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As an investor, before you invest any money in a unit trust, or as they are formally known, Collective Investment Schemes (CIS), it is important for you to have done some research to ensure that the chosen fund is best suited for your financial goals. This is where Fund Factsheets come in, or as they are formally known, Minimum Disclosure Documents (MDDs), and it is important to understand how to read and compare them. 

Any marketing of CISs is regulated by the Collective Investment Schemes Control Act which puts an obligation on the fund manager of the CIS to disclose certain information, in a standardised manner, in the MDD, at least quarterly. This standardised approach allows investors to compare CISs and it eliminates any possible confusion about how certain numbers were calculated or what certain words may mean. So, let us take a closer look at what some of these standardised obligations are that fund managers need to disclose: 

Category 

All regulated CIS funds are classified according to the Association of Savings and Investments South Africa’s (ASISA) categories and must be disclosed on the MDD. The category will tell you something about “where” the funds are invested (locally, offshore or a mix), “what” the funds will be invested in (Equity, Real Estate, Interest Bearing investments etc.) and lastly “how” it will be invested. The “how” is the most important part as it tells us something about the level of risk the fund manager will take with the pooled investments and the investor must decide whether it is aligned with their risk appetite and goal. 

Remember that higher risk investments can, in theory, deliver higher returns over a longer period that should be well above inflation, but they may be very volatile over the shorter term. Lower risk investments may give more stable returns over the short term, but their performance will probably be very low and even below inflation, over the longer term. 

Risk profile 

As explained above, it is important to understand the level of risk a fund manager will take to deliver a performance. This risk associated with the fund is also classified and reported on the MDD by ranging it from “low” to “high”. This is just another way that the investor can easily compare different funds based on their level of risk. 

Investment objective 

Each CIS has a mandate that determines what types of assets can be invested in, what the investment strategy of the fund will be and what the fund managers investment philosophy will be. This is summarised into a few sentences and can usually be found at the top of a MDD. 

Benchmark 

The performance of a CIS will always be compared to a pre-determined benchmark as it sets out the fund’s definition of success. Often, indexes are used as a benchmark since they are a close reflection of the market. The chosen index is usually one that has the same category of underlying investments as that of the CIS to ensure the comparison is fair. Remember that a CIS is an actively managed fund where the managers is trying to outperform the market. If managers can’t outperform the market, their fees aren’t justified and the investor will rather invest directly in the market via a passively managed index with low, or even zero, management fees.  

It is however becoming more common for regulated CIS Funds to use the weighted average return of all the unit trusts in their ASISA category as the benchmark since this makes it easier for the investor to compare the fund with its peers. 

Essential characteristics 

Important information regarding liquidity constraints and contributions can also be found on the MDD. The minimum initial amount that an investor can invest as well as details around ad-hoc and regular contributions are usually provided clearly at the top of the MDD. There will also be information on how often withdrawals can be made from the fund and when the cut-off time will be to send through a withdrawal request. 

In the second part of this series on factsheets, we will consider how fees and performance are reported on the MDD as well as which information reflects the fund manager’s abilities to manage risk.

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