You will be able to read a fund's reported returns and identify the assumptions behind them before comparing.
Marcus is comparing two Asia equity funds for a friend who asked him to look. Fund A's factsheet shows 6.9% a year over five years. Fund B shows 5.8%. His friend has already decided on Fund A. Marcus spends twenty minutes on the two documents and finds that the numbers can't be put side by side at all.
A fund's performance table looks like a fact. It is a set of choices, and each choice can move the number by more than the gap between two funds. This lesson lists the choices to check, in the order that catches most problems.
Start with fees. Most performance tables in Singapore are calculated from the fund's net asset value, which already has the yearly management fee and other running costs taken out. What they often leave out are the costs charged to you directly: the initial sales charge when you buy, any platform or wrap fee, and switching or redemption charges. Some factsheets show a second line that deducts the initial sales charge. Many don't.
Then check the share class. One fund can have several classes holding the same portfolio but charging different fees, or priced in different currencies, or paying out income differently. An institutional class with a low fee will show better returns than the retail class you can actually buy. In Marcus's comparison, Fund A's 6.9% turned out to be its institutional class. The retail class, with a fee about 0.8 points a year higher, returned about 6.1%, as you'd expect when the same portfolio is charged more.
Unit trusts, robo-advisors and managed money compared covers fund charges and share classes in its module 2, Find every charge you pay. Here you only need the rule: compare the class you would buy, and add the charges the table leaves out.
Fund B was priced in Singapore dollars. Fund A's factsheet was in US dollars. Before comparing, Marcus restated Fund A in SGD using the method from lesson 1.3, Returns in Singapore dollars when the asset is priced in US dollars. In a year when the US dollar weakened, that cut Fund A's lead further.
Check the period end too. Two factsheets dated three months apart are reporting two different five-year windows, and lesson 1.5 showed how much the window can matter. Use factsheets with the same end date, or rebuild both from the funds' published prices.
League tables, fund platform rankings and "top performing funds" lists show the funds that exist today. Funds that did badly were often closed or merged into better performers, and their records disappear with them. What's left looks better than the average fund an investor could actually have picked at the start.
Here is the effect with made-up figures. Ten funds launch together. Over five years, three do badly, averaging minus 4% a year, and are closed or merged. The seven survivors average 6% a year. A table of today's funds reports an average of 6%. The average fund investors actually owned returned closer to 3% a year: seven tenths of 6%, plus three tenths of minus 4%. The table isn't lying about any single fund. It's lying about the odds.
The same bias affects a fund house's marketing. When a manager says "our funds have beaten their benchmarks", ask how many funds they had five years ago and how many of those still exist. Lesson 12.7, Survivorship bias, SPIVA and where your edge is and is not, comes back to this when you judge your own record.
Every fund names a benchmark. The manager picks it, and the manager has a reason to pick one that is easy to beat. A fund that holds mostly mid-sized Asian companies might name a benchmark of large Asian companies, or a fund that mixes shares and bonds might choose a cash rate plus a margin. The fund then beats its benchmark in most years for reasons that have nothing to do with skill.
Apply the tests from lesson 1.6, Choose a benchmark that matches what you actually hold. Look at the fund's top holdings, country split and sector split, which the factsheet shows, and ask what index looks most like that. If it differs from the stated benchmark, compare against both. Fund B in Marcus's comparison named a broad Asia ex-Japan index and held something close to it. Fund A named a narrower index that had done badly over the five years, which flattered it.
By the end of twenty minutes Marcus had restated both funds as the retail class, in SGD, over the same five years, against the same index. The gap of 1.1 points in Fund A's favour had become a small gap in Fund B's favour. His friend still chose for himself, as he should, but on numbers that meant the same thing.
For the activity, take any one factsheet you have and work down it as Marcus did, writing down each convention it uses before you look at any comparison.
Take one fund factsheet and list the return convention it uses: fees, currency, share class, benchmark and period.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).