GLOSSARY

B

Basis points (BPS)

A basis point is one one-hundredth of a percent. If an interest rate goes up from 5.50% to 6.50%, it is said to have risen by 100 bps. So, with 100 bps in one percent, 50 bps is half a percent and 10,000 bps is 100 percent.

Benchmark

A measure against which investment performance can be targeted, constrained and/or compared.  A benchmark will normally use, or be based upon, a market-based index or the average performance of similar investments. To beat the benchmark is to outperform.

Bond (Fixed Interest Security)

Essentially a type of loan issued by governments, companies, local authorities and other institutions as a way of raising funds. Bonds normally promise to pay a fixed amount of interest (often referred to as ‘coupons’) on set dates, usually twice yearly, until maturity, when the loan is repaid in full.  The payment of coupons, and repayment at maturity, depend on the ongoing financial stability of the issuer.

Bonds can be traded on the stock market.  Even though they normally have a fixed repayment value at maturity, their prices fluctuate depending on a number of factors, including investor sentiment, market demand, interest rates, and the creditworthiness of the issuer.

C

Capital gains tax

A tax paid on profits made from selling investments like shares and funds.

Collective investment

A term used to describe unit trusts, investment trusts, and Open Ended Investment Company (OEIC) funds, where investors’ capital is pooled to increase individual buying power and risk is spread through diversification.

Concentrated portfolio

A portfolio which is invested in a smaller number of investments (compared to more diversified or index-linked portfolios with a wider range of investments).

Convertible bond

A fixed interest security that may be converted into another type of asset, usually a share, at some future date and/or contingent upon certain conditions being met at some future date.

Corporate action

An event which brings change to a company and can affect the shares or bonds issued by that company. These events are generally approved by the company's board of directors. Shareholders in the company may be permitted or required to vote on some events.   Examples of corporate actions include dividends, mergers, acquisitions and demergers.

Corporate bond (see also Bond)

A bond issued by a company.

D

Derivatives

Investments whose value is linked to another investment, or to the performance of an index, or to some other factor, such as interest rates. These include futures, options and warrants that permit the holder to buy or sell a particular asset at a set date in the future and/or at a specified price.

Diversification

Spreading your money across lots of different investments, with the aim of generating better longer term returns while also reducing exposure to individual investments/asset types.

Dividend

The income from a share-based investment. Many companies will pay dividends from their profits twice a year. The mid-year payment is known as the interim dividend, and the end-of-year payment is called the final dividend.

Dividend yield

The dividend yield is calculated by dividing the total annual dividend paid in respect of a share, by its share price.

E

Equities (shares)

Shares in a company that represent a proportional stake in the company’s economic interests i.e. its assets, liabilities, profits and losses. Shareholders are effectively the owners of the company.

Equity fund

A fund which invests in the shares (equities) of a range of companies, sometimes spread across different countries, regions and industries, on investors’ behalf.

Emerging markets

Countries that are progressing toward becoming advanced, usually shown by some development in financial markets, the existence of some form of stock exchange and a regulatory body.

ETF (Exchange-traded fund)

An investment fund that tracks an index passively but is traded on the stock market and can be bought and sold in the same way as an individual share.

Ex-dividend

The period immediately before an investment pays out its dividend (income). If shares are purchased ex-dividend, the buyer is not eligible for the next dividend payment. Share prices normally drop the first day they trade ex-dividend to reflect this.

F

Fixed interest rate

A rate of interest fixed at a stated percentage until a specific date.

Fixed interest securities

See ‘Bond (Fixed interest security)’.

Financial Conduct Authority (FCA)

The FCA regulates the conduct of the financial services industry in the UK. It aims to protect consumers, ensure the financial industry remains stable and promote healthy competition between financial services providers.

FTSE 100 or Footsie

An index that tracks the share price of the 100 largest companies listed on the London Stock Exchange by market value. The Index is a market-capitalisation weighted index whereby the weight of each company in the index is driven by the size of the company. This means that the larger the company the greater the weighting it has in the index.

Fund factsheets

Fund factsheets are usually produced either monthly or quarterly and provide a summary of news on the fund’s performance and structure. They tend to include:

• Asset allocation - what the fund is invested in
• Sector breakdown - types of industry sectors the fund invests in
• Fund aim and basic fund information - this includes fund manager details
• Fund performance - for funds launched over 12 months ago
• Fund manager commentary – commentary on performance and activity
   

G

Gross interest rate

The interest rate paid before tax has been deducted.

Gross redemption yield

The gross redemption yield represents the total return from a bond (income plus any capital growth), assuming the bond is held to its maturity date.

Growth approach

A style of investment that concentrates on companies with a history of good growth and/or strong earnings potential.

H

Hedging

Using some investments as a way to reduce risk. Investors and asset managers use hedging to reduce or control their exposure to risks. A common way of hedging is through the use of derivatives. These can be used in such a way that a loss for one investment is mitigated or offset by a gain in a comparable derivative.

High yield bonds

See Non-investment grade bonds

Holdings

The assets or investments held within a fund or portfolio.

I

Income share/unit

Funds are divided into portions called shares. For income shares any income earned by the fund is paid out to investors at periodic intervals (rather than automatically reinvested).

Income yield (also known as running yield)

By dividing the gross income of an investment by its current market value, you can calculate the gross income yield for the investment.

Index tracker

A type of fund that aims to replicate the performance of a particular index (benchmark) by investing in all or a representative proportion of the stocks within that index. For example, a FTSE 100 tracker fund will aim to replicate the performance of the FTSE 100 index by investing in all or a representative proportion of the stocks of that index.

Inflation

The devaluation of currency over time, where it costs more money to buy the same goods. The effect of inflation reduces the value of money over time, as the following example illustrates:

Infrastructure assets

Infrastructure assets are physical assets which provide basic vital functions to a business or country. These may include systems which facilitate: power generation, sewage, transportation, communication etc.

Investment Association (IA)

The Investment Association (IA) is the trade body that represents UK investment managers. The Investment Association sectors divide fund into groups (known as sectors) to make them easier to compare.

ISA (Individual Savings Account)

A vehicle that allows individuals to invest tax-free. UK residents can currently invest up to £20,000 each year in an ISA. Cash ISAs operate as savings accounts; stocks and shares ISAs allow you to invest in shares, funds, exchange-traded funds and investment trusts.

Investment Bonds

Investment bonds are life insurance policies.  They’re not the same as corporate bonds, premium bonds or fixed-rate bonds but are effectively a type of investment plan.You normally have a choice of funds to invest in within investment bonds (e.g. with-profits or unit-linked). Both have the same tax rules: tax is paid on both growth and income accrued in the fund(s) by the insurer.

Investment Funds

Investment funds are collective investments which pool your money in with other investors to give you a stake in a larger, ready-made portfolio. An investment fund can offer you an affordable way to invest in lots of different assets and, in many cases, without the pressure of making your own investment decisions. They can make the process of investing a lot simpler for you.

Investment portfolio

The collection of investments that you hold. Your portfolio should be aligned to your investment profile and risk appetite.  It should generally incorporate a range of funds and asset classes that best suit your preferred aims and objectives.

Investment profile

The investment philosophy that best expresses or reflects your investment objective.

Investment style

The investment approach adopted by an individual fund manager or investment house, hence the term ‘house style’. There are many investment styles including:

• Value, where managers seek to identify and invest in sound but undervalued companies;
• Growth, where managers seek companies with the right pre‑conditions for growth, (see Growth Approach)
• Momentum, where managers seek to exploit the tendency for share prices to continue to move in a particular direction in the short-term.

Investment trust

A close-ended collective investment fund pooling investor capital across a number of assets. ‘Close-ended’ means there is a fixed number of shares in issue, which won’t change as individual investors buy into or sell out of the fund.  As it is listed on a UK stock exchange, the share price of an investment trust is subject to normal market forces (e.g. investor sentiment and demand) and as such can move independently of the value of the trust’s underlying assets.

Investment grade bonds

Credit ratings indicate the likelihood that an issuer of a bond will be able to make their payments. Investment grade bonds have achieved or exceeded a minimum credit rating awarded by a credit rating agency. Therefore they are considered lower risk than bonds with a lower credit rating.

K

Key Investor Information Documents

Key Investor Information Documents (KIIDs), provide information of a fund’s aims, risks and charges. They are designed so that they funds can be compared easily. They focus on the following:

• The objectives and investment policy of the fund - what it invests in and what its aims are
• The potential future risk and reward profile - using a standard scale from 1 (lower risk) to 7 (higher risk)
• Charges - this will include all relevant charges that apply and how they are taken
• Past performance - normally displayed in graphical format
• Other practical information –anything else you might need to know about the fund and how it operates.

L

Liquidity

The degree to which an investment can be quickly bought or sold on a market without affecting its price. Investments with a higher liquidity can be bought or sold more quickly than investments with a lower liquidity.

Long Exposure

Long exposure to an asset means the investor or fund could benefit if that asset rises in value.

M

Manager of managers (multi-manager)

An investment approach that seeks to select the most suitable investment managers, with a range of complementary investment styles to suit the objectives of the fund. This approach aims to diversify risk and optimise returns by providing access to a wide spectrum of managers – some of which are not normally available to individuals.

Money market

The money market is where financial institutions and companies access short-term borrowing and lending.

N

Net interest rate

The interest payable after tax has been deducted.

Non-investment grade bonds

Bonds that are issued by companies exhibiting what the market considers a higher risk of default than usual. Because they are higher risk, they generally offer higher interest (coupon) payments, and so can provide greater potential for returns. Credit ratings indicate the likelihood that an issuer of a bond will be able to make their payments. Non-investment grade bonds, also known as sub-investment grade or high yield bonds, have a lower credit rating than investment grade bonds.

O

OEIC (Open Ended Investment Company)

A collective investment scheme that pools investor capital for increased buying power. The fund is divided into shares the value of which rises and falls in line with the value of the underlying assets. One of the main differences between OEICs and unit trusts is that OEICs quote a single price rather than differences between buying and selling prices.

Ongoing Charges Figure (OCF)

A measure of what it costs to invest in a fund on an ongoing basis. It includes the fee paid to the management company and other operating costs, but excluding transaction costs.

P

Passive investment funds

Passive investment funds track a market or index.  The funds will invest in all of the assets, or a sample of the assets, in a particular market or index, to give a return that reflects how the market or index is performing.  They normally charge less in comparison to actively managed investment funds.

Passively managed

Passive management is where the fund manager aims to match a market or index and will buy, sell or hold investments depending on the components of that market or index.

Pensions

Pensions are a tax-efficient way of holding investments with the specific purpose of building up a sum of money which is then used to provide tax free and/or taxable lump sums and/or provide a taxable income in retirement. Your money will usually be locked away until you reach the minimum pension age, which is currently 55 years old.

Pension income drawdown

A way of taking a flexible, taxable income from your pension pot during retirement (as you need it), while keeping the rest of your pensions savings invested.

Preference share

A type of share issued by a company. A preference share usually issues a fixed dividend payment which takes priority over payments of dividends for ordinary shares.

Prudential Regulation Authority (PRA)

The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms and works alongside the Financial Conduct Authority (FCA). The PRA’s role is defined in terms of two statutory objectives to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders.

R

Return

The money made or lost on an investment.

Rolling three year period

Any period of three years, immediately preceding a stated end date.

Rolling five year period

Any period of five years, immediately preceding a stated end date.

Running Yield

A running yield represents annual income from a bond or bond fund as a percentage of its current value.

S

Sectors

Investment funds are divided into sectors containing funds of the same type to make them easier to compare. One example is the Investment Association UK All Companies sector. Sectors also refer to the specific industry in which companies operate, for example, Lloyds Bank plc trades within the Banking sector. Other sectors include Oil & Gas, Pharmaceuticals, travel and leisure, and telecommunications, for instance.

Securities/Stocks

A general term used to describe shares (equities) or bonds.

Share

An equal portion representing part ownership of a company, an investor essentially buys a share in a company or fund in return for a share of the profits. Investment funds such as OEICs can also be divided into shares.

Share class

One of the types of share representing part of the fund that is different to other share classes for specific reasons, such as it pays out income rather than paying it back into the fund.

Short exposure

Short exposure to an asset means the investor or fund could benefit if that asset falls in value.

Strategic asset allocation

The longer-term asset allocation of an investment portfolio among different kinds of assets such as absolute return strategies, bonds, property, equities and commodities that is designed to meet the aims and objectives of a fund or an investor.

Stock lending

A process whereby the holder of investments (such as a fund) lends them to other parties who pay a fee for borrowing. The lender will normally require the borrower to provide some form of collateral (usually cash) to mitigate against the risk of default.

Supplementary Investor Information Documents

Supplementary Investor Information Documents, (SIIDs), are designed to provide additional information that does not usually feature in KIIDs. You may find the following in a SIID:

• Tax implications
• How to complain or cancel your investment
• Details of the available funds
• Frequently asked questions
• Generic risks linked to investing
• Detailed charging information

T

Tactical asset allocation

The short-term actual asset allocation of a fund or an investor among different kinds of assets.  The tactical asset allocation can vary from the strategic asset allocation to take advantage of short term investment opportunities in the marketplace. Tactical asset allocation amendments can be made to an investment portfolio at any time.

Tax wrapper

An investment structure which is designed to help savers invest while also being tax efficient. Examples include individual savings accounts (ISAs) and pensions.

Tracker fund

See ‘Index Tracker’.

Trust

A legal arrangement where assets are placed under the control of a trustee for the benefit of individuals (called beneficiaries). Trusts allow legal ownership of an asset to pass from the original owner (the ‘settlor’) to the trust.

Trustee

The person or organisation managing the assets in a trust.

U

Unit trusts

A collective investment scheme that pools investor capital to increase their buying power and provide diversification. The fund is divided into units the value of which rises and falls in line with the value of the underlying assets.

V

Volatility

A measure of the size and frequency of short term changes in the value of an investment.

Y

Yield

The income from an investment (e.g. an annual dividend), usually stated as a percentage of the value of the investment.