Finance & Investment

How to read a unit trust’s fund fact sheet

Note: This is a continuation of a previous article: “ETFs vs Unit Trusts”.

Hi! So,you’ve decided to look further into Unit Trust investments after reading ETFs vs Unit Trusts.

Whether you eventually decide to approach a financial advisor, or directly buy into the fund yourself, it is essential that you understand what exactly you are investing in. This is critical, as without a proper understanding of your investments, you may lack the conviction needed to stay invested in the long run and may be susceptible to irrational decision-making during market downturns.

To gain an overview of a Unit Trust, we need to take a look at something called a fund fact sheet. Every Unit Trust comes with a fund fact sheet, which lays out critical information to potential investors, such as fund size, historical performance of the fund, as well as the fund’s top holdings.

In this example, we are looking at a fund fact sheet from Schroders Investments Management Limited, which is a British asset management company. Schroders is one of many asset management companies in Singapore, with other big names such as Blackrock, Allianz etc.

In general, a decision on which unit trust to buy into can be made after analyzing the components of a Unit Trust’s fund fact sheet.

Those components can namely be broken down into:

1. Fund Name
2. Fund Objectives
3. Fund Details
4. Variance/Risk Statistics
5. Historical Price Information
6. Fund’s Largest Holdings
7. Asset Class Allocation
8. Necessary Disclaimers

1.Fund Name

When you are looking to buy a new phone or laptop, you always look for its name, based on brand and model number (eg. Apple Macbook Pro 13” 2018). Similarly, we look to the name of the fund to learn more about it.

As you can see,the name of a UT provides several key pieces of information.

1.Geography: In this case, “Asian” refers to assets from Asia.Other classes of fund geography include and are not limited to: “Global”, “European”, “US” etc.

2.Aim: The fund aims to provide a regular stream of income to the investor in the form of dividend payments. Other aims include “growth”, which focuses on reinvestment of dividends for long term capital growth.

3.Currency: Fund can be bought in/sold out of in terms of Singapore Dollars. If the fund was denominated in other currencies, such as “USD”/”RMB” etc., an investor will have to first change SGD into that currency before buying into the fund.

However, do take note that it does not mean that an investor is free from foreign exchange risk even if the fund is denominated in SGD,. This is because if the fund is invested in assets from other countries, the fund manager will still need to convert SGD into that countries’ currency.

Therefore, in order to combat volatility in the fund’s value due to foreign exchange fluctuations, funds may employ hedging, denoted by SGD-H. Hedging is simply an investment made by the fund manager to prevent excessive losses to their positions, reducing risk.

4.Dis/Acc

Dis = Distribution meaning regular payouts from the fund’s capital gains
Acc = Accumulation meaning reinvestment of capital gains/dividends to increase the compounding effect.

Several funds may give investors the choice of picking between Dis or Acc options

Investors should pick between the 2 depending on their investment objectives, whether it is to gain a stream of income paid at fixed intervals(Dis), or to accumulate for long term growth(Acc)

2.Fund Objectives

An important part of investing is about setting goals. Once you have an idea of what your end goal should be, you can see if the fund objectives align with your goals.

Time Horizon:
In general,
Short Term – Less than 3 years
Medium Term – 3 to 10 years
Long Term – Longer than 10 years

Disclaimer:
“Derivatives” refer to complex financial instrument such as options and future contracts that a fund may utilize to make hedges to their investments to reduce certain risk exposure.

The fund will clearly state its objectives on the fund fact sheet, and investors should refer to this section to determine if the fund’s objectives align with their own risk tolerance and goals.

For instance, if an investor has a low risk tolerance and wants a regular income stream, he should pick a bond fund rather than an equity fund.

3.Fund Details

Thinking back to the Macbook example, when deciding between laptops, you have to compare its technical specifications to determine whether its reliability and suitability.

Similarly, we look to a fund’s details, to learn more about its components.

Launch Date: The day the fund began its operations. In general, looking for funds with a longer track record usually gives more information on the fund’s overall performance. This is because funds with shorter track records may have the returns skewed by initial growth in its first few years, but without proven record of being able to survive economic downturns.

Subscription mode: SRS refers to the Supplementary Retirement Scheme, which is a voluntary contribution retirement account individuals in Singapore use to gain tax benefits. Individuals are able to use funds from their SRS accounts to invest in Unit Trusts such as this fund.

Sales charge: Initial commissions paid by an investor buying into the fund. The higher the sales charge, the smaller the proportion of the investors’ money actually goes into the fund. Thus, a lower sales charge is better.

Management fees: Similar to sales charge, the fees are annual commissions paid to the fund manager. Lower management fees are better for investors.

NAV: Fund’s total assets minus liabilities, divided by the total number of units. Refers to the per-share value of the fund.

Fund Size: Shows the total assets under management. Too small a fund size may lead to inefficiency, due to lack of economies of scale, causing miscellaneous fees to become more significant. However, too big a fund may cause fund managers to overstretch themselves and make decision errors in picking assets.

Average Credit Rating: Assets held under management all have credit ratings awarded by rating agencies such as Moody’s/S&P/Fitch. Credit ratings reflect the risk of default associated with various assets. In this case, an average rating of BB refers to on average, assets being “high-yield”.

The higher the credit rating, the lower the risk of default, which is better for investors who want stability and lower risk. Yet, while this means lower risk, it also means lower returns for investors.

Average Duration: Refers to the average sensitivity of bond or other debt instrument’s prices to changes in interest rates. Average duration = 4.7 means that if interest rates increase by 1%, average bond prices held under management will decrease by 4.7%, vice versa. A shorter duration will represent lower risk exposure to interest rate changes.

ISIN and Bloomberg Code: International Securities Identification Number and Bloomberg codes are used to identify companies/securities.

4.Variance/Risk Statistics

Compared to other laptops, how would your MacBook perform? Variance statistics for UTs similarly compare a fund’s performance to the rest of the market.

These statistics are more complicated and may not be as relevant to the layman who lacks understanding of financial concepts. However, you can use the following a guide to understanding the figures.

Beta: measures the volatility of the fund with respect to the entire market.

Beta = 1 – price strongly correlated with the market
Beta > 1 – price more volatile than the market
Beta < 1 – price less volatile than the market

High beta may lead to higher returns at the cost of greater volatility, while lower beta leads to lower returns with less volatility.

Standard Deviation: Used to capture the swings in a fund’s returns, to determine how consistent returns are over time. Lower S.D. represents more consistent returns than a fund with a higher S.D.

Sharpe Ratio: Measures returns in relation to the risk a fund undertakes. The higher the Sharpe ratio, the better its returns have been, in relation to the amount of risk undertaken by the fund.

The Sharpe ratio is important, as you can only reasonably justify taking more risk in exchange for higher returns. If you are able to get higher returns from an alternative investment of lower risk, you should pick that investment instead.

5.Historical Price Information

A consideration one may make in their laptop purchase may be its resale value after several years. Similarly, looking at historical price information may give you insight on how the value of your fund may change over time.

Offer Price: Price paid by investor.
Bid Price: Price sold by investor.

Eg. You spend $1000 to buy units of a fund with Offer price $1.05 and Bid price $1.00. This results in a bid-offer spread of 5%. Of that $1000, you will receive a total number of (1000/1.05) x 1.00 = 952.38 units

Thus, if you immediately sell your units, you will only receive $952.38.

This means that you are not able to quickly buy and sell out of a fund due to small price fluctuations, as you will need a return of 5.04% to break even. This reinforces the importance of picking a good fund you have conviction in, and holding long term to maximise gains.

Looking at the Fund (Offer-To-Bid) returns will give a real representation of returns after taking into account the bid-offer spread.

“Net dividends reinvested” – shows the returns the fund will have if instead of paying out dividends, they were instead reinvested into the fund.

With a price chart using bid-bid prices and dividends reinvested, it may be misleading toinvestors, as the actual returns will be lesser, given that dividends are paid out and commissions are paid via the bid-offer spread.

Thus, it is important to take the returns shown with a grain of salt.

6+7)Fund’s Largest Holdings/Asset Allocation

To determine whether a laptop is a good buy, you have to evaluate the quality of its internal components. Are they from good quality producers, or are they cheap parts? Looking at a fund’s asset allocation will give you an insight on whether the fund is made up of good quality components or not.

This component simply shows the top holdings in the fund.

It can be seen that there is a mix of assets to diversify the portfolio, with equity holdings from South Korea such as ST Telecom, as well as Singapore listed holdings such as Mapletree Commercial Trust REIT.

With a mix of asset classes and various companies from different geographical locations, it avoids concentration risk and this enables the price fluctuations to be smoothened out.

Asset allocation is important for investors to align their risk tolerance with the fund objectives. A fund with a higher composition of equities and derivatives will generally be of higher risk than that of a more fixed income focused fund.

8.Necessary Disclaimers

When you receive warranty for your laptop, it always states several disclaimers such as the company not being responsible for damage to the laptop caused by the user etc. Similarly, the fund manager will claim no responsibility to any losses etc made by the investor.

“Past performance… are not necessarily indicative of the future or likely performance”

Based on current rules and regulation, asset management companies are required to provide disclaimers to potential investors. This should always be a reminder that future returns are always unpredictable, and that individuals should invest based on their own risk tolerance.

In general, it is advisable to keep at least 6-12 months of monthly income as emergency savings before delving into investments, as they will likely be unavailable in the short-term.

Aside from the fund fact sheet, a fund’s prospectus provides more detailed information about the fund. However, unlike a fund fact sheet, a prospectus is typically more complex and investors should turn to financial advisors if they are not able to comprehend the contents of a prospectus.

Conclusion

If you’ve made it to the end of the article, congratulations!! You have an amazing attention span and a thirst for knowledge.

Either way, I hope that this guide provides valuable insights into those interested in learning more about Unit Trust investments, and through this, will be able to understand the content of a fund fact sheet to make more informed investment decisions.

Stay tuned for future articles!!

Disclaimer: All investment opinions made in this article are based on personal experiences and are meant for informational purposes only. As such, information from this article shall not be taken as investment advice, nor is not a substitute for financial advice provided by a professional. While we strive to provide accurate and up to date information, by engaging in investments, it will be at your own risk.