Glossary

Active Management
A style of investment management that aims to provide returns above a set benchmark through asset allocation and stock selection. The opposite to passive management.

Alpha
The alpha of a fund is the return which it can produce irrespective of what the market does. It is a risk adjusted measure of a fund manager's performance. A positive alpha indicates that the fund manager has produced a premium above the market return, whereas negative alpha suggests the manager has returned less than the market.

Asset Allocation
The weighting of investments across different kinds of asset classes (such as stocks, bonds, real estate and cash) to optimize the risk/reward trade-off to meet a specific strategy or goal.

Bear Market
A prolonged period of falling prices (usually 20% or more) accompanied by widespread pessimism. The opposite to a bull market.

Benchmark
The main investment yardstick of a fund. A benchmark is usually a well-known market index, combination of indexes or an in-house index used to assess the risk and performance of a fund. Comparing the fund relative to its benchmark offers a way to assess the performance of the fund manager.

Beta
Beta is a measure of risk. The Beta of a fund indicates its sensitivity to fluctuations in the market. If a fund has a Beta equal to 1, it is exactly as risky as the market. A Beta higher than 1 indicates that the fund is more volatile than the market, and may produce higher returns when the market rises and lower returns than the market when it falls. Alternatively, a fund with a beta less than 1 would be expected to produce a more stable return than the market.

Bond
A debt security that pays a fixed amount of interest at a regular interval over a certain period of time.

Bull Market
A market in which prices trend upward over time, usually by 20% or more. The opposite to a bear market.

Closed End Funds
A mutual fund with a fixed closing date, after which the fund can only be traded on a secondary market. No new units can be issued after this closing date.

CLNs
Credit Linked Notes. These are securities with an embedded credit default swap issued by a Special Purpose Company (SPC) or trust, which are designed to pass on the risk of default to investors who are willing to take on this risk in return for a higher yield. CLNs offer investors par value at maturity unless the creditor defaults, in which case they get a recovery rate. CLNs are backed by highly rated, AAA-rated securities such as U.S. Treasury bonds.

Credit Products
A contractual agreement product in which a borrower receives something of value now, with the agreement to repay the lender at some date in the future.

Depository Receipt
A negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. The depository receipt trades on a local stock exchange. Depository receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home country. When the depository bank is in the USA, the instruments are known as American Depository Receipts (ADR). European banks issue European depository receipts, and other banks issue global depository receipts (GDR).

Derivative
A financial contract that derives its value from other assets. Examples include stock options and currency futures.

Diversification
The deliberate strategy of spreading your investment capital across different asset classes, securities and managers so as to reduce risk

ELNs
Equity Linked Notes. A debt instrument (usually a bond) whose return is determined by the performance of an underlying single equity security, a basket of equity securities, or an equity index.

Equity
Commonly referred to as a share. Equity is a security representing the owner's partial ownership in the capital of an asset.

Ethical Investing
An investment methodology that takes ethic as well as investment considerations into account when making investment decisions.

Exchange-Traded Funds
A security that tracks an index and represents a basket of stocks (similar to an index fund ), but trades like a stock on an exchange - experiencing price changes throughout the day as it is bought and sold. Because it's price fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day as a mutual fund does.

Fund of Funds
A mutual fund that invests in other mutual funds. Typically an investor will select a risk/return profile (i.e. growth or capital stable etc), and the product provider will then select the underlying investments from a range of different products across one or more different fund managers.

Fund of Hedge Funds
A mutual fund that invests into a number of underlying hedge funds across one or more different fund managers.

Futures
A financial contract that obligates the buyer (seller) to purchase (sell and deliver) a specified quantity and quality of an underlying asset (such as financial instruments or physical commodities) at a future date, at an agreed upon price.

Hedge Fund
An aggressively managed fund that may take positions in safe and/or speculative opportunities. For the most part, hedge funds (unlike regular mutual funds) are unregulated because it is assumed that the people investing in them are sophisticated investors. The main goal of a hedge fund is to achieve a maximum rate of return, using strategies involving options, short selling, and leveraging.

Income Protection Policy
An insurance policy that offers continuity of income (up to a certain level - usually 75% of income) in the event of sickness or an accident where an individual is unable to continue doing their normal occupation (there are several definitions for disablement).

Leverage
The use of various financial instruments or borrowed capital, such as margin accounts, to increase the potential return of an investment. Leverage may help investors achieve their goals sooner. However, leverage magnifies not only gains but also losses.

Life Insurance
Traditional life insurance combines long-term savings with guaranteed life insurance cover. It may only require a certain period of payments (usually 10 - 20 years) for a whole life cover with bonus dividends and accumulated guaranteed cash value.

Mandatory Provident Fund (MPF)
The mandatory provident fund system was implemented in Hong Kong in 2000. The objective of this system is to provide secured retirement benefits for the workforce of Hong Kong.

Margin Accounts
A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock. In a margin account you are investing with your broker's money. By leveraging your investment, you magnify both gains and losses.

Multi-Manager Funds
Similar to Fund of Funds, Multi-Manager Funds typically bundle together a group of specialist investment managers, giving investors access to a range of expertise through the one fund.

Mutual Fund
An open-ended fund operated by an investment company, which pools money from investors and invests in a group of assets, in accordance with a stated set of objectives. The benefits of this structure include diversification and professional money management. Units of the fund are issued and redeemed on demand, based on the fund's net asset value that is determined at the end of each trading session.

Net Asset Value (NAV)
The share price of a fund. It is calculated by dividing the total net assets of the fund by the total number of shares outstanding.

Nominee Service
A nominee service is a facility whereby an investment, instead of being registered in your own name, is registered and held on your behalf by a professional nominee company. This arrangement facilitates dealing and administration whilst reducing paperwork.

Offshore Fund
A fund that does not depend directly on the law of the country where it is registered.

Options (Call, Put)
A contract, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price during a certain period of time or on a specific date. American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.

Optimising Portfolio Service (OPS)
An forward-looking, actively managed portfolio system, managed exclusively for ING Financial Planning clients and run by ING's in-house Investment Analysis Team.

Passive Management
A style of investment management that aims to achieve performance equal to the market or index returns.

Price/Earnings Ratio (P/E ratio)
The most common measure of how expensive a stock is. Equal to a stock's capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period.

Property Partnership
A business organization in which two or more individuals invest and manage a property. Both owners are equally and personally liable for the debts that arise. Partnership doesn't always mean two people. There are many large partnerships that have thousands of partners.

Retail Bonds
A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

Risk
The chance that an investment's actual return will be different from its expected return. This includes the possibility of losing some or all of the original investment. It is usually measured using the historical returns or average returns for a specific investment.

Sharpe Ratio (annualized)
A statistical measure of risk-adjusted performance. It is defined as the ratio of average excess return over the volatility of the return series. This means that the higher the ratio, the better the risk adjusted performance. A Sharpe ratio greater than 1 indicates strong performance considering the amount of risk taken, whereas a ratio less than 0.1 would indicate that the return has been inadequate for the level of risk taken.

Stock
An instrument that signifies an ownership position, or equity, in a corporation, and represents a claim on its proportionate share in the corporation's assets and profits.

Structured Product
A structured product is a hybrid security that attempts to change its profile by including additional modifying structures. A simple example would be a 5 year bond tied together with an option contract intended to increase its returns.

Tracking error (annualized)
A measure of relative risk. It calculates the standard deviation of the excess performance, i.e. the difference between the performance of the fund and the performance of its benchmark. In other words, the tracking error is indicative of the extent to which the fund is actively managed.

Venture Capital Funds
An investment fund that manages money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.

Volatility (annualized)
The (annual) volatility of a fund is the most common measure of its risk. The higher volatility is, the less certain an investor can be of the funds return.

Warrants
A derivative security that gives the holder the right to purchase securities (usually equities) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue to entice investors. They are similar to call options.

Yield
The yield of a fixed income asset shows the annual cash flows from this asset as a percentage of the market price. For bond funds, the yield is usually calculated as the average duration-weighted yield, in order to take into account the differences in duration of each individual bond.

Yield Curve
A curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at a given point in time.

Yield To Maturity
Yield that would be realized on a bond or other fixed income security if the bond was held until the maturity date. It is greater than the current yield if the bond is selling at a discount and less than the current yield if the bond is selling at a premium.