Asset Allocation: The manner in which a portfolio is divided into the three main types of investments — equities (stocks), fixed income (bonds) and cash (or cash equivalents). Asset allocation depends mainly on your investment objectives, and should take into consideration other factors, such as age and risk tolerance.
Balanced Fund: A mutual fund, which has an investment policy of "balancing" its portfolio generally by including bonds as well as preferred and common stocks to achieve the highest return with lower risk. It blends long-term growth from stocks with income from dividends. The proportions are influenced by the fund manager's investment outlook.
Capital Gains: The difference between an asset's adjusted cost base (ACB) and selling price, when the difference is positive. A capital loss would be when the difference between an asset's adjusted cost base (ACB) and selling price is negative.
Capital Preservation: A management style that concentrates on maintaining the client's initial investment. The goal is to provide decent profits in good times, and to keep losses to a minimum in bad times.
Capitalization: This term refers to the dollar value of a company. In other words, market capitalization is the amount of money someone would have to pay to buy the company. To calculate market capitalization, multiply the total number of a company's shares by the current price per share.
Correlation: A relationship between two variables. The correlation between two mutual funds is a measure of how one fund performs in relation to the other. When building a diversified portfolio, it is useful to combine various funds whose equity returns are not highly correlated with each other. For example, Canadian Equity Funds may perform well when Global Equity Funds perform poorly, or Fixed Income Funds may perform well when equity funds are not.
Deferred Sales Charge (DSC): Often referred to as a redemption charge, this is a fee that is applied to withdrawals (redemptions) that occur during a specified Deferred Sales Charge period. The fees decrease annually.
Diversification: The action of investing in different asset classes. This reduces the risks inherent in investing while still earning an acceptable return. It also lowers the volatility of the portfolio. Diversification may be among types of securities, companies, industries or geographic locations.
Dividend: A per-share payment designated by a company's board of directors to be distributed among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand. It may be omitted if business is poor or the directors withhold earnings to invest in plant and equipment in order to ensure the future growth of the company.
Equity Fund: Funds that invest in equity securities, also called stocks or shares, or equity participation units. The value of the Fund will be affected by changes in the market price of those securities.
Fiduciary: A fiduciary (either a person, company or association) holds assets in trust for a beneficiary. The fiduciary is expected to make sound investment choices on behalf of the beneficiary. Most provinces have laws that limit how a fiduciary may handle the beneficiary's assets. Fiduciaries can be executors of wills and estates; receivers in bankruptcy; trustees or administrators of assets for underage or incompetent beneficiaries.
Front-End Load: When a Front-End Load option is chosen, a sales charge is deducted from the amount received for investment and paid to the Financial Advisor, with the remaining amount invested in the chosen Fund options.
Income Funds: Mutual funds that invest primarily in fixed-income securities such as bonds, mortgages and preferred shares. Their primary objective is to produce income for investors, while preserving capital.
Index: A composite of stock or bond prices or market capitalization of a specific set of companies. Indices are used to gauge market activity and direction. Familiar indices are the Dow Jones Industrial Average, the S&P 500 and the S&P/TSX Composite Index.
Load: Broadly speaking, all mutual funds can be classified as either load or no-load funds. Load funds require the investor to pay a commission to the broker, either at the time of purchase or at the time of redemption. No-load fund investors pay no sales commission.
Median Return: The Median Return is the mid-point of returns for all funds in a sample. One half of the funds in a group have returns lower than the median. The other half of the funds in a group has returns higher than the median.
Mortgage Fund: A mutual fund that invests in mortgages or mortgage-backed securities. Portfolios of mortgage funds usually consist of first mortgages on Canadian residential property, although some funds also invest in commercial mortgages.
Mutual Fund: A mutual fund consists of a pool of different types of investments purchased with funds contributed by investors. Investments in a fund may include equity securities, bonds, treasury bills, debentures and cash or cash equivalents. The value of the underlying assets of the fund influences the current price of units.
Net Asset Value: The net asset value of a Fund is determined by calculating the market value of all of its assets (its investments) and subtracting its liabilities (such as the Fund's operating expenses).
Net Asset Value Per Unit (NAVS): Net asset value of a mutual fund divided by the number of shares or units outstanding. This represents the base value of a share of unit of a fund and is commonly abbreviated to NAVS.
Pension Plan: A formal arrangement through which an employer, and in most cases the employee, contribute to a fund to provide the employee with a lifetime income after retirement. Generally, pension benefits are payable as long as the retiree or retiree's spouse is alive. Benefits may or may not be adjusted to cost of living increases.
Performance: The best way to measure investment performance. Combines price change plus income from dividends or interests. With mutual funds, total return calculations assume the investor is reinvesting all distributions.
Pre-Authorized Chequing Plan (PAC): A program that permits purchases of units through automatic periodic deductions of a fixed dollar amount from your bank account. Payment may be made monthly, quarterly, semi-annually or annually (or semi-monthly under TAL fund codes) on any given day of a month selected by the investor.
Redemption: A redemption happens when a security is bought back by the company or fund that issued it. Redeeming units of your mutual fund means that you are selling your units back to the fund for cash.
Registered Retirement Income Fund (RRIF): A tax-deferred vehicle available to individuals collapsing their Registered Retirement Savings Plans (RRSP). It provides a retirement income stream that must be withdrawn each year over the investor's lifetime.
R-Squared: R-Squared is the measure of correlation between a fund and the market (benchmark). Having a value of .50 means that 50% of the variation in the fund price changes could be attributed to changes in the market index over a period of time. A completely diversified security will be perfectly correlated with the market, and will have an R-squared of 100%. In other words, the security's results have so perfectly emulated the market's results (such as might be the case with an index security) that we can say the security is 100% as diversified as the security's related index. A security with an R-squared of 75%, for example, is only 75% as diversified as the security's related index. This means that 75% of the security's risk is market-related, and the other 25% is attributable to the security's unique characteristics.
Securities: Generally, an instrument evidencing debt of or equity in a common enterprise in which a person invests on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership.
Segregated Funds: An investment or co-mingled fund insured by a Canadian life insurance company that invests in a portfolio of securities on behalf of several investors, and that is held separate from the insurer's general assets and provides various insurance benefits.
Sharpe Ratio: A measure of risk-adjusted performance calculated by dividing the excess return of a portfolio above the risk-free rate by its standard deviation. Higher values are desirable and indicate greater return per unit of risk.
Standard Deviation (S. Dev.): A measure of the dispersion of possible outcomes around the expected outcome of a random variable. A higher standard deviation usually means higher volatility in a fund.
Stock Market Indices: A composite of stock capitalizations of a specific set of companies. Stock market indices are used to gauge market activity and direction. Familiar indices are the Dow Jones Industrial Average, the S&P 500, the S&P/TSX Composite, and NASDAQ.
Tax Efficiency: The Tax Efficiency Ratio is an estimate, expressed as a percentage, of a fund's total return achieved over a period of time that is retained by the taxable investor. A taxable investor in this context refers to those who hold a mutual fund outside a tax-deferred plan (e.g., an RRSP program) or outside a tax-exempt plan.
Tax efficiency may be an important consideration because mutual funds often distribute capital gains and interest income to their unit holders at regular intervals. These distributions are often used to purchase additional units of the fund. Capital gains are typically generated by the fund through the selling of securities at a premium (relative to its adjusted cost base). Income can be generated by interest payments or dividend payments of the fund's underlying assets. Even though the investor does not sell her position in the fund, she is liable for the taxes payable on these "distributions."
Treasury Bill (T-bill): Short-term government debt. Treasury bills bear no interest, but are sold at a discount. The difference between the discount price and par value is the return to be received by the investor.
Upside/Downside Capture Ratio: This ratio is the average of the differences between the price movements of the fund and those of the underlying benchmark. This measurement reveals to what degree a manager captures the market's moves, both up and down, in a given period. A capture ratio is calculated by dividing the returns in a benchmark (e.g., S&P 500 or Russell 1000) over a period of time into two categories, positive returns and negative returns, and summing these amounts into total positive and negative returns. The manager's returns are aggregated in the corresponding positive and negative periods. To determine how much of the positive (upside) returns a manager captures, the manager's total return (in up markets) is divided by the index's total up period returns.
The same principle is used for the down capture. An upside ratio greater than 1.00 means the manager is, on average, capturing more of the positive returns than the benchmark during these up periods. A ratio between 0.00 and 1.00 indicates that the manager is producing positive returns, but less than the benchmark. Conversely, the downside capture ratio demonstrates to what degree a manager is participating in down markets. A downside capture ratio less than 0 indicates that a fund produced positive returns during down markets.
Managers seek to have more upside volatility, that is, a high upside capture ratio of greater than 1.00, and less downside volatility, a downside capture ratio of less than 1.00.
The Capture Ratio is used to determine the extent to which the fund participated in the moves, either up or down, that have occurred in the benchmark of reference. The Capture Ratio is a useful tool for selecting and evaluating funds. A high Capture Ratio means that the price movements of the benchmark tend to be magnified by the fund. A high Capture Ratio should be chosen for an aggressive strategy. A low Capture Ratio will fit the need of a more conservative selection.
Warrant: Certificates allowing the holder the opportunity to buy shares in a company at a stated price over a specified period. Warrants are usually issued in conjunction with a new issue of bonds, preferred shares or common shares.