Glossary of investment terms

Explore what some commonly used investment terms mean in practice

A-D

A

Active management

A style of investment management where the fund manager aims to outperform a benchmark by superior asset allocation, market timing or stock selection (or a combination of these). Compare with passive management.

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.

Affidavit

See bank declaration.

Alpha

A fund's alpha is its outperformance relative to a benchmark. It is often used loosely to describe the amount of investment return an active manager adds from their management of the fund. If a fund has a consistently high alpha this can indicate skilful management. For example if the benchmark returns 12% and the portfolio returns 14%, the outperformance (alpha) is equal to 14% - 12% = 2%. Compare with beta.

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 class

A collective term for investments of a similar type with a unique combination of investment characteristics. The main asset classes are equities (shares), bonds, cash and real estate.

Asset manager

See portfolio manager.

Asset value

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

Auditors

An organisation independent of the fund management company and the custodian bank which regularly monitors compliance with the legal regulations. Auditors must be recognised by the supervisory authorities, which in Switzerland is the Federal Banking Commission.

Average Life

Weighted average time in years for which each a unit of unpaid principal on an investment remains outstanding. The longer capital from the original investment is held (longer average life), the longer it is exposed to risks like inflation, interest rate risk or credit risk.

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.


B

Basis point

One hundredth of 1% (i.e. 0.01%). Also referred to as bps.

Bear market

A market where prices decline against a background of widespread pessimism. Compare with bull market.

Benchmark

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

Beneficial owner

The person or persons who have ultimate rights to the value of an investment or property, as distinct from the registered owner who may be a nominee.

Best execution

The duty of an investment firm to take all reasonable steps to obtain, when executing orders on behalf of clients or decisions to deal, the best possible result for those clients taking into account factors such as price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of the order.

Best-in-class principle

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

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. Compare with alpha.

Bid-offer spread

The difference between the price at which financial securities and units in a pooled fund can be sold (bid price) and bought (offer price). Compare with single price.

Blue chip

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

Bond

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 organisations such as the World Bank or the International Monetary Fund.

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 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.

Broker

A firm that provides investment research and execution services.

Bull market

A market where prices increase against a background of widespread optimism. Compare with bear market.

Business year

See financial year.


C

Call options

See options.

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. UBS offers two types of capital preservation funds: Limited Risk Funds and Dynamic Floor Funds.

Capitalisation 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, amortisation/depreciation of buildings, risk of rental losses, administrative costs) and is expressed as a percentage of the capitalised-income value. As one of the elements used to calculate the capitalised-income value, the capitalisation rate is determined by an independent expert based on expenses which are expected to be incurred in connection with the property.

Capitalised-income value

This is calculated on the basis of current rental income and a property-specific interest rate (capitalisation rate). Rental income must seem appropriate and obtainable over the long term in order to be fully included in the calculation. The capitalised-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

The document evidencing ownership of stocks, shares or unit trusts confirming relevant registration details. See also Crest.

Class action

A class action arises when a group of investors initiates a legal action against a company or ist directors in respect of alleged negligence or illegal behaviour. The majority of class actions are initiated in the US. The case usually involves a claim for compensation in respect of share price losses in a specified period.

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 unitholder. Units of this type of investment fund may not be sold publicly under Swiss law. As opposed to an open-end fund.

Collateral

Assets put up as a security that a future financial obligation will not be met. Security for a credit or other liability, usually in the form of something readily convertible into cash, e.g. bonds and shares. UBS ETFs engage in securities lending for select physically replicated ETFs. Before borrowers receive the securities from the ETF (securities lending) they must provide the lender – the ETF – with collateral. The collateral assets serve to secure the borrower's obligations to the lender. The collateral is transferred to a completely separate custody account or collateral account that is ring-fenced from the lender's balance sheet.

Collateral security margin

The margin or difference between the market value of collateral and the credit granted or securities lent. This margin is demanded by the bank or fund to cover itself against any possible decline in the value of the collateral. See also haircut

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.

Collective investment scheme

A fund in which several investors hold units.The assets are not held directly by each client, but as part of a ''pool''. Unit trusts and OEICs are types of pooled funds.

Commissions

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

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.

Commodity

A tradeable item that can be further processed and sold. Industrial (metals), agricultural (wool, wheat, sugar) and bulk commodities (coal, iron ore) are examples. It is possible to invest in physical commodities or in derivatives based on commodity prices.

Commodity funds

Investment funds which invest the assets primarily in tradable commodities or futures, via a swap.

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.

Core/satellite strategy

In a core/satellite strategy approach, invested capital is divided into a core and smaller individual investments (satellites). The bulk of the capital, the core investment, is invested in broadly diversified investments designed to achieve a stable market return with low risk and with the least possible deviation from the benchmark. That is why standard or blue chip indices are particularly suitable for a core investment. UBS ETFs offer a very straightforward and inexpensive way to implement this approach. The smaller portion of the capital is invested in a flexible manner in multiple satellite investments. The most suitable investments using this approach are those that have the potential to achieve above-average returns, complementing the core investment. They include investments in specific regions (e.g. emerging markets), sectors (e.g. infrastructure), strategies (e.g. mid-caps) and asset classes (e.g. commodities). Because they can be traded both on the stock exchange and over the counter in a quick and cost-effective manner and are available on a wide range of indices, UBS ETFs are suitable for both the core and the satellite component of a core/satellite portfolio.

Corporate bond

Strictly speaking, corporate bonds are those issued by companies. Generally, however, the term is used to cover all bonds other than those issued by governments in their own currencies. Therefore the ‘credit’ sector, as it is often known, includes issues by companies, supranational organisations and government agencies. The key feature that distinguishes corporate bonds from government bonds is the risk of default – see credit risk.

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. The Swiss Investment Fund Act does not recognise funds set up in corporate form, but it is widely used in other parts of Europe and the United States.

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 (Definition: Prince of Wales Business Leader Forum).

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

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 favourable cost price than with the regular purchase of a fixed number of units over the same period of time.

Counterparty

The other party with whom a transaction is made.

Country fund

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

Coupon

The regular interest payment due on a bond. Expressed as a percentage of the nominal value of the stock.

Coupon yield

Annual interest paid out on a coupon

Creation units

Using creation and redemption procedures, new ETF units are issued and existing units are dissolved. This mechanism allows professional market participants to trade baskets of stocks with the same composition in exchange for ETFs - and vice versa - with the fund company. This makes the ETF units more liquid.

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. See also credit rating.

Credit spread

Incremental yield over the benchmark risk free government issue.

Crest

A service which enables the securities of UK registered companies to be held and transferred between members of Crest without the need for paper-based certificates and transfer forms.

CSSF

See Commission de Surveillance du Secteur Financier.

Currency hedging

Currency risk can be mitigated by hedging using derivatives.

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.

Currency swap

(1) Also referred to as a swap. An arrangement in which a currency is sold at the spot rate and then immediately repurchased forward or the other way round. Currency swaps are used to hedge currency risks on export credits. See also spot transaction. (2) Also referred to as a swap, cross-currency swap. Swap of a capital sum together with the related interest payments in one currency into a capital sum and the related interest payments in another 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.

Custody/Custodian

Custody is the administration of securities by a financial institution; known as the custodian. The custodian is the primary record keeper of a client’s investments and collects income, processes tax reclaims and provides other services, according to client instructions.

Customised benchmark

A benchmark specifically constructed by a client rather than using an industry standard.


D

Debtor risk

See credit risk.

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.

Distribution

The distribution of income generated by the fund to the unit holders.

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.

Dividend indices

Dividend indices follow strict rules in order to safeguard exposure to higher-than-average yielding dividend stocks

Dividend yield

The return that the annual dividend of a share represents in relation to the current share price. Calculated by dividing the annual dividend per share by the current market price.

Dividend-focused strategy

weights selected stocks according to their dividend yields, i.e. higher yielders receive a higher allocation, with the intention of harvesting dividends

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.

Double taxation relief

Companies or individuals with profits or income arising abroad may suffer withholding tax on amounts remitted to the UK. The profits or income may also be subject to UK tax. A double taxation agreement aims to prevent or give relief for double taxation. It provides that income will be taxed in one country only or, if taxed in both, that one country will allow credit for tax paid in the other.

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%.

E-H

E

Earnings per share (EPS)

A common way of expressing company profits – dividing the profits after tax by the number of shares in issue. Earnings per share is the basis for the calculation of the PE ratio (price/earnings ratio).

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. Using a detailed analytical process, UBS identifies the leaders in each sector of the economy.

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. See also emerging markets.

EMU

Economic and Monetary Union. One stage of this was the introduction of the euro.

Encumbrance

The expenditure of a property for interest on investment capital, duties, real estate operating costs, insurance premiums, maintenance and repair costs, building amortisation/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.

ETF

Exchange traded fund – a relatively new technique evolved from passive investment. Instead of buying a unit in a tracker fund, investors can “buy” an index in the form of units which are traded on a stock exchange. The price of these units depends on the prevailing market price.

Eurobonds

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

Euromarket

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

Eurozone

A collective term for the countries participating in the euro.

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.

Ex dividend

To clarify who receives the dividend on a share that is sold around the time the dividend is due, a date is fixed when a share goes ex-dividend. Anyone buying after this date will not receive the dividend. A share price will normally fall by the amount of the dividend on the day that it goes ex-dividend. Compare with cum dividend.

Ex-ante

Literally means ‘before the event’. A forward-looking measure or estimate. Compare with ex-post.

Exchange-rate risk

The risk that investors are exposed to due to changes in exchange rates potentially affecting the value of investments. This is applicable when investing in non-domestic investments, i.e. when buying foreign currency denominated shares or bonds. See currency risk.

Execution

The buying or selling of an investment.

Execution-only

A broker who simply executes his client’ orders, without giving any advice. This is the cheapest form of stockbroking and is often done by telephone.

Exercise price

The price at which an option holder has the right to buy or sell the underlying asset. Also known as strike price.

Expiry date

The last date on which an option can be exercised. Also known as maturity date.

Ex-post

Literally means ‘after the event’. A backward-looking measure using historical data. Compare with ex-ante.

Exposure

Underlying securities. When an investor exposes assets to the influence of uncertain variable (risk factors), the assets are exposed to these factors.

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.


F

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. Various organisations such as Max Havelaar define standards and check that criteria are being met.

FCP

See fonds commun de placement.

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 authorises management companies, custodian banks, representatives and sales agents to commence business activities. The FBC is also responsible for authorising 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 licence 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 conduct authority (FCA)

The FCA regulates the financial services industry in the UK, with a focus on protecting consumers and promoting effective competition. The two regulatory bodies FCA and the PRA replaced the FSA (Financial Services Authority) on 1 April 2013. See PRA.

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

Debt securities such as bonds, debentures and mortgages. With fixed income assets, you are lending your money to a borrower in return for a steady payment of interest and a promise to repay the amount owing at a future date (also called “maturity date”).

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

UBS applies a so-called flat fee to most securities and money market funds. 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). UBS's flat fee is comprehensive and very client-friendly. 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. As regards all UBS Funds domiciled in Luxembourg, Switzerland or Germany except UBS Real Estate Funds, "Flat fee".

Floating rate notes

Securities with variable interest rates.

Floor

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

Floor funds

See capital preservation funds.

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 contract

A transaction in which two parties agree to the purchase and sale of a commodity or asset at some future time under such conditions as the two agree.

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.

Full physical replication

The ETF invests in the securities represented in the index in accordance with their index weighting.

Full replication

Normally at least 95% of a sub-fund's total assets will be invested in component securities of its index and/or exposed to its index by entering into derivatives replicating its index and/or its component securities.

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 manager

See portfolio manager

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 regulations

See prospectus.

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 standardised amount of an underlying instrument at an agreed price on a stipulated future date. See also derivatives, options.

Futures contract

An obligation to make or take delivery of a specified quantity of an underlying asset at a particular time in the future and at a price agreed upon when the contract was made. Exchange-traded futures contracts have standard terms, and are subject to daily margining.


G

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 germline 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, characterise and manipulate genes, the carriers of genetic information.

Gilts

Gilt-edged securities; the familiar name given to sterling-denominated marketable bonds issued by the British government.

GIPS

Global Investment Performance Standards set out a voluntary code which aims to achieve fair representation and full disclosure of performance records. This code provides a number of key ethical principles when quoting figures.

Gold

Gold is potentially attractive as an investment due to its high liquidity, its status as an asset held by central banks, and because it is seen as a good source of diversification for funds and an inflation hedge.

Government bonds

Bonds issued by governments to finance their national budgets.

Gross yield

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

Growth stocks

Appeal to their desire for high earnings potential.


H

Haircut

A haircut is applied in order that capital is preserved whilst the asset is sold.

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. UBS Asset Allocation funds and hedged UBS ETFs specifically hedge against exchange-rate risks.

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.

Holding Count

Number of the underlyings securities

I-L

I

IFA

See Investment Fund Act.

IFO

See Investment Fund Ordinance.

IFO-FBC

See Ordinance of the Federal Banking Commission on Investment Funds.

Illiquid

Illiquid assets are those assets that cannot be easily bought, sold or converted into cash. It may often be impossible to convert the asset to cash until the end of the life of the asset. Illiquid funds are those that take time for investors to trade.

Income

Interest and dividends.

Income distribution

The distribution of income to unit holders of pooled funds in strict proportion to the number of units held at the ex dividend date.

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.

Indexation

A style of fund management that aims to construct a portfolio to provide the same return as that of a chosen market index. This can be achieved on a full replication or sampling basis or via synthetic replication. Full replication involves buying all the stocks in the index in the same proportions in which they make up the index. Sampling means using statistical methods to choose an appropriate portfolio to best match index performance. Indexation is also known as passive management.

Inflation

A measure of the increase in prices of goods and services over time. Inflation erodes the real value of an investment’s return.

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.

In-specie transfer

A direct transfer of a parcel of stocks from one manager to another. Avoids the need to make sales and purchases and thus saves transaction costs.

Interest rate

An interest rate is a fee paid on capital borrowed. It indicates the price at which you can borrow. For example, when you get a bank loan, the interest rate is the rate you pay and will often depend on how much you want loaned to you.

Interest withholding tax (Zinsabschlagssteuer)

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 (Zwischengewinnbesteuerung)

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.

Intrinsic value

See net asset value.

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 grade bond

Bond of satisfactory to very good quality, for example a government bond or bond issued by a company with a high credit rating (BBB or above). Opposite: high yield bond

Investment grade corporate

A bond issuer is considered investment grade if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. These issuers are judged by the rating agencies as likely enough to meet payment obligations due time.

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 management agreement (IMA)

A document setting out the investment management contract between the fund manager and the client. Contains appropriate legal details and details of investment objectives and benchmarks agreed.

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 characterise 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 recognised 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.


J

Junk bond fund

See high-yield funds.


L

Large caps

Companies with very large stock market capitalisation 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.

LIBOR

London Interbank Offered Rate. Interest rate at which prime banks will offer to lend money in the London Interbank market.

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 fulfilment of certain criteria. UBS's real estate funds are listed on the Swiss Exchange.

Listing rules

Rule book for listed companies.

London stock exchange (LSE)

The UK’s main exchange for trading in shares and ETFs

Long and short maturities

Number of years for which a financial instrument remains outstanding. Upon maturity of a fixed income investment, the bond issuer has to pay back the full amount of the outstanding principal, plus any applicable interest to the bond holder. Short maturity is usually thought of as less than 3-5 years, whilst long maturity is usually thought of as longer than 7-10 years.

Long/short

The strategies that come under this heading invest in a combination of different financial instruments to optimise 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.

M-P

M

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. Less comprehensive than UBS's all-in fee and covers only part of the costs due.

Management style

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

Market capitalisation

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 impact

Market impact is a measure of each trade’s average execution price versus the volumeweighted average price of the stock for that trading day. It is thus a measure of how the size of the order affects the price at which it is executed.

Market maker

Someone who offers to buy and sell securities acting as a principal. This contrasts with the operations of a broker who acts as an agent for the investor.

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.

Mark-to-market

Valuing stocks or other financial instruments held against the current market price to determine the paper profit or loss to date.

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. See also term to maturity.

Medium-term fund

At UBS, investment funds which invest in bonds with a (term to) maturity of 3-5 years.

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 capitalisation. Also called secondary stocks.

MiFID

Markets in Financial Instruments Directive. MiFID is an EU Directive that came into force on 1 November 2007 across the European Economic Area (EEA). It aims to harmonise financial markets across the EU to create a consistent approach to the regulation of financial markets. MiFID brought about changes in scope, details and evidential requirements. Some of the key changes MiFID brought in are in the areas of client classification, best execution, suitability, inducements and conflicts of interest.

Modified Duration

Weighted average measurable change in the value of a bond portfolio in response to a one-percent change in reference interest rate. Bonds with higher duration have a greater price sensitivity to changes in interest rates.

Money market

A general term for the banks and other institutions that accept cash deposits.

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.


N

NAV

Net Asset Value. Used to describe the value of a company’s assets less the value of their liabilities.

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 asset value per share

The market value of the securities and assets held by the fund, less its current liabilities divided by the number of total shares.

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.


O

Offer price

See bid-offer spread.

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.

Optimized physical replication

The ETF invests only in those securities represented in the index that are needed to achieve a performance very close to that of the index.

Option-Adjusted Duration

Measure of the price sensitivity of a fixed-income security with an embedded call or put option. The embedded option changes the pay-out profile of the security and usually shortens the duration compared to a fixed-income security without option.

Option-Adjusted Spread

Weighted average incremental yield earned over the similar duration 'risk-free' sovereign bonds, measured in basis points. It measures a premium to compensate an investor for the credit risk associated with a bond portfolio. The metric takes into account the likelihood that the underlying bond will be called (if callable) or prepaid bevore the maturity.

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.

OTC

An over the counter (OTC) financial contract is one that is not traded on an exchange but is ‘tailor-made’ for a client by a financial institution.

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).

Overcollateralized

A collateralisation level of more than 100%


P

Passive management

A style of investment management that seeks to attain performance equal to market or index returns. Compare with active management.

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

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 (when applicable).

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.

Physical replication

In physical replication, an ETF invests directly in securities held in the benchmark it is tracking. To do so, the ETF can buy all the securities that make up the replicated index - this method is called full replication and is suitable for liquid indices. Alternatively, instead of buying all the securities, it can buy just some of the corresponding underlying instruments. Called "sampling," this can be a useful option if an index is made up of many securities that are not easily traded or are illiquid. Synthetic replication differs from physical replication.

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. Also called asset managers.

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 optimised 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.

Price differential

See premium.

Price-earnings ratio

P/E ratio. A ratio used to value a company's shares. It is calculated by dividing the current market price by the earnings per share.

Price-to-book ratio

The price-to-book ratio is measured as the market value of equity divided by the book-value of equity (common shareholders' equity).

Primary market

The market on which new securities are launched and enter into circulation.

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.

Proxy

A written authorisation given by a shareholder to someone else to vote on his behalf at a company’s annual general meeting (AGM) or special meeting (EGM).

Put option

An option that gives the buyer the right (but not the obligation) to sell a specified quantity of the underlying instrument at a fixed price, on or before a specified date. The writer (seller) of the option has the obligation to take delivery of the underlying instrument if the option is exercised by the buyer. Compare with call option.

R-T

R

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.

Rating

The measure of the creditworthiness of a borrower by special rating agencies such as Standard & Poor?s or Moody’s. As a rule, UBS bond funds principally invest in bonds issued by prime borrowers.

Real estate funds

Investment funds investing in residential and business properties. UBS real estate funds invest exclusively in Switzerland. 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 plan

Speciality of the UBS Investment Fund Account: Once the investor’s account has reached CHF/EUR/USD 100,000, he or she can regularly withdraw an amount. The investors determine the amount (by either receiving the gains the account generates or directly drawing down assets) they would like to have transferred, to which account, and on which dates

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.

Reference index

See benchmark.

Regional fund

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

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. This is true of most Swiss-registered funds.

Reinvestment discount

See reinvestment.

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.

REIT

Real Estate Investment Trust. An efficient, fully-tradable tax-transparent vehicle for property investment. Originated in the US but now used in other countries.

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 authorisation from the Federal Banking Commission. See UBS Fund Management (Switzerland) AG.

Research

The process of gathering information about economies, markets and individual investments to support investment decisions.

Resource efficiency

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

Return

See performance.

Return on equity (ROE)

A method of valuation of company accounts which can determine how a company is spending its money, calculated by dividing a company’s net income by its stockholder equity.

Return on investment

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

Rights issue

When existing shareholders are given rights to purchase the new shares in proportion to their existing holding. Compare with bonus issue.

Risk

In a financial context, the possibility of financial loss, or of returns less than those expected. Such losses could come from market movements (market risk), counterparty or bond issuer default (credit risk), or errors, legal problems or fraud (operational risk). Generally investors deliberately take market risk through investments in risk assets such as equities and bonds. In return for the risk, investors expect higher returns than they would get from a riskless investment such as treasury bills in their home currency.

Risk capacity

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

Risk management

Identifying and quantifying risk, then taking appropriate action to make sure risk remains within acceptable levels. Sophisticated systems and statistical models are required to measure and manage risk, and appropriate expertise to interpret and use the results. With good risk management, an effective balance between risk and returns can be achieved.

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 investor?s 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.

Risk-free asset/rate

An investment with no chance of default, and a known or certain rate of return.


S

Sales agent

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

Savings plan

Speciality of the UBS Investment Fund Account: 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 unweighted 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. The fee is charged for UBS's capital preservation funds.

Securities turnover tax

See stamp duty.

Securitisation

The process of taking a set of underlying assets and repackaging them as a new security.

Security

A generic term for a financial asset such as a bond or equity (share).

Security risk

Risk of fluctuations in the price of a security.

Segment

See subfunds.

Semi-annual report

See annual report.

Settlement

The completion of a purchase or sale of bonds or shares. The moment when the cash is delivered to the seller and the stock is delivered to the buyer.

SFA

See Swiss Funds Association

SFAMA

Swiss Funds & Asset Management Association

Share

A stake in a company which confers ownership rights on the holder. Shares are also known as equities.

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.

SICAF

Société d’investissement à capital fixe. An investment fund in the form of a joint-stock company with fixed capital. See corporation form.

Sicav

Société d’investissement à capital variable. An investment fund in the form of a joint-stock company with variable capital. The fund’s units are issued in the form of equities. See corporation form.

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 capitalisation. See also small caps and mid caps.

Socially responsible investments

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

Solvency

The ability of an organisation to cover its liabilities. Solvency can be determined by using the ‘current ratio’, which divides total current liabilities by total current assets.

Speciality 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.

Spread

The difference in yield between different types of bonds, for example between government bonds and corporate bonds. Also referred to as yield spread.

Spread Duration

For non-Treasury credit securities, the yield is equal to the Treasury yield plus a spread to the Treasury yield curve to compensate for additional credit risk. The price of a bond with credit risk can change even though Treasury yields are unchanged because the spread required by the market changes. The measure of how a non-Treasury issue`s price will change if the spread sought by the market changes is referred to as spread duration. It estimates the price sensitivity of a non-Treasury issue to a 100 basispoints movement (widening/narrowing) in its spread relative to Treasuries. For a Treasury bond portfolio the spread duration is 0. The spread duration for fixed-rate credit bonds equals normal duration.

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.

Standard deviation

Standard deviation is a statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. The greater the degree of dispersion the greater the risk.

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 ETFs and 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. For investment funds 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.

Strategic asset allocation

The long-term benchmark asset allocation, designed to meet the fund’s risk and return objectives.

Strategy funds

See asset allocation funds..

Subfund

Part of an umbrella fund. For investment funds with different subfunds, investors are only entitled to the assets and income of the subfund in which they hold units. Subfunds 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).

Swap

A swap is a type of derivative where two parties agree to exchange assets or cashflows over an agreed period. Swaps can be based on equity indices, bonds of different maturities, baskets of securities, individual securities, or interest rates. As with other derivatives, swaps can be used to gain a desired exposure without trading in the underlying assets. Swap-based strategies are offered by some investment banks as potential solutions for reducing pension schemes’ risk relative to their liabilities.

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.

Switching costs

The costs of buying and selling investments in order to implement a change in investment strategy.

Synthetic replication

In contrast to physical replication, with synthetic replication an ETF does not invest directly in the securities held in the benchmark. Instead it enters into a swap agreement with a counterparty, which promises to pay the return on the replicated index to the ETF. The ETF in turn pays the counterparty with the return from an asset portfolio that it holds, any counterparty risk is typically mitigated through collateralisation, and via the physical payment of the amount owed to the ETF by the counterparty. TIn this manner virtually all counterparty risk that could arise from a swap agreement. In accordance with UCITS regulations, counterparty risk cannot exceed 10 percent.


T

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 annualised 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 (e.g. companies which are undergoing restructuring programmes).

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.

Total cost of ownership (TCO)

The total cost of ownership means the overall charges that arise from buying and using a product. A comparative figure for investment funds and specifically for ETFs is calculated by adding the total expense ratio (TER) and the cost of buying and selling, i.e. stock exchange fees and bid/ask spreads.

Total Expense Ratio

The ratio of total expense to a fund s average size over an annualised accounting period. Expenses are taken to include all expenses shown in the income account, including management, administration, custody, audit, legal and professional fees.Total Expense Ratio (TER): this ratio is calculated in accordance with the Swiss Funds & Asset Management Association (SFAMA) "Guidelines on the calculation and disclosure of the TER and PTR" in the current version and expresses the sum of all costs and commissions charged on an ongoing basis to the net assets (operating expenses) taken retrospectively as a percentage of the net assets. If "n.a." is shown instead of the TER, the fund has been launched recently and will show a TER when the first reporting period for the fund has been published.

Total return

Essentially, a combination of capital return and income return. To be precise, the aggregate increase (or decrease) in the value of the portfolio resulting from the net appreciation (or depreciation) of the principal of the fund, plus the net income during the period. This is expressed as a percentage of the value of the fund at the start of the period.

Total return index

Measures the performance of a stated index and assumes reinvestment of all dividends and distributions over a period of time.

Total risk

See risk.

Tracking Difference

Difference between fund and index performance

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.The tracking error (TE) is calculated using the annualized standard deviation of a portfolio's excess return over the corresponding index return. The tracking error for a defined period expressed in months is calculated as follows: = STANDARD DEVIATION (monthly excess calculated each month over period expressed in months) * SQUARE ROOT(12 DIVIDED BY period expressed in months).

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 subfund 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/subfund are always invested in the same portfolio.

Turnover

A measure of the percentage of a fund switched within and into or out of a market sector. To be precise it is defined as the sum of purchases and sales divided by the mean value of the sector or market.

U-Z

U

UBS Fund Management (Switzerland) AG

This company serves as the management company of all UBS Investment Funds and UBS ETFs established under Swiss law and also acts as the representative of UBS foreign-based funds and UBS ETFs in Switzerland vis-à-vis the investors and the supervisory authority.

UCITS

Undertakings for Collective Investments in Transferable Securities. A UCITS fund is an authorised fund that may be sold across all countries in the EU.

Umbrella fund

An investment fund which comprises several subfunds. Together the subfunds form one single legal entity, meaning that only the umbrella fund needs to be submitted for authorisation. The subfunds are governed by the same fund regulations and prospectus. Once the umbrella fund has been approved, other subfunds can be created. All UBS Investment Funds domiciled in Luxembourg are umbrella constructions. Not to be confused with fund of funds.

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.

Unit trust

A pooled fund established under trust in which investors can buy and sell units on an ongoing basis.


V

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.

Value stocks (High yield stocks)

Featuring above-average dividend yields and low price-to-book ratios.

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.

Volatility

See risk.


W

Warrant bonds

Bonds with a warrant attached. The warrant enhances 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.

Warrants

A certificate giving the holder the right to purchase shares or stock at a stipulated price within a specified time span, or in some cases, forever.

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.


Y

Yield

A measure of the income return earned on an investment. In the case of a share the yield expresses the annual dividend payment as a percentage of the market price of the share. For real estate, the yield is the annual rental income as a percentage of the capital value of the asset. For bonds the running yield (or flat or current yield) is the annual interest payable as a percentage of the current market price. The redemption yield (or yield to maturity) allows for any gain or loss of capital which will be realised at the maturity date.

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 (for UBS bond funds, this corresponds to maturities of 1 to 3 years for Short-Term Bond Funds, over 5 years for Bond Funds and 3 to 5 years for Medium-Term Bond Funds). 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.

Yield spread

The difference in yield between different types of bonds, for example between government bonds and corporate bonds.

Yield to maturity

Weighted average rate earned by an investor who buys the bond portfolio today at the market price and holds the bond portfolio until maturity, and assuming that all coupon and principal payments will be made on schedule.

Yield to worst

Weighted average potential rate that can be received on a bond portfolio without the bond issuers actually defaulting.The yield to worst is estimated by making a worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, are used by the bond issuer. Yield to worst may be the same as yield to maturity but never higher.


Z

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%.

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