Glossary of financial terms    

Annual Compound Return – The annual compound (ACR) return is the return that if compounded over the life of the fund would lead to the total return of the fund. For example, if a fund has a 10 year total return equaling 100%, the annual compound return would be 7.18%.

Alpha - Alpha is the measure of a fund's average performance independent of the market, (i.e. if the market return was zero.) In a Regression of fund excess returns versus benchmark excess returns, Alpha measures the consistent element (positive or negative) of fund excess returns not related to the benchmark or random factors. For example, if a fund has an alpha of 2.0, and the market return was 0% for a given month, then the fund would, on average, return 2% for the month.

Asset - An asset is anything that is considered as having a positive monetary value.
Assets include holdings of obvious market value (cash, equities, property), harder-to-measure value (equipment & stock), and other quantities (pre-paid expenses, goodwill) considered assets by accounting conventions but possibly having no market value at all.

Asset Allocation is the process of selecting a mixture of different asset classes - equities, bonds and cash investments to achieve an investment objective. It is a critical part of investing. A wise asset allocation strategy is the difference between a structured investment approach and a simple collection of investments.

Average Annual Return or Average Rolling 12 Month Return ­ The average of the rolling 12 month performance periods i.e. If a fund launches in January 1997, and it is currently March 1998, then there are four rolling 12 month periods for the fund. (The first is January 1997-December 1997, the next is February 1997-January 1998, the next is March 1997-February 1998, and the last is April 1997 - March 1998.). The average annual return is the average of the four rolling 12 month periods.

Average Gain – The average of all profitable months in a given period. The Average Gain is used as the numerator when calculating the Relative strength Index.

Average Loss - The average of all negative months in a given period. The Average Loss is used as the denominator when calculating Relative Strength Index.

Average Return - The average of all the monthly performance returns in a given period. Average Return is commonly used as a component in some Risk/Return measures.

Average Number of Positions - The number of securities that a fund holds on any given day.

Average Portfolio Turnover - The percentage of a portfolio that is bought and sold each year.

Balanced funds - Theseinvest in a mix of equities and bonds & cash. In general balanced funds provide a reasonable level of income with the scope for an increase in both the capital and the income.

Benchmark - A fund’s benchmark should be a reasonable proxy for the investment universe available to the fund manager. Total return indices are preferable as are those that use a suitably weighted index of the universe of assets from which the fund manager can select. In practice an index exactly reflecting the fund asset universe may not be available in which case the benchmark shoukd be a close proxy.
Beta. Beta is the measure of a fund's volatility relative to the market. In a Regression Analysis Beta is the slope of the regression line. In a regression of fund versus benchmark excess returns Beta measures the tendency of the fund excess returns to move in line with the benchmark. A beta of greater than 1.0 indicates that the fund is more volatile than the market, and less than 1.0 is less volatile than the market. For example, if the market rises 1% and a fund has a beta greater than 2.5, the fund will rise, on average, 2.5%. For a fund with a beta of 0.4, if the market rises 1%, the fund will rise on average, 0.4%. The relationship is the same in a falling market. (Please note that funds can have a negative beta, meaning that on average they rise when the market falls and vice versa).

Bid Price - The price at which investors sell their units back to the manager.

Bond funds - These hold only bonds and cash. As with equity funds, they can be designed to purchase particular grades of bonds. When considering investing in a bond fund an investor should pay particular attention to the investment grade and the duration of the holdings of the fund.

Calmar Ratio - A return/risk ratio. Return (numerator) is defined as the Compound Annualized Rate of Return over the last 3 years. Risk (denominator) is defined as the Maximum Drawdown over the last 3 years.

Capital Asset Pricing Model (CAPM) - This is a method suitable for the management of diversified portfolios where the only risk is systematic risk.

Components of Risk - A fund’s total risk, where risk is measured by volatility, can be analysed into two components, called specific and non-specific risk. The non-specific risk is the benchmark-correlated component and is typically measures by Beta.

Corporate Bonds - These are bonds issued by companies. The amount of interest they pay, the coupon rate, is generally higher than bonds of similar duration issued by the governement because the risk of default is higher. Independent companies such as Standard & Poor’s and Moody’s issue credit ratings for Corporate Bonds to allow investors to have a clearer perception of quality.

Correlation - This is a measure of the extent to which a change in one variable tends to correspond to a change in another. Correlation is measured on a scale from +1 to –1. A correlation of +1 represent perfect unison, with up and down movements synchronsied and in proportion. Correlation of zero represents complete independence, with up and down movements of one varialble having no relation to those of the other. Correlation of –1 represents perfect unisoon but this time with the two moving in the opposite direction.

Distributor status - An offshore fund which pays out most of its net income to investors (at least 85% after charges and other expenses). Funds whose gross income is minimal (less than 1% of assets) are also granted distributor status. Any gain made on the sale of the investment will be subject to the normal Capital Gains Tax rules. The fund must have held distributor status for the full term of the investment to obtain this tax treatment.

Diversification - A well-diversified portfolio will have assets placed in investment classes that cover a wide range of the risk/return spectrum. Examples of some investment vehicles include equities, bonds, mutual funds (which can comprise equities, bonds, or a combination of both), certificates of deposit (CDs), savings, and money market accounts. Each investment class tends to react differently to changes in financial markets and to the economy as a whole. Thus, by diversifying your portfolio, risk is spread over a broader range of investments, potentially minimizing the impact of downturns in the economy or a particular market sector.

Downside Deviation - This is a measure of the deviation of fund or benchmark returns that fall below the Minimum Acceptable Return (MAR). It is calculated by taking root mean square of the negative differences. Downside Deviation is an alternative measure of risk that focuses on the downside only. Semi-variance is a special case of Downside Deviation where MAR for each period is the risk-free rate of return plus the mean excess return.

Drawdown is the percentage loss in value of a fund or benchmark from previous high point.

Efficiency is a description of the trade-off between risk & return. There are a number of different rations used to describe efficiency including Sharpe ratio, Treynor Ratio, Jensen Alpha, Risk adjusted performance (RAP), M-squared, Information ratio and Sortino ratio. Each of these ratios seeks to provide a measure of return-per-unit-of-risk.

Efficiency chart is a chart which plots mean return versus risk. Points can be plotted on the chart for one or more funds, the benchmark & the risk-free rate. The Efficiency line is a straight line drawn through the risk-free and benchmark points. The main difference between different types of Efficiency chart is the risk measure used.

Efficient Frontier - If you have data for a collection of funds and you graph the return rates and standard deviations for these funds, and for all portfolios you can get by allocating among them. Markowitz showed that you get a region bounded by an upward-sloping curve, which he called the efficient frontier. Any point on this line has the optimum return for a given level of risk.

Equites - The term for company shares The share capital forms the basis of the equity of the company.

Equity funds buy equities. Their investment objective is usually specific to a certain equity type -- small cap, large cap, international, etc. In general they will have more than 80% of their assets invested in equities.

Excess Return is the return in excess of the risk free return. Note that the risk-free rate of return is not a constant but changes each period.

Growth Manager. A growth manager buys stocks whose growth rates in sales have been, or are expected to be, greater than most companies. New technology, a proprietary product or being well positioned within a growth industry, can all contribute to a company's accelerated growth rate. Growth portfolios generally contain stocks whose earnings growth and return on equity are greater than the FT All Share.

Hedge Funds. Hedge funds are eclectic investment pools, typically organized as private partnerships and often located offshore for tax and regulatory reasons. Their managers--who are paid on a fee-for-performance basis. They are free to use a variety of investment techniques, including short positions and gearing, to raise returns and cushion risk. Three main classes of hedge funds can be identified:

• macro funds, which take large directional (unhedged) positions in national markets based on top-down analysis of macroeconomic and financial conditions, including the current account, the inflation rate, and the real exchange rate;
• global funds, which also take positions worldwide, but employ bottom-up analysis, picking stocks on the basis of individual companies' prospects; and
• relative value funds, which take bets on the relative prices of closely related securities (treasury bills and bonds, for example).

Within these categories, there is further diversity. Although most macro hedge funds take positions mainly in mature markets, some also take positions in emerging markets. A number of the largest macro funds do both and spread their holdings across equities, bonds, and currencies (taking both short and long positions), and in addition hold commodities and other less liquid assets such as real estate. But the majority of macro funds hold a more limited range of assets, typically allocating only a fraction of their portfolios to emerging markets, where risks of concentrated stakes and costs of establishing and liquidating large positions can be high. Most relative value funds similarly limit their holdings to the mature markets, because their expertise is limited to those markets.

High Water Mark is used to mark a point above which performance related fees are paid to an investment manager. Use of High Water Marks has become standard in the Hedge Fund industry. High water marks are not mandatory.

Highest 12 Month Return - The best or highest 12 month period of a fund's performance The best or highest 12 month period of a fund's performance

Highest Monthly Return - The best or highest monthly return of the fund. The best or highest monthly return of the fund.

High Yield Debt Market Risk. The market for high yield debt depends on the above-average risk that a company rated non-investment grade will not be able to serve its debt obligations in a timely manner. High yield bonds therefore expose investors to a higher probability of default than other fixed income instruments.

Holding Period Return is the return for a stated period for which an investment is held. The Holding Period Return = (sale price + dividends or interest - purchase price) / purchase price.

Hurdle Rate is the return above which a hedge fund manager begins taking incentive fees. For example, if a fund has a hurdle rate of 10%, and the fund returns 25% for the year, the fund will only take incentive fees on the 15% return above the hurdle rate.

Incentive Fee - The fee on new profits earned by a fund for a period. For example, if an initial investment of £1,000,000 returned 25% during the period (creating profits of £250,000) and the fund has an incentive fee of 20%, then the fund receives 20% of the 3250,000 in profits, or £50,000.

Index Tracker is a fund whose aim is to track a specified benchmark. There are various tracking techniques including replication, stratification, optimisation and derivative-based strategies.

Information Ratio - The Information Ratio for a fund relative to a benchmark is it’s Alpha divided by it’s Tracking Error.

Investment Objective of a fund is designed to give investors an understanding of the style of a investment management employed and to outline the regions, sectors and asset classes in which a fund invests.

Investment Trusts are similar to unit trusts but are governed by company law. The number of shares in issue is normally fixed and the price varies according to market demand. The underlying value of an Investment Trust is called the Net Asset Value (NAV). When the share price is above the NAV price the trust is said to be trading at a Premium. When the share price is below the NAV price the trust is said to be trading at a Discount. Discounts and Premiums are normally expressed as a percentage of NAV.

Jensen Alpha is the Alpha from regression of fund versus benchmark excess returns. As a performance measure it is similar to Risk Adjusted Performance (RAP) but uses Beta as the measure of risk rather than volatility (or VaR).

Kurtosis is a risk term for describing distributions of standard deviations that are not “normal”.

Leverage is the practice of using borrowings to increase gearing. The amount of leverage/gearing used by a hedge fund is expressed as a percentage of the fund. For example, if the fund has £1,000,000 and borrows another £2,000,000, to bring the total amount invested to £3,000,000, then the leverage/gearing level is 200%.

Lockup - Time period that an investment cannot be redeemed from within a fund.

Longest Losing Streak - The largest number of consecutive months of negative performance.

Management Fee -The fees taken by the manager on the entire asset level of the investments. Normally accrued daily and deducted monthly from the fund.

Maximum Drawdown is the worst period of fund performance for a fund. It is calculated by taking the performance from the high point to the low point in the period.

Maximum Recovery Period is the maximum time period required to recover from a previous Drawdown.

Mean – Arithmetic - The mean usually referred to is the arithmetic mean. It is the sum of a series of n numbers divided by n. A weighted arithmetic mean gives specified weights to each element. Some indices are calculated by weighting components according to their market capitalisation and/or their level of “free-float” of shares.

Mean – Geometric - For a series of n positive numbers, the geometric mean is obtained by multiplying the numbers together and taking the n’th root. The arithmetic mean will always be greater than or equal to the geometric mean.

M-squared is a measure of performance named after Modigliani and Modigliani. It’s a fund’s mean excess return, risk-adjusted to the risk level of the benchmark, less the benchmark’s mean excess return. M-squared and Risk Adjusted Performance are simple measures but RAP risk-adjusts the benchmark to the fund while M-squared risk-adjusts the fund to benchmark.

Median is the most value of the “middle observation” in a series of monthly investment returns.

Minimum Acceptable Rate (MAR) is used in the calculation of Downside Deviation. It represents the return below which an investor considers a loss to have occurred. In calculating Downside Deviation only returns below MAR are counted.
Typical settings for MAR are the risk-free return and zero.

Mode is the most frequent observation in a series of monthly investment returns.

Modern Portfolio Theory (MPT) was introduced by Harry Markowitz with his paper "Portfolio Selection" which appeared in the 1952 Journal of Finance. Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection and corporate finance. MPT is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that level of risk. The conclusion of MPT is that the scientific way to attain a diversified portfolio is by using the Sharpe Ratio to invest in low cost index funds.

Money market funds stick with safe, short-term debt instruments such as commercial paper, banker's acceptances, repurchase agreements and certificates of deposit. Because they have low risk, they typically provide the lowest returns among mutual funds. Their main uses are to park money between investments, hold emergency savings and to save for short-term goals. A small investment in money markets may also reduce some risk in a long-term investment account.

Money-weighted return is a method of calculating returns when there are cash flows during the period. It is the internal rate of return which equates the intermediate cash flows and final portfolio with the initial portfolio. The money- weighted return method assumes that the same return applies over the whole period, unlike the time-weighted method where changes are taken into account. The time-weighted method is preferable but the portfolio values at the time of each cash flow must be known in order to calculate it. Mutual Funds calculate unit prices daily, taking into account sales and repurchases, so it is simple to calculate time-weighted returns for funds. For a portfolio, if the return during the period does not does not fluctuate greatly and the cash flows are not large compared to the size of the portfolio then the difference between the time-weighted and money-weighted returns method should be small.

Net Asset Value (NAV) – The NAV price is calculated by dividing the value of the assets of the fund less the applicable annual charges and fees, by the number of shares in issue. The NAV price is therefore the value per share before any sales charges are added.

Non-Distributor Status - Effectively an offshore fund which accumulates income within the fund and pays no dividends. All gains from this type of fund are taxed as income. This will result in most cases in an investor having to pay more tax than would be required with a Distributor fund.

Normal Distributions are a set of distributions of returns that have the same general shape. They are symmetric with returns more concentrated in the middle than in the tails. Normal distributions are sometimes described as bell shaped. The height of a normal distribution can be specified mathematically in terms of two parameters the mean (m) and the standard deviation (s). Investment managers use a normal distribution when calculating the Value at Risk (VaR).

Offer Price - The price at which investors buy units from the manager. The offer price normally includes any establishment, sales and commission charges.

OEIC - An Open Ended Investment Company does not have a fixed capital. The number of shares or units in issue can be varied according to demand. They are very similar to Unit Trusts but are subject to Company Law not Trusts Law. Units are normally quoted on a single price basis with charges highlighted separately.

Open-Ended Fund - There is no limit to the number of units or shares issued by the fund. Units are created according to the number of units purchased by investors.

Option - The right, but not the obligation, to buy or sell an asset at an agreed price on or before a fixed date and time in the future.

Optimisation - A mathematical process to obtain the optimum asset allocation for a portfolio from a given range of assets. The input variables are normally risk and return.

Overbought/Oversold - Generally associated with the Relative Strength Index. RSI readings below 30 are considered oversold and readings above 70 considered overbought. The choice of overbought and oversold levels is discretionary and much will depend on the individual fund. Generally, a RSI that rises above 30 from oversold levels is bullish and a RSI that falls from overbought levels below 70 is bearish.

Past Performance - The past is not necessarily a guide to the future. This caveat invariably and properly appears when historical investment performance is analysed. An analyst or investor therefore needs a clear view of what he hopes to achieve by historical performance analysis and its limitations.

Percent Long - The percentage of a hedge fund invested in long positions

Percent Short - The percentage of a hedge fund that is sold short.

Period Returns - Period Returns are used to isolate periods of out-performance or under-performance that can be hidden by cumulative returns. Period returns are normally analysed on a rolling monthly or quarterly basis.

Private Equity Market Risk - The market risk for private equity depends to a certain degree on the small cap and high-tech IPO market. A reduction in the IPO market activities limits the exit possibilities in many private equity investments.

Profitable Percentage - The percentage of profitable monthly returns from a fund in a given period.

Redemption- The frequency at which fund redemptions are accepted by the fund. Liquidity risk should be an integral part of any risk assessment.

Regression is a statistical procedure to establish the relationship between two variable, for example fund and benchmark excess returns. Each point is plotted on a graph and a line of best fit is calculated. The slope of the line is called the regression Beta. The intercept with the axis is called the Alpha.

Relative Downside Deviation of a fund compared to a benchmark is the fund Downside Deviation divided by the benchmark Downside Deviation. Relative Downside Deviation of greater than one indicates that the fund is more risky than the benchmark, less than one indicates that it is less risky.

Relative Strength Index was devloped by J. Welles Wilder. The Relative Strength Index (RSI) is a momentum oscillator that moves between 0 and 100. Its name can be confusing because it does not compare the strength of one fund against another. Rather, RSI compares the magnitude of gains against the magnitude of losses. The Relative Strength Index = Average Gain / Average Loss.

Relative Volatility of a fund compared to a benchmark is the fund volatility divided by the benchmark volatility. A fund with a Relative Volatility of greater than one indicates that the fund is more volatile than the benchmark, less than one indicates that it is less volatile.

Reporting Agent - A third party that analyses and verifies the returns of a fund.

Return is the percentage increase in value of an investment for a given period. If X is the starting value and Y is the finishing value the return is 100 x ( Y/X – 1). For the calculation of return where there are cash flows during the period see Time-weight and Money-weighted Return.

Risk denotes the unpredictability of investment returns. The standard measure of risk is volatility, measure by the standard deviation of excess returns. Alternative measures of risk are Value at Risk, Beta, Downside Deviation. Tracking Error is sometimes referred to as a risk measure as it denotes the unpredictability of investment returns around the benchmark.

Risk Adjusted Performance (RAP) of a fund is it’s mean excess return less the mean excess return of the risk-adjusted benchmark. On an Efficiency chart for where risk is measured by volatility or Value at Risk, the RAP I shown by the distance of the fund point above the Efficiency line.

Risk–adjusted Benchmark - A fund is usually somewhat more or less risky than it’s benchmark. The benchmark excess return can be risk-adjusted to any level using a notional combination of benchmark and risk-free assets. For example, a combination of 75% benchmark and 25% risk-free has a risk of 75% of the benchmark. It also has 75% of the benchmark excess return. Combinations that are more risky than the benchmark can be obtained if it is assumed one can borrow at the risk-free rate. The risk/return combinations are shown by the efficiency line on an efficiency chart. When the benchmark has been risk adjusted to the same level of risk as the fund their excess returns can be then properly compared.

Risk Free - The risk-free return is the return that a fund manager could have obtained with certainty by placing funds on deposit. For a sterling-based investor it is normally given by the yield achieved from short term gilts or by the interbank deposit rate for the relevant holding period.

Risk Measure - There a several ways of measuring risk including: beta, standard deviation (volatility), tracking error, semi-variance and downside deviation, Each measure provides a different insight into the dispersion of returns around their mean level.

R Squared - In a regression R-squared measures the proportion of the variance of one variable explained by the variance of the other variable. R-squared is equivalent to the correlation squared. R-squared says nothing about the direction of cause and effect. The industry assumes that an R squared below 0.3 has no correlation to the market.

Semi-Variance is a special case of Downside Deviation where the Minimum Acceptable Return (MAR) for each period is the risk-free rate of return plus the mean excess return.

SICAV. Société d'Investissement à Capital Variable. A french Unit Trust.

Standard Deviation is a common measure of risk (volatility) - It is usually calculated as the Standard Deviation of monthly returns over a 3 year period.

Sharpe Ratio for a fund is the mean excess return dividend by the volatility (measured by standard deviation). On an efficiency chart for which risk is measured by volatility, the Sharpe Ratio is the slope of the line joining the fund point and the risk-free point.

Short selling involves borrowing an equity or other instrument and selling it in anticipation of being able to repurchase it at a lower price in the market, at or before the time when it must be repaid to the lender. Both short selling and leverage are regarded as risky when practiced in isolation.

Short Selling Market Risk - The market risk for short selling is due to the fact that the profit is limited and the loss is unlimited.

Skew is used to describe returns that are not “normal”. Returns with a positive skew are sought by risk averse investors. Reality more often delivers a negative skew.

Sortino Ratio is similar to the Sharpe Ratio, except that instead of using standard deviation as the denominator, it uses Downside Deviation. The Sortino Ratio was developed to differentiate between “good” and “bad” volatility in the Sharpe Ratio. If a fund is volatile on the upside (which is generally a good thing) its Sharpe ratio would still be low. To quote the Sortino web site: “A comparable downside risk ratio that has come to be called the Sortino ratio has for the numerator the difference between the return on the portfolio and the Minimum Acceptable Return (MAR). The denominator for the Sharpe ratio is standard deviation, and for the Sortino ratio it is downside deviation."

Sterling Ratio is similar to the Sharpe Ratio, except that instead of using standard deviation as the denominator, risk is defined as the average yearly maximum drawdown over the last 3 years plus an arbitrary 10%.

Systematic Risk is the potential variability of returns of an investment caused by general market influences such as interest rate, inflation & tax changes. This element of risk cannot be eliminated through diversification.

Time Horizon is the minimum time period which an investor must have in mind when choosing to invest in a particular asset class. For equity based investments the recommended time period is at least 5-7 years.

Time-weighted return is a method of calculating return where there are cash flows during the period. Returns for each sub-period between cash flows are calculated and these are accumulated to obtain the return for the total period. The time-weighted return represents the return for £1 of the portfolio that remains invested from beginning to end. In practice the intermediate portfolio values are not always know in which case the money-weighted return method has to be used.

Time-weighting - In making estimates time-weighting counts recent data more heavily than distant data. Unweighted estimates treat all data equally. By time-weighting the impact of a very good (or a very bad month) reduces gradually over time.

Total Return is measure of performance where both dividends and capital growth are included in the return.

Tracing Error is the specific risk for a fund, i.e. the component of a fund’s risk that is independent of the benchmark. Note that tracking error squared plus beta squared equals volatility squared.

Treynor Ratio for a fund is the mean monthly excess return divided by the Beta. For the benchmark the divisor is 1. It is a measure of efficiency similar to the Share Ratio but with Beta as the risk measure rather than volatility.

Umbrella Fund – An open-ended investment Company (OEIC/SICAV) with sub-funds or compartments, each with its own specific investment objectives. The umbrella structure allows investors to select particular funds investing in different geographical regions or industrial sectors within the same investment vehicle.

UCITS - Undertakings for Collective Investment in Transferable Securities. Funds with UCITS accreditation can be freely sold across the EU, hence the term “fund passport”, though they are subject to local marketing and tax laws. The initial UCITS directive strictly limited the assets in which funds could invest. Future & Options and Funds of Funds were specifically excluded. This limitation has been relaxed through UCITS II.

Unsystematic Risk is sometimes called Specific or Idiosyncratic risk and is the potential variability of returns of an investment caused by specific items such as management, profitability, liquidity & default. It can be eliminated through diversification.

Value at Risk (VaR) is a measure of the risk of a fund or benchmark. It is calculated as 1.65 times volatility. Roughly interpreted one would not expect a loss of more than VaR in 19 periods out of 20 on average. In 1 period out of 20 one would expect the loss to be more severe. These are averages so it does not mean that a loss greater than the VaR in one period cannot be followed by another in the following period. VaR depends on the time horizon chosen. For instance the VaR for a 3-month time horizon is greater than for a 1-month time horizon, though it is less than 3 times as great. Some of the short-term volatility cancels out over the longer period. However, relative VaRs are the same for any time horizon so VaR is a good way of comparing the relative risk of funds and benchmarks.

Value Investor - Warren Buffet is the most famous value investor, he buys companies that may be trading at a discount to their intrinsic value. Buy low, sell high at it's elegant best. He invests only for the long term, in companies who's earnings he can reasonably predict, and has strong economics working in their favor. That means that the business makes lots of money, and is free to improve its own profitability through re-investment. He selects businesses that he understands well, which is why he avoids the technology sector, and companies that he would like personally to participate in. But, once identified, he waits for the right price before he buys. Patience as a financial virtue. In particular, he looks for companies that exhibit a consumer monopoly, or provide a product or service that is special, and inspires its own consumer loyalty. Among the holdings of Buffett's company, Berkshire Hathaway, have been The Washington Post Company, Coca-Cola, GEICO and Gillette.

Volatility of fund or benchmark monthly excess returns is a measure of their variability from the mean. Volatility is a measure of risk, calculated as the standard deviation of excess returns. Although usually calculated on the basis of monthly returns, volatility is often quoted as an annualised figure to facilitate comparison with annualised returns.

Winning Ratio is the number months with positive returns divided by the number of months with negative returns and is expressed as a percentage. i.e. If over a period of 36 months, 24 months are positive and 12 are negative the Winning Ratio is ( 24 / 36) x 100.

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