A foreign company whose income is 75% passive or has over 50% of its assets in investments earning interest, dividends, and/or capital gains.
Ownership in this type of company creates tax implications for American investors because the IRS handles the taxation of profits differently.
An investing strategy that mirrors a market index and does not attempt to beat the market. Also known as "passive strategy" or "passive investing".
Followers of passive management believe in the efficient market hypothesis. It states that at all times markets incorporate and reflect all information, so stock picking is futile. As a result, the best investing strategy is to invest in an index fund. This is the opposite of active management.
An incentive-based form of compensation that is reserved for hedge fund managers or elite portfolio managers. The compensation will almost always be based on a percentage of total assets managed, and will be paid out if the portfolio manager delivers returns above a pre-specified level, such as performance in relation to the S&P 500.
Many hedge fund managers are paid 20% of client profits if their investment returns are over and above a pre-determined benchmark. Under this form of compensation scheme, talented hedge fund managers that manage large funds can easily earn tens of millions of dollars (if not more).
1) An investment company whose purpose is to collect investment funds from a pool of individual investors and invest them in financial securities.2) The underwriting procedure which must be completed by the Securities & Exchange Commission (SEC) before a security can be offered for sale to the public.3) A type of risk most often present in mortgage transactions. It expresses the potential for change in financial factors during the time lapse between the mortgage application and the purchase of the property.
1) Such firms are usually exempt from normal corporate taxes, since they simply serve as an investment conduit, or pipeline, rather than actually producing goods and services as a regular corporation does. A mutual fund structured as a trust would be exempt from corporate taxes and considered an investment pipeline.2) A new security issue must go through the SEC's pipeline before it is legally cleared for sale to the public. This practice attempts to screen out fraudulent investments and ensures security offerings are presented to the public in an accurate fashion.3) During the time it takes for a bank to review a mortgage application and for a borrower to actually purchase their desired property (the mortgage pipeline), financial conditions specific to the application can change, which would change the amount of risk the bank incurs by lending funds to the borrower.
A theory stating that an investment firm passing all capital gains, interest and dividends onto their customers/shareholders shouldn't be levied at the corporate level like most regular companies are. Also referred to as "conduit theory".
Basically the investment firm passes income (without taxing themselves) directly to the investors who are then taxed as individuals. This theory means investors are taxed once on the same income, whereas in regular companies investors are taxed twice. Both when the company reports income and when dividends are received. An example is a REIT or mutual fund company.
Funds from many individual investors that are aggregated for the purposes of investment, as in the case of a mutual or pension fund. Investors in pooled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, diversification and professional money management.
The enormous advantages of investing in pooled fund vehicles make them an ideal asset for many investors. There are added costs involved in the form of management fees, but these fees have been steadily declining for many years as competition has increased. The main detractor of pooled fund investments is that capital gains are spread evenly among all investors - sometimes at the expense of new shareholders.
The group of assets - such as stocks, bonds and mutuals - held by an investor.
To reduce their risk, investors tend to hold more than just a single stock or other asset. Think of the portfolio as a pie: each piece is divided up into specific assets such as bonds, equities, etc.
Income from investments, including dividends, interest, royalties and capital gains.
There are three main categories of income: active income, passive income and portfolio income. These categories of income are important because losses in passive income generally cannot be offset against active or portfolio income.
1. A method of hedging a portfolio of stocks against the market risk by short selling stock index futures. 2. Brokerage insurance such as the Securities Investor Protection Corporation (SIPC).
1. This hedging technique is frequently used by institutional investors when the market direction is uncertain or volatile. By short selling index futures they offset any downturns, but they also hinder any gains.2. SIPC is an insurance that provides brokerage customers up to $500,000 coverage for cash and securities held by a firm.
The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.
The person responsible for investing a mutual fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading.
The portfolio manager is one of the most important factors to consider when looking at a mutual fund.
The illegal act of bidding up the value of a fund's holdings right before the end of a quarter, when the fund's performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund. Also known as "marking the close".
Portfolio pumping can be highly destructive for investors in the fund because it is a temporary gain and the stocks will generally fall back to previous levels once the price manipulation is over. For example, if a fund has 1,000 shares of ABC purchased for $10 per share, if the shares are trading at $9 right before the managers’ performance is measured, they will have performed poorly. As a result, the managers may resort to portfolio pumping and place enough orders to bid the price to $14, dramatically increasing the fund’s performance. However, it is likely that the shares will fall back towards $9, leaving investors with a $9 stock that was made to look like a $14 stock.
A measurement of how frequently assets within a fund are bought and sold by the managers. It is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period.
The portfolio turnover measurement should be considered by an investor before deciding to purchase a given mutual fund or similar financial instrument. After all, a firm with a high turnover rate will incur more transaction costs than a fund with a lower rate. Unless the superior asset selection renders benefits that offset the added transaction costs they cause, a more passive fund may likely generate higher returns.
A private investment firm's, mutual fund's or other qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares).
This financing technique is popular due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues with the SEC and there is also no need for an expensive roadshow, lowering both the costs and time it takes to receive capital. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing.
1. A formal legal document describing details of a corporation. The prospectus is generally created for a proposed offering (usually an IPO), but it can still be obtained from existing businesses as well. The prospectus includes company facts that are vitally important to potential investors. 2. In the case of mutual funds, a prospectus describes the fund's objectives, history, manager background and financial statements.
The prospectus is a document that makes investors aware of the risks of an investment.
A type of mutual fund that guarantees an investor at least the initial investment, plus any capital gains, if it is held for the contractual term. The idea behind this type of fund is that you will be exposed to market returns because the fund is able to invest in the stock market, but you will have the safety of the guaranteed principal.
The initial investment is protected by an insurance policy in case the fund is unable to pay the investor back his or her principal. The initial investment can only be paid back after the guarantee period is over; if the investor sells before this period, he/she is subject to the current value of the fund and any losses that may arise. This type of fund tends to have higher expense ratios than other types of mutual funds. While protected funds state that you will be guaranteed at least your original investment in addition to being exposed to market returns, these funds are often heavily invested in fixed-income securities and have less weighting in the stock market.
An investment fund that selects securities based on quantitative analysis. In such funds, the managers build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model.
If computers can beat world champion chess players, shouldn't they be able to beat the traders on Wall Street? That's the thinking behind quant funds, whose name comes from the term "quantitative analysis". The advantage is that computers aren't swayed by emotion, and they obviously react much faster than a person ever could. The problem is that humans have to program those computers, and even computers can make mistakes when they are programmed incorrectly. Remember the saying "garbage in, garbage out". To take advantage of the power of computers, you still have to figure out a superior investment strategy. The term "quantitative fund" also doesn't tell you anything about the actual investment strategy being used. Any study of a company or an industry based on quantitative data can be considered a quant strategy.
A statistical measure that represents the percentage of a fund's or security's movements that are explained by movements in a benchmark index. For fixed-income securities the benchmark is the T-bill, and for equities the benchmark is the S&P 500.
R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100, yet has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta.
The process of changing the class of mutual funds once certain requirements have been met. These requirements are generally placed on load mutual funds. Reclassification is not considered to be a taxable event.
Sometimes mutual fund companies will decide to issue more than one series of similar mutual funds. Each series has different features and durations, and when the restrictions expire, they become reclassified to the fund with no restrictions. Suppose the a company issues 2 mutual funds. Fund A is a no load fund, while fund B is a 5 year back-end load fund. After 5 years, when there is no longer a load structure, fund B will then be reclassified to fund A.
The return of an investor's principal in a security, such as a stock, bond, or mutual fund.
Redemption of mutual fund shares from a mutual fund company must occur within seven days of receiving a request for redemption from the investor.
A mutual fund that confines itself to investments in securities from a specified geographical area, such as Latin America, Europe or Asia. A regional mutual fund will generally look to own a diversified portfolio of companies based in and operating out of its specified geographical area. However, some regional funds can also be set up to invest in a specific segment of the region's economy, such as energy.
For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area. These funds are practical for the average investor, since most people wouldn't have enough capital to adequately diversify themselves across many investments in the region.Regional funds select securities that pass geographical criteria. They are not to be confused with other mutual funds such as international funds, which attempt to provide investors with a diversified portfolio spanning the globe, or country funds, which provide investors with diversified exposure to companies in one specific nation.
A mutual fund or real estate investment trust that is eligible to pass the taxes on capital gains, dividends, or interest payments onto the clients or individual investors.
This is done to help avoid "double taxing" for investment distributions.
The return that an asset achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the asset and the return achieved by the benchmark.
Relative returns are most often used when reviewing the performance of a mutual fund manager. Because holders of mutual funds are charged management fees, they expect a manager to achieve returns higher than the benchmark index. For example, if the fund you are holding achieves an absolute return of 12% over the past year while the benchmark index provides a return of 15%, then the fund has achieved a relative return of -3% for the year.
A right that allows a shareholder to receive reduced sales charges when the amount of mutual funds purchased, plus the amount already held, equals an ROA breakpoint. In addition, there is no time limit on how long the mutual fund needs to be held to qualify for a ROA.
For example: You wish to buy $2,000 of Fund ABC with a sales charge of 5.50% to add to your existing $19,000 of the same fund in your account. Given that Fund ABC is linked to an ROA and that the breakpoint is $20,000, you would qualify for a reduced sales charge (i.e. 5.25%). Also, the entire purchase ($2,000) would qualify for the reduced sales charge and not just the amount in excess of $20,000.
A measure of how much risk a fund or portfolio takes on to earn its returns, usually expressed as a number or a rating.
This is often represented by the Sharpe ratio. The more return per unit of risk, the better.
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