.Glossary







Funds Glossary

Activity Portfolio

The Activity Portfolio is that part of the portfolio of a (dynamic) capital preservation fund that invests in international financial markets with the aim of participating in the movements on these markets. Investments are usually made in foreign-currency bonds and in equities.

Annual report/semi-annual report

For each fund it manages, the management company publishes an audited annual report within four months of the close of the financial year and an unaudited semi-annual report within two months of the end of the first half of the financial year.

The annual report contains e.g. the annual financial statements, the statement of changes in the fund’s net assets, the structure of the portfolio and the auditor’s report. The semi-annual report contains the most important half-year results.

 

Arbitrage

Exploiting price differences in the same securities or related assets – be it locally or internationally – whereby the securities are bought on the market offering a lower price and sold on the market offering a higher price.

Asset allocation

The strategic investment of the available assets in different asset classes, such as money market instruments, bonds, equities, real estate, etc. The portfolio is also broken down by sector and according to geographic and currency criteria.

Asset allocation funds

Investment funds which replicate the investment strategies of the providers for the various risk classes. Asset allocation funds invest worldwide in various instruments, depending on the risk category equities or bonds are overweight. Also known as strategy funds, portfolio funds, investment objective funds, asset management funds or mixed funds.

Asset value

The net assets of a fund divided by the number of units in circulation.

Auditors

An organization independent of the fund management company and the custodian bank which regularly monitors compliance with the legal regulations. Auditors must be recognized by the supervisory authorities.

Average residual term to maturity

The residual term to maturity is the remaining life of a bond up to its final due date. In a fund, the average residual term to maturity is calculated from the weighted residual maturities (weighted according to capital invested) of all bonds held in the fund.

Bank declaration (Affidavit)

In the case of investment funds established under Swiss law, federal withholding tax amounting to 35% is in principle deducted from distributions of income (interest/dividends).

Benchmark

Index against which an investment fund’s performance is measured. Also called a reference index.

Best-in-class principle

In addition to traditional financial analysis, company analysis also looks for the companies in selected industries that best meet environmental and social criteria (the best-in-class principle).

Best-of-breed

Seasoned professional investors in the private equity fund and hedge fund business.

Beta

A measure of risk which indicates the sensitivity of an investment, such as an investment fund, to fluctuations in the market, as represented by the relevant benchmark.

For example, a beta of 1.2 tells us that the value of an investment fund can be expected to change by 12% if the market is forecast to move by 10%.

The relation is based on historical data and is only an approximation. However, the closer the correlation between the benchmark and the investment fund, the better this approximation.

Biotechnology

The use of living organisms (often bacteria), which in many cases have been genetically modified, in technical processes and industrial production.

Blue chips

Term used to describe equities of leading companies with top-class credit ratings, high market capitalization, strong earnings power and sound financial structure.

Bond funds

Investment funds which invest in bonds and other fixed or variable interest securities. Bond funds generally have a specific reference and investment currency.

Bonds

Debt instruments with a fixed coupon, at times also with a variable rate of interest and generally with a fixed maturity and redemption date.

The most common issuers are major companies, government bodies such as the federal government and the cantons, public institutions and international organizations such as the World Bank or the International Monetary Fund.

Bonds in default

Bonds which do not make their interest payments or redemption on the scheduled due dates.

Book profit /loss

The theoretical profit or loss on an investment due to its rise or fall in value, as long as the investment is not actually sold.

Borrowing

This refers to the liabilities of the fund before liquidation taxes as a percentage of the total fund assets.

Buy-out

This refers to take-over’s of companies.

The well known forms are management buy-outs (MBO), where companies or divisions are acquired by the management, and leveraged buy-outs (LBO), where new investors acquire the majority of a company using borrowed capital.

Buy-outs are often used to resolve issues relating to succession of ownership of a family business.

Capital preservation fund

An investment fund that enables investors to benefit from advances on the financial markets while providing a large measure of protection against losses exceeding a specified percentage.

Capitalization rate (static discounted cash flow method)

It is made up of the charges on a property (interest costs, fees, operating expenses, insurance premiums, maintenance and repair costs, amortization/depreciation of buildings, risk of rental losses, administrative costs) and is expressed as a percentage of the capitalized-income value.

As one of the elements used to calculate the capitalized-income value, the capitalization rate is determined by an independent expert based on expenses which are expected to be incurred in connection with the property.

Capitalized-income value

This is calculated on the basis of current rental income and a property-specific interest rate (capitalization rate). Rental income must seem appropriate and obtainable over the long term in order to be fully included in the calculation. The capitalized-income value is the major factor used in valuing income properties.

Cash flow

Cash flow represents the net income earned in a financial year before write-offs and provisions.

Cash flow yield

Net income earned before write-offs and provisions in proportion to the current market price, less the accumulated earnings included in this price.

Certificate

Collective security evidencing one or more investment fund units.

Closed-end fund

An investment fund in the form of a company (normally a stock company) with fixed capital. A closed-end fund is not obliged to redeem issued units at the request of the unit holder. As opposed to an open-end fund.

Collective investment contract

The collective investment contract is the legal basis for the investment fund business in Switzerland. This agreement is concluded between the management company, the custodian bank and the investor.

It is the legal basis for the management of the investment fund by the management company on the one hand and for the participation of the investors in the assets of the investment fund on the other.

The collective investment contract is embodied by the fund regulations.

Commission de Surveillance du Secteur Financier

The “Commission de Surveillance du Secteur Financier” (CSSF) is the state supervisory authority which monitors the investment fund business in Luxembourg.

Commissions

Issuing commission and redemption commission. Fee charged on the subscription or redemption of fund units.

Commodity funds

Investment funds which invest the assets primarily in tradable commodities.

Commodity Traded Advisor (CTA)

CTAs invest exclusively in futures and other derivatives. The majority of CTAs pursue a trend-following strategy. This acknowledges the fact that temporary trends do exist on the financial markets.

Trend followers replicate a trend and stand to gain during both bull and bear market periods. A further strategy is to identify exactly when these changes in trends occur and to profit from them.

Contract form

An investment fund which has no legal personality. By purchasing units, the investor concludes a collective investment contract with the management company and the custodian bank.

The unit holder does not have any rights of ownership to the fund assets, but rather a claim to participate in the assets and income of the fund. As opposed to a corporate form.

Convertible bonds

Bonds which feature a conversion right entitling the holder to convert the bond into shares of the company in question at a certain point in time and at a conversion ratio set in advance. Following the conversion, the bond expires.

Core Portfolio

The Core Portfolio is that part of the portfolio of a (dynamic) capital preservation fund that serves to ensure that the capital is preserved. Investments are generally in money market instruments and bonds in the fund’s reference currency.

Corporate form

An investment fund which has its own legal personality, usually a joint-stock company. The units are issued in the form of equities. The investors are shareholders and have both proprietary and membership rights.

Corporate governance

According to an OECD study, corporate governance describes the ways in which mutual responsibilities are distributed between a company’s management and its shareholders.

Corporate social responsibility

Corporate social responsibility may be defined as transparent corporate conduct, which is based on ethical values and takes into account the interests of employees, society and the environment, thereby seeking to create sustainable value for the company and its shareholders.

Correlation

A measure of the degree to which the price trends of various investment categories or instruments move in the same direction. The correlation quantifies the strength of the relationship as a figure between -1 and +1.

The closer the coefficient is to 1, the stronger the correlation. If the coefficient is -1, the investments and the benchmark move in opposite directions. If the value is 0 there is no correlation.

Cost averaging

Strategic exploitation of price fluctuations. This method of investing takes advantage of regular payments. The investor invests the same amount every month, and thus acquires more units when the issue price is lower and less units when it is higher.

Over the long term, the investor thus attains a more favorable cost price than with the regular purchase of a fixed number of units over the same period of time.

Country fund

An investment fund which invests primarily in equities of a specific country.

Coupon

The interest or dividend certificate attached to a security. These certificates entitle their owners to receive the income on the respective due dates and also entitle them to exercise the rights evidenced by these certificates.

Credit rating

Measurement of the quality of a borrower, particularly in respect of solvency and willingness to pay. The credit rating makes it possible to draw conclusions regarding the quality of bonds and the probability that interest payments will be made regularly and that the principal amount will be repaid at maturity.

Credit risk

Risk of the issuer of a bond becoming insolvent.

Currency of account

Currency in which the fund’s accounts are kept and in which the net asset value and the issue and redemption prices are calculated. Not to be confused with the investment currency or the reference currency.

Custodian bank

The custodian bank is responsible for keeping the entire assets of the fund in its custody and for the issue and redemption of fund units. It ensures that the fund management company complies with the provisions of the Investment Fund Act and the provisions of the fund prospectus.

Custody account administration fee

Fee charged annually for the safekeeping and administration of securities.

Delta of an option

The delta of an option is a measure of sensitivity which indicates the extent to which an option participates in the movement of the underlying instrument.

The delta of an option only remains constant when there are very small movements in the underlying instrument and can in any case only be indicative as its value is largely dependent on the underlying and the option’s term to maturity.

Delta-adjusted exposure

The delta-adjusted exposure to an underlying instrument (e.g. the SMI) is equal to the sum of the weighted deltas (see delta of an option) of all individual options which are held in the portfolio plus all equity investments.

This figure indicates the extent to which the portfolio as a whole will participate in stock market movements. If, for instance, a portfolio has a delta-adjusted equity exposure of 30%, this means that the portfolio as a whole will change by 30% of any movement made by the equity market.

If the stock market goes up by 2%, the value of the portfolio as a whole will rise by 0.6% (30%*0.2% = 0.6%).

Like the delta, the delta-adjusted exposure only remains constant when there are very small movements in the underlying instrument and is in any case only indicative since its value is largely dependent on the underlying and the option’s term to maturity.

Derivatives

Financial instruments, such as options or futures, which are derived from underlying instruments, frequently equities or foreign exchange. In portfolio management, derivatives can be used to reduce the risk of capital losses.

Direct yield

Distribution per unit as a percentage of the market price.

Discount

For real estate funds, the difference between the market price and the (higher) net asset value of a unit expressed as a percentage. As opposed to premium.

Discount rate (DCF method)

The discount rate consists of various general and property-specific components: 1. Basic interest rate (basis, low-risk investment opportunity) 2. Risk premium for real estate in general 3. Premium for building type (residential building, business premises, etc.) 4. Discount or premium for macro location 5. Discount or premium for micro location

Discounted cash flow (DCF)

The dynamic valuation method based on the discounted cash flow (DCF).

For this purpose the potential yield of the property to be valued is determined on the basis of future income and expenditure.

The basis for the forecasts is formed among other things by property statements for recent years, the current rental situation and anticipated inflation.

The net cash flows calculated in this way are discounted, and the sum of the discounted net cash flows and the residual value equals the fair market value (corresponds to the value in accordance with DCF). This figure is determined once a year for all fund properties by independent appraisal experts.

Distribution

The annual distribution of income generated by the fund to the unit holders. See also reinvestment, continuous.

Distribution fund

An investment fund which distributes the income generated to its unit holders. As opposed to a reinvestment fund.

Diversification

The distribution or spread of investments across a variety of different individual stocks, sectors, countries and currencies. Diversification, or the spreading of risk – a characteristic common to all investment funds – is regarded in modern portfolio theory as the key factor in reducing risk.

Systematically distributing investments over a number of securities spreads risk so that the total risk of a portfolio is significantly lower than that of the individual securities. Should investments also be diversified across various investment instruments, equities, bonds, money market paper, risk is reduced once again compared to a pure equity portfolio.

Finally, spreading investments across a wide geographical area leads to a further reduction in risk. Interestingly, a portfolio’s return potential increases with geographical diversification, e.g. adding foreign equities to a Swiss equity portfolio.

Hence, security-conscious investing always requires systematic international diversification. A broad diversification with dozens or hundreds of individual stocks is only possible with substantial assets or investment funds.

Dividends

The share of a company’s net profit distributed on equities, participation certificates, cooperative shares or dividend-right certificates.

Domestic bonds

Bonds issued by domestic borrowers in their own currency on their home market.

Double taxation agreement (DTA)

International treaties which Switzerland has concluded with other countries to ease or prevent double taxation. Double taxation occurs when a taxpayer is taxed for the same taxable object or tax process by two different governments. A DTA may make it possible for the withholding tax deducted in Switzerland to be reclaimed, in whole or in part, by foreign investors (investors who are not tax residents in Switzerland) on their tax returns.

Duration The duration represents the length of time for which capital is “tied-up” in a bond investment. In contrast to residual maturity calculations, the concept of duration takes account of the time structure of returning cash flows (such as coupon repayments).

The average duration of the portfolio is derived from the weighted average duration of the individual securities. The “modified duration” is derived from the duration and provides a measure of the risk with which the sensitivity of bonds or bond portfolios to interest-rate changes can be estimated.

A 1% increase (decrease) in the interest level accordingly produces a percentage fall (rise) in the price in proportion to the modified duration. For example: the modified duration of a bond fund is 4.5, the theoretical yield to maturity is 5.3%. If the yield drops by 1% to 4.3%, the fund price increases by around 4.5%.

Eco-innovator

A company whose products and services help to achieve a specific benefit with the greatest possible resource efficiency. Examples: a supplier of organic food or regenerative energies such as wind and solar power.

Eco-leader

Leading company with the best record of environmental achievement in its industry.

Efficient frontier

Modern financial theory sees the relationship between return and risk as two-dimensional, taking returns and volatility into consideration. The portfolio return corresponds to the weighted average of the returns from each of the individual securities.

The volatility of the portfolio is not however calculated as a weighted average of the individual securities’ volatility, as the valuations of the individual securities do not correlate perfectly.

Through diversification, the investor can thus reduce risk without having to forego returns. Due to the close correlation of alternative and traditional investments, an existing portfolio is able to achieve a more favourable risk/return profile by adding alternative investments.

Emerging economies bonds

Bonds from Latin America, Eastern Europe and Asia that offer high potential yields but entail a higher risk exposure due to the political or economic uncertainty in these countries.

Emerging markets

Emerging markets or developing markets – mainly in Asia, Eastern Europe and Latin America – that are growing quickly, but whose economies and stock markets have not yet reached Western standards.

Emerging markets fund

An investment fund which invests in emerging markets, such as Asia or Latin America.

Encumbrance

The expenditure of a property for interest on investment capital, duties, real estate operating costs, insurance premiums, maintenance and repair costs, building amortization/depreciation, risk of rental losses and administrative costs.

Various properties may differ sharply from each other in terms of encumbrance, among other reasons due to the age structure and the related maintenance and repair costs, the type of building (residential or office building) and the tax burden on the location of the property.

Environmental efficiency

The key indicators for environmental efficiency are energy and resource consumption. Environmentally efficient management brings environmental benefits and, thanks to the savings it achieves, economic benefits.

Environmental funds

Investment funds that employ environmental criteria in their decisions.

Equities

Securities which evidence an equity interest in a company. As a joint owner, the shareholder has rights of participation (voting right, right to information) and rights to assets (right to a share of profits, subscription rights).

Equity funds

Investment funds which invest their assets primarily in equities. The main categories are country and regional funds, emerging market funds, small and mid cap funds, sector and theme funds, index funds.

Equity Hedged

Equity-based strategies with long and short positions (the weighting distribution between long and short positions can vary significantly from strategy to strategy). Hedging by means of short selling, options and futures.

Eurobonds

Bonds issued on the Euro market which are exempt from withholding tax. Eurobond trading is centered in London for tax reasons. See also foreign bonds.

Euro market

Term used to refer to money markets and capital markets where currencies and securities are traded outside their respective country of origin.

Event-driven

Event-driven strategies make rapid – and most importantly profitable – use of information on announced events. With this strategy, it is assumed that the markets will rate the information too optimistically or pessimistically.

The key success factors in event-driven strategies are in-depth knowledge and experience in the valuation of securities and access to the latest information.

Exchange-rate risk Risk of price fluctuations between the currency of account and the investor’s reference currency.

External costs

Costs which are not incorporated in the market price are described as external costs since they are not borne by the responsible party, and include costs related to deforestation, damage to health, structural and material damage, climate change etc.

Factor 4

Demonstrates the benefits of the environmental efficiency principle. Double the prosperity using only half the resources.

Fair trade

Fair trade with farming associations and plantations includes paying prices which cover costs, ensuring guaranteed minimum wages for workers and establishing long-term trading relationships.

In return, companies’ production methods comply with stringent guidelines, thus ensuring quality standards remain high.

Federal Banking Commission (FBC)

The supervisory authority and executive body elected by the Federal Council, independent of the Federal Administration and Swiss National Bank, and responsible for the implementation of the Banking Law and the Investment Fund Act.

The FBC authorizes management companies, custodian banks, representatives and sales agents to commence business activities. The FBC is also responsible for authorizing new funds and approves their fund regulations.

It monitors compliance with the Investment Fund Act and the fund regulations. In cases of gross misconduct, the FBC can withdraw a management company’s or custodian bank’s license to conduct business.

Fiduciary responsibility

The duty imposed by law on the management company and custodian bank as well as on their representatives to act solely in the interests of their investors.

Financial year

Period between one year-end closing and the next. A fund’s financial year need not necessarily coincide with the calendar year. Also known as business year.

Fixed-income securities

Together with money market instruments, bonds are referred to as fixed-income securities because they make regular, fixed-interest payments and repay the principal amount in full at maturity.

Flat fee

This fee is charged to the fund’s assets and covers all expenses incurred in the management, administration and safekeeping of the fund’s assets as well as costs incurred in the distribution of the fund (printing prospectuses, annual and semi-annual reports, costs for auditing and publication of prices, fees charged by the supervisory authority etc.).

The only costs not covered are transaction costs incurred in the administration of the fund’s assets (brokerage fees in line with the market, fees, duties etc. as well as any applicable taxes).

It cannot be compared with similarly named fees from other fund providers, because these often only cover part of the investor’s effective costs. Also refer to “management fee”. The flat fee is not charged to the investor, but directly to the fund’s assets.

Floating rate notes

Securities with variable interest rates.

Floor

Lower limit below which the invested capital may not fall on a set date.

Fonds commun de placement

French term for investment funds established in contract form.

Foreign bonds

Bonds issued by a borrower outside its home country and denominated in the currency of the market where the issue is made. See also Eurobonds.

Forward pricing

Under this system, the fund assets are valued on the basis of the previous day’s closing prices. As opposed to historic pricing.

Fraction

In the investment fund business, a fraction of a fund unit.

Fuel cell technology

A fuel cell generates electricity and heat by combining hydrogen and oxygen within an electromagnetic process. Unlike internal combustion engines, which emit waste gases, the only by-product generated by fuel cells is water.

Fund assets

“Fund assets” (also called “net fund assets”) is the term used to denote fund assets based on their market values after deduction of liabilities. With real estate funds, mortgage loans and other debts must be deducted, as must the taxes that have to be paid when properties are liquidated.

Fund domicile

A fund is domiciled in the country in which the fund is established or registered with the local supervisory authority.

Fund management company

The fund management company administers investment funds for the account of the investors. It decides on investments and exercises all rights associated with the investment fund. It may delegate investment decisions and other tasks, but it is liable for actions of its appointed agents as if they were its own actions.

Fund of funds

An investment fund which restricts its investments to units of other investment funds. Not to be confused with an umbrella fund.

Fund-linked life insurance

In the case of fund-linked life insurance, the portion of insurance contributions which are normally invested in the unearned premium reserve (savings portion) is used to acquire fund units.

There are life insurance policies which allow the policyholder to choose from a range of funds, as well as policies which allow the policyholder to simply select an investment focus (bonds, equities, real estate, etc.).

Futures

In the case of futures, the contracting party is obliged to buy or sell a standardized amount of an underlying instrument at an agreed price on a stipulated future date. See also derivatives, options.

Gearing ratio

Borrowed funds taken up for financing (mortgages and other interest-bearing liabilities) expressed as a percentage of the market value of the real estate (including building land and buildings under construction) at the end of the period under review.

Gene therapy

Gene therapy aims to definitively cure inherited or acquired genetic diseases by inserting “normal” genes into specific target cells within the body.

Somatic gene therapy involves the treatment of the disease symptoms, while germ line gene therapy enables genetic mutations to be passed on to future generations.

Genetic engineering

Branch of biotechnology. Generic term for all techniques which can be used to isolate, characterize and manipulate genes, the carriers of genetic information.

Government bonds

Bonds issued by governments to finance their national budgets.

«Grandfathering»

Bonds with “grandfathering” status i.e. principally bonds that were first issued prior to 1 March 2001 and for which no new tranches have been issued since 1 March 2002, are exempt from the EU Savings Tax Directive for a transition period up to the end of 2010.

Gross yield

With real estate funds, rental income as a percentage of market value.

Hedge funds

Despite the name, hedging transactions are not the primary purpose of such funds. Since these funds are aimed at generating absolute income, they make investments which conventional funds are not allowed to make (speculation on market declines, short sales, use of derivatives, financing investments by borrowing). This enables hedge funds to record positive returns irrespective of the market situation.

Hedging

Protecting investments against losses.

Hedging costs

These are costs that arise when a portfolio is hedged against losses using dynamic or static hedging. For portfolios with dynamic hedging, the expenses primarily consist of purchase and redemption costs for shifting investments between the Core Portfolio and the Opportunity Portfolio.

For static hedging, the costs can arise from the purchase of derivative instruments.

High watermark

The high watermark is used in connection with the performance fee.

The fund manager calculates his or her share of the profits on the basis of the value increment over and above the last peak in the NAV. As a result, the performance fee does not become payable until all losses incurred have been completely recovered.

High-yield funds

Bond funds which invest in bonds issued by borrowers with lower credit ratings. Such bonds offer higher rates of interest, but at the same time there is also a higher risk of default, i.e. that interest payments will not be paid or that the face value will not be repaid.

Historic pricing

Settlement method in the investment fund business. The investor knows the net asset value of the fund at the time of subscription/redemption. As opposed to forward pricing.

Income

Interest and dividends.

Income property

Property which is built or bought not for the owner’s use but as a capital investment.

Index

Indicator of performance on one or more markets. The oldest and best-known stock market index is the Dow Jones.

Indexes make it possible to compare the performance of a fund which is invested in a specific market with the development of this market. See also benchmark.

Index fund

An investment fund which replicates a chosen stock market index in its stock selection and weightings as exactly as possible.

Information Ratio

The information ratio is a measure used to assess an investment fund, and refers to the excess return relative to the tracking error. It is calculated by dividing the fund’s return (expressed as alpha) by the fund’s risk (expressed as tracking error).

The alpha measures the fund’s outperformance relative to its benchmark.

The tracking error shows the volatility in deviations between the fund’s return and that of the benchmark, and is thus a measure of the fund’s risk.

The higher the information ratio, the more rewarding this makes a strategy that deviates from the benchmark for investors.

In-house funds

Assets managed separately by the bank, for which no public advertising may be carried out.

Innovator

The majority of innovators are small, new companies whose products offer proven environmental benefits and high resource efficiency.

Examples include suppliers of organic food and energy producers which use renewable energy sources such as wind and solar power.

Interest withholding tax

Since interest withholding tax was introduced on 1 January 1993, the custodian banks in Germany are generally obliged to deduct 30 percent of the interest revenue contained in the distribution (dividends are subject to capital gains tax), to retain this as a pre-tax deduction and to forward it to the Finance Department.

Interest withholding is a type of collection tax which may be partly or wholly reclaimed by taxpayers by declaring it in their income tax assessments.

For taxpayers acting as custodians of their own securities (in particular this affects investors who acquired their fund units on an over-the-counter basis), the deduction on the paid-out revenue is 35%.

An exception here are reinvestment funds, which are subject to 30% interest withholding tax in all cases (for securities held by a custodian or by the owner of the securities).

Interim profit taxation

German finance authorities observed that many investors regularly sold their fund units prior to the year-end of the fund, in order to avoid taxation of earnings (considered a tax-free capital gain).

German lawmakers therefore introduced the so-called interim gains tax on 1 January 1994. With each sale or redemption of units of foreign funds, the interest accrued until that date is taxed (does not apply to dividends).

The sale or redemption of units before the end of the fund’s financial year thus no longer allows investors to make tax-free gains.

Investment currency

Currency in which an investment fund makes its investments. Not to be confused with reference currency or currency of account.

Investment Fund Act

In Switzerland, relationships between investors, the fund management company and the custodian bank are governed by the Investment Fund Act (IFA) and the related ordinances from the Federal Council and the Swiss supervisory authority (Federal Banking Commission, FBC).

In Luxembourg and in Germany, investors are protected by the law regarding undertakings for collective investments.

The Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and the Federal Banking Supervisory Office (BaKred) in Germany are the supervisory authorities in these countries analogous to the Swiss Federal Banking Commission.

Investment Fund Ordinance

Investment Fund Ordinance (IFO) issued by the Federal Council on 19 October 1994, which contains detailed provisions regarding the Investment Fund Act.

Investment funds

Investment funds are assets solicited through public advertising, pooled by a great number of independent investors for the purpose of collective investment and managed by the fund management for the account of investors and in accordance with the principles of risk diversification.

Investment grade

Term used to denote securities with ratings of between BBB and AAA, indicating that their credit quality is satisfactory or good.

Investment horizon

The period of time for which investors want to commit a part of their assets.

Investment instruments

The various investment categories such as equities, bonds and money market instruments.

Investment policy

The investment policy describes the approach taken to achieve the investment objective (stock selection, timing, cash holdings, etc.).

Investment principles

The investment principles characterize and define the fund.

The investor receives information about the securities held in the portfolio, the investment currency, the geographic mix of the investments and the risk diversification of the investment fund.

Investor

Holder of fund units. By purchasing units, the investor acquires the right to participate proportionately in the assets and earnings of the fund.

ISIN number

International Securities Identification Number. Internationally recognized securities number. Equivalent in Switzerland to a securities number.

Issue

Issue of new securities.

Issue price

Price at which investors can subscribe fund units. It corresponds to the net asset value per unit plus the issuing commission.

Issuer

Legal entity or public entity which issues securities in order to raise borrowed capital.

Issuing commission

The commission charged by the distribution unit to the investor upon subscription of units.

Large caps

Companies with very large stock market capitalization in relation to the market on which they are traded.

Late stage

Late-stage financing refers to mature companies that have been in existence for some years. Such investments typically involve relatively large amounts, but are more liquid and less risky, as the companies can be sold more quickly or floated on the stock exchange.

Leader

Leading company which is the best in its sector in terms of environmental and social performance.

Leverage

With derivative instruments, greater returns can be earned with a comparatively low capital investment than with an investment in the actual underlying instrument. This effect is called leverage.

Liquidity

Units of investment funds enable the unit holders to remain liquid, i.e. they can redeem their units as a rule at any time. The management company is obliged to redeem the units at the current redemption price without any notice of termination.

Listing

The admission of a security to official trading on a stock exchange, which is usually subject to the fulfillment of certain criteria.

Long/short

The strategies that come under this heading invest in a combination of different financial instruments to optimize risk and return.

The purchase of an equity that promises an increase in value (long) is combined with the sale of another equity where the value is expected to fall (short).

Short selling and credit financing for investments are explicitly permitted.

Long-term funds

An investment fund which invests in bonds with a (term to) maturity of at least 5 years.

Luxembourg-based funds

An investment fund established under Luxembourg law and managed by a management company domiciled in Luxembourg.

Macroeconomics

In macroeconomics, the development of the economy as a whole is studied. Sectors and regional economic systems are looked at rather than individual economic units.

Management fee

The charge levied by the management company for the administration of an investment fund. The amount of the fee is expressed in percentage or tenth of a percentage of the fund assets or in basis points.

Management style

Manner in which the investment decisions are made to achieve the investment objective.

Market capitalization

The market value of a listed company, corresponding to the current market price of its shares multiplied by the number of all the equity securities in circulation.

Market risk

Risk that depends on factors which influence the whole market and which cannot be reduced or excluded by diversifying the portfolio.

Market value

The current value of a property, assessed by independent experts, which would be obtained were the property to be sold in a conscientious manner at the time of the valuation.

Valuations are generally carried out once a year in accordance with the valuation method used by the fund management company.

Maturity

Period of time from the issue of a bond to its due date or to the premature repayment of the bond. Not to be confused with duration.

Medium-term notes

Fixed-income investment instruments issued by banks, with maturities between two and eight years. Bond funds cannot invest in medium-term notes as they are not permitted for official stock exchange trading.

Mid caps

Companies with medium-sized market capitalization. Also called secondary stocks.

Money market funds

Investment funds which invest in short-term fixed-interest paper (less than a year to maturity) in specific currencies.

Money market instruments

Securities with maturities of no more than one year which are traded on the money market. The classic money market instruments in Switzerland are domestic bills of exchange, treasury bills and treasury notes. Key foreign investments include commercial paper and certificates of deposit.

Net asset value

The net asset value of a unit is equal to the net fund assets divided by the number of units in circulation. In the case of securities and money market funds, the net asset value, which is generally calculated daily, is the basis for calculating the issue price and the redemption price. Also called intrinsic value.

Net assets

The net (fund) assets are the sum of the market values, minus liabilities and the anticipated liquidation taxes (property gains taxes).

Net fund assets

The fund assets calculated at market values less all liabilities.

No-load fund

An investment fund which does not charge any commission on the subscription or redemption of units.

Notes

Securities privately placed (i.e. without public advertisement) on the Swiss capital market by foreign borrowers.

Offshore fund

An investment fund with its legal domicile in a country which offers tax exemption or tax breaks (such as the Bahamas, Bermuda).

In Switzerland only offshore funds from countries which have comparable fund supervision to Switzerland’s are allowed to be sold publicly.

Open-end fund

An investment fund with variable capital which can continually issue new units but which must also redeem the units issued upon request at their net asset value. Swiss investment funds, except for real estate funds, are open-end funds.

Operating expense ratio of the fund TER REF

The fund’s operating expenses expressed as a percentage of the average total fund assets. Operating expenses include the regulatory remuneration paid to the fund management and custodian bank and all other recurring third-party expenses.

Options

The buyer of an option acquires the right – but not the obligation – to buy (call option) or sell (put option) a specified amount of a certain underlying instrument at a predetermined price on or by a specified future date.

The buyer pays the seller of the option a premium (option price) for this right.

Ordinance of the Federal Banking Commission on Investment Funds

Investment Fund Ordinance issued by the Federal Banking Commission (IFO-FBC) on 27 October 1994, which contains detailed provisions regarding the Investment Fund Act.

Other funds

Investment funds which are neither securities funds nor real estate funds.

They may contain investments which have limited marketability, are subject to greater price swings, have a limited diversification of risk or which are difficult to value (e.g. investments in precious metals, commodities, options, forward contracts, units of other investment funds and other rights).

Other funds with special risks

Investment funds which, unlike funds in the other funds category, have a special risk which is not comparable to the risk of securities funds.

There must be explicit reference to this fact in the fund name, the prospectus and in advertisements.

The units of such funds may only be sold on the basis of a written agreement in which the special risk is stated.

Paying agent

The agent or bank which is explicitly appointed by the issuer and which is responsible for all ongoing transactions that arise for the owner of the securities concerned, such as the collection of dividends and coupons as they fall due.

Payout ratio

Expresses the ratio of cash flow to distributed income, which indicates how much of the funds earned during a business year has actually been distributed.

Performance

Total return of an investment expressed as a percentage of its market value at the beginning of the period measured. Performance is composed of price changes plus reinvested income (i.e. dividend distributions in the case of shares and coupon payments in the case of bonds).

Performance is always reported in the currency of the fund. For distribution funds, the performance calculation is predicated on a reinvestment of distribution payments.

The overall or absolute performance over 5 years (OP5) includes the compound interest effect.

It can be computed using the following multiplication of the last 5 yearly performances (YP1 to YP5): OP5 = (YP1+1) x (YP2+1) x (YP3+1) x (YP4+1) x (YP5+1) – 1 (all performance figures in %).

The annualized or average annual performance (AP5) is represented as a geometric rather than arithmetic average and can be computed with the following formula: AP5 = [1+OP5] 1 – 5 –1.

For example, for an overall performance of 20% over 5 years, the annualized performance is 3.71%.

Performance

Percentage change in the value of an investment, plus any accumulated income, and corrected for inflows and outflows of funds during a defined period of time.

Performance fee

For non-classical investment funds such as hedge funds, the investor often has to pay, in addition to the conventional management fee, a supplementary performance fee in the form of a percentage (e.g. 20%) of the fund’s annual increase in value. A high watermark is usually set for this amount.

Perpetual bonds

Bonds with no maturity date. Perpetual bonds make regular interest payments, but never redeem the principal amount; to get back the capital invested in such bonds, investors must sell them on an exchange.

Portfolio

In the investment fund business, the composition of a fund’s assets.

Portfolio managers

Investment specialists who manage the assets of an investment fund. They decide which securities to buy and sell within the defined investment principles.

Portfolio theory

The relationship between risk and return is a key tenet of modern portfolio theory. In principle, a higher return can only be “purchased” for a higher risk.

However, the relationship between risk and return may be optimized via a broad spread of investments (diversification). By doing so, a higher return can be generated with the same level of risk, and a lower return can be achieved with a lower level of risk.

Premium

A figure, usually expressed as a percentage, to indicate, for example, how high the issue price of a security lies over a specific reference price, usually the nominal value.

A premium can also mean the amount (often also expressed as a percentage) a buyer is willing to pay for a right (option price, option, subscription right) above the book value.

For derivative instruments used for hedging purposes (put options), it is the price that the option buyer pays for the right to sell the underlying security. In the case of the put options used for the Limited Risk Funds, the premium rises as market volatility increases.

Premium

The premium is the percentage difference between the current stock exchange price and the net asset value adjusted for the distribution plus the last distribution (proportionate).

Private equity

A start-up company or a young company already in business requires capital, which it seeks from investors and private equity funds. Since these companies are usually ones that are not yet listed on the stock exchange, so-called private markets that receive investment are referred to here.

Prospectus/ fund regulations

The rights and obligations of the contracting parties are defined in the prospectus and fund regulations. In particular, these documents contain guidelines governing investment policy, the use of earnings and the costs the fund and/or the investor have to bear.

Rate of rental loss (rate of income loss)

Rental losses expressed as a percentage of targeted net rental income. Rental losses include losses due to vacancies (based on the most recently paid rent) and collection losses on rental income.

Real estate funds

Investment funds investing in residential and business properties. These funds enable investors to participate in the real estate sector with just small sums of money without incurring the administrative expenses associated with direct investments.

Real value

Post facto calculation of the actual asset value of a property, i.e. the cost of reconstructing a building of the same standard, taking into account the depreciation due to age that has occurred in the meantime and the value of the land.

Redemption commission

The commission charged by the distribution unit to the investor upon redemption of units.

Redemption of units / stock-exchange trading

Real estate fund units may be traded daily on the stock exchange or presented to the fund management company for redemption at the end of a financial year subject to a 12-month notice period. The repayment is made two months after expiry of the notice period.

Redemption price

The price at which the fund management is obligated to buy back units, subject to the period of notice prescribed by law (net asset value minus any commission in accordance with the fund regulations).

Reference currency

Currency in which an investor normally thinks, calculates and fulfils his or her liabilities. It is also the currency in which the performance of an investment is measured.

Regional fund

An investment fund which invests in a specific geographic region (e.g. Scandinavia) or a particular economic area.

Reinvestment

The possibility of reinvesting the distribution in the same fund. Certain funds offer investors a special reinvestment discount on the issuing price if the annual distribution is reinvested.

Reinvestment fund

An investment fund that continuously reinvests its income in the fund rather than distributing it to unit holders, as opposed to distribution fund. See also tranche.

Reinvestment, continuous

The continuous reinvestment of the income generated by a fund in the same fund.

Relative value

This investment strategy aims to exploit market inefficiencies. Accordingly, simultaneous investments in long and short positions in strongly correlating portfolios are generally entered into.

Representative

In the case of investment funds established under foreign law that can be sold publicly in Switzerland, the representative is the individual or legal entity domiciled in Switzerland that represents the fund vis-à-vis investors and the supervisory authority in Switzerland.

Representatives require prior authorization from the Federal Banking Commission.

Resource efficiency

Resource-efficient production uses fewer and/or more environmentally friendly resources. This helps protects the environment and offers financial savings.

Return on investment

Change in the net asset value of units, assuming that distributions are reinvested at net asset value.

Risk

In portfolio theory, risk tends to be defined as the standard deviation of performance values.

The standard deviation is a statistical measure of the distribution around an average value over the period being observed. Markowitz’s portfolio theory posits that a higher return can only be “purchased” with a higher risk.

Risk capacity

An investor’s capacity to tie up his money (capital) for a specified period of time without getting into financial difficulties.

Risk tolerance

The degree of possible price fluctuations that an investor is willing to accept in order to attain a specific investment goal.

Risk tolerance and an investors need for security are important factors when selecting an investment fund.

The higher the risk tolerance, the greater the component of equities and foreign currencies.

Sales agent

Partner of a fund provider who sells the provider’s products to clients and redeems the products from clients.

Savings plan

This form of investment involves the regular payment of a specified amount to accumulate fund assets. See also cost averaging.

Sector average

The sector average is the un weighted average performance of all funds in the same investment category.

Generally all funds of the same investment category which are authorized for sale in one country are considered together.

Allocation to an investment category based on S&P Fund Services, revised using the criteria “same investment universe”, “fund volume larger than CHF 20m” and “investment level higher than 85%”.

Sector fund

An investment fund which invests its assets solely in securities of companies in a specific sector of the economy.

Securities fund

An investment fund that invests in securities and loan-stock rights that are traded on a stock exchange or on another regulated market open to the public. See also real estate funds and other funds.

Securities lending

The lending of securities against remuneration and on provision of collateral. Since 1992, securities lending has also been permitted for investment funds.

Securities number

Identification number of securities used in Switzerland to facilitate their trading and transfer. International equivalent ISIN number.

Securities purchase fee

There are certain funds which, owing to their special structure, may charge so-called securities purchase fees in addition to the issuing commission.

This commission accrues to the fund and is used to cover the costs arising in the acquisition of securities.

Security risk

Risk of fluctuations in the price of a security.

Sharpe ratio

The Sharpe ratio expresses how much higher (or lower) a return an investor can expect compared to the risk-free rate of interest (e.g. interest rates on savings accounts) per unit of risk (volatility). The risk-free rate of interest varies from currency to currency.

Short sale

The forward selling of financial instruments which the seller does not yet possess, whereby the investment objective is to be able to cover the missing securities at cheaper prices before the delivery date. The risk involved in short selling is that the price of the underlying may rise.

Short-term fund

A fund which invests in bonds with a (term to) maturity of 1 to 3 years.

Small caps

Shares of companies with a market capitalisation of generally less than CHF 500 million. Also called secondary stocks.

Small/mid cap funds

Funds which invest in shares of companies with relatively small market capitalization.

Socially responsible investments

Socially responsible investments (SRI) include those investments which take into account social and environmental criteria in addition to traditional financial factors.

Specialty fund

A fund which differs from conventional investment funds in that it adopts a special investment approach or focuses specifically on certain countries, industries or investment instruments.

Stamp duty

Subscriptions to investment funds domiciled abroad are subject to stamp duty in Switzerland. Redemptions are exempt from stamp duty. The issue and redemption of units of Swiss-based investment funds are not subject to stamp duty.

Stem cells

Stem cells are relatively undifferentiated cells which are not yet established as certain cell types and thus have no specific function. Stem cells retain the ability to develop into different cell types.

Stock exchange price

The price of units of investment funds which are listed on the stock exchange or traded over the counter (real estate funds). The price is governed by supply and demand in the market, whereas the issue and redemption prices of the units are determined by the management company on the basis of the net asset value.

Straight bonds

Bonds with a fixed coupon and fixed redemption date.

Sub fund

Part of an umbrella fund. For investment funds with different sub funds, investors are only entitled to the assets and income of the sub fund in which they hold units. Sub funds are also called compartments or segments.

Subscription

In the fund business, subscription means the acquisition of fund units. As opposed to redemption.

Supervisory authority

The state body which supervises the activities of management companies. In Switzerland the Federal Banking Commission (FBC) acts as the supervisory authority for the investment fund business.

In Luxembourg it is the “Commission de Surveillance du Secteur Financier (CSSF)”, in Germany the Federal Banking Supervisory Office (BAKred), in Austria the Federal Ministry of Finance (Bundesministerium für Finanzen) and in Liechtenstein the Office for Financial Services (Amt für Finanzdienstleistungen).

Sustainable development

Development which meets the needs of the present without compromising the ability of future generations to meet their own needs. (Report of the Brundtland Commission 1987).

Swing Pricing

Swing Pricing is an innovative method used to calculate the net asset values of investment funds. SSP allows an investment fund to settle the daily transaction costs arising from subscriptions made by incoming investors and redemptions made by outgoing investors.

Existing investors will no longer have to indirectly bear these transaction costs because with SSP the charge of the estimated transaction costs is directly integrated into the calculation of the net asset value, with these costs borne by incoming and outgoing investors.

Under SSP, the net asset value (NAV) is adjusted daily to take account of net transaction costs; the direction of the swing is determined by the daily net capital flows.

Where there are net capital inflows, the swing factor is added to the NAV to take account of subscriptions of fund units; where there are net outflows, the swing factor is deducted from the net asset value to take account of unit redemptions.

In both cases, the same NAV applies to all incoming and outgoing investors on a particular date. For the funds under Luxembourg law, a threshold value may apply. The NAV is thus only adjusted if this threshold value is exceeded on a trading day.

The swing factors by which the NAV is adjusted are based on external brokerage fees, taxes and duties as well as estimated bid/offer spreads of the transactions which a fund carries out in accordance with the subscriptions or redemptions made on a particular day.

Performance figures and portfolio statistics are calculated based on the adjusted NAV.

Swiss Fund Association

Association which represents the interests of the investment fund industry in Switzerland. It was established in Basel in 1992 under the auspices of the Swiss Bankers Association.

Tax at source

Tax levied directly at source, for example withholding tax in Switzerland.

TER

The ratio of total expense to a fund’s average size over an annualized accounting period. Expenses are taken to include all expenses shown in the income account, including management, administration, custody, audit, legal and professional fees.

Term to maturity

Remaining life of a bond from the current date to the final due date or the premature repayment of the bond. Not to be confused with duration.

Termination

In the investment fund business, withdrawal of an investor from the collective investment contract. The redemption price is in principle to be paid immediately. Special regulations apply to real estate funds, see redemption of units/stock-exchange trading.

Theme fund

An investment fund which invests in securities which meet a specific criterion (environmentally friendly, ethical commitment, etc.) or which all have the same characteristic.

Theoretical yield to maturity (gross) for asset allocation funds

In contrast to bond funds and money market funds, the theoretical yield to maturity in this case is reported as a gross figure to allow meaningful comparisons, as the asset allocation funds can vary considerably with regard to weighting of their interest-bearing investments as well as to their fee structure.

Theoretical yield to maturity (net) for bond and money market funds

The theoretical yield-to-maturity figures published for our bond funds and money market funds represent the yield expected for the next 12 months based on the current fund portfolio.

This yield is an estimate and corresponds to the weighted average yield to maturity on all the fund’s investments. In the process, the fund’s own administrative costs are calculated and subtracted from the gross yield to maturity.

The theoretical yield to maturity is also affected by changes in the composition of the portfolio and fluctuations in interest rates. In other words, no conclusions can be drawn from a fund’s yield to maturity concerning a possible distribution.

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.

Trading (strategy)

Generally active yield strategies. Potential for high absolute returns and significant “draw downs”. Low Sharpe ratio and low correlation with equities and bonds.

Trading opportunistic

This term comprises strategies which, depending on the situation, invest in a large number of financial instruments, sectors and markets, according to the opportunities available to the managers.

Macro hedge funds follow a trading-opportunistic strategy and attempt to identify and exploit global profit opportunities using macro-economic analysis.

Due to the variety of strategies used, the correlations to the markets are also different.

Tranche

A fund or sub fund may be divided up into several tranches, i.e. with separate securities numbers, which differ from one another in one or a number of factors such as distribution practice, conditions, or fund currency. However, all tranches of a fund/sub fund are always invested in the same portfolio.

Umbrella fund

An investment fund which comprises several sub funds. Together the sub funds form one single legal entity, meaning that only the umbrella fund needs to be submitted for authorization. The sub funds are governed by the same fund regulations and prospectus. Once the umbrella fund has been approved, other sub funds can be created.

Underlying instrument

A financial instrument (security, currency, index, commodity, etc.), which forms the basis for an option or future.

Unit

A unit is a security which evidences the investor’s right to participate in the assets and income of the fund in proportion to the units acquired.

Unit certificate

Physical certificate which evidences a unit of an investment fund. In general, however, units exist as a book entries only.

Value of land

Value of a piece of land in relation to the economic possibilities for use.

The value of land depends on location and geological properties as well as on the legal and technical possibilities for building on it.

Variable-interest bonds

Bonds whose coupons change every quarter or every six months in line with the development of the respective reference interest rates. A commonly used reference interest rate is the Libor (London Interbank Offered Rate).

Venture capital

This term refers to the provision of equity capital and also comprehensive management support for young companies with above-average growth potential.

The capital is typically tied up in the company for five to ten years.

An investment in venture capital is not without its risks, as there is often no balance sheet or other key financial statistics available on the companies.

The valuations therefore mainly reflect the future prospects.

Warrant bonds

Bonds with a warrant attached. The warrant entitles the holder to buy a specific number of shares of the company in question during the exercise period at a price fixed in advance. Once the warrant is exercised, the bond continues to run until its maturity date.

Withholding tax

In the case of Switzerland, a 35% federal tax on domestic capital income levied on the distributions of income made by Swiss investment funds. These deductions can be wholly or partly reclaimed depending on the source of the income and the domicile of the investor.

Yield curve

The yield curve represents the relationship between the maturities of bonds traded on the market and their yield to maturity. The yield curve is basically divided into three segments: a short end, a long end and a middle segment.

The shape of this curve allows conclusions to be drawn regarding the current state of the bond market.

Normally, the curve rises for longer maturities: the investor enjoys higher returns as a result of investing his money over the longer term. If the yields in the shorter-dated segment are higher than at the long end, this is called an inverse yield curve.

The fund manager controls the interest-rate risk of the fund according to the positioning of his portfolio on the yield curve. See duration.

Yield on distribution

The yield on distribution is the ratio of distributed income to the current market price.

Zero-coupon bonds

Bonds that make no interest payments. Instead of interest payments, the buyer of a zero-coupon bond purchases the security at a discount. Redemption is made at 100%.