Making investment decisions can be daunting. There is an abundance of information available to investors. Yet it can seem that there is little help for the average investor to interpret them. Investment factsheets are an excellent place to start. In most cases, they are legally required documents which provide potential and existing investors with an overview.
Below are four essential components of a factsheet along with some tips on what to consider.
The investment's objective will give you an idea of the proposed investment's aims. Although investment objectives can be described in many categories, let's consider two investments which are classified as growth and income. A growth investment usually aims to increase the value of the capital invested over time. In contrast, an income investment would typically target a steady stream of cashflows to be paid out, while preserving its original capital.
It goes without saying that your objective should align, at least in part with your investment's objective. Those two investment objectives are achieved using very different investment strategies and underlying assets. Do you want your initial investment to grow as much as possible for a future goal or is your priority to generate a regular income stream?
The asset manager chooses a benchmark with which investors can compare the investment's performance. The benchmark is a portfolio of assets that holds a similar risk profile to the investment. Furthermore, your investment should be investing in the same assets as what is in the benchmark. You can compare the return of the investment to that of the benchmark using the factsheet. This comparison will indicate if the investment is overperforming or underperforming according to the risk that it has taken on. If the return of your investment compared to that of the benchmark is consistently lower, it is vital to understand the reason for this, and an essential point of discussion with your asset manager or financial advisor.
Most factsheets will show you the investment's top holdings and asset allocation along countries or sectors. You can ask yourself if these are the sort of companies and industries in which you would like to invest. You should also see how many companies are held by the investment. Generally, the more stocks/assets in an investment, the more diversification it offers, which in turn can provide some protection in adverse market conditions.
The risk profile on a factsheet will indicate the risks associated with the investment. The risk is often represented on a scale, ranging from low to high. Investments with higher risk are likely to have their returns vary widely month to month. Months of significant gains can follow months of equally substantial losses. Yet, over the long term, large fluctuations could be mitigated, and these riskier investments have the potential to realise higher returns. While an investment with a low-risk profile may be safer from heavy losses in the short term, it is also less likely to take advantage of long term gains.
It is essential to take into account your risk appetite. Many factors will influence your risk profile. These include but are not limited to: your age, number of dependants and future earning potential. A young person without any dependants and a long stable career ahead of them are typically be more comfortable with risk than someone close to retiring with many dependants.
Factsheets will also express risk as a measure of volatility, also known as standard deviation. An investment with a high standard deviation measure indicates that you can expect large swings in gains and losses. In turn, you should expect a higher expected return from a riskier investment.
A factsheet is usually a legally mandated document, but it can also help you make more informed investment decisions. We have discussed some basic things to keep in mind when reading this document. However, keep in mind that there is much more to consider when investing and when in doubt, you should always seek professional advice.
Advicement provides an outsourcing service which calculates different reporting measures required in these documents and creates great-looking factsheets for its clients. For more information on this service, visit the factsheet outsourcing service page or contact us.