Actively managed fund – an investment strategy that seeks to achieve a particular goal, e.g. to perform better than a particular comparative benchmark (e.g. the market or an index) through selection of individual securities (such as equities). In contrast, a passively managed fund (index fund) tracks the securities listed in an index.
Administrator – see Fund administrator.
Annual/semi-annual report – a fund’s annual or semi-annual financial report includes a report on its investments and operations over a specific period, and includes detailed financial accounts. Annual and semi-annual reports allow investors to check whether the investment fund’s managers are doing their job properly and in accordance with the investment policy set out in the fund’s prospectus. The annual report also includes a certification by the independent auditor that the accounts give a true and fair view of the fund’s financial position.
Advisor – see Investment advisor, Fund advisor and Financial Advisor.
Asset allocation – the balance between different classes of investment held within a fund or an investor’s portfolio, also known as investment allocation or portfolio structuring. Creating an asset allocation model is often part of a fund manager’s investment process and is designed to ensure that portfolios are diversified as stated in the fund’s prospectus. The asset allocation model may specify limitations for particular asset classes, regions and sectors.
Asset class – refers to the classification of assets. The three main asset classes for Undertakings for Collective Investments in Transferable Securities (UCITS) are equities, bonds and money market instruments.
Assets – the investments held by an investment fund.
Balanced funds – see Mixed funds
Base rate – the main interest rate set by a country’s central bank or monetary authority. Other lending and saving rates are calculated with reference to this figure.
Bear market – an equity market in which prices are falling consistently; the opposite of a bull market.
Benchmark – a financial yardstick, usually a stock or bond market index, against which the performance of an investment fund or portfolio of assets is measured and judged.
Bid/offer spread – the difference between the price at which securities are sold and the price at which they can be bought. Bid is the sale price and offer is the purchase price.
Blue chip – also "standard stocks", a term denoting the world’s or an individual country’s biggest and best-known companies or the shares and bonds they issue. Investors may prefer blue-chip securities because of the stability and reliability they expect of them.
Bonds – Debt securities issued by governments, financial institutions or other companies to raise capital. They are traded on financial markets and mainly offer fixed rates of interest over a determined period. The nominal value is repaid when the bond reaches the end of its term. While generally regarded less risky than equity investments, some bonds carry a greater degree of risk than others. The degree of risk depends on the issuer’s financial strength and stability but bond prices can also be affected by interest rate fluctuations or changes in overall market conditions.
Bull market – a market enjoying a sustained period of growth, the opposite of a bear market.
Capital – an amount of money available for investment or that has been invested. Capital growth (price gain) is the increase in the value of the investment, as opposed to any interest or dividend income it may pay out.
Capital protection fund – an investment fund with capital protection aims to ensure that the whole or a specified proportion of the investor’s original investment is returned at the end of a pre-defined investment period. The investors are protected against a fall in their investment’s value at the end of the pre-determined investment period. Such protection is, however, associated with certain costs, so that the investor does not fully participate in price rises on his fund’s markets when these occur. There are also capital-protected funds with a guarantee given to the investor or the fund by the fund company or by a third party company such as a bank.
Closed-ended fund – an investment fund with a fixed amount of share capital. Once the fund’s capital is fully issued, investors must buy shares in a secondary market from existing shareholders (often on a stock exchange). Existing shareholders must also use the secondary market when selling their shares.
Collective investments – the pooling of investors’ money, usually through investment funds, in order to maximise the impact of their investments or to meet minimum investment levels, and to reduce the cost of making and managing investments.
CSSF – Commission de Surveillance du Secteur Financier (Financial Sector Supervisory Authority), Luxembourg’s financial industry regulator.
Custodian – the custodian of a fund is a regulated institution, usually a bank, and provides safekeeping of the fund’s assets in accordance with the applicable fund regulations. For some types of fund the custodian has additional monitoring functions.
Debt securities – financial instruments that represent a debt owed by the issuer to the holder, including government and corporate bonds, money-market instruments and other fixed-income securities.
Derivatives – financial instruments “derived” from securities such as shares and bonds, including futures (contracts to buy or sell securities at a fixed point in the future) and options (contracts that give the holder the right but not the obligation to carry out a specified transaction) as well as other financial contracts.
Distribution – the sale of investment funds to investors through channels such as intermediaries including banks, brokers and independent financial advisers.
Distribution fee – see Front-end load.
Distribution of income – income payment distributed to a shareholder or unit holder of a fund.
Diversification – the spreading of investment risk by investing in different assets that may vary according to criteria such as country or region, sector, currency or asset type.
Dividend – the income shareholders receive from a company as a share of its profits. Some investment funds distribute this income, while others re-invest any dividends received back into the fund.
Domiciliation agent – provides the legal registered office of the investment fund. The domiciliary agent is responsible for the performance of functions and duties associated with the physical domicile, such as the provision of office space and other facilities for the fund, handling all correspondence addressed to the fund and arranging the settlement of bills on its behalf.
Earnings per share (price-earnings ratio) – a widely-used indicator of the return on investments in shares. It is arrived at by dividing the total profit of a company by the number of common stocks in circulation.
Exchange-traded funds (ETFs) – investment funds that are listed on a stock exchange. Their most important characteristic is that they can be bought and sold at any time that the exchanges are open. The majority of ETFs aim to track the performance of a particular index.
FCP – the French abbreviation for Fonds Commun de Placement (common investment fund). The FCP is a co-ownership structure whose joint owners are only liable up to the amount they have contributed and whose rights are represented by units. A common fund has no legal personality and must be managed by a management company in accordance with applicable regulations.
Fixed income investments – securities such as bonds and money-market instrument that pay a set or floating (variable) rate level of interest over a predetermined period of time.
Financial advisor – see Investment Advisor or Independent Financial Advisor
Front-end load – a fee payable when fund units or shares are purchased, also termed a "subscription fee". As a rule, most of it goes to the fund distributor, such as a bank, broker, or financial advisor. This fee will be described in the fund’s prospectus.
Fund – see Investment fund.
Fund administrator – the administrator is responsible for the administrative duties associated with an investment fund, such as the calculation of the net asset value (NAV), proper accounting and the recording of the issue and redemption of fund shares or units.
Fund units or shares – portions of ownership of an investment fund’s net assets that investors receive in return for their investments of capital. Investors in a UCITS fund have a legal right to sell their shares back to the fund; they can do so in most cases daily, and in all cases at least twice a month.
Fund advisor – see Investment advisor (fund).
Fund assets – the securities, cash and other investments held by an investment fund.
Fund management company – see Management company.
Fund manager – the person responsible for the investment management of a particular investment fund. The fund manager takes day-to-day decisions as to which assets should be bought or sold. In doing this, he frequently makes use of research and analyses produced by a team of experts.
Fund promoter – the person, group of persons or company that launches the investment fund and determines its business profile.
Futures – a futures contract is a derivative that creates an obligation to buy or sell a specific asset such as a number of shares or bonds at a particular price on a specified future date. Like other derivatives, futures can be traded on specialised regulated exchanges, such as NYSE Liffe or Eurex, or on an ‘over the counter’ (OTC) basis.
Growth stocks – stocks of companies whose earnings are expected to increase at an above-average rate. Growth stocks are typically found in sectors benefiting from scientific or technological breakthroughs and where demand for companies’ products or services is growing rapidly.
Hedging – A strategy used to reduce risk, usually by using derivative instruments such as futures and options to insure against a fall in the price of specific assets held by a fund or within an investor’s portfolio.
Independent Financial Advisors – also known by the abbreviation IFA, the term denotes an independent expert who advise individuals on their financial investments. It is an IFA’s job to determine the individual’s financial means, investment profile and goals, and to recommend investments that fit their needs.
Index – a measurement of the average price of a group of assets, especially shares and fixed-income securities. Indices can refer to securities or other assets from a country, region, sector, etc., and are often used as a benchmarks for the performance of an investment fund that invests in similar assets. They often serve as the basis for Exchange Traded Funds that are designed to track performance.
Index fund – an investment fund whose investment strategy is to track an index, e.g. a stock or bond market index, as closely as possible.
Inflation – the amount in percentage terms by which the prices of a selected basket of goods and services rises each year (or falls, which is deflation). The level of inflation is important to investment in all kinds of securities, but particularly fixed-income securities and funds, because inflation must be deducted from the annual return on an asset to determine the real gain for the investor.
Investment advisor (fund) – any person or group that makes investment recommendations or provides securities analysis to the investment fund’s manager in return for a fee. In some cases the fund company may appoint an investment advisor to use their specialist skills in the particular field or market in which the fund invests.
Investment advisor (private investors) – an expert who is either independent or employed by financial companies such as banks or brokers, and provides guidance to individuals on the best way to invest their capital. It is the financial advisor’s job to examine the individual’s financial means, investment profile and goals, and to recommend investments that fit the individual’s needs. – see also Independent Financial Advisor.
Investment company (see also SICAV) – an investment fund structured as a company, with shareholders and a board of directors that is ultimately responsible for the successful operation of the fund according to the investment policy set out in its prospectus.
Investment fund – the general term for any investment vehicle that pools together the money of a number of investors. An investment fund invests in certain markets and securities according to its investment strategy and objectives. Funds can take many legal forms, including companies, partnerships or contractual agreements.
Investment guidelines – the rules set out in an investment fund’s prospectus that explain how investments should be managed, including any restrictions on the type and size of investments.
Investment instruments – financial products that are available for investment through funds or directly, including equities, bonds, money-market instruments, cash and derivatives.
Investment policy – describes in essence the measures taken to manage the fund assets. Among other things, it sets out the types of securities in which the investment fund may invest, as well as guidelines to be followed by the fund manager, such as the investment limits applicable to individual securities or asset classes or steps to be taken to hedge against weakened prices.
Investment process – the established operating method according to which fund managers make decisions about which investments to buy and sell. In so doing, they make use of processes/methods for the selection of individual securities and/or general asset allocation. Some managers use quantitative methods that employ computer systems to screen for securities with particular characteristics. Investment processes include risk management procedures and may also involve regular meetings of committees that approve each investment.
Investment style – the best-known styles of investment include “growth” and “value” stocks, which display different characteristics and perform in different ways depending on the economic climate. Another aspect of investment style is the size of companies in whose securities a fund invests, usually designated as ‘small cap, ‘mid-cap’ and ‘large cap’.
IPO – initial public offering, which takes place when a company first sells its shares to the public and lists them on stock exchange.
Key Investor Information Document– the KIID (also abbreviated to KII or KID) is a concise overview of a UCITS fund’s main features, written in plain language and produced in a standard format on two A4 pages, introduced as of July 2011 as part of the UCITS IV legislation.
Liquidity – the ease with which assets, including shares, bonds or fund shares, can be converted to cash. If an asset is described as highly liquid, this means it is quick and easy to sell. Property probably represents the least liquid of assets. If a fund offers daily liquidity, that means investors can buy (subscribe to) the fund’s shares or units or sell (redeem) them back on a daily basis.
Load – a fee charged to investors in an investment fund, notably in order to pay commissions to distributors, and which may be paid when they buy fund shares or units, during the period of investment in the fund, or when they request their redemption (see also Front-end load and Back-end load). These fees will be described in the fund’s prospectus.
Management company – a company that organises, manages and administers an investment fund.
Management fee – the charge levied by the management company for the services it provides in connection with the investment management and the operation of an investment fund. The more complex the investment strategy, the higher the management fee is likely to be.
Market capitalisation – the value of a company, measured by its stock market price multiplied by the number of outstanding shares. Market capitalisation is widely used as a way to measure a company’s size for investment purposes, with companies classified as ‘small cap, ‘mid-cap’ and ‘large cap’.
Market maker – a specialist company that act as an intermediary for investors seeking to buy or sell a particular share on a stock exchange. Market makers participate in these transactions for their own account and at their own risk. Their profit comes from the difference between the buying and the selling price. There are also market makers for exchange-traded funds.
Merger (of funds) – the combining of two or more investment funds into one entity, which may happen for a variety of reasons. A fund may merge with another fund in order to create a larger pool of assets that is more economically viable to run, or where a merger of two fund management groups creates a range of overlapping funds with similar objectives.
MiFID – the European Union’s Markets in Financial Instruments Directive, known as the Financial Markets Directive or MiFID for short, aims to provide a uniform set of rules for investor-oriented services throughout the EU, including stipulations on the quality of service offered by financial institutions to their clients. MIFID requires firms to categorise their clients and apply different levels of protection for each category, one of which comprises retail investors. Financial companies regulated under MiFID that deal with retail clients must have clear procedures in place and fulfil specific requirements to assess the suitability of each type of investment product for the investor.
Mixed funds – investment funds (also known as balanced funds) that invest in both equities and bonds, and sometimes other asset classes such as money-market instruments.
Mutual funds – The US term for investment funds, normally used to denote funds that are available for sale to the general public.
Net asset value (NAV) – the total value of an investment fund’s assets, minus any liabilities such as expenses and other debts. The price per unit (net asset value per share) is calculated by dividing the NAV of a fund by the number of outstanding units. The frequency of the NAV calculation depends on the nature of the fund and the provisions of the prospectus, and provides a basis for the price at which investors can buy (subscribe to) or sell (redeem) shares or units of a fund, subject to any fees and commission charges.
No-load – an investment fund that does not require investors to pay fees (sales load) at the time they buy or sell shares or units in a fund.
OEIC– abbreviation for open-ended investment company used in the UK.Open-ended investment companies in Luxembourg are known as SICAVs after the French abbreviation.
Open-ended fund – an investment fund that allows the creation of new shares or units whenever investors seek to make an investment in the fund. The size of the fund varies according to the current number of investors and the number of shares or units they hold.
Options – derivatives that take the form of an agreement under which the holder of an option may (but is not obliged to) to buy or sell a particular security at a specific price in the future. Options can offer insurance against changes in asset prices.
Passive investment – an investment strategy that seeks to perform in line with a particular market, typically reflected by an index, generally by investing in stocks or securities in the same proportions as the index in question. If there are changes in the index, for instance because individual stocks or their weighting change, a passive investment fund needs to make similar adjustments.
Performance – an investment fund’s performance is measured by the return it delivers over a particular time period, often compared with the returns of similar funds or with a benchmark such as a stock market index.
Portfolio – is the sum of all investments in securities held in a custody account by a private or institutional investor. It also refers to the aggregate assets held by an investment fund.
Prospectus – the key legal document of the investment fund, providing comprehensive details of the fundamental goals of the fund, its investment policy and details of how it operates.
Purchase fee – see Front-end load.
Quoted company – a company whose shares are traded on a stock exchange. Quoted companies must publish regular information about their financial position as well as other information that could affect their share price.
Redemption fee – a type of fee charged by some investment funds when investors sell or redeem their shares or units back to the fund. A redemption fee is paid to the fund and is typically used to defray some of the fund’s costs associated with the redemption. This fee will be described in the fund’s prospectus.
Regular savings – the process by which investors make regular purchases of financial assets, usually monthly but sometimes annually, and as a rule according to a predetermined plan. It is the opposite of a lump sum investment that involves a single purchase of assets. Regular savings ensure that you put money in the market in all conditions, when prices are low as well as when they are high.
Retirement provision – a precautionary arrangement that provides an income for an individual’s retirement, funded either by that individual through their own savings, by their employer or by the government of the country they live in. Many company and private pensions use investment funds as the basis of their assets.
Risk – the general term given to the likelihood that investors may suffer a loss or fail to receive the expected level of return from an investment. Many investment funds show the level of risk taken by the fund through an indicator such as volatility, which represents the historical level of price fluctuation a fund or an asset experiences.
Sales charge – a charge levied on the investor at the time they buy shares or units in an investment fund (see Front-end load).
Sector – a particular part of the economy in which a fund may invest; for example an industry group, such as technology, a geographic location such as a single country or region, a continent or the entire world.
Securities – frequently used as another term for financial assets such as shares and bonds. Legally speaking, a security is a certificate securitizing a private right such as, for example, shared ownership of a company.
Share classes – different types of share issued by a single investment fund that typically confer different rights on their owners. For example, some funds issue shares in a variety of currencies, such as the euro, the US dollar and the pound sterling. Others, however, offer a variety of share classes with varying conditions and fee structures for different types of investor.
Shares – units of ownership of a company. Shares can be listed and traded on a stock exchange or held by the company’s owners on a private basis. Shares are sold at a price decided by the issuing company in an initial public offering or subsequent share issue, but subsequently their price is determined by supply and demand, influenced by factors such as the company’s profitability and the overall economic environment.
SICAV – the French abbreviation for Société d’Investissement à Capital Variable (open-ended investment company), one of the main types of investment fund established in Luxembourg. In a SICAV the capital of the fund will always be equal to its net asset value, and the price at which shares are bought and sold is based on the current net asset value.
Simplified prospectus – a document established under the UCITS III legislation in 2001 that provides a summary of the content of the full prospectus. From 2011/2012 this will be replaced by a Key Information Document (KID) providing a concise overview of the fund’s main features on two pages.
Stock exchange – a market in which securities such as shares, bonds and certain types of investment funds (including exchange-traded funds) are traded.
Stock selection – the investment process by which a fund manager decides which shares in a particular sector or market to buy rather than others. The decision usually involves detailed analysis of companies’ activities and accounts, and often face-to-face meetings between fund managers and company management.
Subscription fee – see Front-end load
Swing pricing – a mechanism for compensating an investment fund for the dilution effect of redemptions and subscriptions, and to protect continuing investors. It aims to ensure that investors subscribing to or redeeming from a fund bear a portion of the trading costs, i.e. transaction costs or the spread between the bid and offer prices of underlying securities.
Total expense ratio (TER) – a measure of the total costs charged to an investment fund and expressed in percentage terms of the fund’s total assets. The total expense ratio typically includes the administration fee, management fee, audit fee, and the cost of the prospectus.
Tracker fund – see also Index fund
Trailer fee – a recurring fee, generally charged to the investment fund, which pays for the costs of ongoing payments to fund intermediaries.
Transfer agent – a regulated company that undertakes the administration of subscriptions to and redemptions from funds by investors and maintains the register of the fund’s shareholders.
UCITS – an acronym standing for Undertakings for Collective Investment in Transferable Securities, the title of a series of directives introduced by the European Union (EU) beginning in 1985. Funds that meet the conditions laid down by the directives are known as UCITS funds and may be marketed throughout the EU.
Umbrella fund – an investment fund that contains a number of sub-funds or compartments, each of which can have a different investment policy. The various sub-funds may invest in different assets or markets, be aimed at different types of investor such as individuals and institutions, or be priced in different currencies to suit investors from various parts of the world. The rights of investors and creditors of a sub-fund are in general limited to the assets of that sub-fund.
Valuation currency – the currency in which a fund’s assets are valued, even though the assets themselves may be denominated in a different currency.
Value stocks – shares of companies that are considered underpriced by the market (in the sense that their current price does not reflect their fundamental characteristics) and which therefore represent an attractive investment opportunity. A value stock may be identified by key data such as a low market price compared with its book value, a high dividend yield or a low price relative to earnings multiple.
Volatility – indicates the degree to which the price of a fund or security fluctuates during a given time period.
Yield – the annual return realised from an investment such as stocks, bonds or investment funds, expressed as a percentage of the price. It is often used to compare and contrast the performance of financial assets and funds.