Let’s Talk about Minimum Disclosure Documents

When entering the world of investing, you may encounter many new terms and abbreviations – one of those is a minimum disclosure document or MDD, also commonly known as a fund fact sheet. This Money Smart Week, Satrix, South Africa’s leading provider of index-tracking products, breaks down everything you need to know about MDDs:

What are Minimum Disclosure Documents?

An MDD – minimum disclosure document or fund fact sheet – is where you will find all the vital information about a unit trust or ETF (exchange traded fund). It is a ‘cheat sheet’ that provides detailed information about a fund to aid investment decisions.  

The Satrix MDDs outline the fund objectives, known as the investment mandate, and key characteristics. For instance, it will outline a particular fund’s index, fees, recent performance, top 10 investments held, distribution of income or dividends paid out over the past 12 months and the investment’s risk level – spanning low, moderate, and high risk.  

How Can I Find an MDD? 

MDDs are included on the “Our Funds” tab  on our website. For example, the Satrix Top 40 ETF and unit trust pages have an easy-to-find download button for the MDD. 

Also, under our fund summary pages, each fund tile has a “downloads” button that gives you an option to download the relevant MDD.

The document contains the latest information for the past month, and updates are made monthly to ensure investors are making the most accurate, informed decisions possible. 

What are Benchmark Indices?

A benchmark index is a standard against which something is compared. The term benchmark and index are sometimes used interchangeably, and, at Satrix, we refer to an index or indices. For instance, the FTSE/JSE Top 40 Index is the standard to which we compare the Satrix Top 40 ETF. It tracks the performance of the 40 largest companies by market cap, listed on the Johannesburg Stock Exchange.  Knowing which benchmark index the fund uses will give you a good idea of the type of returns the fund is looking to achieve.

What are the Top 10 Holdings?

The Top 10 holdings are the shares in a particular product which have the highest market value. Almost all publicly available funds will report their Top 10 holdings in the MDD. Top holdings are typically displayed alongside an asset class, sub-asset class, or sector breakdown. They can show all the types of assets you can invest in, including different stocks and bonds. These will change from time to time to give investors the best possible returns from the product.

The Top 10 holdings are comprised of some of the fund’s constituents. Constituents are the holdings or assets (often shares in listed companies, sometimes bonds and even cash and cash equivalent instruments in the case of money market funds) a fund is invested in. For an ETF, it would be the funds in the index that the ETF tracks – for instance the FTSE/JSE Top 40 Index. This section of the MDD changes regularly so looking at it helps you to understand where your money is invested.

What is the TER, Transaction Cost and Management Fee?

There are various costs associated with investments in ETFs and unit trusts: 

• The total expense ratio, or TER, is the measure of the total costs or expenses in running a fund and these are typically charged inside the fund (i.e. they are not deducted from your account but are incurred at a fund level). For example, a 0.10% TER on a R100 investment means you’ll pay an annual fee of 10 cents in TER fees. The TER is important to help you determine if a fund is right for you after all the fees are considered. 
• Transaction costs are all charges relating to the purchase and sale of the underlying holdings that are held in the fund. Much like the TER, these are costs that are incurred at fund level.
• A management fee is a cost charged by an investment manager to compensate for their time, resources, custodial services and more. Management fees are included in the TER. 

Understanding Performance

When it comes to performance, it is important to differentiate between the fund performance and the investor performance. The MDD displays the performance of the fund at various time periods (one year, three years, five years, etc.) and the reporting periods are always from month beginning to month end. For example, a three-year performance period on 31 March 2023 would be from 1 April 2020 to 31 March 2023. 

Fund performance numbers shown include both capital growth and income earned by the fund (from the fund constituents). They are also net of the fees described above. 

An annualised return is a measure of how much an investment has increased on average each year, during a specific period. Annualised returns can only be reported for periods of 12 months and longer. For example, an annualised return of 8% over three years means that for each of those three years, the funds would have yielded a return of 8%.

Cumulative returns show the total percentage growth of the fund from the beginning of the calculation period to the end of the period.

It’s also important to note that your personal investment account performance results can differ from the performance of the fund as reflected in the MDD.

This could be because you may have started investing in the fund at some point during the period or you may have made multiple small investments.

Secondly, you may have withdrawn money during the period. Even if you put it back later, your return won't match the fund's return. 

Fund performance numbers also assume that all the dividend and interest payments distributed during the period were immediately reinvested in the fund. If you took the distributions instead, that would also affect your personal performance.

What is a Distribution?

All ETFs and unit trusts receive income from underlying investments such as dividends and interest payments. Typically, the fund will use the income earned from the underlying investments to pay expenses incurred in the fund; and will distribute the net income to the unit holders.

Therefore, a distribution is a payment made to you, the investor, in the form of a dividend or interest payment. These payments are often paid in regular intervals (monthly, quarterly or annually) depending on the fund. Some funds are non-distributing, which means the dividends are automatically reinvested back into the fund on your behalf. 

Understanding the Fund Information

• JSE code is the main method of identifying securities on a global scale, e.g. STX40 (Satrix Top 40 ETF)
• Fund classification falls into four broad categories determined by ASISA (The Association for Savings and investment South Africa), these include shares, bonds, money market funds and hybrid funds. This classification allows you to invest in a diverse mix of funds with a varying risk and return profile. 

Understanding a Fund’s Risk Profile

Funds have risk profiles linked to whether they offer investors a Low (or Cautious), Medium (or Moderate) and High (or Aggressive) risk. The risk profile is based on what the fund is invested in, with the higher risk funds typically being invested in equities and the lowest risk ones including a large portion of cash. The riskier funds often can deliver greater return in the long run, but you should consider remaining invested for longer periods to ‘smooth’ performance when there are market downturns. The lower risk funds will likely deliver lower returns but will be less volatile. 

Understanding Market Data

Market data is the price and other related data for a financial instrument. It allows investors to know the latest price and see historical trends for certain instruments like ETFs or unit trusts. 

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

Disclaimer