The total return of an asset, portfolio or strategy over a given period of time or an investment approach that attempts to achieve a return which is not benchmarked against an index.
The dates when a fund's accounts are finalized and income from a fund is calculated for distribution to shareholders or for accumulation.
An investor who follows an active portfolio management strategy buys and sells stocks in an attempt to outperform a specific index. An actively managed investment strategy has an individual portfolio manager, co-managers or a team of managers all making investment decisions for the strategy. The success of the strategy depends on in-depth research, market forecasting and the expertise of the management team.
A measure of excess return generated by a manager compared to the benchmark index. An alpha of 1.00 indicates that a fund has outperformed its benchmark by 1%.
Annual management charge (AMC)
A fee charged by fund managers to investors for the day to day management of an investment portfolio (fund) based on a percentage of a fund’s value. Fund managers use it to cover costs of managing the funds, however they don’t cover all fees and are just a guide to what the annual charge to investors will be. AMCs can differ between strategies.
An annuity is a financial product typically sold by life insurers, which in return for a lump sum provides a guaranteed income every year for the rest of the retiree’s life or a specified period.
Ask / Bid price
The lowest price a seller is willing to sell a security for / against the highest price a buyer is willing to pay for a security.
Authorized Corporate Director (ACD)
A company authorized and regulated by the Financial Conduct Authority and given powers and duties under Financial Conduct Authority regulations to operate an OEIC.
A market where an index has endured a prolonged fall and is anticipated to drop further still. Pessimism and negative sentiment tend to be characteristics of such a market. If a market falls 20%, it is considered to be a bear market. See Bull market for the opposite scenario.
Some investment strategies measure their performance against a benchmark, others use these as a performance indicator. Fund managers typically try to outperform a certain benchmark.
A measure of a strategy’s sensitivity to market movements (as represented by the fund benchmark). A bet of 1.10 suggest the fund could perform 10% better than the benchmark in up markets and 10% worse in down markets, assuming all other factors remain constant.
Shares in large companies with a strong credit rating.
An IOU issued by a company or government. During the life of the bond, the bondholder usually receives regular interest payments based on the coupon rate. When you buy a bond, you are essentially lending out your money. They have a set duration period. The loan must be repaid in full when the bond reaches maturity. These are sometimes referred to as fixed interest or fixed income securities.
Callable bonds: can be redeemed (“called”) by the bond issuer, allowing the issuer to return the principal prior to the bond’s maturity. These bonds often have a scaled call schedule and usually a premium redemption price above par is paid to the bond owner.
Corporate bonds: bonds issued by businesses looking to raise cash. Generally companies pay in two instalments in a year, but this can vary.
Government bonds: bonds issued by governments looking to raise cash. US government bonds are called Treasuries.
Junk bonds: high-yield or non-investment grade bonds. They are viewed as far higher risk than many bond investments, as the issuer carries a greater chance of defaulting on payment.
The issuer of a bond agrees to repay the original amount loaned at the bond's maturity date which is usually set when it is issued. This is the date on which the principal amount of a bond is to be paid in full.
An investment approach used by fund managers. A manager who selects stocks by analyzing companies based solely on their investment quality and potential, regardless of their wider industry and the macro-economic backdrop.
Acronym for emerging market giants, Brazil, Russia, India and China.
Such as a stockbroker or insurance broker – a person or firm, which executes buy and sell orders on behalf of investors. Brokers make their money via commissions from their trades.
This is the opposite of a ‘bear market’. A market where securities such as shares and / or bonds have risen markedly. It is characterised by optimism, investor confidence and expectations of further rise. Generally speaking, a sustained 20% market rise would be considered to be a bull market.
Means Cash Flow Return On Investment.
Collective investment schemes
A general term encompassing authorized unit trusts, common investment funds, OEICs and investment trusts.
Natural resources and raw materials from oil to gold. Includes 'hard' commodities such as industrial and precious metals, as well as 'soft' commodities such as agricultural produce including coffee and wheat.
A type of bond which can be converted into company shares at a later date.
A bond issued by a corporation to an investor as a means of raising money.
A bond's coupon rate is the amount of interest income earned on the bond each year based on its principal.
Credit ratings and credit risk
An assessment of a bond's security, given by an independent ratings company such as Standard & Poor's. The highest rating is AAA, and the lowest is D. Bonds rated between AAA and BBB – are known as investment grade bonds and bonds with a lower rating are not investment grade bonds.
Deflation is the opposite of inflation when the price of goods and services declines. A country is in deflation if its inflation level drops below 0%. Prolonged bouts of deflation can be dangerous for an economy as consumers stop spending in the hope of buying something cheaper at a later date, and therefore money that flows into businesses slows down.
Failure to pay interest or principal on a bond when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment.
Delta measures the change in value of a derivative from a change in the price of the underlying asset. It is sometimes referred to as the “hedge ratio”.
Derivatives are investments, whose value depends on the changes in an underlying asset or security. The stock is not physically held but there is a contract based on a number of predictions in time or price in the future. The use of derivatives can result in greater fluctuations of a fund's value and may cause the strategy to lose as much as, or more than, the amount invested.
Usually refers to an investment trust trading in a range less than its net asset value. As investment trusts are traded as shares on the stock exchange, their share price can fluctuate, based on demand. If a trust is in great demand, its shares can trade at a premium i.e. at a great value than their actual net worth.
Shares where the income generated by a fund can be paid to investors rather than accumulated. This income is known as the Distribution.
Payouts made to shareholders of corporation who share their profits with their investors. Usually dividends are paid either quarterly, twice a year or annually.
The difference between the highest price and lowest price during a specific period, usually quoted as a percentage. Not to be confused with pension drawdown.
A measure of the extent to which the value of a bond will be affected by changes in interest rates expressed as a number of years. As a general rule, the greater the value of duration, the greater the price volatility which results from interest rate movements.
Effective duration estimates the sensitivity of a bond’s price to changes in benchmark interest rates. Effective duration is required for the measurement of interest rate risk for complex types of bonds.
An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it gives companies access to capital to grow their businesses, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company’s future performance.
The return of the fund in excess of the benchmark / index return (annualized).
Exchange Traded Funds or ETF
ETF is a fund vehicle that is traded like a stock on the stock exchange. It is used to track and mimic the performance of a specific market index.
Describes the level of risk to a particular asset, asset type, sector, market or government. Also, the directional market exposure of a (absolute return) fund.
Fixed interest securities or Fixed income
Another term for bond related investments. Fixed income assets are IOUs issued by governments. They pay a fixed rate of return, and have a set duration period.
Floating Rate Note (FRN)
A bond with a variable interest rate that is variable as it is tied to a benchmark such as LIBOR (London Interbank Offered Rate).
The price at which shares of a fund are bought and sold. This price is based upon the next valuation of a fund's assets following an instruction to buy or sell shares.
These are transactions where the buyer and seller agree on a price now for a delivery of a commodity at a later date.
A pooled investment. Typically run by a fund manager who uses investors’ money to invest in a wide range of assets, such as stocks or bonds, following a determined strategy, and with the aim of delivering capital growth and/or income.
Sometimes known as a multi-manager fund, is an investment portfolio, which invests in a range of other funds, as opposed to individual stocks or securities.
Like derivatives, futures are contracts agreed for assets. Commonly used in oil trading, a future contract refers to an asset, which is purchased at a set price but will not be delivered until sometime later.
This describes the ratio of a corporation's debt that its books to the value of its shares. Investment trusts often take on debt or use gearing to try to boost investor returns. While gearing can increase potential returns in a rising market, it can also magnify the extent of losses in a declining market. A geared investment trust will also fluctuate more than an equivalent non-geared fund.
The percentage value of the long positions plus the percentage value of the short positions. See net exposure.
A transaction involving derivatives, with the aim of reducing a particular financial risk, for example exchange rate risk. However, hedging transactions can also expose a strategy to additional risks, such as the risk that the counterparty to the transaction may not be able to make its payments, which may result in loss to the fund.
High Water Mark
The highest level that a fund’s net asset value (NAV) has reached at the end of any 12 month accounting period.
High yield bond
A bond with a high coupon payment and typically a low or no credit rating.
The minimum level of return required before a fund can charge a performance fee.
Investment Company with Variable Capital - another term for an OEIC.
See ‘Distribution/distribution shares'.
Index refers to stock markets, such as the FTSE 100 index of the UK’s largest firms or the S&P 500 index, which represents the biggest firms in the US. An index tracker fund will mirror the performance of a particular index.
Inflation represents an increase in the cost of everyday living as it devalues spending power. The higher it rises, the less money is worth and people have to spend more to buy the same items. Measured in the US by the Bureau of Labor & Statistics.
Information ration (IR)
Measures if a manager is outperforming or underperforming the benchmark and accounts for the risk taken to achieve the returns. A manager who outperforms a benchmark by 2% p.a. will have a higher IR than a manager with the same outperformance who has taken more risk.
An investment trust operates like an investment fund but it is structured as a limited company, and its primary business is to invest its shareholders money. They are bought and sold on New York Stock Exchange
A fee charged on the purchase of shares in a fund based on the value of the initial investment.
Initial Public Offering (IPO)
An IPO, sometimes referred to as floatation, marks a company’s stock market debut. It is the very first time it sells shares on a stock exchange, when it goes public.
Investment grade bonds
Bonds issued by a company that has a higher credit rating, and so are considered more secure.
Key ratios can be used to easily obtain an idea of a company's financial status. Companies that are in good condition financially will have better ratios to those that are performing poorly. A mathematical ratio that illustrates and summarizes the current financial condition of a company.
The use of financial instruments (example debt) to increase the potential return of an investment.
This refers to cash flow, or how easily an asset can be converted into cash. Shares which can be bought or sold rapidly on the stock market are considered a liquid asset whereas a commercial property would be considered more illiquid as it is much more cumbersome to sell.
Long / short position
A long position is buying a security with the expectation that it will deliver a positive return if its value goes up and a negative return if its value falls. Conversely, a short position involves selling a borrowed security with the expectation of buying it back at a lower price to make a profit. However, if the security goes up in value, a short position will usually make a loss.
See ‘bond maturity’
The price at which shares in a fund are bought and sold by investors. It is mid-way between the real buying and selling prices based on the underlying assets held by a fund.
Modified duration estimates the effect that a 1% change in interest rates will have on the price of a bond or bond strategy.
Short-term debt instruments, usually running for a year or less. Examples of these include Treasury bills.
A strategy that generally invests across a very wide spread of asset classes in order to diversify risk. As well as other funds, multi-asset portfolios can invest in individual shares, bonds and commodities such as gold.
A common phrase used to describe Merger & Acquisition activity - company consolidation trends. A merger is when two firms join forces to create a new corporation. An acquisition is the purchase of another company, which is absorbed into the buying firm.
Net asset value (NAV)
This is a mutual fund’s price per share
Non rated bonds
Bonds that are not rated.
Commonly used in relation to a derivative, denoted the theoretical value of its underlying asset.
An OEIC (Open Ended Investment Company) is a type of investment product that offers indirect investment in securities and other assets. Your money is pooled with that of other investors who choose to invest in the same fund. Funds will use this money to buy investments, such as stocks and shares, as selected by the Investment Adviser for the fund in line with the objectives of that fund. The value of your shares in the fund is directly related to the underlying value of these investments.
The ongoing charges figures is based on the fund’s expenses during the previous 12 months, on a rolling basis. It excludes transaction costs an performance fees incurred by the fund.
Fees deduced from the fund’s asset incurred as part of the fund’s operations.
Income is paid or accumulated on these dates.
Passive portfolio management is also referred to as index fund management. The portfolio is designed to mirror the returns of a particular market index or benchmark as closely as possible. Index funds are branded as passively managed rather than unmanaged because each has a portfolio manager who is in charge of replicating the index.
A feed paid to an asset manager for generating positive returns above a hurdle rate.
Portfolio turnover rate (PTR)
The percentage of a fund's portfolio that is bought and sold over a 12 month period.
The difference between an assets net asset value and the price being paid. For example an investment trust’s shares can trade at a premium to the portfolios actual net worth, if it is in high demand.
The amount of cash the bond-issuer owes to the bondholder at the bond’s maturity (not including any accrued interest.) This is often referred to as “face value” or “par value” or “nominal value”.
A rights issue occurs when a publicly listed firm issues new shares to existing shareholders in a bid to raise money. Existing shareholders have pre-emption rights to buy the shares before anyone else. A company might do it if it was in financial difficulty and needs more cash or if it wants to raise money for expansion. It will dilute the value of the share already in issue.
An investment instrument such as shares or bonds, issued by a corporation, government or other organization which offers evidence of debt or equity.
A unit of ownership in a company or financial asset.
A measure of the performance of an investment adjusting for the amount of risk taken (compared to a risk free investment). The higher the Sharpe ratio the better the return compared to the risk taken.
The difference between the bid and the ask price of a single security. It can also refer to the difference in price between securities.
Sub-investment grade bonds
These tend to be issued by a company that has a lower credit rating and so have a greater possibility of failing to make their repayments. (See also: Credit Ratings).
A swing price is used to pass particular investment costs that result from a large investment joining or leaving the fund.
Total expense ratio (TER)
The annual costs of running a fund summarized into a single figure.
A term used by institutional investors. Top down investors select industries and stocks to invest in based on the wider macro-economic backdrop rather than the fundamentals of individual shares. Some investors may combine top-down and bottom-up strategies (looking at an individual shares characteristics) when they make investment decisions..
The capital gain or loss plus any income generated by an investment over a given period.
A tracker fund, sometimes known as an index tracker, is essentially a computer run fund which tries to mirrors, or tracks, the trajectory of a particular market or index, such as the FTSE 100.
Tracking error (%)
Measures how much a strategy’s returns deviate from those of the benchmark. The lower the number the closer the strategy’s historic performance has followed its benchmark.
These are securities which can be freely traded on a market.
The date and time of day when funds are valued and their shares priced.
Value at risk (VaR)
A mathematical way of measuring the level of risk of loss of an investment over a period of time.
The measure of the tendency and magnitude of an asset's price changes over time. Generally a measure to assess risk.
A measure of return from interest or dividend income expressed as a percentage of an asset's price.
Yield to Maturity (YTM)
The rate of return an investor would receive if a bond is held to its maturity date. This include all coupon interest and principal payments and is expressed as an annual percentage rate (this is also known as the internal rate of return).
Yield to Worst (YTW)
This is the lowest potential yield a corporate bond holder can expect. If a bond is callable, the rate of return is calculated to each call date. The YTW is then the lowest of either the yield to maturity or yield to call. Because YTW is a conservative way to look at a bond, it is often used in high yield investments, where bonds are frequently callable. See callable bonds.
Yield to call
The yield of a bond if you were to buy and hold it until its call date. This yield is valid only if the bond is called prior to maturity.
Zero coupon bond
A debt security that doesn't pay interest (a coupon) but is traded at a deep discount and will receive the full face value when the bond “matures” or comes due. Because they offer the entire payment at maturity, zero coupon bonds tend to fluctuate in price much more than coupon bonds.