Financial Planning

Five questions your client’s fund fact sheet should answer

By: Gontse Tsatsi, Head of Retail Distribution at Old Mutual Investment Group

Reading a Unit Trust fund fact sheet can feel overwhelming, some may even consider it an extreme sport – what with all the financial terms, acronyms, and percentages. In reality, the fund fact sheet isn’t nearly as confusing as it first seems.

All the clients need to understand are a few basics. Once they do, they’ll realise that making sense of a fund fact sheet goes a long way in helping them decide which unit trust best suits their investment needs.

With so many options available, the fund fact sheet, also known as a minimum disclosure document (MDD), is a good start in making this process easier.

Using the Old Mutual Albaraka Balanced Fund fact sheet as an example, here are the five most important questions a fund fact sheet should answer.

1. Does the fund’s objective suit my needs?

To help investors determine which unit trust is best suited to reach their financial goals, a fund fact sheet should provide a summary of the fund’s objective, its mandate and the market or region in which it operates.

For example, the Old Mutual Albaraka Balanced Fund fact sheet states that the fund offers investors an ethical investment that provides steady long-term capital growth underpinned by Islam’s prohibition on charging interest on capital and buying shares in companies that cause social harm.

The fact sheet also outlines the kind of investor the fund is most suitable for, helping investors determine whether or not the fund is suitable for them. It also provides an indication of the minimum recommended length of time an investor should commit to in order to best meet their investment goals.

2. How much risk do I need in exchange for performance?

Risk profiles provide investors with an indication of how risky or volatile the underlying fund assets are likely to be over time. If they are risk-averse, their instinct may be to avoid more volatile funds. It’s important for them to remember, however, that risk and performance go hand in hand. Generally, funds bearing greater risk tend to achieve higher returns over the long term, thus mitigating the risk of loss.

While most people want quick, high returns, investing is really about balance – balancing what you need or want with what you are able or willing to risk. Key considerations when weighing up risk include the client’s preferred investment period and the desired return.

The use of ‘balance’ in Old Mutual Albaraka Balanced Fund suggests that the fund is a mix of asset classes. This means that it seeks to strike an equilibrium between risk and return, which is the perfect diversified solution for investment terms of five years and longer.

3. What is the objective of the unit trust relative to its benchmark?

Every unit trust fund has a benchmark against which the fund’s success is assessed. A fund’s benchmark is determined relatively simply: it can be an index, its Association for Savings and Investment South Africa (ASISA) category average, or an inflation-based target.

A positive long-term track record relative to benchmarks that show realistic, steady performance tends to offer investors some evidence that a fund manager is meeting its mandate.

4. What does the reported fund performance actually mean?

While every fund will tell you that past performance is no indication of future returns, it remains a good start. Performance indicators show investors the level of return that the fund has provided. The fund’s fact sheet will report this as a percentage of the fund’s net return excluding costs.

When reading these figures, it is essential to note that short-term fluctuations are relatively meaningless. More significant indicators of performance happen over the long-term, and the recommended investment period returns will show the true ability of the manager and the fund.

5. What will the investment cost me?

There are two parts to this answer – the amount you will need to invest and the cost of that investment (i.e. fees).

All fund fact sheets will indicate what the minimum investment for the fund is. For example, the Albaraka Balanced Fund requires a monthly contribution of at least R500 or a once-off lump sum of no less than R10 000 and an ad hoc minimum of R500. Different funds have different requirements, and you will simply have to find the fund that suits the client’s budget and needs.

In terms of costs, a fund fact sheet will typically display fees according to their fund class (depending where the fund is accessed, i.e. is it based in South Africa). As with any other purchase that you make, aim to get the most value for your money. Because unit trusts generally measure their success by comparing their return to that of a benchmark, investors should measure the costs associated with investing by looking at the total expense ratio (TER) of each fund.

Represented as a percentage, TER is a global standard used to measure the total costs associated with managing and operating a unit trust. Charges related to TER consist primarily of management fees and additional expenses such as trading, legal, and auditor fees and other operational costs. Transaction Costs (TCs), which are often represented as an additional expense, should also be considered as they’re necessary to administer the fund.

While the TER ratio is very helpful to compare funds, it shouldn’t be viewed in isolation as many other factors might affect returns over time. In addition to TER and TCs, market returns, the type of fund, and investment decisions taken by the investment manager should be taken into account when selecting a fund.

Now that the basics are clear, investing in unit trusts will be simple and accessible.

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