Glossary

Active Management A style of investment management, where the Manager chooses to buy and sell shares based on their potential for capital appreciation or lack thereof. Therefore the fund’s portfolio is likely to have securities that are dissimilar to the benchmark index, either in terms of type of securities or proportion.

Annualised Return The rate of return of your investment on an annual basis. The formula for converting cumulative return to annualised return is : [(1+CR%)^(1/n)-1] * 100 Where * CR is the cumulative return * n is the number of years.

Asset Allocation The portions of the total fund that have been assigned to specific asset classes (such as equities vs bonds vs cash).

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B

Benchmark A quantitative standard by which performance of a Fund is measured against. For example, the benchmark normally used for a fund that invests in global equities is the MSCI World Index. Hence, to gauge the performance of the Fund, you may compare it against the performance of the benchmark MSCI World Index.

Beta A measure of the sensitivity of your investment to market movements. It indicates the risk level of your investment relative to the benchmark. A "beta" of 1 indicates that your investment mirrors the movement of the benchmark. A "beta" of greater than 1 indicates that your investment has outperformed the market more in bull markets than bear markets because a £1 rise/fall in the market had caused a greater than £1 rise/fall in the Fund. It also implies that your investment has higher risk than the benchmark. A "beta" of less than 1 indicates that your investment has tended to outperform more in bear markets than in bull markets because a £1 rise/fall in the market had caused a less than £1 rise/fall in the Fund. It also implies that your investment has lower risk than the benchmark.

Bid Price The price at which unitholders sell or realise their units.

Bid/Offer Spread The percentage difference between the bid and offer prices. The spread is usually 5%.

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C

Capital Appreciation An increase in the value of your investment. If you had made an investment at £1 and the value of the investment increased to £3, the capital appreciation is £2.

Capital Growth An increase in the value of the unit trust or the mutual fund.

Closed-Ended Fund Closed-ended funds have a fixed fund size. They are normally incorporated as an investment company and quoted on a stock exchange. Shares cannot be redeemed but can be traded through the stock exchange. Share prices are determined by supply and demand and can trade at a discount or premium to net asset value.

Coupon The interest payment made from a bond; the term comes from when holders redeemed paper coupons to receive periodic interest payment.

Cumulative Return The total return over a period of time. It is computed as the change in the value of your investment divided by the initial investment amount you have put in, expressed as a percentage. For example, if you have invested £5,000 on 1 Jan 1995 and the investment is worth £6,500 on 30 June 1998, the cumulative return of your investment over this 3½ year period is : (£6,500-£5,000) / £5000 = 30%

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D

Deflation Decline in the prices of goods and services in an economy. Deflation is the opposite of inflation.

Distribution Payment of income from a unit trust or fund.

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E

Expense Ratio The cost of operation and management of the Fund, expressed as a percentage of the total size of the Fund. This gives an indication of the proportion of costs and expenses incurred by the Fund.

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F

Feeder Fund A unit trust which invests directly into another fund.

Franked Income Dividends from companies are paid after the company has paid corporation tax. The income is referred to as ‘franked’ and is not subject to further corporation tax in the hands of the unit trust.

Fund of Funds A unit trust which invests in other unit trusts.

Fundamental Analysis Fundamental analysis encompasses using financial information such as earnings stream, cash flows, interest rate, inflation, management capability, etc to make judgements on future stock prices. By appraising such factors, analysts assess whether a particular stock is undervalued or overvalued at the current market price.

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H

Hedging The process of protecting a fund’s assets from the impact of currency fluctuation.

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I

Index Funds Funds whose investment objective is to mirror the performance of an index, also called a ‘tracker’ fund.

Inflation An economic condition where there is a rise in the prices of goods and services in the economy. This can happen due to demand-pull or cost-push factors. Demand-pull inflation causes prices to rise when supply is not adequate to meet demand. Cost-push inflation occurs when rising production costs are the root of the rise in prices.

Initial Charge See Management Charges.

Initial Offer Price The price at which units in a new trust is offered to the public. This price is usually fixed during the launch period of the fund.

Investment Grade A term used to describe borrowers or bonds that meet a certain satisfactory credit quality as deemed by credit rating agencies such as Standard & Poor’s and Moody’s Investors Service. The former categorise BBB and higher as investment grade. The latter categorise Baa and higher as investment grade. Any debt issue below investment grade is considered speculative and is often referred to as junk bond.

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L

Liquidity Unit trusts are generally very liquid investments in that you can sell your units back to the Manager on any dealing day and realise cash.

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M

Management Charges The remuneration of the managers. An initial sales charge (also called preliminary charge) is paid by the unitholder in the offer price at the time of purchase. The managers are also entitled to a periodic management fee which is quoted as an annual percentage of the fund value, and factored into the daily prices of the fund.

Managers This is the management company. They are responsible for the whole operation of the unit trust, including the investment of the fund.

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N

Net Asset Value This is the market value of the fund’s total assets - stocks,bonds, cash and income less expenses, divided by the number of units in issue. The net asset value of a unit trust is usually calculated daily.

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O

Offer Price The price at which investors buy units.

Open-Ended Fund A unit trust or mutual fund is usually open-ended. This means that new units may be issued or existing units can be realised (redeemed) from time to time. The fund size can therefore contract or expand. There is no limit to the size of the fund although the Manager usually puts in a provision that should a fund fall below a certain minimum size it will be wound up, with the proceeds returned to unitholders.

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P

Pound-Cost Averaging A feature of regular savings plans where a fixed sum is invested periodically. Because the fixed sum buys more units when the price is lower, and fewer when it is higher, the effect is to make the average price paid for the units bought lower than the average price ruling over the period of saving.

Put Option An option to sell a security at a particular price.
The seller of a put option is obliged to buy the security at the agreed price, if the put buyer chooses to exercise the right to sell the security.

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R

Reinvestment Unitholders who opt for reinvestment instruct the Manager to use their dividends to buy additional units on the date of distribution.

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S

Sharpe Ratio A risk-adjusted performance measurement. Measures the value-added of the manager per unit of risk taken. Computed as : (RI - RF) / SD where : * RI is the return on the investment * RF is the risk-free rate of return that gives a definite rate of return at the end of the holding period without risk of defaulting (often taken to be short term government bills rate) * SD is the Standard Deviation of the returns.

Standard Deviation Measures the variability of the returns from the mean return. This is frequently used as an indication of risk of the investment, and in contrast to Beta, is independent of the benchmark. For example, if your investment had an average return of 8% and a standard deviation of 5%, then : 68% of the time the return was between 3% (8% less 5%) and 13% (8% plus 5%).

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T

Technical Analysis Technical analysis involves the use of mechanical rules such as trading volume, price movements, momentum indicator and charting to profit from recurring patterns in stock price behaviour.

Tracking Error Measures the variability of returns relative to the benchmark return. Computed as the standard deviation of the monthly excess return where the excess return is the return earned by the investment less the return on the index. A higher tracking error means that there is greater active management.

Trust Deed The legal document drawn up between the trustees and the managers for regulating the operation of the trust.

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V

Valuation Point The time at which a fund is valued. Most trusts will have at least one valuation point daily. Top

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