Useful terminology for mutual funds

A company that has the sole purpose of managing UCITS funds. The company also provides services including institutional investor portfolio management, investment advice and UCITS unit storage/administrative management.

The wealth of the UCITS, i.e. its assets, is deposited to a custodian (a credit institution) for safekeeping. The custodian:

• Is charged with safekeeping the assets in accordance with the terms of the custody agreement.
• Is responsible for monitoring cash flows and managing asset transactions.
• Has continuous access to the documents relevant to their role.
• Ensures the transactions made by the UCITS are legal.
• Co-signs the UCITS Articles of Association and oversees their observance.

The shares made available by the UCITS are divided into classes according to payout policy, target investors, etc.

Examples of Alpha mutual fund share classes include:

• Classic share class. Suitable for private investors.
• Institutional share class. Suitable for institutional investors.
• Classic “D” share class. Suitable for private investors that wish to receive regular payments in cash.

The features of each share class are detailed in each mutual fund’s Articles of Association.

Depending on the financial instruments in which they invest their assets, mutual funds fall into different categories:

• Money market funds. Assets are invested in deposits and money market instruments.
• Fixed income funds. At least 65% of the assets is invested in bonds.
• Equity funds. At least 65% of the assets is invested in equities.Balanced funds.
• Assets are invested in all financial instruments. Investment in each category cannot be less than 10% or more than 65%.
• Structured. Assets are invested in all financial instrument categories, to the end of reaching a specific yield to maturity.

UCITS assets are divided into units of equal value. Units are registered and their owners are called unit holders.

The number of units offered by a UCITS increases when new investors buy units and decreases when existing unit holders leave.

It stands for “undertaking for the collective investment in transferable securities”. The sole purpose of such undertakings is to collectively invest the capital contributed by investors in transferable securities, money market instruments and cash. A UCITS’ assets (wealth) are jointly owned by all unit holders.

The most common UCITS include:

• SICAV (Société d'Investissement à Capital Variable).
• FCP (Fonds Commun de Placement – Αμοιβαία Κεφάλαια).

A measure of UCITS return deviation from the mean return of the period, which is an expression of the overall investment risk.

The higher the standard deviation of a UCITS, the higher the investment risk.

The difference between a unit’s acquisition value and its current value, expressed in percentage form. That is: Return = (Current value - Acquisition value) / Acquisition value.

An independent and globally accepted index specified by the management company for each UCITS. Benchmark selection depends on the UCITS’ investment policy and is used for return comparison purposes.

It is not mandatory to specify benchmarks for all UCITS.

The overall value of a UCITS’ net assets, divided by its total number of units.

The currency in which the UCITS portfolio is denominated.

Some investment companies offer different share classes in different currencies (trading currency) within the same mutual fund. For example, a UCITS whose portfolio is denominated in US dollars may have 1 share class denominated in euros.

In this case, the trading currency – as opposed to the base currency – is used in unit distribution and redemption.

The euro is the base currency for all Alpha mutual funds.

A document detailing information about the UCITS. Its structure is defined with the utmost precision by decision of the Hellenic Capital Market Commission.

Investors must receive the KIID before they apply to participate in a UCITS.  
 

The document detailing the UCITS’ purpose, investment policy, share classes if any, permissible investments in transferable securities, obligations, and operation; the terms of unit distribution and redemption, the fees payable by the unit holder, and generally all UCITS-related information.

The Articles of Association and any amendments to those Articles must be approved by the Hellenic Capital Market Commission. They are also legally binding for the unit holders.

Investment risk has to do with the deviation that may occur between the expected and the actual returns.

There are different types of investment risk, such as market risk, credit risk, operational risk, country risk, currency risk, etc.

The risk of decreases in a mutual fund’s net value due to fluctuations in the market value of its portfolio positions. Value fluctuations may be caused by market-related parameters including interest rates, foreign currency exchange rates, share and commodity prices, or an issuer’s solvency.

The risk associated with fluctuating returns on mutual fund assets. This risk also encompasses any full or partial protection of the mutual fund assets by a credit institution.

The risk associated with an inability to transact investments in financial instruments, especially when the counterparty does not pay or deliver securities in a timely fashion.

The risk associated with the limited diversification of mutual fund assets.

The risk of mutual fund asset loss due to custodian-related reasons: actions or omissions on the part of the custodian, fraud or insolvency on the part of the custodian or any third party charged with safekeeping individual mutual fund assets.

The risk associated with the institutional and regulatory framework in place in the country where mutual fund assets are invested.

The risk of a decrease in mutual fund assets due to:

• Unit redemption or cancellation.
• Distribution of units whose value is greater than the profits made during the fiscal year.

This includes the following individual risks:

• The derivative may lack a strong correlation to the underlying financial value; therefore, hedging may not have the anticipated benefits. 
• Extended losses due to leveraging or missed investment opportunities.
• Inability to sell a derivative in an illiquid market.
• Breach of obligations by the counterparty, in the case of OTC derivatives.

The risk associated with the limited diversification of mutual fund assets.

The risk associated with an issuer’s inability to meet the obligations arising from the transferable securities they have issued and the mutual fund has invested in (credit risk of the issuer) or with a counterparty’s failure to meet their obligations during transactions made on account of the mutual fund (credit risk of the counterparty). 

The risk arising from the changes in foreign currency exchange rates when mutual funds invest in securities traded in currencies other than the reporting currency, therefore affecting unit value.

The fee charged by the managing entity for the overall management of the UCITS. Usually expressed as a percentage of the UCITS’ mean daily value.

For instance, the fee is lower for investments in the European equity market than for investments in emerging equity markets. Management fees include the cost of survey, the managing entity fees, etc.
 

A fee calculated based on excess NAV return for each share class over the applicable benchmark NAV return.

The overall charges paid by the UCITS, such as the management fee, the custody fee, etc.