NEW YORK — Few industries slip into jargon as much as the investing world. As quickly as you can give your shoe size, mutual fund managers can rattle off their “active share” or “duration.”
Such terms have all the grace of a clog, but they can also give valuable information that investors should consider before buying a fund. Here’s a look — the ABCDEs, if you will — at several buzz phrases that have been bubbling up for stock and bond mutual funds.
• Active share. To explain this bit of jargon, it helps to introduce another that’s used in the industry as an insult: closet indexer. That’s the term for active managers who say they’re picking only the best stocks but have portfolios very close to their benchmark, whether it’s the Standard & Poor’s 500 or another index.
Returns for the vast majority of actively managed funds have fallen short of index funds in recent years, and investors are asking why they should pay the higher expenses if they’re just going to look like an index fund anyway. Enter a fund’s active share, a number that shows how different its composition is from the index. So having, say, 10 percent of a portfolio in Apple would boost a fund’s active share, because the technology giant makes up just 3.6 percent of the S&P 500 by market value.
• Beta (smart). To a fund manager, “beta” refers to the amount of returns broad market indexes are generating. So “smart-beta” funds are those that are based on the S&P 500 and other indexes, but with tweaks in their construction to hopefully offer better performance.
• Capital-gains distributions. Dealing with these payments will soon be atop the to-do list of investors with taxable accounts. Each year, funds pass along to investors the gains they booked from trading securities. Investors must pay capital-gains taxes on these distributions, even if they didn’t sell any shares.
To limit this tax bill, consider funds that say they have low “turnover.” This number shows roughly how much of a portfolio the manager has sold in the past year, and a lower figure can lead to smaller gains distributions.
• Duration. This term isn’t new, but its profile is growing by the day. Duration shows how risky a bond fund is when it comes to rising interest rates, and many analysts expect rates to climb this year. Rising rates cause the price of the bonds in fund portfolios to drop because their yields will suddenly look less attractive. Prices fall more sharply for long-term bonds. To come up with its duration, a fund crunches the maturity and other factors of all the bonds that it holds. The higher a fund’s duration, the riskier it is in terms of interest rates.
• Expense ratio. This figure shows how much of a fund’s assets its managers use to cover their expenses, and investors are paying more attention. Money has been flocking to funds that have the lowest expenses.
