The Moneywise Investment Jargon Buster
1. Unit trust/OEIC
A collective investment, where your money is put together with that of other investors and invested by a professional.
2. Investment trust
Another collective investment but where only a limited number of investors can put their money in, and the value depends not just on the performance of the investments but also on the demand from investors.
If you take all the available shareholder funds in an investment trust – the company's assets less its liabilities – and divide it by the total number of shares in that company, you get the net asset value, or NAV, per share.
Because investment trust companies are quoted on the stock exchange, the price of shares is determined by the stockmarket, according to supply and demand, and may not equal the NAV per share. This means they can be sold at a discount or a premium from that value.
The worst-performing investments in the bottom 25% are fourth quartile. Those above the bottom 25% and below the halfway mark are third. Those which are between average and the top 25% are second quartile, and the top 25% are first quartile.
6. Cumulative performance
This is the performance over a number of years. It is usually expressed as what you could expect to get back if you invested £1,000 a year ago, three years ago or five years ago.
7. Discreet performance
This takes out individual years and looks, for example, at how the fund performed in the whole of 2009, 2010 and 2011.
This is a measure of how much of a rollercoaster ride investors get and whether there are wide swings in the value of funds.
The annual management charge is the portion of the annual fee that comes directly from the amount the fund manager swallows up in managing your fund, from their remuneration to the cost of their research and their team.
The total expense ratio shows your total costs, including the AMC, administrative charges, transaction charges and fees.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.