Understanding a fund fact sheet

SHARE   |   Wednesday, 17 July 2019   |   By Keabetswe Lianna Koorapetse Dithebe Corner
Understanding  a fund fact sheet

At some point in our lives we have heard phrases such as ‘it takes a village to raise a child’ or ‘if you want to go fast go alone but if you want to far go together’. These phrases have implied that team work and collective effort can achieve great successes, most especially in challenging times.

Crowd-funding is becoming more and more popular these days. More people are losing faith in the government and the systems in place to help them achieve a better life. Just as we personally budget for our finances, the way the country budgets for the economy limits how much we can reasonably achieve with our financial planning efforts. There is always a way even where it seems like there is no way. And crowd-funding is one of those ways.

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Did you know that investment funds or portfolios are a type of crowd-funding investment strategy? Unlike the common collective crowd-funding identity where there are fewer participants that are involved in all investment decisions, an investment fund uses the same investor contributions but at a larger scale with the investor having very little control or participation in investment decisions.

Our financial planning topic for this week is UNDERSTANDING A FUND FACT SHEET 2. It was previously mentioned that investments and portfolio management form part of the base of most financial planning strategies to achieve identified financial and lifestyle goals. A fund fact sheet outlines the skeletal structure and identity of an investment fund.

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More aspects to look out for on a fund fact sheet are: fund objectives; asset class structure; investment geographical specifics; past performance; future performance estimations; and other fund facts.

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Fund objectives

At times, the fund objectives are stated under the fund name or in the fund management team section on a fund fact sheet. The objectives include the aim of the fund and an overview of the two main asset classes the fund will be investing in using investor funds.

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Asset class structure

To refresh our memories, a fund is a group of equities, bonds, cash and other commodities. These different asset classes have varying percentages to collectively make up a total of 100 percent for a whole investment fund. Most fund fact sheets use a pie chart to illustrate the different asset classes and their portions within a fund. This can be seen from the image of a circle with different split sections and unique shadings. This image is usually accompanied by a legend key which explains which shading represents which asset class and the percentage contribution to the fund.

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More detailed funds go as far as listing the top industry sectors (such as health care or technology) and major holdings (such as company names or full government bond names).

Be informed that unlike other investment funds, retirement funds legally have limits for some asset classes as a risk management strategy.

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Investment geographical specifics

It is important to know where our money is or will be invested as current and potential investors. A good fund fact sheet will list the top continents as well as the top countries in which investor contributions will go towards. These geographical specifics can give us an idea of where our asset classes are located. Some investors look to invest in the world’s strongest economies whilst some look to invest in emerging markets. Be mindful that although some funds may be registered locally and managed locally, a large number of them heavily invest outside the borders of our country. This does not help in the development our local investment industry, but it does give investors reasonable returns.

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Also, let us train ourselves to pick up on certain locations around the world that are usually a red flag for investments. These locations include those that are usually involved in high volumes of money laundering allegations. And let us not be too trusting of our investment professionals and investment firms. It is always our responsibility to thoroughly read any and every investment agreement we undertake. As it still happens that some well-established investment fund providers can invest in suspicious geographical areas without permission from investors or without offering a proper explanation.

Be informed that unlike other investment funds, retirement funds legally have a limit for how much can be invested internationally in relation to how much is invested locally (with a larger portion for local investments). This is to help in the development of our economy. However, it seems this law restriction has been overlooked at times where our local economy was yielding disturbingly very low returns.  

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Past performance

There is no absolute guarantee that our fund will perform as it did in the past. Past performance, usually expressed in a table, line graph or bar chart, gives us an idea of how our fund performs with regards to the effect of market fluctuations over time. Positive gradual returns are a good sign. Whilst some funds will have categorised returns of 1 yr., 3 yrs., 5 yrs. and so forth on a fund fact sheet, other funds like new funds do not have any past performance information which is understandable. Therefore, be sure to cross reference the fund date of inception with the reported past performance timeline as a safety measure.

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Be aware of a common practice in the financial industry that will express past performance in a table rather than a pictorial graph or chart. This can be because there is a lot of information to report on. Or this can be to disguise bad past performance either by hoping that we will not see any of the negative returns or by the simple fact that a line graph will clearly illustrate diminishing returns over time which might scare away many potential investors.

Future performance estimations

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There is no absolute guarantee that we as investors will receive the estimated returns stated in our fund fact sheet. We can only hope. New funds will definitely have a heavy reliance on future performance estimations. Therefore, let us cross reference the estimations with the stated risk profile to see if they reasonably make sense. When we are considering on undertaking any new fund, we must ask for more information about the fund. This information is usually provided in a booklet and presented to investment advisors at invitation only industry meetings when the fund is ready to be released into the market. Therefore, we must ask for this information either from the fund provider if we are making a direct purchase or ask our investment advisor or financial planner that recommends such a fund.

Other fund facts

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Other fund facts include the date of inception (the date when the fund officially began operating), fund currency (the currency basket or main currency in which the fund operates in), fund size (or net assets, is the total value under management in the fund), average maturity in years (average time it will take the fund to start producing maximum returns), average credit quality as rated by the major rating agencies (the same rating agencies that rate countries using rating categories such as AAA or BBB also rate some types of investment securities), fund management fees, investment policy on withdrawals and many more.

Deeper analysis of funds and their asset class composition will fall closer to the Financial Analyst profession. Us understanding the information on fund fact sheets and other informative channels can enable us to compare different funds to finally make informed financial decisions best fitted for our unique financial planning position.

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