How to research investment funds for your Isa

Tom Stevenson:  There are more investment funds available to a UK investor than there are shares listed on the London Stock Exchange

Tom Stevenson is investment director at Fidelity International.

Deciding which fund to invest in can be a challenge for someone managing their own portfolio.

For one thing, there are more investment funds available to a UK investor than there are shares listed on the London Stock Exchange.

Fortunately, there is no shortage of information available. Fund managers and investment platforms publish a range of documents that will help you get started.

The core information crops up in several places but, once you’re familiar with the main items, it’s relatively simple to compare and contrast the funds you’re interested in.

To begin with, therefore, let’s look at the factsheets and other key information documents that all funds must present to potential investors.

After that it’s worth looking at some of the more detailed checks that professional fund selectors make before investing and why tapping into their expertise via a curated list of funds (sometimes called a best buy or select list) might be a good idea.

And, finally, we’ll consider the hot topic of sustainability and look at how to check a fund’s environmental, social and governance credentials.

Most investors these days will use an investment platform, sometimes called a ‘fund supermarket’. The way these platforms present information differs slightly, but the underlying data is the same.

All will give you an insight into: a fund’s objectives and strategy; the level of risk you will be taking by investing in it; what the fund is currently invested in; its performance; and the charges you will incur.

A good starting point, as they are a kind of primary source, are the key documents provided by the fund manager itself: the fund provider factsheet; the key information document; and the annual and interim reports for the fund.

To illustrate what’s available, let’s look at a popular global fund, the Rathbone Global Opportunities Fund.

Vast choice: Deciding which fund to invest in can be a challenge for someone managing their own portfolio

Fund factsheets

This document is published regularly (monthly in this case). It states the fund’s investment objective, which is to beat the Investment Association’s Global Sector performance after fees over a five-year period. It also sets out the investment strategy it will employ to try and achieve that.

The factsheet also provides some basic information about the manager, or managers, of the fund. You will learn, for example, that James Thomson has been running this fund since 2003, which is a reassuringly long tenure.

There is some basic information about the fund’s size, number of holdings, charges, income distributions if any, and the time of day the fund is priced for dealing purposes (this can be useful to know if markets are particularly volatile).

Other information includes: the geographical split, which in this case is weighted towards the US; the size breakdown (mainly larger companies); sector exposure; and performance over various time periods.

Key Investor Information Documents (KIIDs)

Providing a little more detail than the fund factsheet is the Key Investor Information Document.

In particular, the KIID offers an assessment of the risk and reward profile of the fund. In the case of the Rathbone Global Opportunities Fund, this is deemed to be 6 on a scale of 1 to 7. 

This measure reflects past volatility (the speed and extent of the ups and downs in the fund’s price) and is only a rough guide to how safe or otherwise the fund will be in future.

A fund like this, investing in shares listed around the world, is at the riskier end of the spectrum. But don’t forget that even investing in cash, which would be ranked at the other end of the scale, carries a risk: that inflation will erode the value of your savings over time.

Other than the risk profile, there is little in the KIID that is not also covered in the fund factsheet.

Interim and annual reports

If you are considering investing in a fund, it is well worth reading the manager’s reports in the interim and annual reports. 

These provide a more qualitative insight into the thinking of the fund manager than the rather bland comments in the regulatory filings.

In the reports from James Thomson in 2020, for example, there were some useful comments about the likely depth and duration of the recession caused by the pandemic (deep but short-lived, was Thomson’s prescient assessment in August last year).

The other important feature of these more in-depth reports is the greater detail they can provide on a fund’s holdings. Most investment platforms, and the shorter regulatory documents, will only show a fund’s top ten holdings.

This provides a flavour, but many investors want to know exactly what a fund is invested in. The Rathbone Global Opportunities Fund is relatively concentrated but even so has around 60 holdings.

As the snapshot above shows, the annual report’s more detailed display shows exactly how much of the fund is invested in each holding and how much exposure the fund has to different economies around the world.

Charges

A key consideration when comparing funds is their charges. These are usually clearly laid out in all the main documents and on the fund’s pages on a platform’s website.

The Rathbone fund launched a new cheaper share class in January 2019 with an ongoing charge of 0.51 per cent.

This is relatively low for an actively managed global equity fund and reflects the large size of the fund, which at around £3.5billion is now significant.

Funds tend to strip out transaction costs from the ongoing charge because these are a backward-looking charge that reflects actual dealing activity and can vary from year to year.

As an investor, you also need to consider how much your chosen platform will charge you in order to arrive at the total cost of holding the fund.

Select lists

Many platforms show their investors a curated list of funds which they rate highly.

These are typically 50 or 60 funds spread across a range of assets (bonds, equities, property, commodities etc) and in different geographical regions.

These can be helpful for individual investors because of the better access enjoyed by asset managers and platforms. Professional fund selectors are also experienced in picking good managers and can use analytical tools that might not be cost effective for a private investor.

Here are some of the things that the professional fund pickers focus on:

– The depth and experience of the investment team

– The rigour of the investment process

– How their remuneration is aligned with an investor’s goals

– The quality of a fund’s portfolio construction

– Ongoing due diligence and reviews

– A fund’s liquidity

– Batting average – how often the manager makes good and bad decisions

– How consistent investment choices are with the fund’s objectives

Select lists are a good starting point for investors, but they need to be used with care.

They will, for example, include a range of different investment styles, which won’t all perform well at the same time. You still need to look under the bonnet of the funds you are interested in.

Sustainable investing

Investors are increasingly interested not just in the performance of a fund but how well it is aligned with their values.

They are looking for funds that invest in a way that chimes with their beliefs on a range of environmental, social and governance issues. These factors are sometimes abbreviated to ESG.

Finding out how sustainable a fund is and assessing how well aligned it is with your values can take some time and research.

Although some investors have focused on ESG issues for many years, these factors have only recently come into the investment mainstream. There are few agreed definitions and a company that one investor views as sustainable may not be seen in the same way by another.

A good source of information about all aspects of sustainable and responsible investing is the Fund Ecomarket website published by SRI Services, an established expert in this area. 

SRI collates information from fund managers about their sustainable funds and the website has tools to help investors narrow down their search to a short-list of funds that meet their requirements.

It was originally aimed at financial advisers but is a useful resource for individual investors too.

This post first appeared on Dailymail.co.uk