Know a mutual fund beyond its prospectus
Joel Dresang: Kyle, we’ve been talking about ways that mutual fund investors can learn more about the funds they invest into. We did a video already on prospectuses, what other sorts of things are available?
Kyle Tetting: You know Joel, we’ve talked about the prospectus before and how it’s a very key piece in understanding what it is a mutual fund is doing or what it is your mutual fund is trying to accomplish. But there are a number of other documents, as you said, and in particular, one that I like to focus on is the fact sheet.
It’s a little bit more simplified view of what a fund is trying to accomplish, what its objectives are, who runs it, expenses. But then you get a more up-to-date look at key holdings in the fund, what are the top ten investments, a more detailed look at allocation of the fund, how its stock and bond mix is. And then you get some performance data as well that’s a little bit more up-to- date than what you get in the prospectus.
Joel: What about the statement of additional information? That’s more detailed and not as reader-friendly.
Kyle: Absolutely, Joel. You know, it really is more lawyers writing for lawyers. But if you have a particular question about your fund, it’s likely that the answer is going to be in that document. In particular, some of the things I like to highlight: The fact that if you want to know how your manager or how the trustees of the fund are investing, you can get a very detailed look at how much they’ve invested in their own fund.
Another piece I think that’s important to point out is that there’s a much more spelled-out section on what the fund objectives are, what they can invest in and what the risks of those investments are.
So yes, it’s very detailed, very particular to the fund and lots of information, but it can be a useful tool if you’re looking for a particular piece.
Joel: And the Securities and Exchange Commission requires mutual funds to file semi-annual and annual reports. How useful are those?
Kyle: Those are a very useful tool in understanding what a fund is doing on an ongoing basis. I think, you know, you look at the prospectus, the fact sheet. That gives you a point in time when you buy that fund, but investors are going to get that semi-annual and annual report every six months, and they know what the fund is doing from there on out.
Joel: And those reports include a letter to the investors?
Kyle: They absolutely do. So, that letter to the investors is going to spell out how the fund has performed over that last six-month period or over the year, for the annual report. It also spells out what kinds of things have added to and detracted from performance. And then I think, maybe most importantly, it also spells out how the manager sees things working out in the future. What are the opportunities? What are the risks? What’s the economic environment? Those are all typically things that a manager will include in that letter.
Joel: How much do investors need to look at all of these documents?
Kyle: You know, if they’ve got a particular question, I think any of these has the ability to answer it, depending on what they’re trying to get at. As a supplement to the prospectus, all of these again are going to offer some unique takes on what it is a fund is trying to do.
So, for the investor, I think it’s important to know what they are, know what story they’re trying to tell so that if you do have a question, you can get it answered in a timely fashion. And then for professionals, it’s I think very important that we keep up to date on what’s going on with the fund. Part of that is these documents, part of that is ongoing conversations with managers and with representatives of the funds.
Joel: And individual investors can get at all of these documents pretty easily?
Kyle: That’s correct. They are required to be made available. The semi-annual and annual report delivered to the investor on that ongoing basis, and then the fact sheet and statement of additional information available from the fund companies themselves either on their website or through the mail.
Kyle Tetting is director of research at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
(initially posted Jan. 12, 2016)