How to Read a Fund’s Minimum Disclosure Document

The Minimum Disclosure Document (MDD) of a collective investment scheme, commonly referred to as a fund fact sheet, tells investors what they need to know about an investment fund in accurate, understandable terms, enabling them to make informed decisions about their investment.

The Collective Investment Schemes Control Act, which governs collective investments such as unit trust funds and exchange traded funds (ETFs), requires management companies to publish an MDD for each fund they manage. The MDD can be downloaded from the management company’s website or that of an investment platform offering the fund in its range of underlying investments.

The regulations stipulate that the MDD:

• Must be a short (maximum four-page), plain-language document providing essential information, including the fund’s objectives, risk profile, performance and costs, updated at least quarterly. (Note that most funds publish monthly updates.)

• Must be for the purpose of disclosing information to a consumer wanting to invest, and providing a general report to existing investors.

• Should enable an investor to understand the nature and risks of the portfolio.

• May not make forecasts about returns.

Because they follow a formula set by the regulations, MDDs make it easy to compare funds and fund managers. The information is presented as follows:

• General information: This includes the fund’s inception date, classification according to the types of assets in which it invests, portfolio manager, size by total assets under management, and current unit price.

• Investment objective: This is typically a short introductory paragraph outlining the portfolio manager’s investment strategy and giving the investor an idea of what can be achieved, at what level of risk, and over what timeframe.

• Risk profile: Depending on the types of assets it holds, the fund will fit a particular risk profile, ranging from low to medium to high. Funds investing in higher-risk asset classes such as equities and listed property are more aggressive, targeting higher returns over the long term, but subject to possible capital loss over the short term. Lower-risk funds tend to focus on preserving capital and providing steadier, though less spectacular, returns.

• Timeframe: This ties in with the risk profile, suggesting an appropriate minimum timeframe for investing. Higher-risk funds recommend keeping your money invested for at least 5-7 years, medium-risk funds 3-5 years, and low-risk funds 1-3 years.

• Minimum investment amounts: The MDD will stipulate the minimum amounts for lump-sums (for example, R10 000) and for recurring contributions (for example, R1 000 a month).

• Benchmark: This is the indicator against which the manager assesses the performance of the portfolio. It is typically a market index or combination of indices representative of the portfolio’s assets (such as the FTSE/JSE Top 40 Index for an equity fund investing in the largest companies on the JSE). Alternatively, the benchmark may be the average return of a fund’s peer group, or a certain above-inflation return, such as CPI+4%. Note that these returns are not guaranteed; they are targets set by the portfolio manager.

• Composition: The MDD typically lists the fund’s top 10 holdings, with the percentage of assets in each holding. It will also show the split between offshore and local assets and the allocations to different asset classes.

• Performance: All performance figures show returns after fund management costs have been deducted and income distributions (see below) reinvested. They include returns over the past year and annualised (average per-year) returns over longer periods such as three years, five years, and since the fund’s inception, alongside the fund benchmark’s returns for the same periods. There is also a graph plotting the fund’s cumulative return since inception against that of its benchmark.

• Distributions: The fund receives income from its investments in the form of dividends and interest. This income is distributed to investors monthly, quarterly or semi-annually, who may choose to receive it or reinvest it. These details and amounts are included in the MDD.

• Risk statistics: The MDD typically contains historical statistics about positive returns, negative returns (euphemistically termed “drawdowns”), the fund’s volatility and its risk-adjusted return (see “Risk-adjusted performance: a reliable guide to investor skill”).

• Costs: All costs incurred by the fund must be disclosed to investors. These include the fund management fee, performance fee (a bonus fee on top of the management fee if the fund beats its benchmark) and transaction fees. The fund management fee plus any performance fee comprise the Total Expense Ratio (TER), which represents the fund’s operational costs. However, there are also transaction costs, incurred at fund level but not included in the TER, which relate to buying and selling the underlying holdings. The total cost to the investor, the Total Investment Cost (TIC), is the TER plus the transaction costs. (Also see “How to determine the costs of your investments”.)

• Market commentary: The portfolio manager reports on the economic and financial-market backdrop, contextualising the fund’s performance for investors and giving them an idea of how their money is being managed.

References

How to read fact sheets/MMDs – Old Mutual

Let’s talk about Minimum Disclosure Documents – Satrix

An easy guide to understanding fund fact sheets – mcubed

Collective Investment Schemes Control Act: Board Notice 92 of 2014