Asset allocation is a process leading to the decision of how to break down the different financial activities categories (including equity, bonds, cash) and real assets (including properties, goods, precious metal). Asset allocation choices are determined by the need to optimise the risk/return ratio depending on the time span and the client's expectations.
Shares are titles representing the capital of a company. Ordinary shares: titles representing a share of the capital granting the voting right during the shareholders' meetings and entitling to dividends. They do not grant any privilege to its holders in case of bankruptcy of the company. They are a form of risky investment whose value depends on the trends and the strategic choices made by the company. Preferred stock: preferred stock is made up of special equity as compared to ordinary shares in terms of dividend payment and capital refund at the winding-up of the company. Preferred stock grants the right to a specific share of the net income before the dividends for Ordinary Shares are agreed. It does not entitle to voting rights during the shareholders' meetings. Savings shares: savings shares do not entitle to voting rights and may be issued only by listed companies. They may be registered or bearer shares.
A benchmark, or reference parameter, is commonly used to compare the performance of a mutual fund, based on indexes designed by third parties and commonly used. The benchmark, which in Italy is a mandatory information that must be provided in the information sheet, serves the purpose of allowing the investor to easily assess the reference market - hence the potential risk/return level - in which the fund operates; moreover, it provides an indication as to the added value in terms of management extra performance. The most commonly used benchmarks are the major stock exchange indexes, such as Mibtel, MSCI Europe or Dow Jones Industrials.
A mutual fund is a way to invest one's own savings; according to it a given amount is trusted to a Savings Management Company (SGR) that is legally authorised to provide professional stock brokerage services. It is referred to as "mutual" because it is formed by many savers who invest in the fund, in which the collected assets must be invested. The participation to a fund takes place by means of shares, and the gains are split accordingly. Purchasing shares in a mutual fund incurs the payment of a range of commissions (entry fee, management fee, exit fee, etc.).
Established by Legislative Decree no. 124 of April 21, 1993, these instruments allow to build a complementary pension income (the so-called 'second' or 'third pillar'), to integrate the income guaranteed by mandatory social security systems ('first pillar'). Their operation is best explained in two different moments: first, the so-called "collection" phase, whereby the pension fund receives the contributions paid by the worker participating and the employer, as well as the yearly severance provision share. The amount collected by the worker is used for the following phase, commonly named "income" phase. In this phase the worker is paid a periodical pension income proportionally to the contribution paid beforehand.
Management type usually referred to a fund whose manager chooses, to its discretion and based on its personal evaluation, what instruments to buy or sell, without being guided in this by the reference index (Benchmark). The manager tries to outperform the benchmark by weighting the portfolio and depending on the expectations, by privileging certain stocks rather than others (stock picking).
Flexible management is a management method that does not refer to a market benchmark. The manager is unrestrained in terms of investment decisions, since its goal is to achieve a positive result (total return) regardless of market trends. Usually flexible management sets a return goal in that it should overcome a "risk-free" return and provides for a maximum volatility level (portfolio risk statistical measurement) within which the manager intends to operate.
A fund manager is responsible for the fund asset allocation according to the corporate strategies and the declared investment policy. The activity is divided into three phases: asset allocation, that is, the distribution of the resources among the different financial instruments, the decision regarding the time to change the portfolio (market timing) and the selection of single stocks (stock picking).
Bonds are financial instruments for States and companies. They represent debt capital, as opposed to equity, which is risk capital. In other words, the holder of a bond is entitled to a remuneration for the invested capital (interest), while the remuneration of shareholders depends on the ability of the company to generate income. During the life of a bond its holder receives the regular payment of interests accrued according to the nominal rate, while at the expiry the holder will be returned the invested capital. There are a few exceptions, such as Zero coupon bonds or ZCB, thus called because they do not include the payment of interest but a discount on the issue price.
INVESTMENT ORGANISMS OF COLLECTIVE SAVINGS (OICR)
OICR (Investment organisms of collective savings) means all mutual funds held by SICAV. These are institutional investors who deal with collective asset management.
A portfolio is made up by a number of shares, bonds and investment instruments, such as a mutual fund. A fund's portfolio usually refers to the instruments it invests in, while regarding savers and investors it refers to the instruments on which the assets have been allocated. Capital investment plans are single-solution fund subscription method whereby the payment is made in a single solution, as opposed to the PAC (Savings Plan).
A written document that must be prepared and handed to the investor at the time of purchasing a fund. It is divided in two parts. The first describes the investment policy, the risks and provides economic information and details, such as costs, tax breaks and tax rates; the second part reports the historical risk/return data and the costs of the fund. Many companies have their information sheet freely available in their web pages.
It is the set of all norms that regulate the activities of a fund and make it different from any other. It must be approved by Banca d'Italia. Together with the information sheet, when subscribing to a fund the investor must also be given the management regulations, being the text of the Agreement entered into with the company containing binding provisions for both Parties.
ASSET UNDER MANAGEMENT
The asset management industry may be construed as the combination of the people and organisations that generate savings (savers) and the companies that manage the collected assets (asset management companies and other intermediaries). The Single Law containing the provisions on Financial Advisory authorises Savings Management Companies (SGR), Stock brokerage companies (SIM) and banks to manage the assets. The duly performance of the operations is supervised by supervisory bodies having legal competence on such matters.
Savings Management Company (SGR). Sgr are limited companies with legal headquarters in Italy and authorised to provide collective savings management services. To summarise, the Sgr manages the fund assets, choosing which stock to buy or sell, the liquidity investment, the portfolio structure and the investment allocation between risky and risk-free activities. Besides collective management, they may also provide individual management services (asset management). In order to provide their services, SGRs must be authorised by Banca d'Italia, having heard Consob's opinion.
Variable capital investment companies (SICAV) are limited companies with capital varying depending of the subscriptions and refunds, thus called variable. The company capital, then, is not only the rated value on paper, but it amounts to the net equity of the very company. Their purpose is to invest the collective asset collected by offering the public their share, whose value amounts to the net equity divided by the number of shares issued. The difference with mutual funds is the fact that the saver, by purchasing shares instead of quotas, is entitled to voting right and may directly influence the company management. Moreover, in SICAV the fund and the manager coincide, Such managers were introduced in our legislation in 1992. In order to operate they must be duly authorised by Banca d'Italia and have a minimum capital of one million Euros. The supervisory role is held by Banca d'Italia and Consob.
Unit-linked are insurance policies whose return are linked with the trend of some related investment funds. The policy may include a guaranteed capital of minimum returns.
Volatility is the variation detected in the price of a share, generally measured by means of standard deviation.