There are numerous types of unit trusts from which to choose, and it can be quite daunting; and is said to be one of the reasons why some people decide not to invest in them. To assist individuals, each unit trust has a factsheet that can give you the opportunity to gain a more in-depth insight. It can serve as a means to compare the characteristics of the unit trusts you are considering purchasing.
South African legislation states that unit trusts must produce factsheets, formally known as a minimum disclosure document (MDD). The MDD explains how the unit trust may operate, its performance, its risk profile and the associated costs.
The information available on a factsheet
A factsheet is made up of multiple sections, each of which builds the ‘personality’ of the particular unit trust and can conclusively answer the following questions.
1. What is the unit trust’s benchmark and objective?
This section defines the unit trust’s objective and benchmark. The determination of a unit trust’s performance can be measured by comparing its return to the set benchmark.
Benchmarks can also be used as performance indicators that come in handy when reviewing your investments. This should ideally be done annually.
When assessing a unit trust, it’s best to look at whether the benchmark is appropriate. This could be used to determine fees charged by the unit trust, and a unit trust with a lower benchmark compared to others in the same category may cost more because it can collect fees when it clears the more achievable benchmark.
2. How does the unit trust aim to achieve its objective?
The mandate of a unit trust sets the types of assets it may buy. The way that the investment manager invests is known as their investment philosophy. The factsheet may not describe the manager’s behaviour, but you can read commentaries written by portfolio managers to ascertain whether or not their philosophy is following tried-and-tested methods.
3. How much do I need to invest, and what will it cost?
Unit trusts can charge a performance or a fixed fee. The factsheet can show you how the fee is calculated as well as the total expense ratio which is the average annual total fees and expenses in the fund over the last one- and/or three-year period. A factsheet should also include the minimum amounts required to invest. E.g. You can invest in a unit trust at a monthly contribution rate of R500.
4. How has the unit trust performed in the past?
In the fine print on a factsheet, you’ll typically find a variant of the following sentence: ‘Past performance is not necessarily a guide to future performance’. Therefore, it’s recommended that you read the performance figures alongside the investment philosophy and the risk numbers to gain a better understanding of how the unit trust operates.
In saying this, the investment manager’s financial know-how can also play a role in a good performance.
5. How much risk has the unit trust taken on to achieve its returns?
It should be noted that performance and risk are usually interwoven and need to be considered together. Take note of the following numbers that appear on the factsheet.
a) Percentage positive months: This is the percentage of calendar months the unit trust has produced a positive return since its inception.
b) Maximum drawdown: This is the highest percentage decline the unit trust has experienced.
c) Highest and lowest annual return: These are the highest and lowest returns over a yearly period.
d) Monthly volatility (also known as ‘standard deviation’): This is how much the unit trust’s return varies statistically from its average over time.
Information you cannot get from a factsheet
It’s unlikely that a factsheet can explicitly tell an investor whether the unit trust matches their financial goals and/or may be a good fit for investors’ broader portfolios. It’s probably best to seek professional financial advice.
A factsheet can be a decent summary that can give you more insight into a unit trust, but it’s not a substitute for professional financial advice that can be tailored to suit your investment goals.
Where can I find the factsheets?
Unit trust factsheets can usually be found on the investment manager’s website in PDF format.
