Calculation principles of key figures

Ever since 2002, the Nordea funds have published fund-specific key figures in the semi-annual and quarterly reports as well as in annual reports in compliance the recommendation of The Finnish Association of Mutual Funds.

The Association clarified its reporting guidelines in the spring of 2005. The calculating principles of some key figures were changed (turnover and Total Expense Ratio) and the requirements now include reporting of the Sharpe Ratio and trading expenses. The key figures were defined in accordance with the new calculation principles for the first time in the quarterly report of non-UCITS fund as at 31 March 2006. Since then some key figures (turnover and Total Expense Ratio) are not comparable with the figures of the preceding years.

The uniform calculation and reporting procedure of key figures increases the comparability of funds

The aim of the recommendation is to increase the transparency of investment fund activities and to give comparable information to customers considering investments. For several years, Nordea Investment Fund Company Finland Ltd has been a trendsetter in the reporting of different return and key figures disclosed either in annual reports and other publications or in the Funds Now service (www.nordea.fi).

Depending on the fund, the fund-specific key figures are calculated and disclosed in the reports twice or four times a year in the annual, semi-annual and quarterly. The reports are published in Finnish and Swedish in the Funds Now service (www.nordea.fi) under the section Ajankohtaista and Aktuellt respectively.

What do the key figures tell?

The first key figure volatility measures the fluctuation in the return of the investment. A high volatility figure indicates that the uncertainty related to the fluctuation in return in the fund unit, ie risk, is likely to be high and vice versa. Nordea Funds publishes both the fund unit and benchmark volatility if an index has been assigned for the fund.

Tracking Error (TE) illustrates how much the return on the fund unit differs from that of the benchmark. If the portfolio´s investments differ considerably from the benchmark distribution, it is more likely that also the return on the investment is above or below that of the comparison index. Then again, if TE is small, it is likely that also the fund unit return follows the benchmark quite closely.

Sharpe ratio is a ratio used in measuring the fund unit return and risk. The higher the ratio, the better the investment return in relation to the risk.

Turnover measures how many times securities have been bought or sold compared to the fund´s total assets. The higher the turnover the more the fund has traded in addition to the turnover caused by fund unit subscriptions and redemptions.

Total Expense Ratio (TER) includes the actual management fee in terms of the euro, charged from the fund´s assets during the 12 months preceding the end of the review period, a performance-based fee (since the beginning of 2006) and other expenses that are charged from the fund value during the year. However, the figure does not include trading costs which are reported separately.

The fund´s transaction costs (since the beginning of 2006) are reported for the 12 months preceding the end of the review period. The key figure indicates how the fees related to trading, paid to brokers and charged from the fund´s assets as well as charges caused by currency exchange affect the fund value at a yearly basis. Transaction costs are reported as a percentage of the fund´s highest market value during the review period (the last 12 months).

The last key figure, brokerage fees paid to the Group, indicates the value of all securities trades (in the euro) in which a broker belonging to the same group was used.

How are the key figures calculated?

Fluctuation in return / volatility / standard deviation, %

This is how the volatility is calculated in the Funds Now service

Fluctuation in the investment´s market value is a part of investing in securities, in other words the investment value can both increase and decrease. When the value fluctuates, the uncertainty connected to the return on the investment is called risk. The fluctuation in the yearly return, ie volatility (standard deviation), indicates how high the risk is. The volatility is calculated using the logarithmic monthly observations on the net asset value (NAV) per unit in the fund for the last 12 months (or 36 months), and a total of 12 months (or 36 months) as a default. The calculation of the volatility was based on daily observations up to the end of 2010.

Calculation formula for volatility (250 should be replaced by 12 or 36)

 

in which I is an indexed NAV per growth unit / benchmark value.

Volatility illustrates the variation in the NAV per growth unit return around its average. Volatility is calculated if the fund has a performance history of at least 12 months. Benchmark volatility is also reported for each Nordea Fund if the fund has been assigned an index.

This is how the volatility is calculated in the annual and other reports
New review periods have been added, based on the instruction issued by the Financial authority
The calculation principles of the volatility have otherwise remained unchanged; new review periods have only been added.

The volatility is calculated using the logarithmic daily observations on the net asset value (NAV) per unit in the fund for the last 12 months, and a total of 250 trading days per year as a default.

In case the fund has operated for more than three months but less than 12 months, the volatility is calculated for the period in question, and then the figure is annualised and disclosed as an annual percentage. The volatility figures, calculated in accordance with these instructions, were computed for the first time in the quarterly report of the Nordea non-UCITS funds, as at 30 September 2007. 

Tracking Error / active risk, %

Tracking Error (TE) illustrates the volatility of the difference between the fund unit return and that of the benchmark. It reflects the risk involved in fund investment relative to the benchmark. TE is calculated using the differences of the logarithmic monthly returns on the net asset value (NAV) per growth unit and the benchmark for the last 12/36 months, and is reported as an annual percentage.

TE can be calculated if the fund has a benchmark and a history of at least 12 months.

Sharpe ratio

The Sharpe Ratio illustrates how much extra return compared to a risk-free rate the fund has earned per each percentage point of volatility. The value of the Sharpe metre is the difference between the fund unit return and risk-free return, divided by volatility. The fund return and volatility are computed on the basis of daily observations over the last 12 months.

New risk-free rate in use in the Funds Now service
Nordea intends to follow the common practice on the market and to take in use the 3-month Euribor as the risk-free rate in the Funds Now service because it illustrates the performance on the the 3-month money market in the best way. In the Finnish Funds Now service, the transfer to the new risk-free rate will take place in 2010.

During the long history of the Funds Now service, Nordea has employed the JP Morgan Cash (3-month) index as the risk-free rate when calculating the Sharpe ratio. Originally, this index was chosen as the risk-free rate because JP Morgan could then offer a very representative selection of indices available for Nordea's different fixed-income funds and suitable for their benchmarks. 

In accordance with the recommendation issued by the Finnish Investment Fund Association, the return on the 3-month money market index is to be used as the risk-free retrun. The change of the index was justified as the new rate illustrates the performance on the 3-month money market in a better way.

Nordea Investment Fund Company Finland Ltd has applied the 3-month Euribor for the first time in the semi-annual report 2009 when calculating the Sharpe ratio. The same index was also selected as the comparison index of the short-term fixed-income funds Nordea Moderate Yield and Nordea Yield which were introduced in May 2009.

Portfolio turnover, %

The portfolio turnover is calculated by deducting the sum of subscriptions and redemptions (sum 2, EUR) from the sum of the securities bought and sold by the fund (sum 1, EUR). The turnover is the above-mentioned difference (sum 2 deducted from sum 1) divided by the average market value of the fund which has been calculated from the daily market values during the past 12 months.

If the turnover is 0%, the turnover caused by fund unit subscriptions and redemptions has been the main driver in the fund´s trading activities. Due to the new calculation principles, the turnover can be negative as well. If so, the total value of the fund´s purchases and sales is lower than the sum of the subscriptions and redemptions.

The portfolio turnover is not annualised in the quarterly and semi-annual reports or in the annual report, if the fund has operated for less than 12 months.

According to the turnover definition, a security refers to all financial instruments in which the fund has traded, with the exception of such transactions that are connected to certain options, futures or security lending contracts eg.

Total Expense Ratio (TER), %

Total Expense Ratio is an annualised figure that corresponds to the fund’s total fees comprised of four different lots and charged from the fund´s assets. The TER figure does not include the fund´s transaction costs whose effect on the fund unit value is reported separately.

NB! When calculating the TER figure the divider is the fund´s average market value and when computing the transaction costs key figure the divider is the fund´s highest market value during the review period. 

The Nordea funds disclose the annual percentage (varies from fund to fund: 0.10% - 2.00% p.a.) of the management fee in compliance with the simplified prospectus in the quarterly, semi-annual and annual reports in connection with the TER figure.

TER = A + B + C + D

A = The management fee in terms of the euro that is de facto charged from the fund´s assets. This sum is divided by the fund´s average market value calculated from the daily observations during the 12 months preceding the end of the review period. It is reported as an annual percentage. If the fund has operated for less than 12 months when the review period ends, the percentage of the management fee is annualised.

Possible performance-based fees are included in TER from the beginning of 2006 and they must always be reported separately in connection with TER. The following Nordea Funds must report the performance-based fee: Nordea Finnish 130/30 Equity. This fund is the only domestic Nordea Fund (as at 12/2010) from which a performance-based fee is charged when it is possible.

The TER figure does not take into account the potential trading fee in connection with a subscription and/or redemption. As for the funds from which such a trading fee is charged, it is likely that the transaction costs charged from the fund´s assets and caused by buying and selling investments are at least as high as the trading fee (in connection with subscription/ redemption).

Investing in domestic or foreign Nordea Funds
The management fees of the investment targets, ie domestic or foreign Nordea Funds (target funds), do not affect the TER figure of a fund of funds. Thus, the so-called synthetic TER corresponds to the fund of fund´s TER. When a fund of funds invests in a domestic or foreign Nordea Fund, the part of the management fee corresponding to the investment charged from the target fund´s assets and paid to the fund management company is returned to the fund of funds assets to avoid charging a double management fee

An exception is a situation where performance-based fees can be charged from the target fund´s assets. In such cases, a performance-based fee charged from the target fund´s assets is taken into account when calculating the synthetic TER figure for the fund of funds.

A fund of funds does not pay a subscription or redemption fees when investing in domestic or foreign Nordea target funds or when selling the fund units in the underlying funds.

When a fund of funds subscribes for units in a target fund with a trading fee which is charged from the fund of funds in connection with the subscription (and redemption) and paid to the target fund. This fee covers the target fund´s transaction costs. The fee is charged in order to make sure that all unitholders are treated equally when it comes to sharing the effect of the transaction costs. These fees are calculated from the NAV per fund unit on a subscription or redemption day and they are not included when calculating the fund of funds´ synthetic TER.

B = A custody fee potentially charged from the fund´s capital (%). The management fee includes a compensation to the custodian for all domestic Nordea Funds (valid as of 1 June 2001), so it is not charged separately.

C = The account maintenance and other fees potentially charged from the fund´s capital. As the other fees taken into account in the TER figure are annual as well, the account maintenance and other fees are annualised if the fund has operated for less than 12 months when the review period ends.

D = Potential other fees which, according to the fund´s rules, can be charged directly from the fund´s capital. In the Nordea Funds registered in Finland there are no such costs in addition to the transaction costs. TER does not include the fund´s transaction costs.

Different from the standard practice in Finland, it is also possible to charge, besides the management fees, even other, in the sub-fund’s rules mentioned expenses from the assets of a foreign funds (a SICAV sub-fund registered in Luxembourg e.g.). These expenses may include fees paid to the custodian, production costs of statutory documents (fund prospectuses, semi-annual and annual reports), other costs arising from supply of information to unitholders, legal fees and fees paid to the auditors. Charging the above-mentioned fees affects the TER of the fund of funds when it invests in these funds. The TER figures presented in this report do not include the fees charged from the assets of foreign funds (D). The TER figures of foreign funds are calculated and reported in annual and semi-annual reports or simplified fund prospectuses.

In accordance with the present practice in Finland, the above-mentioned expenses (D) are included in the management fee charged by the fund management company.

The fund´s transaction costs, %

The fund´s transaction costs are calculated so that the sum of the fund´s transaction costs (EUR) including currency exchange costs during the 12 months preceding the end of the review period are divided by the fund´s highest market value during the corresponding period.

It is not possible to report the transaction costs separately for the fixed income investments of fixed income or balanced funds as the transaction costs/ brokerage fees are included in the trading prices.

Brokerage fees paid to the Group, %

The percentage of the brokerage fees of all transaction costs paid to the investment firms belonging the fund management company´s related parties, ie the group, is reported fund-specifically.

According to section 6 of the Investment Firms Act, an investment firm belonging to related parties refers to an investment firm or credit institution belonging to the same consolidation group. 

Kindly note

A basic investment rule is that higher return expectations are balanced by a higher risk. Depending on market conditions, the daily NAV per unit in a fund may rise or fall. The past performance of the investment fund does not necessarily provide any guarantee of future results.