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Investment Glossary

Active Common Factor Risks

The measure of risk in an active element of return that influences many assets.

Active Common Factor Risks - Countries

The measure of risk in an active element of return that influences many assets by countries.

Active Common Factor Risks - Currencies

The measure of risk in an active element of return that influences many assets by currencies.

Active Common Factor Risks - Industries

The measure of risk in an active element of return that influences many assets by industries.

Active Common Factor Risks - Risk Index

The measure of risk in an active element of return that influences many assets by risk index.

Active Specific Risk

The specific risk (annualised standard deviation) of the active return

Alpha

Alpha measures the difference between a fund's actual returns and its expected returns given its risk level as measured by its beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager.

AMT Exposure

Percentage of a fund's assets invested in bonds with income subject to the alternative minimum tax (AMT).

Annual Turnover Ratio

Percentage of a fund's holdings replaced with other holdings during a fund's most recent full fiscal year. A fund's fiscal year end can be found in a fund's current summary prospectus and/or prospectus.

Average Coupon

The average interest rate stated on the securities held by a fund.

Average Credit Quality

The credit rating of a bond is an assessment of the credit worthiness of individuals and corporations. It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities. The average credit quality of a fund reflects the holdings of the underlying issues, based on the size of each holding. Usually we quote the average credit quality as per Standard & Poor's or Moody's credit rating agencies.

Average duration

Also known as “effective” or “McCauley” duration it is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. It's an indication of an issue's coupon relative to its maturity. Rising interest rates mean falling bond prices; declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk; (or reward for bond prices). The weighted average duration of a fund reflects the effective duration of the underlying issues, based on the size of each holding. This value differs with “Modified Duration” which is modified for the market (dirty) price of an issue.

Average Life

An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying holdings. Average life is calculated using the weighted average time to the receipt of all future cash flows for all holdings. Sometimes also known as “average maturity” for fixed-term products. The weighted average life of a fund reflects the maturity of the underlying issues, based on the size of each holding.

Average maturity

A weighted average of all the maturities of the bonds in a portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security.

Average weighted coupon

The average interest rate paid on the bonds held by a fund. It is expressed as a percentage of the stated maturity value of its bonds.

Average Weighted Maturity

An estimate of the number of terms to maturity, taking the possibility of early payments into account, for the underlying holdings. Average life is calculated using the weighted average time to the receipt of all future cash flows for all holdings. Sometimes also known as “average maturity” for fixed-term products. The weighted average life of a fund reflects the maturity of the underlying issues, based on the size of each holding.

Benchmark

An unmanaged group of securities whose overall performance is used as a standard to measure investment performance

Benchmark Risk

A collective measure of the various risks related to the potential for the returns of a mutual fund to differ significantly from the returns of the benchmark against which it is measured.

Beta

A measure of the magnitude of a portfolio's past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%.

Bond

A debt security (IOU) issued by a corporation, government or government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and make regular interest payments until that date

 

Correlation

The linear relationship between two return series. Correlation shows the strength of the relationship between two return series. The higher the relationship, the more similar the returns.

Credit quality

A measure of a bond issuer's ability to repay interest and principal in a timely manner.

Current Yield

In general, yield is the annual rate of return for any investment and is expressed as a percentage. With bonds, yield is the effective rate of interest paid on a bond, calculated by the coupon rate divided by the bond's market price. Bonds are typically issued with fixed coupon payments (regular cash payments of a fixed amount). Bonds are typically valued in terms of the their yield - what dollar amount as coupon payments is received as compared to the bond's current market price. For a bond fund the current yield may be the disclosed yield paid out to investors.

Debt to capital

Indicates the percentage that debt comprises of total capital; calculated by dividing each underlying fund holding's total debt by total capital. A large debt/capital ratio indicates that a company is highly leveraged.

Distribution Rate

The rate that reflects the fund’s past dividends paid to shareholders. The rate may reflect a monthly 30-day figure, or an annual 12-month period. The annual distribution rate looks back at the actual payout, while the monthly distribution rate and the SEC yield try to predict the future.

Diversification

The strategy of investing in different asset classes and among the securities of many issuers in an attempt to lower overall investment risk.

Dividend

A payment of cash or stock from a company's earnings to each shareholder as declared by the company's board of directors.

Duration

A measure of the sensitivity of bond and bond mutual fund prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

 

Earnings growth

The average annual rate of growth in earnings over an indicated period of years for the stocks now in a fund.

Emerging countries

Those countries that were not members of the Organisation for Economic Co-operation and Development (OECD) on 1 January 1995 and, in addition, Mexico and Turkey.

Emerging markets fund

A fund that invests primarily in countries with developing economies (that is, those that are becoming industrialised). Emerging markets funds tend to be more volatile than domestic stock funds due to currency fluctuation and political instability.

Enterprise Value/EBITDA

A ratio used to determine the value of a company and is calculated as the enterprise value divided by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

EPS Growth

Earning Per Share. The portion of a company's profit allocated to each outstanding share of common stock. Serves as an indicator of a company's profitability.

Equity

In investing, ownership in a company. Often used as a synonym for stock.

Equivalent rating

The rating employed by such other Rating Agency which is equivalent to the relevant rating by S&P or Moody's.

Expense ratio

The percentage of a portfolio's average net assets used to pay its annual expenses.

FY1 Price to Earnings

A measure of the price to earnings ratio (P/E) using forecasted earnings for the P/E calculation. The forecasted earnings for FY1 represent the forecasted earnings at the end of the next fiscal year-end period.

 

G7

Group of Seven - France, the United States of America, the United Kingdom, Germany, Japan, Italy and Canada

Growth and Income fund

A fund that seeks long-term growth of capital and current dividend income from stocks.

Growth fund

A mutual fund that emphasises stocks of companies believed to offer above-average prospects for capital growth due to their strong earnings and revenue potential. Growth stocks tend to offer relatively low dividend yields, because these companies prefer to reinvest earnings in the company.

 

Historical 3 Yr EPS Growth

Historical 3 Year Earning Per Share. The portion of a company's profit allocated to each outstanding share of common stock. Serves as an indicator of a company's profitability. The past 3 years of earnings per share are used within this calculation.

Historical 3 Yr Sales Growth

The rate at which sales have increased for the fund's underlying holdings over the last three years.

 

Income fund

A fund that seeks current income rather than growth of capital. Income funds typically invest in bonds and/or high-yielding stocks.

Income risk

The possibility that a portfolio's dividends will decline as a result of falling interest rates. Income risk is generally greatest for money market instruments and short-term bonds, and least for long-term bonds.

Index

See benchmark.

Index fund

A passively managed mutual fund that seeks to parallel the performance of a particular market index.

Indexing

A low-cost investment strategy that seeks to match, rather than outperform, the return and risk characteristics of an index, by holding all securities that make up the index or a statistically representative sample of the index. Also known as passive management.

Inflation

A general rise in the prices of goods and services.

Inflation risk

The possibility that increases in the cost of living will reduce or eliminate the returns on a particular investment.

Information ratio

In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager's performance against a benchmark. This measure explicitly relates the degree by which an Investment has beaten the Benchmark to the consistency by which the Investment has beaten the Benchmark.

Interest rate

The amount charged for borrowing money.

 

Latin America

The countries of Central and South America (including Mexico, but excluding the Caribbean countries).

Market capitalization

A determination of a company's value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Also called capitalization.

Market risk

The possibility that stock or bond prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Maturity/Maturity date

The date when the issuer of a money market instrument or bond agrees to repay the principal, or face value, to the buyer.

Member state

Member state of the European Union, that is Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom.

 

Net assets

The net asset value of a fund, plus all other assets, minus liabilities.

Net Margin

The ratio of net profits to revenues for a company or business segment that shows how much of each dollar earned by the company is translated into profits.

 

Operating Margin

A measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc.

 

P/E to Growth

A ratio used to determine a stock's value while taking into account earnings growth.

Passive management

See Indexing.

Portfolio

The securities of a fund.

Price/Cashflow

Supplements price/earnings ratio as a measure of relative value; represents a weighted average of the price/cash flow ratios for the underlying fund holdings.

Price/Earnings ratio (P/E)

The share price of a stock, divided by its per-share earnings over the past year. For a portfolio, the weighted average P/E ratio of the stocks in the portfolio. P/E is a good indicator of market expectations about a company's prospects; the higher the P/E, the greater the expectations for a company's future growth in earnings.

Price-to-Book ratio (P/B)

The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the ratio is the weighted average price/book ratio of the stocks it holds.

Prospectus

A legal document that gives prospective investors information about an investment, including discussions of its investment objectives and policies, risks, costs, and past performance.

 

Rating agency

Moody's or S&P or an internationally recognised securities rating agency which shall be substituted for S&P or Moody's or both.

Return on assets

Measures profitability by reporting the percentage earned on assets; calculated by dividing 12 months of net income by total assets.

Return on equity

A measurement of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Risk tolerance

An investor's ability or willingness to endure declines in the prices of investments while waiting for them to increase in value.

R-squared

A measure of how much of a portfolio's performance can be explained by the returns from the overall market (or a benchmark index). If a portfolio's total return precisely matched that of the overall market or benchmark, its R-squared would be 1.00. If a portfolio's return bore no relationship to the market's returns, its R-squared would be 0.

S&P 500 Index (Standard & Poor's 500 Index)

An index of many of the 500 largest capitalised stocks in the United States that is widely recognised as a guide to the overall health of the US stock market.

Sector

A group of companies, often related to a particular industry that have certain shared characteristics.

Securities

Stocks, bonds, money market instruments, and other investment vehicles.

Sharpe ratio

A measure of risk-adjusted return. To calculate a Sharpe ratio, an asset's excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset's standard deviation.

Sovereign debt

A debt obligation of any government, including political sub-divisions, local authorities, government agencies, government-owned, controlled, sponsored or guaranteed corporations and supra-nationals.

Spread to LIBOR

The difference between the London Interbank Offered Rate (LIBOR) and the weighted average nominal yield for the Franklin Floating Rate Daily Access Fund and the Credit Suisse Leveraged Loan Index.

Standard deviation

A measure of the degree to which a fund's return varies from its previous returns or from the average of all similar funds. The larger the standard deviation, the greater the likelihood (and risk) that a security's performance will fluctuate from the average return.

Stock/Common stock

A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

 

Time to Reset

Bank loans pay interest at a rate negotiated between the borrower and lender. The interest rate is linked to, but generally at a spread above, the current London Interbank Offering Rate (LIBOR), which typically resets every 3 months. However, the time period in which bank loans reset can vary between loans and is dictated by the terms of the loan between the borrower and lender. The average time to reset for the portfolio will be based on the average number of days in which the loans in the portfolio will adjust to the new rate based on the current LIBOR rate in the market.

Total Active Risk

The total risk (annualised standard deviation) of the active return.

Total Portfolio Risk

The standard deviation of the asset's total return distribution, where the standard deviation measures uncertainty. Total Risk is forecast using Barra's multiple factor model. The total risk for an asset depends on the asset's exposures to the risk factors, the factor variance/covariance matrix, and the forecast specific risk of the asset.

Tracking Error

Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error.

 

Volatility

The degree of fluctuation in the value of a security, mutual fund, or index, volatility is often expressed as a mathematical measure such as a standard deviation or beta. The greater a fund's volatility, the wider the fluctuations between its high and low prices.

 

Weighted Average Rating Factor (WARF)

A measure that is used by credit rating companies to determine the credit quality of a portfolio. This measure allows rating companies to look at a portfolio as a single security, and assign it a single rating. WARFs are most often calculated by rating companies for collateralized debt obligations (CDOs).

World Equity

Mathematically, the world factor represents the intercept term in the cross-sectional regression. Economically it describes the aggregate up and down movement of the global equity market.

 

Yield

A snapshot of interest and dividend income from a fund. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualised for the coming year.

Yield (Distribution)

For a fixed income fund, this reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the Net Asset Value per share. It does not include any preliminary charge and investors may be subject to tax on distributions.

Yield (Historical)

For an equity fund, this reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the midmarket unit price of the fund. It does not include any preliminary charge and investors may be subject to tax on distributions.

Yield to call

The rate of return an investor would receive if the securities held by a portfolio were held until their call dates. This yield is valid only if the securities are called prior to maturity.

Yield to maturity

Yield to Maturity (“YTM”) also known as the “Gross Redemption Yield” or “Redemption Yield”. The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate.

Yield to worst

The bond yield computed by using the lower of either the yield to maturity or the yield to call on every bond.