Glossary
Alpha also spelled Alfa (Jensen’s Alpha)
Alpha is a market-risk-adjusted performance measure that expresses how much the realised return on the fund unit diverges from the (beta)risk-adjusted benchmark return. The minimum value for the alpha is zero in order for it to be considered good. The more positive the alpha, the higher return the fund unit has generated in relation to the risk involved.
Beta (sensitivity to movements in securities markets)
Sensitivity to movements in securities markets is expressed by the beta coefficient measuring the dependence of the fund's total return on its benchmark. If the beta of a fund is higher than 1 the fund unit is likely to increase more than the benchmark in a rising market whereas the development of the fund unit tends to be poorer during a market decline, on the assumption that the other factors remain unchanged. In bullish markets a high beta would therefore be an advantage while in bearish markets a lower beta would be desirable.
Calculation of return figures
The management fee is already taken into account (deducted from) in calculating the daily NAV per unit; thus management fee is incorporated into the return percentage calculations; whereas the subscription or redemption fees are not included in the return percentage. The stated return also includes any fund dividend distributed. Performance figures over periods longer than 12 months are annualised, i.e., given as an average annual return, in the form of a per annum (p.a.) percentage. For instance, the column 1 month shows the return for the review period concerned.
The annual returns shown on the Return pages and in the Fund Report are given as an average annual return if the review period is longer than 12 months. If the review period is 1, 3 or 6 months, the return given is for that period. Note: if the fund has operated for less than 12 months, the return is stated for the review period concerned. The annual performance is then the fund's annualised return percentage over the periods concerned, i.e. the return that an investor would have earned in each year equalling the total cumulative return over the period concerned.
In all Funds Now screens and in the fund reports, return and risk figures are computed on the same principle: the return figures and risk measures for both the growth and distribution (accumulation) units are calculated on the basis of the development of the growth units. When the return is calculated, the fund dividend distributed has been reinvested in the fund on its ex-day. Although the growth and distribution units have values that usually differ from each other on every NAV calculation day, it is a common practice that for the distribution units no separate return and risk figures are displayed.
The yield on bonds consists of two factors: the nominal coupon, i.e. yield on individual bonds and value changes. Value changes arise when the interest rate changes. If rates go down, the yield of a bond funds increases, and if rates go up, the yield declines.
Distribution unit (also called income unit; distributes fund dividend)
The units in a certain unit series can be divided into growth (accumulation) units and distribution units (unit classes) on the basis of the fund-dividend distribution policy. All the unit series can include both growth and distribution units.
Distribution units are best suited for the investment needs of foundations
- As for distribution units, a fund dividend is distributed on a yearly basis. Non-profit organisations and foundations prefer distribution units because they can use the fund dividend when awarding scholarships and grants.
Duration - see Risk and interest-rate risk or Risk and credit risk
Exchange of unit class - growth and distribution units
Distribution units can be exchanged for growth units without charge and vice versa. Exchange of a unit class within the same fund is not comparable to sales of units and is not subject to taxation based on the fact that no capital gain will be generated. When switching from one fund into another fund managed by the same management company, capital gain or loss can be generated.
Fund category - European Fund Classification system
During 2010, the Nordea funds will introduce in the Fund Now service a uniform fund classification system, EFC, which covers the whole of Europe. In accordance with the EFC system the funds’ holdings are opened and x-rayed quarterly, and at the same time the correctness of the assigned fund category is verified. Learn more about the EFC fund classification.
Gross exposure to equities
The fund’s gross exposure to equities market is the total of long (purchased) and short-sold equity positions. Short selling refers to the selling of equities that the seller/ fund does not own when selling them. The seller borrows or rents the securities from the broker or another investor at the selling time. The short-selling positions can also be executed by using derivatives.
Growth unit (also called accumulation unit)
The units in a certain unit series can be divided into growth (accumulation) and distribution units (unit classes) on the basis of the fund-dividend distribution policy. All the unit series can include both growth and distribution units.
The profit accumulated on the growth units increases the value of the growth units
- In regard to growth units, profit is reinvested in the fund in order to increase the value of growth units.
- For a private person, it is usually worthwhile to invest in growth units unless annual income is needed for instance for consumption. In the case of growth units, the potential capital gain will not be subject to capital income taxation until the fund units are redeemed. When saving regularly into funds, growth units are also a natural choice.
Information ratio (IR)
Information ratio (IR) is the difference between the return of the fund unit and that of the benchmark, divided by the volatility of the difference in returns (=value added/ tracking error). IR illustrates the additional return generated by risk-taking diverging from the benchmark.
NAVs (Net Asset Values) per unit on the front page (Overview)
The Overview page shows the NAV per unit in each fund managed by the following:
1) Nordea Investment Fund Company Ltd;
2) Nordea 1, SICAV;
3) Nordea Fund of Funds, SICAV; and/or
4) certain non-Nordea, external fund management companies.
The NAVs per unit are given per 1, 100 or 1000 units, depending on the fund. The fund-specific number of units is shown on the page General fund info. The Overview table also shows the YTD (year-to-date) return percentage meaning the return since the year end.
Net exposure to equities
The fund’s net exposure to equities market is the difference of the long (purchased) and short-sold equity positions. Short selling refers to the selling of equities that the seller/ fund does not own when selling them. The seller borrows or rents the securities at the selling time from the broker or another investor. The short-selling positions can also be executed by using derivatives.
R2 (R squared)
R squared illustrates which proportion of the fluctuation in the value of the fund unit is explained by the changes in the benchmark. R2 varies between 0 and 1 or 0 and 100%. In funds with a R2 figure close to 1 or 100%, such as index funds, almost all the changes in the value of the fund unit are explained by the changes in the benchmark, because they in their investment operations very closely follow the benchmark. Whereas in a fund with a R2 figure clearly lower than 1 or 100%, only a part of the increase or decrease in he fund unit is explained by the benchmark. The correctness of the beta and alpha can also be estimated on the basis of R2. A higher R2 usually proves the correctness of the beta and alpha.
Risk - General risks relating to fund investment
- Investing always involves a risk which means the uncertainty concerning the return on the investment. In practice, the risk refers to the possibility that the investor receives a lower or higher return on the investment than expected and that the investor may lose the invested assets partially or fully. Fund investors should also take into account that the fund can be merged with another fund, be divided into several funds or be terminated.
- It is a common feature for all funds that the net asset value (NAV) per unit may rise or fall. The fluctuation in the Net Asset Value (NAV) per unit in a fund is in general measured by volatility. The higher the fund’s annual volatility, the bigger the risk relating to variation in NAV per unit. When redeeming fund units, the investor may get back less than the original invested amount, and the fund’s performance history is not a guarantee of future results. Funds are not in the scope of the Investor Compensation Fund or deposit guarantee.
- Funds reduce the risk relating to an individual investment by diversifying investments among several instruments in accordance with the fund rules and investment policy. However, a fund always encompasses a market risk, which means the risk that the prices of the individual investments of the fund vary as a result of general market performance.
- A fund can also be subject a liquidity risk, ie the risk that the fund’s investments cannot be converted into cash within the planned time frame or at the desired price. This may affect the performance of the NAV per unit if the fund’s investments have to be realised at a less advantageous time. A liquidity risk can occur in an exceptional market situation when, for example, certain securities are not actively traded or their buy and sell quotations differ greatly or are missing entirely. In such a case, redemption of fund units may take a longer time than normally and redemptions can be suspended in certain situations.
Settlement risk can be defined as the risk that the counterparty to a securities trade does not act in compliance with the agreed terms even though the other party has fulfilled his own contractual obligations. The settlement risk is higher in securities and foreign exchange transactions between different continents because the settlement of the trades can take place in different time zones. The settlement risk is usually higher in emerging securities markets than in developed markets. - Investing in funds can involve operational risks arising, for example from external factors and technology or the deficient actions of the personnel or from inadequate operations of the organisation or internal processes. Operational risks also include potential changes in the personnel and organisation.
- Force majeure risks comprise factors for which the contracting parties are not liable for and which cause unpredictable and insurmountable consequences that are independent of agreements and cause a risk of the discontinuation of operations. For instance, severe natural catastrophes, uprisings, strikes and states of war can be considered force majeure risks. The realisation of force majeure risks may have a marked impact, for example, on the prices of the securities in the fund's portfolio or on the fund's possibility to engage in securities trade. Consequently, the realisation of force majeure risks may impact the execution schedule of fund redemptions.
Risk - Interest-rate risk
- Funds investing in fixed-income instruments involve an interest-rate risk which illustrates the sensitivity of the price of the fixed-income investment to changes in the interest-rate level. Changes in the interest-rate level have a reverse impact on the price of a fixed-income investment; in other words, when interest rates rise, the price of a fixed-income investment falls, and vice versa. The further ahead in the future a security has cash flows and the bigger they are, the more sensitive the price of the security is to changes in the interest-rate level. In the case of floating-rate fixed-income instruments the interest-rate risk is measured up to the following interest-rate fixing date with the assumption that the entire capital is repaid on that date.
- The interest-rate risk is usually measured by modified duration. Modified duration reflects how many per cent the price of a fixed-income investment is expected to rise or fall if the general interest-rate level falls or rises by one percentage point. For example, if the modified duration of an investment is 5, the price of the investment will rise by approximately 5% if the general interest-rate level falls by one percentage point.
- The modified duration for a certain security is calculated using the formula Macaulay duration/(1+y). The Macaulay duration is the weighted average term to maturity of cash flows (interest and capital) received from a fixed-income investment, weighted on the basis of the present values of such cash flows. In the formula ‘y’ is the presently expected yield of the security if it is kept until maturity (in the case of floating-rate fixed-income instruments until the next interest-rate fixing date). The modified duration of a fund is calculated as a weighted average of the modified durations of the securities in the portfolio.
Risk - Credit risk
- A fund investing in fixed-income instruments also involves a credit risk which means the uncertainty caused by changes in the ability of the issuer of the security to repay. An issuer’s ability to repay is assessed with a credit-risk premium which is the additional return required by the market on the issuer’s bonds in relation to debt instruments of similar maturity, issued by solvent governments.
- Credit risk can be reflected in the price of a fixed-income investment when the issuer’s credit rating changes or the general credit-risk premiums change. If, for example, the issuer’s credit rating is lowered, the issuer’s credit-risk premium can increase, which results in falling market price for the bonds in circulation. If the general credit-risk premiums increase, the market prices of bonds on the market decline. The longer the remaining term to maturity of the bond, the higher the credit risk. This means that the prices of floating-rate notes are sensitive to changes in credit-risk premiums although their sensitivity to interest-rate movements is usually low.
Sharpe ratio
Sharpe ratio is used to measure the fund unit return in relation to the risk. Sharpe ratio illustrates how much excess return compared to a risk-free rate the fund unit has earned per each percentage point of volatility. The value of the Sharpe ratio is the difference between the return of the fund unit and the return of a risk-free rate, divided by volatility. The higher the ratio, the better the investment return in relation to the risk. Read more about the key figures under the section Calculation principles of key figures.
Short selling
Short selling refers to the selling of equities (securities) that the seller/ fund does not own when selling them. The seller borrows or rents the securities at the selling time from the broker or another investor. The short-selling positions can also be executed by using derivatives.
Tracking Error (TE)
Tracking Error is based on the performance history of a fund and illustrates how much the return of the fund unit differs from that of the benchmark. TE reflects the risk involved in the fund investment relative to the benchmark. If TE is high, i.e. if the portfolio´s investments differ considerably from the benchmark distribution, the return of the investment is more likely above or below that of the benchmark. Similarly, if TE is small, the fund unit return is also likely to follow the benchmark return quite closely. Read more about the key figures under the section Calculation principles of key figures.
Value added
Value added is the difference between the fund return and that of its benchmark.
Volatility/ standard deviation/ fluctuation in return
When investments are made in securities the market value of the investment may fluctuate, both up and down. Because of this movement, there is some uncertainty about the return on the investment, and this is called risk. The scale of the risk is reflected in the fluctuation in the annual return, i.e. standard deviation (volatility). Volatility illustrates the variation in the return of the fund unit around its average. A high volatility figure indicates that the uncertainty related to the fluctuation in the return of the fund unit is likely to be high and vice versa. Read more about the key figures under the section Calculation principles of key figures.
Example: if the annual return of an equity investment is 10% and the volatility 20%, and we are applying the general bell curve distribution, the return of the investment can be set with the probability of some 2/3 at 10+/-20%, i.e. between -10 and 20%. Correspondingly, if the expected return for an interest-bearing investment is 5% and the volatility 4%, the return is 5+/-4%, i.e. between 1 and 9% with the same factors and the same probability.
