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How to read a fund fact sheet

The best way to understand a fund is to read its literature. But having done so, you may well feel like an ancient king after consultation with his soothsayer – bemused, wary, and like you haven’t really got a straight answer.

It doesn’t help that the proffered information is fragmented across factsheets, prospectuses, KIIDs1 [1],websites, and independent data keepers like MorningStar.

However I’ve found that most of the info you need to buy any index tracker [2] is concentrated on the fact sheet. It’s just a question of speaking the language and ignoring the stuff that doesn’t matter.

So the rest of this piece will guide you through cracking the fact sheet code for an equity index tracker. I’ll take you through the vitals of a Vanguard index fund, explaining what all the terminology means.

Here’s the fact sheet as an annotated PDF [3], too, in case that’s easier to use. (You will need to download that PDF to your PC/Mac and open it in your usual PDF reader to see my annotations – they don’t show up in all web browsers).

The rest can be safely ignored as irrelevant to the average investor or as standard industry practice (in other words, you won’t get a better deal by switching to another product).

Where I’ve highlighted a section header then all of its accompanying text is worth a sweep.

Enter the fact sheet

Fact sheet formats tend to vary by fund manager but most of them contain similar information.

However, direct data comparisons are rarely straightforward as period dates and calculation methodologies differ. The investment industry loves its confusion marketing!

Below is the first half of the fact sheet for the Vanguard FTSE Developed World ex UK Equity Index fund. Remember, I’ve marked important bits in red…

Vanguard fact sheet - part 1 [4]

(Click to enlarge)

Let’s now run through what it all means.

Fund name and objective

Fund name [5] – This normally decomposes into Fund manager (e.g. Vanguard), geographic region covered (e.g. Developed World excluding the UK), and some indication that this is a passive fund (tracker, index or ETF are the usual tells).

Objective – The magic words we’re looking for here are that the fund “seeks to track the performance of the index” or that it will “closely match the performance of the index”. We’re just after reassurance that this is definitely an index fund and not some other confounded contraption.

Investment Strategy – Most of the fund industry will attempt to bamboozle you here with some marketing guff designed to reassure or impress you while conveying very little real information. Perhaps something about ‘seeking growth while providing income and mitigating downside risks’. But with an index fund you should be told how it replicates the index – by physically holding a sample of stocks, for example.

‘Holding each stock in approximate proportion to its index weighting’ means the fund is tracking a market cap index [6]. This is the way most trackers work unless they are smart beta [7] products or some other form of exotica.

Key fund facts

Income / Accumulation Shares [8] – How the fund distributes dividends. If you own accumulation shares then your fund automatically reinvests its dividends for you – fattening itself up until the day you need to sell. In contrast income shares deposit dividends into your account where you are master of their fate.

Inception date – The date the fund started trading. It takes a while for new funds to bed down so it makes sense to avoid one that’s been around for less than a year. The longer a fund’s track record, the more you can rely on its performance data.

ISIN – The International Securities Identification Number is the best way to identify your tracker across platforms [9]. Ticker symbols can vary and fund names are often hideously mangled by online brokers, but as long as you can cross-reference the ISIN number then you’ll know you’re investing in the right fund.

The SEDOL code for the London Stock Exchange can be useful, too, but don’t worry about the rest.

Benchmark – This is critical. What index [10] does your tracker actually track? Does it cover the asset class [11] you want? Does it expose you to the right securities? The best advice is to Google the index and find out more about it. To choose the right tracker [12] you need to choose the right index, too.

Domicile – What is your fund’s country of residence? It’s worth knowing for two reasons. Firstly, if it’s anywhere bar the UK, Ireland, or Luxembourg, then you’ll be exposed to withholding tax [13]. Secondly, the UK compensation scheme [14] doesn’t apply outside dear old Blighty. Ireland and Luxembourg have less generous terms.

Investment structure – Index funds should be Open-Ended Investment Companies (OEICs) or Unit Trusts. ETFs or ETCs are fine, too. Steer clear of any trackers that don’t conform to those structures.

Total assets – How big is the fund in millions of pounds? The larger it is the less vulnerable it is to being wound up if panicky investors flee. Big index trackers are rarely if ever closed. Closure results in your assets being sold and the proceeds returned to you in cash. The major downsides of this are you’ll be out of the market for a time and you may incur capital gains tax if your fund is liquidated outside of a tax shelter.

Base currency – Anything other than Sterling exposes you to foreign currency fluctuations. For example if your tracker’s base currency is the US dollar then the fund will increase in value if the dollar gains against the pound, setting aside the performance of the underlying stocks for the moment. This is known as currency risk [15].

Similarly, if the fund’s underlying dollar-priced stocks gain in value but the pound rises against the greenback then your fund’s performance will be lower than if currency exchange wasn’t an issue.

Foreign currency exposure is considered to be a neutral risk factor, though retirees generally shy away from too much of this extra volatility.

Many ETFs will list a Sterling version of a dollar fund on the stock exchange but this fund will still be subject to currency risk. It’s the base currency that matters, not the trading currency.

Ex dividend date – If you buy shares in the fund before this date then you will be eligible to receive the next dividend payment as long as you held the shares at any point on the ex dividend date. If you sell the shares after this point, you’ll still receive the dividend.

If you buy shares on this date then you won’t be eligible for the upcoming dividend payment. However the fund price typically falls by the amount of the dividend on this date, too, so you shouldn’t lose out.

Distribution date – Dividends are paid on this date.

Management Charge

AMC/TER/OCF – The main cost [16] of a fund is expressed as the Ongoing Charge Figure (OCF) [17]. The older and still widely used name is the Total Expense Ratio (TER) [18]. Keep this cost as low as you can because you pay it every year from your assets, regardless of whether your fund is a winner or a loser.

AMC stands for Annual Management Charge. Except in the case of Vanguard funds, the AMC is usually lower than the TER or the OCF. As such, it’s a misleading figure and you should always find out what a fund’s TER or OCF is instead.

Other fund charges – A dilution levy is okay because it covers the cost of trading the fund’s underlying stocks as individuals enter or leave the fund. As a passive investor [19], it’s not in your interest to pay a portion of those costs for speculators who rack up fees for everyone else by hokey-cokeying in and out.

Entry charges that cover the cost of stamp duty for UK funds are also fine.

Trading costs and stamp duty are paid by every fund. Funds which don’t levy these fees upfront will reclaim them by subtler means – usually through tracking error [20].

Avoid initial charges levied for any other reason. Also avoid performance fees. [21]

Quoted historic yield – This is usually calculated by summing the dividends paid over the last 12 months and dividing it by the unit price of the fund on the day quoted on the factsheet.

I personally don’t think this is a particularly useful figure because everyone seems to calculate it slightly differently, there’s no guarantee that future yields will be similar, and it’s the total return of the investment that counts, not just the yield. You may feel differently.

Performance

Past performance is over-rated as a useful measure of a fund. The past is no guarantee of the future and passive investors believe it’s near impossible to consistently pick the best funds [21].

Instead a passive investing strategy relies upon a diversified asset allocation [22] to deliver your expected return [23].

If for example you decide you need a Developed World fund in your diversified portfolio, you don’t ditch it just because the developed world takes a beating for a few years. A down-at-heel asset class will very likely rise again if you give it time. Meanwhile you’re buying it on the cheap and probably all but locking in future success.

The main use of performance figures is to check that your fund is doing what a tracker should – hugging its benchmark for dear life.

The closer your tracker’s returns shadow its benchmark (that is, its index), the better. Look at the returns net of expenses and ignore all data below three years. The longer the track record, the more trustworthy the data is. We really want at least five years of worth of results to make an informed decision, but that’s a luxury we don’t often get.

A good tracker will generally trail its benchmark by around the cost of its OCF. You’ll need to understand tracking error [24] to compare similar funds.

Deeper into the fund fact sheet

There’s more! Here’s the reverse side of the same fact sheet…

Vanguard fact sheet - fund characteristics [25]

(Click to enlarge)

Characteristics

Few fund managers aside from Vanguard will bathe you in this much data. If you’re interested though, you can usually find it for other funds via Morningstar.

First and foremost, you want the fund to be the near-identical twin of its index. Ideally they share very similar characteristics, perhaps with their hair parted on opposite sides.

If you’re comparing the specs of two similar funds, look at:

Number of stocks – The more stocks the fund holds the better (up to the benchmark number) as it will be more diversified and is more likely to replicate its index accurately.

Median market cap – If you’re comparing small cap funds, then the one with the lower median market cap holdings is more likely to capture the return premium [26] (all things being equal).

Price/earnings ratio – The P/E ratio [27] is a method of valuing stocks and markets. The lower the ratio the more likely your expected returns will be high in the future. It’s far from guaranteed [28] though and not much more reliable than “Red Sky At Night…”

Price/book ratio – The P/B ratio is an important measure of the value premium [29]. If you’re after a value fund then the lower the P/B ratio, the better.

Turnover rate – Low equals good. The turnover rate [30] is a measure of how often the fund trades. Trading incurs fees, so the lower the turnover, the less your return is being chiselled off by some Ferrari-driving [31] stockbroker.

Weighted exposure / Top 10 holdings / Top country diversification – Think of this section as a quick peek at the contents of your fund before you buy. It should be enough to give you a feel for what you’re getting into.

You can dip deeper and discover every single stock in the index, if you like. That’s generally not necessary though, provided you’re sticking with broad based index funds that track the UK, the developed world, or the broader emerging markets.2 [32]

Your main task is to make sure you’re aware of any big beasts in the room.

Is the index dominated by just a few stocks, or countries, or economic sectors? If so, is that a problem? Does it mean your portfolio is under-diversified overall?

An All-World tracker [33] shows you what a healthily diversified index looks like. This represents global capital’s best estimate of value. As such it’s probably a better choice than anything we can come up with on our own and so should form the bedrock of our equity allocation [34].

On the other hand if you’re invested say 50% in the UK, you’ll notice that the FTSE All-Share index is overweight in oil and gas and financials and underweight technology. The top five stocks account for more than 20% of the index. It’s not the most diversified index in the world, and the FTSE 100 even less so.

Diversification is the one free lunch in investing, so it’s a good reason not to pop too many Union Jack coloured eggs in your basket – nor any other tracker that’s hostage to the fortune of a few key players.

Not on this factsheet but on some others

Product methodology – An important thing to understand about any ETF is how it goes about replicating its index.

Reporting fund status – If your tracker is domiciled overseas then make sure it is a reporting fund [36]. Otherwise capital gains will be taxed as nasty income tax rather than mild and gentle CGT (if the fund is held outside of an ISA or SIPP).

Look out for excess reportable income [37] if you’re a higher rate taxpayer.

UCITS compliant – UCITS is a regulatory standard for funds sold in the EU. Among other things UCITS lays down the law on niceties such as counter-party risk, conflict of interest management, and the amount of information funds are required to disclose to retail investors. It should come as standard on any index tracker you buy.

Securities lending – Many funds lend out their securities to the likes of hedge funds to indulge in a spot of short-selling. The resulting bunce reduces costs, assuming the revenue is split between the fund manager and the investors. A good fund manager should tell you if it is running such a securities lending programme and how the revenue is shared, if at all.

Securities lending exposes investors to counter-party risk [38] and collateral risk.

KIIDs and other animals

Your fund’s Key Investor Information Document (KIID) is also worth a look because it normally provides a clearer explanation of the fund’s strategy and its past performance.

It’s also mercifully short.

A quick interrogation of a fund’s factsheet and a good grounding in the investing basics should help you get the measure of most useful index trackers out there. If they’re into weird stuff then steer clear, unless you know exactly what you’re doing.

Take it steady,

The Accumulator

  1. Key Investor Information Documents. [ [41]]
  2. If you’re investing in niche products that expose you to aquafarming or leveraged oil and gas futures or what have you (I wouldn’t) then you’ll need to do all the research you can! [ [42]]