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Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Active Investment Management
The investment strategy of actively trading the securities in a portfolio
with the object of out-performing the identified benchmark market index.
It is the opposite of passive investment management.
Annual Report
The annual audited report and accounts of the fund.
Asset Allocation
Macro investment decisions made by fund management companies regarding
global and national political and economic considerations affecting
investment decisions. In most cases, but not always, these macro decisions
e.g. "reduce exposure to the Yen" which are made at a high
level within the organisation will be binding on employed individual
fund managers.
Authorised Unit Trust
A UK unit trust which is regulated by the Financial Services Authority
which has authorised the fund for marketing to the general public.
Back-End Load
A charge levied on investors by the management company at the time the
investor redeems shares and designed to pay for the promotion expenses
of the fund. Frequently, this charge will be reduced in proportion to
the period the investor holds the fund shares as a sort of loyalty bonus
- the charge may even be reduced to zero over say a five year period.
Balanced Fund
A fund which aims to achieve its investment objective of producing both
a growing income and capital growth by means of a portfolio balanced
between income and growth stocks.
Bid Price
The value of a security determined by reference to the best (highest)
price at which it may be sold in a stock market.
Bond
A loan stock issued by governments, corporate and quasi-governmental
bodies e.g. the IMF
Cancellation (of Shares)
The act of canceling shares in an open-end fund by the Depository.
Capital Gain (or Loss)
The difference between the share price on redemption and the share price
on purchase.
Capital Growth
Refers to growth in the price of a fund share ignoring income considerations.
Certificate of Deposit
A fixed-interest bank deposit for a fixed duration which is marketable
and hence can be turned into cash quickly.
Closed-End Fund
A fund with a fixed (closed-end) capital structure where issued shares
can only be traded between willing buyers and sellers through the medium
of a stock market. The market price of the fund's shares is determined
by the usual market forces of demand against the fixed supply of shares.
Often the shares will be traded at a discount to their net asset value
and occasionally at a premium
Collective Investment Scheme
See Fund.
Convertible (Loan Stock)
A loan stock (bond) issued by a corporation which may be converted into
shares (usually ordinary shares) in the corporation at some defined
future date(s) at a pre-determined price per share - the conversion
is at the option of the holder of the convertible.
Creation (of Shares)
The act of creating new shares in an open-end fund by the Depository.
Custodian
See Depository.
Diversification
See Risk Spreading.
Depository
The financial institution responsible for investor protection, safeguarding
the assets of a fund and overseeing the activities of the fund management
company.
Dilution Levy
A charge levied on investors in a single price fund either on purchase
of the fund shares or on their redemption and for the benefit of the
fund. The levy is designed to compensate the fund for loss brought about
through the underlying securities having to be traded with a market
spread i.e. different prices according to whether you are buying or
selling. Without the levy, long term investors would suffer loss.
Discount
In the context of closed-end funds which are listed on a stock exchange,
the discount refers to the percentage by which the quoted market price
of a fund share is less than the net asset value of a fund share.
Diversification
See Risk Spreading.
Dividend
A distribution of post-tax profits of a company to shareholders.
Emerging Market
A stock market which is deemed to pose higher than average risks to
investors because of its lack of infrastructure, regulation depth, liquidity
or other hindrance.
Endowment Policy
A life policy which will pay a capital sum to the assured at the earlier
of the death of the life assured or the life assured attaining a certain
age.
Ethical Funds
Funds with an ethical investment objective e.g. avoid companies involved
in certain activities such as armaments, tobacco etc. They vary from
those that literally outlaw any company involved in any way in non-approved
activities to those that will invest in such companies provided they
are deemed to be acting in a "socially acceptable manner".
Equity (Equities)
Ordinary shares in a company.
Expense Ratio
The percentage of net total assets used to pay for the annual fund expenses
- normally most of these expenses go to pay the Management Fee.
Financial Services Authority
The chief regulatory body in the UK and directly responsible for the
regulation of unit trusts and OEICS.
Fixed-Interest Securities
See Bonds.
Floating Rate Notes
Loan notes issued by companies which carry a variable rate of interest
and may be traded to realise cash at short notice.
Front-End Load
See Preliminary Charge.
Fund
Any sort of fund or collective investment scheme where many investors
pool their money to achieve the key objectives of risk spreading coupled
with professional investment management and administration.
Fund Assets
The net total assets held by the fund at any point of time.
Fund Name
The official name of the fund e.g. XYZ European Growth Fund.
Gearing
Refers to any situation whereby risk (and hence possible reward) is
increased through either borrowing or by the use of derivatives. The
gearing may be inherent in the capital structure or operational risk
of the underlying investments, or the capital structure of the fund,
or even by the investor borrowing to invest.
Gilt
A UK government stock - a bond.
Guaranteed Fund
A fund which undertakes to preserve capital either fully or to a guaranteed
lesser extent and which offers a rate of return linked to the positive
performance of a particular stock market over a certain period of time.
If the performance of the stock market is positive the investor will
receive a return in ratio to the positive return. If the performance
is negative the investor will receive no return (a protected capital
position offering the possibility of a return higher than conventional
interest rates over a defined period).
Hedge (Hedging)
Avoiding risk by taking some sort of action now designed to counter
the effect of loss if the risk should actually result in loss. For example,
where a receipt of foreign currency is anticipated in say three month's
time, the currency may be sold at the current exchange rate for delivery
in three month's time, thus voiding currency risk for a modest cost
- in effect insurance.
Income
The earnings of a fund e.g. bank interest, bond interest and dividends
(also see net income).
Index
A measure of performance of a particular stock market or sector of that
stock market e.g. FTSE All-Share Index
Index Funds (Index Tracking Funds)
Funds which seek to track the performance of a particular stock market
index.
Indirect Investment
Refers to any situation where an investor does not invest directly into
real assets e.g. a fund or an insurance policy yielding a return linked
to investment performance - it is the fund or insurance which invests
directly into the stock market not the fund shareholder or the policyholder.
Initial Charge
See Preliminary Charge.
Investment Strategy
Given the investment objective of a fund, the method of achieving the
objective e.g. capital growth through investment in smaller companies.
Issue (of Shares)
The act of issuing shares to subscribing investors - either on the launch
of a closed-end fund or on an ongoing basis by the fund manager where
there is demand from investors in an open-end fund.
Launch Price
The initial price of shares in a newly launched fund. In order to be
able to quote a firm initial price it is necessary for the management
company to prescribe an initial portfolio of securities into which the
first subscriptions will be invested. The fixed launch price can only
be held provided all the designated securities to be bought do not move
in value by more than a very small set percentage. In any case the fixed
price offer may only be held for a maximum of say 3 weeks. After either
event, the monies received must be invested and the fund will be priced
in the usual way by reference to the value of the underlying securities.
Liquidity
Refers to the ease whereby shares in a company may be traded in a stock
market (may be turned into cash) - a function of the number of shares
available and demand - hence larger capitalised companies tend to be
more liquid and hence are easier to trade at better prices.
Managed Fund
A fund where the manager actively manages the fund to achieve its objectives.
Management Fee
The annual charge levied by the management company on the fund for services
rendered. Fee levels tend to be competitive because they have to be
disclosed in fund literature and are highlighted by the financial press;
but they will also depend on the type of fund under management e.g.
an index fund will typically charge ½ % p a whereas an equity
fund may charge 1 ¼ % p a or more depending on the nature of
the portfolio.
Manager
The financial institution responsible for managing the assets of the
fund in accordance with its investment objectives.
Market Capitalisation
Refers to the value placed on a company in the stock market - the total
simply being the number of issued shares of the company multiplied by
the latest mid-market price of a share.
Market Risk
The risk inherent in investing in the stock markets of the world - at
certain times shares fall significantly and sharply.
Mid-Market Price
The price of a security in a stock market determined by averaging the
bid and offer prices.
Minimum Subscription
The minimum amount that an investor must initially invest in a fund,
typically Euro1.000.00. Obviously, the minimum subscription does not
apply to follow on investments or a regular savings scheme.
Net Asset Value ("NAV")
The total value of the fund at any point of time.
Net Asset Value per Share
The total value of the fund divided by the total number of shares in
issue at any point
of time.
Net Income
The income of a fund after allowing for all legitimate expenses of running
the fund - this is the sum which is normally fully distributed to investors
at least annually.
Offer Price
The value of a security determined by reference to the best (lowest)
price at which it may be bought in a stock market.
Open-End Fund
A fund with a flexible (open-end) capital structure which can be expanded
or contracted to accommodate more or less investors according to the
demand for the fund's shares - investors acquire or dispose of shares
through the fund management company at prices reflecting the net asset
value of the shares.
Open-End Fund Company ("OEIC")
OEICS are regulated by the Financial Services Authority in the UK and
they are permitted to be sold to the general public in the same way
as Authorised Unit Trusts. They are organised under new legislation
in the UK and automatically qualify under the UCITS Directive. As such
they may be marketed cross-border to other EC countries subject to local
marketing rules.
Passive Investment Management
The investment strategy of selecting and purchasing securities for a
portfolio and then leaving the securities to perform over a medium or
longer period. It can also mean trying to track a particular stock market
index.
Performance
The rate of total return for any given year - total return including
income reinvested at the prevailing subscription price as well as capital
gain.
Pooled Investment
See Fund.
Preference Shares
Shares in a company which carry limited rights to the income and assets
- but which are entitled to a fixed rate of dividend (some permit further
participation in the profits of the company) each year before the ordinary
shareholders receive any dividend (this right normally extends to any
arrears of preference dividend) and which, in the event of the liquidation
of the company, are entitled to be repaid the face value of the preference
shares before the ordinary shareholders receive any repayment of capital.
Preliminary Charge
A charge levied on investors by the management company at the time the
investor subscribes for shares and designed to pay for the promotion
expenses of the fund.
Premium
In the context of closed-end funds which are listed on a stock exchange,
the premium refers to the percentage by which the quoted market price
of a fund share is greater than the net asset value of a fund share.
Promotion Expenses
Advertising and public relations expenses which are usually passed on
to investors through some sort of additional charge over and above the
official quoted prices of the shares. The charge may take the form of
a preliminary charge (initial charge, front-end load) made at the time
of subscription or a similar charge on redemption of shares (back-end
load). In the latter case the charge may take the form of a loyalty
bonus and reduce (possibly to zero) in proportion to the time the shares
are held by the investor. The management company will reward introducers
of business e.g. brokers or investment advisers, by way of commission
paid out of this income.
Protected Guaranteed Funds
See Guaranteed Funds.
Real Assets
Securities evidencing a direct investment into an asset such as a company
share or loan stock.
Redemption Charge
A charge levied by the management company on investors at the time of
redemption of shares. The charge may accrue to the management company
or may be for the account of the fund. In the latter case the charge
is often intended to compensate the fund where only a single price is
quoted no matter if investors are buying or selling shares.
Regular Savings Scheme
A savings scheme offered by some fund management companies whereby the
investor agrees to save say Euro100 per month - the sum is used to invest
in a particular fund each month and will purchase a variable number
of shares depending on the price at the time. Such schemes are non-contractual
and may be varied or terminated at any time.
Risk Spreading (Diversification)
The investment strategy of always holding at least 15 different types
of security in a portfolio in order to avoid the risk (specific risk)
of severe and irretrievable loss.
Running Yield
The yield - based on the most up-to-date distributable income figure.
Secured Loan Stock
A bond issued to lenders by the entity concerned and secured on some
asset(s) of the entity, usually property.
Shareholder
An investor holding shares in a fund.
Shares
All funds are divided into shares and the total shares owned by investors
will vary from day to day according to demand. Shares are priced simply
by dividing the total number of shares outstanding into the total net
assets of the fund at the valuation point, which is normally a prescribed
time each day. Thus new investors subscribing or investors redeeming
their shares always do so at the prevailing share price thus ensuring
fairness to all.
SICAV
An open-end investment company organised under the laws of one of the
EC member states.
Specific Risk
The risk taken on through holding a single holding of shares (or e very
few holdings).
Total Return
The total return on investing into a share taking into account both
capital growth and income received.
Unauthorised Unit Trust
A UK unit trust which although regulated by the Financial Services Authority
may not be advertised for sale to the general public.
Unit Trust
A collective investment scheme organised under trust law.
Unsecured Loan Stock
A bond issued to lenders by the entity concerned without any sort of
security.
Valuation Point
The precise time when an open-end fund is valued - for most funds this
is carried out every business day but in most jurisdictions the valuation
of a fund must be performed at least twice monthly. In some instances
the manager may value the fund at certain times in the day i.e 10.00am
or 14.00pm or by market close of different or collective time zones
Yield
A percentage figure expressing the distributed income of a fund (or
individual security) as a percentage of the closing market price
of the fund (or individual security).