Making Sense of Offshore Funds

In my previous articles, I have covered the Financial Planning Process, basic concepts and products and latterly lower risk investments bearing in mind the markets this year. This month I'd like to actually explain the jargon that is often used in the trade press in order to give investors a better understanding of "What it all means."

The confusion caused by the use of investment jargon is often compounded by expatriates' polyglot origins and the use of different terms in our home markets. This short glossary covers many of the terms you are likely to encounter in the investment press or when discussing financial planning with your adviser.

Back-end load
Also called redemption fee or exit fee, this is a charge levied for cashing in your investment. This often reduces to zero over a number of years.

Basis Point
One percent of one percent i.e. 100 basis points make up 1%.

Bid/offer spread
This is the difference between the price at which a fund's units or shares are offered for sale to investors (offer price) and the price at which the fund management company will buy a fund's units or shares from investors (bid price).

Closed-end funds
These are funds where the number of shares in issue does not vary. Variations in demand for the fund are reflected in the price of the shares which, after the initial offer period, can only be bought or sold if a buyer or seller is available.

Front load
Also called initial charge, sales charge or bid/offer spread, this is the fee you pay to get into a fund. In most cases the front load is a percentage of your initial investment. A portion of this fee is usually paid as commission to your financial adviser or to the sales agent involved in the transaction.

Index Tracker A fund designed to match or 'track' the performance of a particular stock market index.

Initial Unit
A type of unit allocated in the early months/years of a life insurance savings plan differentiated from accumulation units by higher charges and early encashment penalties.

Insurance Bond
A single premium life insurance policy, enabling convenient access to offshore funds - not to be confused with government bonds or corporate debt. More expensive than investing directly in funds but offering some tax benefits.

Management fee
This is the annual fee charged by the fund management company for managing a fund. It can range from 50 basis points or less for a money market or bond fund to 150 basis points for an equity fund.

Mutual Fund
International term for an open ended collective investment similar to a unit trust.

Mirror Fund
A fund run by a life insurance company enabling an investor to access another company's fund through their life insurance policies. Normally includes an extra layer of charges.

Net Asset Value
The sum of a fund's assets less its liabilities. 'NAV' often approximates to the 'bid' price of a unit.

No-Load Fund
A fund which doesn't impose a sales charge or redemption fee.

Open-ended fund
These are funds where units or shares can be bought and sold daily and where the number of units or shares in issue can therefore vary daily. Sicav, OEICs, unit trusts and mutual funds are examples of open-ended funds.

Sicav
Stands for Société d'investissement à capitale variable. Sicav are structured as companies and are a common fund structure in Luxembourg.

Switching fee
This is the fee charged to move your investment from one fund to another. If you are investing in an umbrella fund and anticipate moving among sub-funds, it is important to check if there is a switching fee. Most savings plans have a number of free switches each year.

UCITS This is an acronym formed from Undertakings for Collective Investment in Transferable Securities. This was a term coined by the EU when drafting a pan-European investment fund directive. The UCITS Directive lays out certain minimum requirements for funds, prohibiting investment in certain types of riskier assets and setting out maximum levels of investment in the paper of one issuer for example.

Unit Trust
Your money is invested with thousands of others in one pooled fund. Presiding over the fund is a manager or managers responsible for achieving the fund's stated investment objective. The fund is divided into 'units'. The value of each unit is an equal share of the fund value or 'Net Asset Value'.

Your financial adviser should have all this information, and more, at his fingertips. Remember the golden rule and if in doubt, take a second opinion.

As this is last article before Christmas, my I take this opportunity of wishing all GH readers a very Happy Christmas and New Year and hope that 2002 will bring a greater peace to the world.

Ivan Doherty
ipd@ifg-asia.com

Ivan Dohety MLIA (dip) is Chief Operating Officer of IFG Asia. Part of The IFG Group PLC and registered with the Ministry of Finance in Japan to give investment advice.

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