In this article, we’re going to deviate from our norm and take you through what a unit trust fund fact sheet looks like and what it all means. While not a specific ‘step’ in your financial journey, understanding where your money goes is crucial to tackling Finance DIY head on.
We don’t expect you to become financial experts overnight and you’d do well to engage a good financial advisor when making investment decisions, but there are some basic things you should know when evaluating a unit trust.
Ask for a fact sheet.
At some stage in your engagement with a financial advisor, they will likely present you with a few fund fact sheets from unit trusts that they would suggest you invest in. If they don’t ever afford you the opportunity to do so, ask them to bring them along. It’s one of the best ways to understand what is inside the unit trust. Remember that a unit trust is only a vehicle to invest in. By itself it cannot give you an investment return. Only the asset classes within the unit trust will generate a return.
Fact sheets are prepared by the unit trust manager, often preparing a new one monthly or quarterly. It’s a brochure of sorts, but also has the technical details you might need to consider what it is exactly that you’re buying into and how much it will cost you.
We picked the Allan Gray Balanced Fund as our example.
What’s on the left?
The left side of the first page is a typical intro to the fund; explaining what the fund can and cannot invest in, and it explains who the fund might be suitable for. In this case, and as the fund has a fair amount of shares in it, Allan Gray has suggested that this fund is more appropriate for someone with more of a risk appetite. If in your meeting with a financial advisor, you have expressed a lower risk appetite or your financial advisor came to that conclusion for you, consider what is being presented to you and see if the fund manager would agree with the suitability of this unit trust for your needs.
This is also the first place where you can get a sense of what the asset classes within this unit trust are.
The second page shows you the asset allocation in more detail in a table. This unit trust holds quite a broad range, hence its namesake – being balanced across a range of asset classes.
What’s on the right?
On the right side is the prior performance of the fund. As we have done on many occasions, we need to caution you against placing reliance on historical performance. Prior performance is not, and cannot be indicative of future returns. Read this one on passive investing strategies if you need convincing.
It’s not just us saying this. On the last page of the fact sheet, under “Performance” Allan Gray acknowledge the same thing.
So while it is easy to get swept up into buying into something that has consistently outperformed a benchmark over many years, that means nothing going forward. The graphs are there purely for marketing purposes, as people get caught up in visuals, with the fund manager colour-branded performance line, extending above the grey, benchmark line.
Minimum investment amounts exist, and are all quite normal. In this case, the monthly debit order amounts are quite low (R500), so setting up a monthly debit order and paying yourself first is achievable.
Fees are important.
The Total Expense Ratio is the industry’s way of representing what investing in this unit trust might cost you. In this case, you are being charged 1.00% p.a. (VAT Excl) should the fund performance match the benchmark performance. Other fees are listed, including a performance fee should the fund do better than the benchmark, as well as other internal costs that you might incur.
The Annual management fee ranges from 0.5% (Excl) to 1.5% (Excl), all depending on the performance of the fund.
Next to the performance that the markets give you, fees are one of the few other items that will dictate your long-term investment returns. We talked about this in detail in this article on compounded costs. Ask your financial advisor if there are cheaper alternatives to the fund being proposed to you. Better yet, ask if there is an index fund that offers the same exposure to the asset classes in the proposed fund – these are typically much cheaper.
Here’s some more marketing for you.
The fund manager has given some commentary on the types of assets that the fund has invested in. You may find this interesting, but it’s certainly not compulsory reading.
Those are the basics.
There are things that we have not discussed in this article as a lot of it is not relevant for you right now. If you can follow what we’ve discussed above, you should be in a position to give any unit trust proposed to you, at least a high-level once-over and consider it for your investing needs.