How to read a fund fact sheet in five minutes

A fund fact sheet is two pages of regulated disclosure wrapped around one performance chart that the marketing department chose. Four fifths of the document is decoration. The rest answers five questions, and if a sheet cannot answer them, that is itself the answer.

The goal is not to identify a brilliant fund. It is to establish what this thing costs, what it holds and what it will do when the market turns, before you own it. Everything below is on the sheet in front of you, in the order it is worth reading.

Minute one: which fund is this, exactly?

The name at the top is not the answer. Most funds exist in several share classes with nearly identical names, and the differences between them are the whole point. Look for the identifier first: an ISIN in Europe, a ticker in the US. Then check the four attributes that change what you actually own.

Distribution policy decides whether income is paid out or reinvested, which matters in a taxable account because accumulating classes do the reinvesting for you at no extra cost. Currency and hedging decide whether you are taking currency risk on top of market risk. Domicile decides which tax treaty applies to the fund's dividends. Share class decides the fee: an institutional class and a retail class can be the same portfolio at half the price.

One trap sits here and catches people every year. Fact sheets usually display the largest or the oldest share class, which is often the institutional one that a private investor cannot buy, at a price that does not apply to the class on your platform.

Minute two: what it costs you

Skip the performance chart. Go to the cost table, which in Europe sits in the KID under ongoing costs, and check three things: the ongoing charge, the one-off costs, and anything described as a performance fee.

The ongoing charge is what the fund takes each year, and it is the number that compounds against you. A broad index fund commonly charges around 0.20%, while an actively managed equity fund typically charges 1.75% and often adds a front load of up to 5% that leaves your money before it is ever invested.

Minute three: what it is measured against

Every fund has a reference point, and reading it correctly takes thirty seconds. For an index fund, you need the index name, the replication method and the tracking difference. Physical replication buys the constituents, sampling buys a representative subset, and synthetic replication uses a swap with a counterparty. All three can track the same index, and the third adds a risk the other two do not have, which is why the sheet must name the counterparty.

Tracking difference is the gap between the fund and its index over a year. If a fund charges 0.20% but trails its index by 0.55% a year, the missing 0.35 points come from withholding taxes, transaction costs and sampling. That is the number to compare across providers, because it is the real price of ownership.

For an active fund the benchmark line deserves more suspicion. A fund measured against a narrow sector index can look excellent against it and mediocre against the global market you actually wanted exposure to. Compare the fund with the category and with a plain index fund, not with the line the provider selected.

Minute four: what is inside

This section takes a minute and tells you what you actually own. Write down four numbers: the share of the fund in its top ten holdings, the total number of holdings, the turnover rate, and the largest country and sector weights.

The top ten share is the one people misread. A global index fund with 1,500 holdings and 20% in its top ten is diversified. A thematic fund with 40 holdings and 60% in its top ten is a bet on ten companies wearing the costume of a fund. Turnover tells you how often the manager trades: a rate of 100% a year means the average position is held for twelve months, and every trade inside the fund costs money that never appears as an ongoing charge.

Holdings data is also older than it looks. Reports are published quarterly in the US and monthly in most of Europe, so the sheet shows a portfolio as of a date that can be three months old. For a long-term index fund that is irrelevant. For an active fund, it means the position you are analysing may already be gone.