. 

But frequent trading tends to increase transaction costs while potentially producing less favourable tax outcomes.  

Low turnover may support efficiency, although it could also indicate that a manager has been slow to respond to changing conditions. 

Compare turnover with a fund’s stated philosophy. A supposedly patient, long-term investor reporting extremely high turnover is a potential red flag. 

Read Fund Factsheets to Your Advantage 

A fund factsheet is most useful when read in an order that adds value for investors rather than in the way most are designed.  

Begin with the fund mandate, benchmark and portfolio rather than the headline return. Separate the history of the fund from the history of its index. Examine its concentration and overlap with your existing fund and ETF holdings, then connect the risk label to plausible losses and liquidity constraints. Finally, add together the costs that appear in different parts of the document. 

Fund factsheets are the beginning of the due diligence process, rather than the entire process. Investors should continue by reading the PDS, examining the full holdings and comparing with similar funds and ETFs. The clearer the comparison, the less influence the marketing is likely to have on your decision. That’s the way it should be. 

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.