Interested in working together?
If something here resonates and you'd like to talk further, we'd love to hear from you.
Get in touchIf something here resonates and you'd like to talk further, we'd love to hear from you.
Get in touchIf you have some kind of self-invested pension or investment account, the chances are that you are investing in pooled funds. These are portfolios of assets that are managed by an investment management firm and then packaged up as funds. Without funds, it can be hard for individual investors to get access to a range of different companies and take advantage of the benefits of being able to diversify risk while still enjoying the return of the best performing companies.
But how do you find out about how your funds are investing? Each fund will have a fund factsheet that tells you a bit about it along with some key statistics. Although these factsheets are intended to be short and easy to read, it can still feel a bit overwhelming if you don’t know anything about finance and investments.
So here are three simple things to look for that will tell you a lot about how your investments are being managed.
All fund factsheets should give a list of the largest holdings in the fund. In a portfolio of listed shares, this will be a list of company names. If the funds invest in large companies in the US and UK markets, there’s a good chance you’ll recognise some of them. Don’t worry about the ones that don’t, they are probably companies that only sell to other companies, and these can be great investments as well.
The fund factsheet should also tell you what industry the companies are part of. This is a good part to pay attention to along with the actual weights in the portfolio. A fund will normally be described as diversified, meaning that it gets its investment performance from a range of different kinds of companies.
But if you add up the weights of the biggest holdings and find that 40% of the portfolio is invested in large tech companies, then it’s really not that diversified at all.This is fine if it’s actually a fund that is focused on technology. But any kind of general fund should be more diversified than that.
The way that diversification helps is that not all companies and industries go up, or down, in price at the same time. So, if you have a range of industries then when technology is doing well you can benefit from that, but if technology companies are all going down in price, hopefully the health care companies, or supermarkets, or something else are going up.
But that only works if you have a good spread across different industries and sectors. And countries, if you’ve invested in a global fund. It’s very tempting when certain countries and industries and companies are doing well to concentrate the portfolio in those areas. And that works for a while. Until it doesn’t. Diversification is your insurance against that day so check to make sure you’ve got it.
The turnover ratio tells you a lot about a portfolio manager’s approach to investing. A high number means that the manager likes to trade a lot, buying and selling, selling and buying. Now, that might just be their style, but it comes with a massive cost.
Trading is very expensive and that cost is paid by you, as it eats into the returns on your investment. A lower number for turnover means that the portfolio manager prefers to buy and hold companies for the long term, taking advantage of their compounded growth and not eating away at your returns with trading costs.
And of course, there is also the problem of a disconnect between how the fund is described and how it’s managed. If the fund description says it buys and holds companies for the long term, but the turnover ratio is over 50%, then something is wrong.
Performance is important of course, but I’ve put it third out of the three things. As the small print always says, past performance is no guarantee of future performance. And that works both ways.
If your fund is an index fund, then it’s just built to track a particular region, country or industry. Once you’ve decided to put your money in it, you get what you get. But if your fund is actively managed, that is the portfolio managers are making decisions over each individual company in the portfolio, then performance can be telling a different story.
The trick with actively managed funds is to zoom out. Most people look at performance over the past year, or even the past couple of months. But one year of good or bad performance doesn’t prove anything. And performance over 1 or 3 months gives you no more information than a coin toss.
Look instead at the five-year performance, and ideally the ten-year performance if the fund has been around that long. And by the way, it’s a good sign if the fund has been around that long, means it’s proven its worth through different market cycles. Looking at whether the portfolio manager has beaten the market over five and ten years gives you a much better idea of whether they’ll continue to do it for the next five. Especially if that is combined with a diversified portfolio and a turnover ratio that makes sense.
There it is.Three numbers to check and five minutes of your time and you don’t need a finance degree. Take a look at the factsheets for the funds you hold in your pension or ISA and you’ll understand more than most people ever bother to find out.