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Vital facts missing from fund factsheets

We explain where to find basic information about funds that many providers fail to give
May 26, 2015

When assessing whether to invest in a unit trust or open-ended investment company one of your first ports of call will be the monthly fund fact sheet. However, the quality of factsheets varies massively between providers.

Gavin Haynes, managing director at chartered financial planner Whitechurch Securities, says that all factsheets should give a broad outline of what the fund does, with performance compared with a relevant benchmark such as the fund sector average.

The larger mainstream fund providers tend to do this, but factsheets lack uniformity or basic standards because asset management groups are not legally required to produce them - though most do. The Financial Conduct Authority (FCA) instead stipulates that fund management groups must produce a Key Investor Information Document (KIID). This sets out information including the fund's objective and investment policy, the risk and reward profile on a scale of one to seven, and the ongoing charge and past performance.

The Investment Association, which represents UK investment managers, says it does not feel the need to force a formal structure with factsheets because there is already a lot of similarity between them, and KIID documents follow a uniform format.

 

Missing information

But wealth managers SCM Direct say factsheets are still read by potential investors much more than the KlID. They want the fund industry to update its format to include information on costs, risk and returns, and say factsheets should also be in a format that allows consumers to make easy comparisons.

For example, there are various different ways of calculating a yield, which stops comparisons between income funds. Even if yield is calculated the same way by providers, the figures will vary depending on the day or time of calculation.

Some factsheets don't even include a yield figure or basic information such as the fund manager's name, what sector the fund is in, or a sector or geographical breakdown, according to Juliet Schooling Latter, research director at Chelsea Financial Services. "It would be good to standardise them and have some basics that they must include," she says.

 

Cost transparency issues

Fund factsheets only reflect some of the costs as not all the underlying transaction costs are shown. You also pay some extra fees on top, for example the platform, wrapper or adviser fee, so costs are going to be much higher than those shown. SCM Direct says that this can be by a factor of over three times.

The wealth manager says the situation has deteriorated since the implementation of the Retail Distribution Review two years ago, when some of these costs were bundled into fees and performance. Alan Miller, founding partner and chief investment officer at SCM Direct, says: "Now factsheets show performance you rarely get because of the need to add costs in. This means that the performance should also be taken with a lorry load of salt as every investor's performance will be less than what is shown on the fund factsheet. And over time the compounding effect means that it will get worse and worse."

Ms Schooling Latter says it would be hard to include some of these costs as they vary depending on how you buy the fund, for example from which platform, and which share class as these have different costs.

But Mr Miller says the person at the end of the sales chain should also be producing factsheets that include all the costs.

Note the KIID document will be replaced from 2017 by the Packaged Retail and Insurance-based Investment Products Key Information Document (PRIPS KID), which will also include a fund's trading costs. However, funds are not obliged to implement this until the end of 2019.

 

Holdings limited to top 10

Most factsheets show just the top 10 holdings so, while you think you might get a feel for the types of securities held, it can also be very misleading. Exceptions include IC Top 100 Fund CF Woodford Equity Income (GB00BLRZQ513), which publishes every holding once a month.

Some UK funds leave quite a time lag between what were the top 10 holdings and what is shown on the latest fact sheet.

Mr Miller says: "In the US any investor can go online and see every single holding within any mutual fund, which has to be updated within 60 days of the quarter end. The same US companies refuse to give the same transparency to their UK customers who they treat as second-class citizens."

Mr Miller adds that the experience in the US has disproved asset management groups' concerns that investors would copy the holdings in their funds.

 

Filling in the gaps

Subscription services such as Bloomberg provide wider information, which can include all a fund's holdings but some of these services charge hundreds or even thousands pounds a year.

But there is fairly comprehensive information on free websites such as Morningstar.co.uk, www.trustnet.com and www.bestinvest.co.uk, although not a fund's full list of holdings. An advantage of these is that the information given is in the same format across all funds so you can compare them to each other more accurately. Mr Haynes adds that these sites are independent, whereas the factsheet is not: it is produced by the asset management group to promote the fund. "The factsheet should be just one of a number of research sources," he says.

When you visit an asset manager's website you will have the option of going into various versions of the site. The version aimed at financial advisers may have more information than the private investor site. An example of this is www.lazardassetmanagement.co.uk, where the adviser site has more information on IC Top 100 Fund Lazard Emerging Markets (GB00B24F1P65).

However, Sam Lees, head of research at website FundExpert, thinks there is already a lot of information on factsheets and KIIDs, and the problem is whether investors understand what it means. Bond fund factsheets, in particular, can contain a lot of technical information. "You get a lot of numbers but if you can't make sense of them they are of no use," he says. "The challenge is to give some information in an understandable way."

Some factsheets provide further information: M&G Investments, for example, includes a glossary with its factsheets explaining many of the terms and information used.

 

How the IC Top 100 Funds measure up

The open-ended members of the IC Top 100 Funds show quite a lot of variation between their factsheets, although most provide a good deal of information.

Looking at overseas equities, while First State Asia Pacific Leaders (GB0033874214) includes both a detailed country and sector breakdown, Lazard Emerging Markets provides a regional rather than country breakdown. But it includes a number of technical statistics such as alpha, beta and tracking error, which are not provided on the First State factsheet.

Among IC Top 100 bond funds we include three from Sterling Strategic Bond sector: M&G Optimal Income (GB00B7FM9R94), Henderson Strategic Bond (GB0007495293) and Jupiter Strategic Bond (GB00B2RBCS16).

All three include a credit rating and asset allocation breakdown, but while Jupiter and Henderson supply a yield figure M&G does not. However, yields are available for each of M&G Optimal Income's share classes on the company's website at www.mandg.co.uk.

All three set out information on what the fund does, with Henderson and M&G giving a brief description but Jupiter providing a detailed description of the fund's objective and the manager's style.

M&G Optimal Income's factsheet provides a lot of detailed information such as a maturity and currency breakdown, but Henderson and Jupiter do not.

However, instead of providing a list of its top 10 holdings, M&G Optimal Income's factsheet has a list of the largest issuers and how much of the fund they account for, and excludes government issuers even though government bonds account for nearly a quarter of its assets.

 

M&G Optimal Income largest issuers (excluding government bonds) (%)

Verizon Communications3.5
European Investment Bank3.0
Lloyds Banking2.4
AT&T1.5
Granite Master Issuer1.3
Virgin Media Secured Finance1.0
Microsoft0.9
Goldman Sachs0.9
Telecom Italia0.9
Wal-Mart0.8

Source: M&G Investments, as at 30 April 2015

 

M&G Optimal Income Physical asset breakdown (%)

Government bonds23.3
Investment grade bonds55.5
High-yield bonds18.0
Equities0.6
Unrated non-government bonds0.7
Cash1.8

Source: M&G Investments, as at 30 April 2015

 

But you can find its top 10 holdings at www.morningstar.co.uk and www.trustnet.com, and these are mostly government bonds. This is also the case for IC Top 100 Fund M&G UK Inflation-Linked Corporate Bond (GB00B7FV9F40), even though government bonds account for nearly two-thirds of its assets and a number of its top 10 holdings.

M&G says that in the factsheets of most of its bond funds it shows the largest issuers excluding government bonds because a large portion of the holdings in government bonds is used as backing cash for derivatives positions. M&G says: "To show individual countries' government exposures in the largest holdings table would be somewhat misleading. For example, at the end of April M&G Optimal Income Fund had 11.8 per cent in German government bonds and 8.5 per cent in UK government bonds. These are sums of many separate underlying bonds, plus a majority of these positions are used for backing cash."

 

M&G Optimal Income top 10 holdings (%)

1061570 CDS USD R F 1.03.39
United Kingdom (Government Of) 2%3.15
1061478 CDS Eur R F 1.03.12
United Kingdom (Government Of) 1.75%3.02
Germany (Federal Republic Of) 3.75%2.79
United Kingdom (Government Of) 0.125%2.10
US Treasury Note1.96
Germany (Federal Republic Of) 3.5%1.95
Germany (Federal Republic Of) 1.25%1.94
Germany (Federal Republic Of) 1.75%1.77

Source: Morningstar, as at 30 April 2015