How to read a unit trust factsheet

This article was first published in the 3rd quarter 2017 edition of Personal Finance magazine.

CAPE TOWN - Legislation requires that all unit trusts produce a minimum disclosure document, which is normally called a factsheet. This document details how the unit trust operates, its performance, its risk profile, and the costs associated with it. You can use factsheets to get more insights into the unit trusts you are considering and to compare their characteristics. This should help you to make more informed investment decisions.

Each of the sections on the factsheet builds a picture of the personality of the unit trust. Using this, you can compare unit trusts and make decisions based on comparable facts. 

The sections of a factsheet are designed to answer the following questions:

1. What is the unit trust’s objective and benchmark?
This section lays out the definition of success for a unit trust, by stating its goal and benchmark. A unit trust measures its success in achieving its goal by comparing its return to that of a benchmark. 

You can use benchmarks to evaluate performance. For example, in the case of the Allan Gray Balanced Fund, the benchmark is the weighted average return of all the unit trusts in its category (excluding Allan Gray unit trusts). 

When appraising a unit trust, you should look at whether its benchmark is appropriate, because it may be used to determine the fees charged by the unit trust. If it charges performance fees, a unit trust with a lower benchmark than that of others in the same category may cost more, because it more easily collects fees when it clears that benchmark.

2. How does the unit trust aim to achieve its objective?
The mandate of a unit trust dictates what types of assets it buys into, while the investment philosophy of the manager describes the way the manager invests.

A single factsheet won’t show you whether the stated investment philosophy actually describes how the unit trust manager behaves. But if you are choosing between a few final unit trusts, it is worth reading the investment commentaries written by the portfolio managers over time, to get a sense of whether or not they are sticking to a tried-and-tested method. If this is the case, their long-term performance is probably a reasonable indicator of future outcomes.

A positive long-term track record that shows reasonably consistent performance at similar points in different market cycles also gives some indication that a manager is applying a consistent investment philosophy and process.

3. How much do I need to invest and what will it cost?
Unit trusts charge either a fixed percentage of the fund (a fixed fee) or a variable percentage based on performance (a performance fee). The factsheet will show the basis for calculating the fee, and the average annual total fees and expenses in the fund over the past three years (the total expense ratio). 

You should aim to get value for money with fees, so a unit trust that charges fees above the average of its peers should also deliver above-average returns. 

Since performance is easy to measure, you would expect that more expensive unit trusts would always be better than cheaper ones, but that is not the case. Some cheaper unit trusts are very good value for money, and some expensive ones are very poor value for money. 

Well-designed performance fees can help to make sure that you pay a high fee only if the unit trust performs well. 

A factsheet will also include the minimum investment amounts. Many very good unit trusts have lower minimums than you would expect, particularly if you make a monthly contribution. 

4. How has the unit trust performed in the past?
On every factsheet, somewhere in the fine print, you will have language saying something to this effect: “Past performance is not necessarily a guide to future performance.” With this warning in mind, it is important to tread carefully when using performance as an indicator – particularly when it is used in isolation. Read the performance figures alongside the investment philosophy and the risk numbers to get a clearer picture of how the unit trust operates. 

Having said that, over long periods, good performance is more likely to be an indicator of a good manager and is unlikely to be the result of pure luck. Short-term returns (less than three years) can vary widely and are often meaningless when it comes to selecting a unit trust, but long-term returns can show a skillful manager. 

5. How much risk has the unit trust taken on to achieve its returns?
Risk and performance are intertwined and you cannot speak about one without mentioning the other. On a factsheet, the relevant numbers to note will include: 

• Maximum drawdown: the highest percentage decline the unit trust has had; 
• Positive months: the number of months the unit trusts has produced a positive return; 
• Monthly volatility (in some cases called the “standard deviation”): how much the unit trust’s return varies statistically from its average over time; and 
• Highest and lowest annual return: the highest and lowest returns over a 12-month period. 

Each of these measures show how well the manager has done to manage risk, but they also depend a lot on the type of assets in which the unit trust invests. 

Equity unit trusts will usually be the most risky, followed by balanced (high- and medium-equity multi-asset) unit trusts, low-equity unit trusts and money market unit trusts. 

These risk measures show the lived experience of being in that unit trust. If you, as the investor, cannot handle the ups and downs of being in the unit trust you choose, you could find yourself selling your investments at exactly the wrong time, just after a period of losses and before a period of 
recovery. 

What a factsheet will not tell you
Although some factsheets may include a “Who this is suitable for” section, no factsheet can tell you whether a unit trust fits into your broader portfolio and whether it matches your personal goals. If you need help to link your needs as an individual and the financial tools available to you, you would probably benefit from independent financial advice. A factsheet is a good summary that can help you to find out about a unit trust, but it cannot replace professional financial advice that speaks to your unique situation. 

Ray Mhere is the Johannesburg regional manager at Allan Gray.

This is an edited version of an article that was first published by Allan Gray. It is reprinted with permission.

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