How to Make a Fund Factsheet
Jocelyn Gilligan, CFA, CIPM
September 30, 2022
Longs Peak is specialized in helping investment firms calculate and present investment performance. As a team, we have either reviewed or created thousands of factsheets for the 200+ investment firms we’ve worked with. Over the years, we’ve come to realize that many investment managers struggle to create fund factsheets that help potential investors truly understand their firm and strategy. Many end up with generic leaflets of information that don’t actually help get interested investors in the door. Others make them because they feel like they have to and piece together an abundance of data without cohesive direction. Unless you have an in-house marketing team that’s specialized in advertising for investment managers, you might feel like you don’t know where to begin.
So how can you decide what to include when making a factsheet for your strategies? Keep reading to find out.
Where to begin
There are three things that you should consider before you make (or hire someone to make) your factsheets:
- Who is the target audience (i.e., your core client)?
- What is the primary objective of your strategy?
- How do you make investment decisions?
Once you know these three things, design is really just puzzling together the critical elements and aligning it with your branding.
Understanding your Target Audience
While this may seem obvious, knowing your target audience can make a huge difference in the success of your factsheets (which can be measured by how many requests you get for additional information). We find that firms often put together a factsheet with information they most commonly see other firms including – risk-adjusted performance statistics, sector allocations, top holdings and more – without much consideration for who will be reading the document. While this is not a bad place to start, too often factsheets end up generic and are not meaningful to the reader. It is important that your factsheet helps your prospects understand your investment process and how your strategy can help them achieve their goals. Picturing who you are communicating with as you develop the factsheet will help ensure your message is clear and focused on what is most important to them.
Institutional investors, such as large pension funds you’d like to sub-advise for, will want to see performance appraisal statistics that demonstrate how your strategy performed on a risk-adjusted basis and how this aligns with your investment objective and process. We’ll discuss more about this in the following sections, but most importantly, your factsheet should tell the story of your investment process – what you set out to do and how you achieved it (or what happened if you didn’t). It’s sort of like a report on your strategy’s OKRs (Objectives and Key Results).
Retail investors are likely less prepared to interpret complicated statistics and care more about how you’re going to help them achieve their future goals (think future college tuition payments, that retirement home in the mountains, etc.). For this type of investor, it may be better to incorporate more absolute return visuals like growth-of-a-dollar line graphs and text that explains how you plan to help grow their capital while protecting it from material losses. Or how you’d make customized investment decisions with their goals in mind.
Regularly, firms have a target audience that is somewhere in between. Sophisticated enough that they understand some performance appraisal measures, but not so sophisticated that they understand what they all mean. In this case, you’ll want to consider your target audience’s goal in investing their money with you. Whether they’re saving for retirement, supporting the financial needs of a loved one, or looking to add risk to a well-diversified portfolio, knowing their objective will help you be clearer about how to communicate to this audience.
And remember, although your factsheet should be designed with your ideal client in mind, there may be situations where your target audience differs from this core customer. For example, if you normally target retail investors but get the opportunity to pitch to a large RIA, you may want to customize the factsheet to cater to this client type. In this case, just follow these same steps with this client in mind.
Need help defining your target audience? You can use this GUIDE to help you define your core customer (or client profile).
What is the Primary Objective of your Strategy?
The key message you want your factsheets to convey is how your strategy goes about identifying drivers of value/returns. You want to communicate your end-goal (your strategy objective) and then demonstrate through statistics, graphs, and charts how you achieved it (your key results).
Whether your strategy is primarily focused on beating the benchmark on the upside or protecting capital on the downside, the statistics shown should act like a scorecard that demonstrates how you performed specifically on that objective. If your strategy’s primary goal is to beat on the upside, you’ll want to show things like Upside Capture (usually shown together with Downside Capture), Batting Average, Sharpe Ratio, and Alpha. Alternatively, if your strategy aims to protect on the downside, things like Max Drawdown, Downside Capture (again usually shown with Upside Capture), or Downside Deviation will be more relevant.
If you manage a strategy that exhibits a non-normal return distribution (e.g., you manage a strategy with options that create positive spikes in performance), you’ll want to include risk measures designed to consider these asymmetrical returns. These measures could include things like Sortino Ratio and Semi-Deviation.
Regardless of the strategy type, be sure to take the time or consult with someone that can help you select statistics that support your investment objective and display how you’ve done on an absolute and risk-adjusted basis.
This information should also be used internally as a feedback loop to assess what worked and didn’t work. The findings from this reflection can also be used in market commentary – either in your factsheet or as a quarterly market newsletter – to explain performance results for the current period. Doing this creates transparency and builds trust. Furthermore, it demonstrates to prospects that you are paying attention to what is happening in the market and taking action to address these changes.
Want to learn more about different performance appraisal measures? We’ve written several posts on different measures available and when you might use them.
How do you Make Active Investment Decisions?
If you – or your sales team – don’t know the answer to this question, it’s probably time to make sure you have this message clear. Because if your team doesn’t know how to explain it, it’s going to be confusing for a prospect. Investors of all types typically want to understand the investment process – how a strategy is implemented and how you manage the trade-off between expected return and risk exposure. You can help them understand these things by clearly identifying where you are making active investment decisions and then illustrating that information in your factsheet.
Frequently, firms don’t know what to include to help explain the story of their investment process but answering a couple simple questions can help. Consider the following:
- Are you performing fundamental or quantitative (systematic) analysis?
- Do you characterize your strategy as top-down or bottom-up?
- Do you consider micro or macroeconomic factors in your analysis?
- Do you have a value- or growth-based approach?
- Do you have geographic/country-based factors in your selection process?
- For spread-based bond portfolio investments, how do you select fixed income issuer types, industries, and instruments? How do you define your universe and narrow that down by credit quality, duration and taxability?
We often see firms that want to include information in their factsheets that really has no relevance to their active decision making. For example, if your investment process involves bottom-up fundamental analysis focused on stock selection with no active decisions to over- or under-weight at the sector-level, showing sector weights in comparison to the benchmark is less relevant than it is for a manager that specifically makes active decisions on sector exposures. Does showing where you ended up this quarter provide any meaning to the reader? If not, it’s best to find something that does.
The same goes for other common factsheet components like holdings and asset allocation. If you manage a strategy that focuses on macro-level variables and invests in a handful of ETFs, swaps and futures contracts to capture macro dynamics to generate returns, showing your top holdings may provide little meaning to the reader and it could even reveal trade secrets you may not wish to divulge. Perhaps in this case, focusing on describing the macro-level environment or trends and how you added exposure to them may be more meaningful.
Having clarity about where active decisions are made will help you select the right information to show. Remember, most factsheets are 1-2 pages in length so there’s not a lot of real estate to waste, especially if your disclosures take up half a page!
The new SEC Marketing Rule
Finally, the SEC’s new Marketing Rule, which is set to take effect on November 4, 2022, has a variety of requirements for presenting investment performance in advertisements. It is crucial that your factsheets follow these requirements. If you have not taken the steps necessary to prepare for these changes, we strongly encourage you to have your factsheets and performance information reviewed to make sure that any advertisement you make has been prepared with the new requirements in mind. Here’s a checklist of key performance-related considerations to help get you started.
The main objective of publishing and distributing fund factsheets is to get you meetings with more prospective investors. If you’re not getting the interest you think you deserve, perhaps it’s time to consider how effective your fund factsheets are at communicating your performance to your core customers.
From our small business to yours, there are many books written about goal setting. As a firm, we subscribe to the OKR method and recommend reading Measure What Matters by John Doerr. While it’s not specifically intended for investment advisors or analyzing investment returns, the concepts can be helpful in outlining how to set objectives for your investment strategies and then use performance statistics to measure the key results.
If you are interested in learning more about how Longs Peak can help you create better prospect engagement through factsheets and pitchbooks, contact firstname.lastname@example.org.