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

We’re all told to “do your own research”. Yet how on Earth can you navigate the explosion-in-a-metrics factory that’s the average fund web page while still having time for things like, y’know, going to work and remembering who your spouse is?

Luckily most of the information is irrelevant to ordinary investors. It can be happily ignored.

In fact once you know what to look for you can breeze through the key information in a few minutes. It’s just a question of speaking the language – and ignoring the stuff that doesn’t matter.

Below we’ll crack the code for an equity index tracker. I’ll take you through all the vital statistics and explain what the terminology means.

Fund web page: name and objective

Fund name – This typically decomposes into fund manager (e.g. Vanguard), the index provider (e.g. FTSE), and the geographic region or market covered (e.g. Developed World excluding the UK). If you’re looking at a passive fund then that’s normally mentioned too: tracker, index, or ETF are the usual tells.

Word to the wise: not all ETFs are passive. Double-check that your pick tracks an index and not the mood swings of some fund manager.

Objective – The magic words we’re looking for here are something like, “Fund X seeks to track the performance of the index.” Or something to that effect. We’re just after reassurance that this is definitely an index tracker. Not some other confounded contraption.

We can also hope the objective might confirm what the fund does. For example, “Fund X invests in large and mid cap company shares in developed and emerging markets around the world.”

Key fund facts

Income / Accumulation Shares – 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. Thereafter you are master of their fate.

Inception date – The date the fund started trading. It takes a while for new funds to bed down and 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.

Fund names are often hideously mangled by online brokers. There can be multiple versions with very similar titles. For example US Dollar (USD) and British Pound (GBP) variants. It’s a world of confusion that can be solved by using the ISIN number. The Ticker symbol or SEDOL code for the London Stock Exchange will also do nicely.

Benchmark index – This is critical. What index does your tracker actually track? Does it cover the asset class you want? Does it expose you to the right securities? The best advice is to google the index and find out more. To choose the right tracker you need to choose the right index.

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. Secondly, the UK compensation scheme doesn’t apply outside dear old Blighty. Here’s a handy list of UK-based index funds to get you started.

Investment structure – Index funds are most likely to be Open-Ended Investment Companies (OEICs) or Unit Trusts. Less common but also on the guest list are Investment Companies with Variable Capital (ICVCs) or SICAVs (société d’investissement à capital variable) and FCPs (fonds commun de placement).

Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are fine too.

Total assets / Net 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. Anything over £100 million is typically profitable enough to survive.

Currency – This is a tricky area. The terminology is clear as mud.

A fund’s underlying currency determines your exposure to currency risk. Underlying currency equates to whatever the fund’s securities are actually valued in. For example, a global tracker will hold US shares (valued in USD) and Japanese shares (valued in yen). Thus a global fund includes many underlying currencies and the only way you can eliminate currency risk is by choosing a GBP-hedged version.

Base or denominated currency – The currency a fund reports its Net Asset Value (NAV) in. It distributes its dividends in this currency, too. You’ll often see this currency mentioned on the fund web page in the fund’s name. For example: Vanguard FTSE Emerging Markets UCITS ETF (USD). But note that base currency has nothing to do with currency risk. You aren’t exposed to the dollar in this case because the fund does not hold dollar-traded equities.

Trading currency – The currency in which the ETF trades on the London Stock Exchange.

Knowledge of the latter two currency types will help you avoid FX fees. (This is only an issue with ETFs. Index funds marketed in the UK trade and report in GBP.) As mentioned, currency exposure depends on fund’s underlying currency and is a fact of life unless you hedge. This piece on currency hedging equities can help you think through that decision.

Ex-dividend date – If you buy shares in this fund before its ex-dividend date then you will be eligible to receive its next dividend payment. If you sell your shares on or after the ex-dividend date, you’ll still receive the dividend.

If you buy shares on the ex-dividend 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 the distribution date.

Management charge

OCF/TER/AMC – The main cost of a fund is expressed as the Ongoing Charge Figure (OCF). An older and still widely-used name is the Total Expense Ratio (TER). Keep costs 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.

Our low-cost index funds page may help here.

AMC stands for Annual Management Charge. Ignore this if mentioned. It’s an old and misleading metric. Follow the money and find out what a fund’s TER or OCF is instead.

Transaction costs – Typically not mentioned on a fund web page but it should be because transaction costs amount to a significant chunk of your overall outlay. Learn how to uncover transaction costs. Fund managers generally hide these costs because ‘the regs’ don’t mandate that they must be published in locations that investors would find useful.

It’s also possible to measure the impact of transaction costs by digging into your passive fund’s tracking difference.

You shouldn’t pay any other fees for trackers, so ignore red herrings like ‘Zero entry or exit fee’ messages. Those imaginary wins are right up there with political nonsense like, ‘No meat taxes’ and ‘No compulsory car sharing’.

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.

Instead, a passive investing strategy relies upon a diversified asset allocation to deliver your expected return.

If, for example, you decide you should own a Developed World fund in your diversified portfolio, then 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 potentially locking-in future success.

The main use of consulting performance figures on the fund web page is to check that your fund is doing what a tracker should. Which is 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 of less than three years. The longer the track record, the more trustworthy the data. We really want at least five years of worth of results to make an informed decision. Ideally more.

Check out our post on the best global tracker funds for a good example of how to incorporate performance results into your decision-making.

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

Portfolio data

First and foremost, you want the fund to be the near-identical twin of its index. Ideally the fund and index will 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). It will be more diversified and it’s 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 (all things being equal).

Price/earnings ratio – The P/E ratio is a method of valuing stocks and markets. The lower the ratio the more likely it is that the underlying shares are undervalued. It’s far from guaranteed 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. If you’re after a value fund then the lower the P/B ratio, the better.

Turnover rate – Low equals good. The turnover rate 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 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.

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 fund web page.

I personally don’t think this is a particularly useful figure. Everybody 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.

Down down, deeper and down

You can dip even deeper to 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.1

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 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. It should form the bedrock of our equity allocation.

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. 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.

Sustainability characteristics

We’re highly sceptical about the reliability of ESG metrics, not to mention how comparable they are across funds.

Naturally, there’s no shortage of firms who will happily offer you methodologies and numbers in an effort to reassure you that your money is being invested in line with your values.

But if you’d like to question the veracity of those claims then try googling, ‘ESG greenwashing’. Or just try reading a few of the underlying methodologies and see if you can make head or tail of it.

There are certainly ways to express our values in favour of preserving the planet and a decent society. But we think you’re more likely to exert influence though voting and being mindful of how you consume, rather than by taking ESG scores at face value.

Other useful fund web page tidbits

Product structure / Replication method – An important thing to understand about any fund is how it goes about replicating its index.

• ‘Physical’ means the fund’s manager actually buys the stocks that make up the index being tracked.

• ‘Synthetic’ or ‘swap’ means they don’t buy the stocks that make up the index. Instead they use a financial derivative called a total return swap to deliver the index return. (Mad science! It’s enough to make you want to sharpen your pitchfork and storm the Doctor’s castle!)

• ‘Full’ means a physical fund owns every stock in the index. You should therefore expect faithful replication.

• ‘Blended’, ‘sampling’, or ‘optimised’ means that the fund’s managers ape the index with less than a full hand of the underlying stocks. Normally this is because the index represents an expensive or illiquid market (for example some emerging markets) that would make buying every stock very costly.

Reporting fund status – If your tracker is domiciled overseas then make sure it is a reporting fund. 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 if you’re a higher-rate taxpayer.

UCITS compliant – UCITS is a regulatory standard for funds sold in the UK and EU. Among other things, UCITS lays down the law on niceties such as counterparty 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’s running such a securities lending programme and how the revenue is shared, if at all.

Securities lending exposes investors to counterparty risk and collateral risk.

KIIDs and other animals

Your fund’s Key Investor Information Document (KIID) and factsheet are also worth a look. Sometimes they contain extra info not included on the fund web page. The annual report can also reveal useful nuggets, if you’re happy to continue down the research rabbit hole.

However, the best tip – if you’re missing any of the info I’ve cited above – is to head over to an independent data keeper like Morningstar or justETF. They’re both treasure troves of fund data and maintain individual web pages for most trackers plus useful comparison tools.

We’ve previously written a short-ish walk-through of how to compare funds.

But there’s one other trick someone naughty might try if they can’t find the information they want. Which is to reload the fund web page in another browser and tick the box that indicates they’re a ‘professional advisor’ or ‘institutional investor’.

You’ll often be trusted with much more information under this guise. Whether you should tick the box is your decision.

Best of luck out there. Once you’ve got your eye in, you’ll find a quick interrogation of a fund’s home page and a good grounding in the investing basics will give you the measure of most mainstream trackers.

And if the fund is into weird stuff then steer clear – unless you know exactly what you’re doing.

Take it steady,

The Accumulator

1. If you’re investing in niche products that expose you to aqua-farming or leveraged oil and gas futures or what have you (I wouldn’t) then you’ll need to do all the research you can! [↩]

What caught my eye this week.

I am not holding my breath for the Spring Budget on Wednesday. The current occupants of Downing Street may be intellectual giants versus the LEGO figures that preceded them. But low expectations can’t work miracles in the real world.

The UK economy is stagnant. The lunatic solution to our national woes has made things worse. The populace is still under the cosh from the cost of living squeeze at the low-end and a growing tax burden for the rest of us. I guess the richest are alright – with interest rates plateauing and markets bouncing back – but there’s a limit to how much a wealthy elite can pay for everyone else.

Some of this is cyclical. Things aren’t much better elsewhere, outside of the US. Perhaps the best thing chancellor Jeremy Hunt could do is sit on his hands and tell us to hang on in there. We’re too frazzled for more drama on the economic front. And I’d prefer they stopped fiddling with ISAs and pensions.

It seems I’m not alone in craving some stability. As Chris Giles wrote in the FT this week [search result] Hunt inherited political as well as fiscal handcuffs from his bungling predecessors:

The irony is that Truss’s most concrete economic legacy is to give economic radicalism a bad name.

Languishing with just 1% average annual economic growth since 2007 compared with 2.5% in the previous 17 years, the economy is crying out for reform, starting with this Budget.

[But…]

Were a government to show radicalism here, opponents would soon raise the ghost of Liz Truss as a weapon against it. UK taxes are not only rising but becoming more complicated, with tapers leading to extreme rates as child benefit, childcare subsidies and personal allowances are removed from the rich. Many of these have arisen because of the focus on whether changes are progressive or regressive.

Truss was right to attack knee-jerk thinking along these lines in September 2022 — what matters is the overall impact of redistribution, not individual effects. But her incompetence in voicing a sensible economic argument prevents other politicians from taking a similar stance. None could withstand the association of those ideas with Truss.

Her failure, and her naive policy positions, will undermine sensible budgetary reform in the UK for years to come.

I suppose something must be done, though. Hunt can’t just whip out a copy of Piketty from of his dispatch box and put his feet up.

Don’t panic!

To that end Simon Lambert offers a wish list in This Is Money on sorting out the UK’s messy tax system.

Abolish the personal allowance taper above £100,000 and the Child Benefit tax trap. Scrap stamp duty or cut it to a flat 1%. Peg student loans to a proper measure of inflation. Unfreeze the tax thresholds.

It’ll all cost money, but I agree it’s more sensible than knocking 1% off income tax or national insurance.

You probably do too. But that’s why we’re not politicians, I suppose.

If we were politicians then we’d read headlines like Britain For Sale: The country’s biggest firms are being picked off ‘one by one’ as foreign predators pounce – and we’d see not a symptom but an opportunity.

As I wrote on X, UK companies aren’t going cheap because of the lack of extra tax breaks.

Listed British companies are cheap and more vulnerable to overseas takeovers than they were because the pound is still down eight years after the Referendum, global fund managers rightly decided the UK was going through a political moment of madness and stepped aside, and our domestic economy hasn’t done anything good to change their minds.

We were promised Singapore on the Thames. They gave us Walmington-on-Sea.

And instead of putting their hands up and admitting we made a terrible mistake, we get renewed talk of a Dad’s Army ISA.

This is all as predictable as it is ill-conceived.

Never mind that a Great British ISA would encourage a home bias that UK investors have only just shaken off. Or that it would enshrine another no-no – encouraging the tax tail to wag the investment dog, as the saying goes.

I don’t think it’ll actually happen, though the chance to slap the Union Jack on something can never be discounted these days.

Even the platforms have warned against it. They’d normally welcome all the sweeteners they can get.

But if we must must have more ISA complications, then it had better be an additional ISA. Not an unhelpful disincentive on private investors putting their money into global markets, by restricting how they can invest the existing £20,000 ISA allowance.

Put that light out!

What we really need is for these tax wrappers to be set in stone, and the annual limits indexed to inflation.

Perhaps they might be usefully reviewed once every 5-10 years. But not every six months! We are trying to plan for our lifetimes with our personal finances. Not for the electoral cycle.

The uncertainty around the Lifetime Pensions Allowance is a case in point. Hunt sensibly scrapped it last year. But Labour – presumed to be the government in waiting – says it’ll bring it back.

How are people supposed to make life-changing decisions about their pensions in this light?

Returning again to the FT:

…some advisers are recommending their clients crystallise excess funds to protect against a future tax charge, but with no guarantees. Wealth manager Tideway Wealth is advising clients […] to crystallise ahead of any election and ideally before April 5. After that date there are some changes to pension death benefits which you may want to avoid by doing the crystallisation before then.

Or then again, maybe they shouldn’t? The article is full of caveats and on the other hands and rightly so.

Pension are complicated enough, without adding a Wheel of Fortune angle to the legislation.

Remember these are savings amassed over 30-40 years that are meant to last for decades more to come. They should not be subject to the last-minute whims of politicians of any stripe.

Ho hum. For a more sober roundup of the announcements Hunt could make next week, head over to Which.

Let’s see where we stand by the end of play Wednesday.

[continue reading…]