A fund factsheet contains a handful of figures worth reading and several designed to impress. Knowing which is which takes a few minutes to learn.
Start With the Objective and the Benchmark
The objective states what the fund is trying to do, and the benchmark states what it measures itself against. Those two determine whether every other number on the page is good or bad, which is why reading them first matters. A fund aiming to track an index should be judged on how closely it does so, measured by tracking difference. A fund aiming to beat an index should be judged on whether it has, after costs, over a meaningful period. Comparing an active fund against the wrong benchmark is the most common way performance is presented favorably.
Check that the benchmark is appropriate. A global fund measured against a domestic index, or an equity fund measured against a cash rate, is being compared with something it should comfortably beat, which tells you very little.
The objective also tells you what the fund will not do. A fund restricted to one sector or region is not diversified regardless of how many holdings it has, and that concentration is a feature rather than a flaw if it is what you wanted.
Costs Are the Most Reliable Predictor
The ongoing charges figure is the annual cost of the fund as a percentage, including management and operating costs. It is deducted from the fund’s value rather than billed, which is why it is easy to overlook and why it compounds quietly over decades. This is the single most useful number on the page, because it is known in advance and entirely within your control, while returns are not. Over a long period the difference between a quarter of a percent and one and a half percent can amount to a substantial share of the final value with no difference in what is held.
Transaction costs sit inside the fund and are not always included in the ongoing figure. Funds that trade frequently incur more, which is part of why index tracking funds tend to cost less overall than the stated difference in management fees suggests.
Platform fees and any adviser charge sit on top. The relevant figure is the total of all layers, and asking for it as a single percentage is a reasonable request of anyone selling you a fund.
Reading Performance Honestly
Past performance figures are the most prominent and the least predictive. Look at them across several discrete years rather than as a cumulative figure, because a single exceptional year can dominate a five year number and tell you nothing about consistency. Check the period shown. A fund displaying three year performance when it has existed for eight is choosing the window, and comparing calendar year returns against the benchmark for each year is considerably more informative than any cumulative figure.
Performance is usually shown after the fund’s own charges and before any platform or adviser cost, which means your actual return is lower than the figure displayed. This is standard and worth remembering when comparing against a benchmark that has no costs at all.
Awards, ratings and star systems are mostly backward looking summaries of the same performance data. They are not evidence about the future and they correlate weakly with subsequent results.
Holdings, Allocation and Concentration
The top ten holdings and the sector and geographic breakdown tell you what the fund actually owns, which is often different from what the name suggests. A fund described as global may hold the large majority of its assets in one country, and a fund described as diversified may have a third of its value in ten companies. Check the overlap if you hold several funds. Two funds with different names frequently hold many of the same large companies, which means the diversification you believe you have may not exist. Adding a third similar fund increases complexity without reducing risk.
Number of holdings is a weak measure on its own. A fund with four hundred holdings where the top ten are forty percent of the value is concentrated despite the count.
For bond funds, the equivalent figures are duration and credit quality. Duration indicates sensitivity to interest rate changes, and credit quality indicates the risk of the borrowers. Both matter more than the yield figure that is usually displayed most prominently.
The Practical Reading
Four numbers cover most of it. The objective and benchmark to know what it is for, the ongoing charges figure to know what it costs, the top holdings and allocation to know what it owns, and discrete annual performance against the benchmark to see whether it does what it claims. That takes a few minutes and is considerably more useful than reading the commentary, which is written after the fact and explains whatever happened in terms that sound deliberate.
For most long term investors, a low cost fund tracking a broad index satisfies all four checks easily and requires no view on markets. The decision is then about how much to hold rather than which manager to choose.
Where you do choose an active fund, do it for a reason you can state, and judge it on the discrete annual figures against the right benchmark over a long period. Anything shorter than five years is noise, and switching on the basis of it is the most reliable way to turn a reasonable strategy into a poor result.
