Glossary of terms

The valuation time is the time of day at which units or shares in a fund are priced.

Dealing is the process of buying and selling investments - such as shares in a company or OEIC, units in a unit trust, bonds etc.

The dealing currency is the currency in which shares or units are bought or sold - this does not have to be the same as the denomination currency of the investment, but this will usually be the case.

A business day which does not fall within a period of suspension of calculation of the net asset value per share or unit of the relevant fund.

Default risk is the risk that a bond issuer may not be able to meet its contractual obligation to investors and will default (ie- not pay) interest payments due on a bond issued by the issuer.

In an OEIC fund, the Depositary oversees the actions of the fund manager on behalf of shareholders (investors). It ensures the fund manager adheres to the investment restrictions of both the OEIC and the regulations of the relevant regulatory body. The Depositary fulfills the same role as the Trustee for unit trusts.

In simple terms, a depository is used to refer to any place where something is deposited for storage or security purposes. In investment terms, it refers to an institution that holds and facilitates the exchange of securities (for example, shares and bonds). Central security depositories allow brokers and other financial companies, such as fund managers, to deposit securities where book entry and other services can be performed, like clearance, settlement and securities borrowing and lending.

Derivatives are financial instruments whose value is derived from that of another investment. The term applies to products such as futures, options and warrants. Derivatives can be used for investment reasons (ie- to try to make money) or to limit risk, reduce costs and/or generate additional income. Investing in derivatives also carries risks, however. In the case of a ‘short’ position, for example, where the fund aims to profit from falling prices, if the price of the underlying asset rises in value, the fund will lose money.

Diluted NAV refers to a reduction in the net asset value of a fund due to the issuance of new units or shares.

A dilution adjustment is a mechanism that permits a fund manager to make an adjustment to the mid price (ie- the buying and selling price of a fund's units/shares). This is to avoid existing investors being adversely affected if a fund has to buy or sell assets in response to large purchases or sales, because the fund (rather than the incoming or outgoing investors) pays the costs of buying or selling those assets, an effect known as 'dilution'.

A director is a person or corporate entity appointed by the company members to run the company on their behalf. In the UK, companies must have at least one natural person director who is as at least 16 years of age.

The discount/premium to diluted NAV (net asset value) is the difference between the underlying value of a fund and the fund's unit or share price. Also see 'diluted net asset value'.

The discount/premium to share price is the difference between the share price and the underlying value of an investment trust.

Distribution refers to income paid out (distributed) to investors in a fund.

Funds may issue two types of units or shares to investors in a fund. Distribution units/shares (sometimes called 'income' units/shares) are those where income will be paid to investors on set dates relating to the financial year of the fund. Conversely, accumulation units/shares are those where income is not distributed but is instead automatically retained and reinvested. Also see 'accumulation units or shares'.

A yield is the calculation of the income return on an investment relative to its price. It is the amount of income paid by an investment, divided by the current price of that investment, expressed as a percentage of that price. Some funds offer investors the choice of withdrawing this amount (a 'distribution yield'). Calculation yields enable comparisons to be made of the level of income provided by different investment such as shares, bonds, cash or property, or between funds at any one point in time.

If assets are diversified, they are spread amongst a range of types of investment. This can reduce the risk of loss through exposure to only one individual asset, type of asset or sector.

A dividend is the amount, usually expressed on a per-share basis, that a company pays to its shareholders (or that a fund pays to its investors) from after-tax earnings.

When any income received from an investment in the form of a dividend is not distributed to investors but is instead used to buy additional units or shares in the same investment, it is referred to as dividend reinvestment.

Dividend yield is the annual dividend paid by a company or fund on a per-share basis, divided by the current share price, and expressed as a percentage.

Domicile is the location of a fund (or a company) for legal purposes.

‘Duration’ is the term used to express the sensitivity of the price of a bond to a change in interest rates. It is expressed as a number of years. The longer the duration, the more sensitive it is. This reflects the fact that when interest rates rise, bond prices fall – and vice versa. There are different ways to calculate duration. Simple duration relies on a number of assumptions, in particular that all bonds are equally sensitive to government bond yields. In practice, this is not the case as high-yield bonds are less correlated to the yield on government bonds compared to investment-grade bonds. In some cases, they are negatively correlated (that is to say, they could increase in value as interest rates rise). Furthermore, this assumes that government bond yields will move in tandem with interest rates. But most high-yield bonds, for example, are much less correlated.