How fund fact sheets help you choose the right fund

In our previous article on investment assumptions, we took a closer look at some important terminology and key inputs used in building an appropriate investment plan and portfolio. In this article, we shine a light on how you can use the information provided by investment managers like M&G Investments in our fund fact sheets to help you choose the right funds to meet your investment goals. These fact sheets can appear intimidating to some investors, given how much data is packed into them, but in fact they’re not difficult to understand once you read them more closely.

Financial services industry regulations require investment managers to produce fund fact sheets (also called minimum disclosure documents, or MDDs), for each of their funds. They are essentially documents that offer a succinct snapshot of all the important characteristics of a particular fund, updated monthly and/or quarterly. To help demonstrate how they work, below we review some of the key information contained in the fact sheets of three of our main funds.

M&G Equity Fund
In a fund fact sheet, you will typically see a fund’s investment objective, the type of investor the fund is best suited for (based on risk tolerance and time horizon), the fund’s investment mandate, a breakdown of its underlying assets, and its top-10 holdings.

As its name highlights, the M&G Equity Fund invests primarily in equities (shares). Its objective is to invest in shares that are well priced (i.e. below our assessment of fair value) and produce medium- to long-term capital growth. This is not to be confused with the fund’s benchmark, which is the specific measure against which its returns are compared over time. In this case, the M&G Equity Fund’s benchmark is the mean return of the ASISA South African Equity General Category.

The investment mandate goes into greater detail about how the fund hopes to achieve its objective. As equities come with higher short-term risk than some other assets (in that they are more volatile over shorter periods, but tend to smooth out over time), an investor with a high risk tolerance is recommended for equity investing. Given that the fund has a long-term orientation, investors should look to stay invested for at least seven years to allow the fund sufficient time to achieve its objective.

Performance track record
An important component of investment planning is the level of performance that you expect to receive from your investments. And while past performance is never a guarantee of future performance, a fund fact sheet will give you a record of the fund’s historic performance over various periods, which gives you a good indication of how the fund was managed throughout various economic cycles, both easy and difficult. The longer the track record, the more data you have on how well the managers have been able to meet their clients’ expectations in all conditions, and how successful their investment process has been.

For the M&G Equity Fund, below are the fund’s annualised returns as at 30 November 2021:

Source: Morningstar

Over the past year, the fund produced a phenomenal return of 36.4%, while its benchmark returned 26.3%. Over three years, the fund returned 15.8% p.a., and over seven years it returned 10.8% p.a. Over every annualised period it beat its benchmark. Now have a look at the 10-year return: 12.0% p.a.  And since inception, which is when the fund was launched, it has returned 16.3%. Very healthy indeed when you consider that over the same period inflation was around 5.1%%. The inception date is always provided on a fund fact sheet – in the case of this fund, it was launched on2 August 1999.

Now let’s look at the M&G Balanced Fund.

M&G Balanced Fund
A balanced fund typically invests in a range of different assets, which is why it’s also known as a multi-asset fund. Balanced funds will include equities, but also offer diversification across other, lower-risk assets in order to give investors relatively high potential returns for lower risk than a 100% equity fund. As the exposure to equities increases, so does the potential for higher returns, as well as the potential for volatility.

The information provided on the M&G Balanced Fund fact sheet is largely the same as that on the M&G Equity Fund fact sheet. You’ll notice that the fund objective, investor profile and investment mandate are different between the two, and that the asset allocation shows its diverse range of assets. As a result, it also has a lower risk profile than the equity fund. Plus, because the level of risk and investment time horizon influence each other, it has a lower investment horizon of five years. To get a better understanding of risk, read our article Savvy Investors Understand their Risk Profile.

Looking at the fund’s performance, we see that it has produced lower returns than the M&G Equity Fund over time, which is to be expected. Remember, this comes at a lower risk, since the higher the level of equity exposure in a fund, the higher the potential for return and also risk. That being said, this particular balanced fund is a multi-asset high equity fund, which means it can have an equity exposure of up to 75% of the portfolio.

From the table, we can see that the M&G Balanced Fund has notably outperformed its benchmark, the mean of the ASISA Multi-Asset High Equity category, over multiple annualised periods since its inception.

Source: Morningstar

M&G Inflation Plus Fund
Finally, let’s look at the M&G Inflation Plus Fund. This is an example of a multi-asset low-equity fund that is suited to investors with a lower risk tolerance compared to our equity and balanced funds. According to its fund fact sheet, it is ideal for those investors saving for retirement, living off a pension or wanting to protect their savings from the detrimental effects of inflation, thereby preserving purchasing power and earning a real return.

While many funds theoretically seek to beat inflation, this fund has a specific mandate to do so. Its primary objective is to outperform the consumer price index (CPI) by 5% before fees (which is 3.4% after fees for the retail A class) over rolling three-year periods. It also has a secondary objective of reducing investors’ risk of capital loss over any rolling 12-month period.

From its fact sheet, we can see that the fund is indeed designed by M&G Investments to be more conservative, due to its stated intended maximum limit on its equity exposure of 40%. Its recommended investment time horizon is much shorter, at only three years.

Looking at the fund’s performance, we see a different picture from the M&G Equity and Balanced funds:

Source: Morningstar

It is immediately apparent that this fund produces lower returns than the previous two. However, it also has a lower risk profile. Its monthly volatility, for example, is only 6.7% and its maximum drawdown over any period is only -15.9%. We explore the concept of risk in more detail in the section below.

Risk Measures
Every investor has a risk profile, or risk tolerance - i.e., the amount of risk they are prepared to take in investing. Likewise, every fund has a risk profile, as indicated by several risk measures that are also included in fund fact sheets to help investors understand how they could expect their fund’s performance to behave going forward. 

Going back to the M&G Equity Fund fact sheet, the risk measures table is as follows:

Source: M&G Investments

As discussed in our article What you Need to Know about Volatility, volatility is the amount of variance in performance of a fund’s returns over a given period of time. In other words, how much it goes up and how much it goes down. Understanding volatility is very important as it can be directly linked to your choice of fund.  While equities are very volatile over shorter periods, this tends to smooth out over longer periods, as the number of months of positive returns generally far exceeds the number of negative returns over periods beyond seven years, and this compounds over time. This is one of the reasons why so many retirement fund members have a high percentage of equities in their retirement portfolio, given that retirement investments are usually long-term by nature. That said, it’s important to remember that there is a limit to the amount of equity exposure that you can have within your retirement investment (currently 75% according to Regulation 28).

Meanwhile, fund fact sheets also show you a fund’s maximum drawdown, which is the largest drop in the fund’s cumulative return (from peak to trough) over any period, while the percentage of positive rolling 12-months is fairly self-explanatory. Then you get to the risk ratios, the two most important of which are the Sharpe and Sortino ratios. To understand these better read our article Understanding investment risk: 2 risk measures explained.

By way of comparison, let’s quickly look at the risk measures for the M&G Inflation Plus Fund:

Source: M&G Investments

The difference between the risk profile of the M&G Equity Fund and the M&G Inflation Plus Fund is significant: the former has a volatility of 14.6%, while the latter is only 6.7%. Equally, the Equity Fund’s maximum drawdown is -27.9% compared to the Inflation Plus Fund’s -15.9%. These numbers highlight the difference diversification can make when investment managers specifically build lower-risk portfolios.  

Hopefully, you now have a better understanding of fund fact sheets, how investment managers design and measure their unit trust funds, and how this information can assist you in choosing the right fund for you.  

For more information on our funds, please feel free to contact our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.