Glossary

A

Alpha

Alpha measures the difference between a fund's actual returns and its expected returns given its risk level as measured by its beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager.

Annualised Performance

The percentage increase or decrease of a portfolio's share price or NAV over a given time period, with net income (dividends) reinvested. Annualised means the figure shown represents the average amount at which capital has compounded each year for the relevant period. The fund's performance is usually benchmarked against either a relevant index or sector.

Asset Allocation

Describes the composition of a fund’s or an individual’s portfolio. For equity funds, this would include a geographic and industry breakdown. For bond fund, it will show net currency exposure of the fund and the split between government, corporate and other fixed-income securities.

Average duration

An estimate of how much a bond fund’s share price will fluctuate in response to a change in interest rates. To see how the price could shift, multiply the fund’s duration by the change in rates. If interest rates rise by one percentage point, the share price of a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the fund’s share price would rise by 5%.

Average maturity

A weighted average of all the maturities of the bonds in a portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security.

Average weighted coupon

The average interest rate paid on the bonds held by a fund. It is expressed as a percentage of the stated maturity value of its bonds.

B

Base Currency

The currency in which a fund is denominated: funds within the Franklin Templeton Investment Funds may be denomited in US dollars or Euro. The base currency does not imply that all, the majority or any of the securities held in the portfolio are denominated in that currency. Rather, it is the measuring rod used to calculate the value of these portfolios. Please refer to the prospectus for specific information. Transactions into the Franklin Templeton Investment Funds can be made in any major currency, irrespective of the fund's base currency.

Benchmark

An unmanaged group of securities whose overall performance is used as a standard to measure investment performance.

Benchmark Indices

The performance of a fund is commonly measured against a benchmark index, which is unmanaged and approximates the average performance of the universe of securities in which the fund can invest.

Beta

A measure of the magnitude of a portfolio’s past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a portfolio with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%.

Bond

A long-term debt security, or IOU, issued by a government or corporation, that generally pays a stated rate of interest and intends to return the face value on the maturity date.

C

Cashflow

In accounting, cash flow represents the amount of cash earned during a period. It is calculated by adding net income after taxes to non-cash charges such as depreciation, amortization and extraordinary charges to reserves. It is sometimes used as an indicator of the likelihood that a company will pay dividends.

Chapter 11

Is a chapter of the United States Bankruptcy Code, which permits activity while reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.

Credit quality

A measure of a bond issuer’s ability to repay interest and principal in a timely manner.

Cumulative Performance

The percentage increase or decrease of a portfolio's share price or NAV over a given time period, with net income (dividends) reinvested. The fund's performance is usually benchmarked against either a relevant index or sector.

D

Debt Securities

A general term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, T-bills and money market instruments are debt securities, but they vary in maturities.

Debt to capital

Indicates the percentage that debt comprises of total capital; calculated by dividing each underlying fund holding's total debt by total capital. A large debt/capital ratio indicates that a company is highly leveraged.

Discrete Annual Performance

The percentage increase or decrease of a portfolio's share price or NAV over a complete 12 month period, with net income (dividends) reinvested. The fund's performance is usually benchmarked against either a relevant index or sector.

Diversification

The strategy of investing in different asset classes and among the securities of many issuers in an attempt to lower overall investment risk.

Dividend

An income distribution to shareholders that generally comes from the net income of the fund. A change in the dividend rate or amount does not affect the fund's share price.

Dollar Cost Averaging

An investment strategy based on investing equal amounts in a fund at regular intervals. Because more shares are bought when prices are low and fewer shares when prices are high, the average cost of your shares may be lower than the average price over the period you bought them. Dollar cost averaging cannot guarantee a profit or protect against loss in declining markets.

Duration

A measure of the sensitivity of bond and bond mutual fund prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.

E

Earnings growth

The average annual rate of growth in earnings over an indicated period of years for the stocks now in a fund.

Emerging Markets Countries

Generally considered countries of low to middle income, as defined by the World Bank. This group currently consists of more than 100 countries and nearly 85% of the world’s population. These countries include much of Southeast Asia, the Indian sub-continent, all of Africa and Latin America, Eastern Europe and the former Soviet Union, as well as parts of Southern Europe.

Emerging markets fund

A mutual fund that invests primarily in countries with developing economies (that is, those that are becoming industrialised). Emerging markets funds tend to be more volatile than domestic stock funds due to currency fluctuation and political instability. Consequently, fund prices can fluctuate dramatically.

Equity

A type of security representing part ownership in a company or corporation. Common stocks, preferred stock, and convertible stock are types of equity securities.

Equivalent Rating

The rating employed by such other Rating Agency which is equivalent to the relevant rating by S&P or Moody's.

Ex-Dividend

Literally means that purchasers at that time will not have the right to the next dividend. Shares are ex-dividend in the interval between the announcement and the payment of a dividend. A fund that has gone ex-dividend is normally marked with an “x” in the newspaper listings.

Expense ratio

The percentage of a portfolio's average net assets used to pay its annual expenses.

G

G7

Group of Seven - France, the United States of America, the United Kingdom, Germany, Japan, Italy and Canada

Growth and income fund

A mutual fund that seeks long-term growth of capital and current dividend income from stocks.

Growth Funds

A mutual fund that emphasises stocks of companies believed to offer above-average prospects for capital growth due to their strong earnings and revenue potential. Growth stocks tend to offer relatively low dividend yields, because these companies prefer to reinvest earnings in the company.

I

Income fund

A mutual fund that seeks current income rather than growth of capital. Income funds typically invest in bonds and/or high-yielding stocks.

Income risk

The possibility that a portfolio's dividends will decline as a result of falling interest rates. Income risk is generally greatest for money market instruments and short-term bonds, and least for long-term bonds.

Index

Index. See benchmark.

Index fund

A passively managed mutual fund that seeks to parallel the performance of a particular market index.

Indexing

A low-cost investment strategy that seeks to match, rather than outperform, the return and risk characteristics of an index, by holding all securities that make up the index or a statistically representative sample of the index. Also known as passive management.

Inflation

A general rise in the prices of goods and services.

Inflation risk

The possibility that increases in the cost of living will reduce or eliminate the returns on a particular investment.

Information ratio

In investing terminology, the ratio of expected return to risk. Usually, this statistical technique is used to measure a manager's performance against a benchmark. This measure explicitly relates the degree by which an Investment has beaten the Benchmark to the consistency by which the Investment has beaten the Benchmark.

Interest rate

The amount charged for borrowing money.

L

Latin America

The countries of Central and South America (including Mexico, but excluding the Caribbean countries).

M

Market capitalisation

A determination of a company's value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Also called capitalisation. Typical Market cap breakdown: large-cap (over $12 billion), medium-cap (under $12 billion; over $1 billion), small-cap (under $1 billion).

Market risk

The possibility that stock or bond prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Maturity / maturity date

The date when the issuer of a money market instrument or bond agrees to repay the principal, or face value, to the buyer.

MSCI World Index

An index, weighted by market size, that approximates the performance of the world’s stock markets. This index is unmanaged and is used as the benchmark for a number of the funds because it represents the universe of securities from which our analysts can choose. It should be stressed that Franklin Templeton Investments picks stocks based on value and not index weightings, thus the composition of our funds may not mirror that of the MSCI World Index.

N

Net Asset Value (NAV)

The share price at which the fund is bought and sold after deducting any sales or redemption charges. The NAV is calculated each day by adding the closing market value of all securities owned by the fund, plus all other assets, and deducting the fund's liabilities. This sum is then divided by the fund's total number of shares outstanding.

O

Out of the money (OTM)

Qualifies an option that would be worthless if it expired today. It happens for a call option, when the strike price is higher than the market price of the underlying asset, and for a put option, when the strike price is below the market price of the underlying asset.

P

Passive management

See indexing.

Portfolio

The securities of a fund.

Price-to-book ratio

The price per share of a stock divided by its book value (i.e., net worth) per share. For a portfolio, the ratio is the weighted average price/book ratio of the stocks it holds.

Price/cash flow

Supplements price/earnings ratio as a measure of relative value; represents a weighted average of the price/cash flow ratios for the underlying fund holdings.

Price/Earnings Ratio (P/E)

One of the benchmarks used by portfolio managers to help them value companies. It is calculated by dividing a company's share price by its earnings per share.

Prospectus

A legal document that gives prospective investors information about an investment, including discussions of its investment objectives and policies, risks, costs, and past performance. A prospectus must be provided to a potential investor before he/she can invest in a specific fund.

Put option

Gives the bond holder the right to sell the bond back to the issuer for early redemption. Callable and puttable bonds will be covered in more detail later in the tutorial.

R

Record Date

The date on which a shareholder must officially own shares in order to receive the dividend. (See also “Ex-dividend”).

Return on assets

Measures profitability by reporting the percentage earned on assets; calculated by dividing 12 months of net income by total assets.

Return on equity

An amount, expressed as a percentage, earned on a company's common stock investment for a specific time frame. This figure tells shareholders how effectively their money is being utilised.

Risk tolerance

An investor's ability or willingness to endure declines in the prices of investments while waiting for them to increase in value.

R-squared

A measure of how much of a portfolio’s performance can be explained by the returns from the overall market (or a benchmark index). If a portfolio’s total return precisely matched that of the overall market or benchmark, it’s R-squared would be 1.00. If a portfolio’s return bore no relationship to the market’s returns, its R-squared would be 0.

S

S&P 500 Index (Standard & Poor's 500 Index)

An index of many of the 500 largest capitalised stocks in the United States that is widely recognised as a guide to the overall health of the U.S. stock market.

Sector

A group of companies, often related to a particular industry that have certain shared characteristics.

Securities

Stocks, bonds, money market instruments, and other investment vehicles.

Sharpe ratio

A measure of risk-adjusted return. To calculate a Sharpe ratio, an asset's excess returns (its return in excess of the return generated by risk-free assets such as Treasury bills) are divided by the asset's standard deviation.

SICAV

Acronym for the legal structure of a “Société d’investissement à capital variable”. Translated into English, it means open-end investment company. Because Sicavs generally hold a range of sub-funds, in English they are sometimes called umbrella funds.

Sovereign Debt

A debt obligation of any government, including political sub-divisions, local authorities, government agencies, government-owned, controlled, sponsored or guaranteed corporations and supra-nationals.

Standard deviation

A measure of the degree to which a fund's return varies from its previous returns or from the average of all similar funds. The larger the standard deviation, the greater the likelihood (and risk) that a security's performance will fluctuate from the average return.

Stock/common stock

A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits, some of which could be paid out as dividends.

T

Top Down/Bottom Up Investing

The top-down style of investment management places primary importance on country or regional allocation, and bottom-up concentrates primarily on individual stock selection. Top-down managers generally focus on global economic and political trends in selecting the countries or regions where they expect to find investment opportunities. Only then do they employ a more fundamental analysis of individual stocks in order to make their final selections. Bottom-up managers usually begin their search with fundamental analysis, in order to find companies whose current prices may fail to reflect their potential longer-term value.

Tracking Error

Measure of the deviation of the return of a fund compared to the return of a benchmark over a fixed period of time. Expressed as a percentage. The more passively the investment fund is managed, the smaller the tracking error.

U

Umbrella Fund

Term used by the practise to describe a collective investment fund, like Frankin Templeton Investment Funds, which offers a number of sub-funds as part of an overall fund, as well as liberal privileges for exchanges among the sub-funds.

Utilities

Basic services provided by utility companies such as heat, light, power, water and communications.

V

Volatility

The degree of fluctuation in the value of a security, mutual fund, or index, volatility is often expressed as a mathematical measure such as a standard deviation or beta. The greater a fund's volatility, the wider the fluctuations between its high and low prices.

Y

Yield

A snapshot of interest and dividend income from a fund. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualised for the coming year.

Yield (Distribution)

For a fixed income fund, this reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the midmarket unit price of the fund. It does not include any preliminary charge and investors may be subject to tax on distributions.

Yield (Historical)

For an equity fund, this reflects the amounts that may be expected to be distributed over the next 12 months as a percentage of the midmarket unit price of the fund. It does not include any preliminary charge and investors may be subject to tax on distributions.

Yield to call

The rate of return an investor would receive if the securities held by a portfolio were held until their call dates. This yield is valid only if the securities are called prior to maturity.

Yield to maturity

The rate of return an investor would receive if the securities held by a portfolio were held to their maturity dates.

Yield to worst

The bond yield computed by using the lower of either the yield to maturity or the yield to call on every bond.