Glossary

These funds aim to deliver positive returns in all market conditions with low volatility. The funds often uses derivatives to protect against falling markets.

Any income generated by the fund is automatically reinvested instead of being paid out, which increases the value of your units.

Where a professional fund manager chooses the companies and amounts in which to invest, instead of simply buying the same companies in the same amount as a market index, such as the FTSE 100. The opposite of active management is passive management.

Alpha is a word commonly used to describe a fund manager's skill. Alpha is the excess risk- adjusted return of a fund relative to the return of a benchmark index. The higher a fund managers Alpha, the better their performance is.

The annual charge paid to a fund management company for managing the fund. It is calculated as a percentage of the value of the fund. The annual management charge is less than the Total Expense Ratio (TER) and Ongoing Charge Figure (OCF).

A word used to describe the measure of a fund's volatility in comparison to the market as a whole. A beta score above 1 means the fund is more volatile than the overall market, while a beta score below 1 means it is less volatile.

A standard against which the performance of a fund can be measured. The FTSE 100 is an example of a benchmark index.

The price paid by the fund manager to buy back your units when you choose to sell some or all of your holding in a fund. The current value of your holdings in a fund is based on the current bid price.

(see fixed interest securities)

The total value of the company's assets that shareholders would theoretically receive if a company were liquidated and all creditors were paid.

A management style where the manager prioritises individual stock selection over industry, sector or wider economic factors.

An agreement that gives an investor the right, but not the obligation, to buy a company, bond, commodity, or other instrument at a specified price, within a specific time period.In return for this right the seller, or option ‘writer’, receives a payment from the buyer. The value of a call rises when the underyling asset increases in price.

A bond, which can be bought back by the issuer prior to its maturity date. The issuer will usually 'call' the bond if interest rates fall and they can re-issue the bond at a cheaper rate. The call feature is an advantage for the issuer and consequently investors will demand a higher yield as compensation to hold these bonds.

Where the only annual cost that comes out of a fund automatically is that charged by the fund manager for managing the assets. In the past, shares class costs also included those of the intermediary and platform. These charges are now made separately.

An investment style which goes against prevailing opinion. Contrarian investors often invest in out of favour sectors or companies, which have recently performed poorly.

A bond, issued by a company, that may be converted into shares in that company for a pre-stated price.

When a company wants to borrow some money it can issue a bond to do so. This bond is called a corporate bond. People buying the bond lend money to the company in return for regular interest payments and the promise that the capital will be repaid on a specified later date.

A coupon is a periodic payment an investor receives for holding a bond – in other words, the interest. The coupon 'rate' is the total coupons paid per year, divided by the face value of the bond. A bond with a high coupon rate, also known as high yield, will be less sensitive to changes in interest rates.

Active share measures how much an equity portfolio's holdings differ from the benchmark index. A tracker fund which matches the index perfectly will have an active share of zero. Most actively managed funds will have an active share of between 50-90%. Research has shown that funds with an active share consistently below 60%, typically struggle to beat their benchmark index over a long period.

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A strategy which involves buying shares in a company and simultaneously selling a call option for those shares. Selling the call option generates an income but means the fund will potentially miss out on some of the gains should the company’s shares increase in value.

The lowest price at which units can be bought from the fund manager; it is simply the cost of creating a unit.

An assessment of the credit worthiness – or ability to pay interest on loans - of a borrower. Assessment is undertaken by a credit ratings agency such as Standard and Poor's, Fitch or Moody's.

The aggregate performance of a fund or company. For example, company X had a cumulative return of 20% over the past three years.

A word to describe an industry or company that is sensitive to the business cycle. Revenues are generally higher during times of economic prosperity, but lower during times of contraction or recession. The airline industry is one example of a cyclical industry.

The opposite of cyclical is defensive.

A word to describe an industry or company that can outperform in difficult economic conditions. They will typically underperform cyclical stocks during periods of economic expansion. The utility industry is an example of a defensive sector. Defensive stocks typically have a Beta of less than 1.

A derivative is a contract between two or more parties, the value of which is determined by fluctuations in the underlying asset. The most common forms of derivatives are futures contracts and options, amongst others. Underlying assets may include company shares, bonds and currencies, to name a few.

An additional charge to investors, levied by fund managers, buying or selling units in a fund, in order to counter any potential effect on the value of the fund such sales or purchases may have. This additional charge is used as a means to protect existing investors in a fund and is usually only applied if there are large numbers of sales or purchases at one time.

The returns of a fund or company over several separate periods of time. For example company X returned 15% in 2013, 12% in 2012 and 5% in 2011.

Calculated by expressing a company’s declared dividends per share as a percentage of the current share price.

Used when describing the average time to maturity of a bond measured in years. The longer the duration, the more sensitive the bond is to changes in interest rates.

The amount of profit attributable to each share, calculated by dividing net profit of a company by the number of ordinary shares in issue.

Also known as shares or stocks, equities represent a stake in the ownership of a company.

An investment vehicle, the units of which are traded on a stock exchange. An ETF can hold a range of assets such as stocks or bonds. Most ETFs track an index, such as the FTSE All share or the S&P 500, so they are typically passive investments.

These are more commonly known as “bonds” and are loans issued by companies or governments in order to raise money, in return for regular interest payments and the promise that the initial investment will be repaid on a specified date in the future. All bonds are essentially IOUs.

A financial portfolio which pools money from many individuals to buy a broad range of assets. Funds are designed to grow an investor’s money, and in some cases, to provide them with a regular income.

A bond issued by the British government. The US equivalent are called Treasuries.

Bonds issued by governments. Typically these are considered safer than corporate bonds issued by companies in the same country e.g. gilts are issued by the UK government.

Growth stocks are characterised by fast growing revenues. These stocks typically have high P/E ratios and high price to book ratios.

Hedging is used to reduce risks to a fund from adverse movements in interest rates, markets, currencies or share prices. Similar to hedging your bets.

A bond issued by a company or government which carries a lower credit rating. These bonds pay a higher yield than other bonds, reflecting the higher risk of default.

Pays out all of the fund’s net income to the investor in cash. Income can be paid out biannually, quarterly, monthly or even triannually.

Note: Income can still be reinvested to buy more units in the fund. Typically this is done where there is no accumulation share class available.

A passive fund aiming to mirror the performance of a benchmark index.

Bonds which are linked to an inflation index. For example, UK government index-linked bonds are linked to the UK Retail Price Index(RPI). These bonds are typically used to protect investors from high inflation. Government and corporate bonds can both be index linked.

The first time a company sells shares to the public.

A measurement (or ratio) of risk-adjusted returns. The information ratio is a special version of the Sharpe ratio in that the benchmark doesn't have to be the risk-free rate.The information ratio also attempts to measure the consistency of the fund manager's performance. A manager with a higher information ratio, is deemed to have consistently better performance.

Corporate bonds carry a relatively low risk of default and have a high credit rating. As they are lower risk than high yield bonds they tend to have a lower yield.

The degree to which a security can be bought or sold without affecting its price. Liquidity is often low in emerging markets and for smaller companies.

The market value of a company, determined by multiplying the number of shares by their current share price.

Forms of cash and near cash, such as bank deposits, certificates of deposit, fixed interest securities or floating rate notes, with a maturity date of under a year.

Total assets of a fund or company minus all liabilities and prior charges. Net asset value per share is calculated by dividing this figure by the number of ordinary shares/units in issue.

The majority of funds now refer to the OCF instead of the total expense ratio (TER), it includes the annual management charge and is very similar to the TER, but it does not include any performance fees or transaction costs.

The price at which the unit trusts are bought by investors. The offer price tends to be higher than the bid price, which is the price at which investors sell their units.

OEICs, unlike unit trusts, are single priced so buyers and sellers of the fund pay the same price, although they may both have to pay a dilution levy. A dilution levy is only charged where a fund provider incurs additional costs and it is intended to protect existing investors in the fund.

Legal agreements giving the holder the right, although not the obligation, to buy or sell the underlying asset at a specified expiration date, and at a price determined at the time of dealing. The price the seller receives for selling the option is called the 'option premium'. The option premium is more expensive the longer the contract lasts and the more volatile the underlying security. See call and put options.

This term refers to when the holding of an individual stock, industrial sector, or country in a fund is greater than the proportionate share of its relevant benchmark index.

As opposed to active management, a passively managed fund will invest in a basket of securities and try to replicate a pre-determined benchmark index. Tracker funds are an example of a passively-managed fund.

How much of a fund’s performance can be attributed to specific factors such as stock selection or asset allocation.

This ratio is calculated by dividing the current share price by the company's book value per share. The price to book ratio is used as a measure of how expensive a company's share price is. A company with a price to book value of exactly 1 would theoretically be worth exactly the same as its share price if it was liquidated immediately (assuming its balance sheet was accurate).

This is a valuation measure calculated by dividing the current share price by the last published earnings per share (net profit divided by the number of ordinary shares). The ‘P/E ratio’ gives investors a quick and easy way of seeing how a company is priced relative to its peers (with a higher P/E being more expensive), although it should not be relied upon by itself.

Property Authorised Investment Funds (PAIFs) are a hybrid between an OEIC a REIT. They have improved tax advantages for ISA investors (no withholding tax is charged) and are able to invest in a wider range of property investments than other types of property fund.

An agreement that gives the buyer of the put, the option to sell a security for a specified price within a specified time. The opposite of a call option. A holder of a put benefits when the value of a security declines.

A fund's performance relative to its peers is often referred to in terms of quartiles. For example, a first quartile fund is one which its performance ranks it within the top 25% of all funds in that sector. First quintile (top 20%) and first decile (top 10%) are also used.

A statistical measure between 0-100 that represents the percentage of a fund or company’s movements that can be explained by movements in a benchmark index. A fund with an R squared of 100 can be completely explained by movements in the index. You would expect index funds to have an R squared very close to 100. A low R squared (usually less than 70) means the fund doesn't act much like the index and you should ignore its beta.

A real estate investment trust (REIT) is a listed company whose primary activity is property investment. REITs own many types of commercial real estate, for example, offices, warehouses, hotels, hospitals and shopping centres. Some REITs also engage in financing real estate. They can be very tax efficient as no corporation or capital gains tax is paid on the company profits made from property investments.  However, dividends are treated as income and are taxed accordingly and withholding tax is charged on distributions, unless held within a tax-efficient investment, such as an ISA.

A secondary offering occurs when a public company sells shares to investors at any time other than for the first time (see IPO).

Another word for stock, bond or company.

A ratio to measure risk-adjusted performance. The higher a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been. The Sharpe ratio is calculated by subtracting the risk-free rate of return (usually based on a 10-year government bond), from the rate of return for a fund and dividing the result by the standard deviation (volatility) of the portfolio returns. The Sharpe ratio helps to tell us whether a fund’s returns are due to smart investment decisions or a result of excess risk.

Short sellers employ this tactic when they believe a security's price will decline. The seller borrows the security from another investor and then sells it in the open market. To close the position the short seller buys the security back in the open market at a later date before returning it to the original lender. They make money if the security has fallen in value and lose money if it has become more expensive.

A modification of the Sharpe ratio which only takes account of downside volatility as opposed to all volatility. A large Sortino ratio indicates a lower probability of a large loss.

This is applicable to dual priced funds and is the difference between the price at which investors buy units (the offer price) and the price at which they can be sold (the bid price). The spread includes any initial charge on the fund as well as the costs of trading in underlying securities.

Measures the volatility of a fund’s returns. Funds with high standard deviation exhibit relatively more volatility than those with low standard deviation.

Strategic bonds funds can invest into any category of fixed interest bond e.g. high yield, corporate bonds, gilts etc. Strategic bond funds are therefore flexible and many utilise derivatives to protect against falling bond prices (often seen when interest rates rise).

A management style whereby the manager takes into account the greater market and wider economic picture to enable them to allocate assets to sectors and regions, before selecting stocks.

The total annual cost of managing a fund, which is charged to an investor. The cost includes the annual management charge (AMC) and other fees such as legal costs, trading fees and operational expenses. In order to arrive at the TER, the total costs of the fund are divided by the fund’s total assets producing a percentage amount which represents the TER. Unlike the OCF, the TER does include transaction costs and performance fees.

The investment return consisting of both the capital appreciation and reinvested income.

The expected and actual maximum deviation of a fund’s returns from those of a relevant index or benchmark.

(see index fund)

A measure of trading activity within a fund, indicating how active a manager has been in buying and selling the stocks held within the portfolio. Neither high nor low turnover is necessarily good or bad and the number will generally just reflect the individual manager’s investment style. For example, 100% turnover indicates that on average each stock is held for one year.

Undertakings for Collective Investments in Transferable Securities (UCITS) are investment funds that have been established in accordance with European Law. A fund authorised in one EU Member State can be freely marketed in any other Member State.

UCITS are subject to rules as to what they can invest in, how much they can borrow and how much of the fund can be exposed to any one counterparty.

This term refers to when the holding of either an individual company, industrial sector or country in a fund is lower than that of its relevant benchmark index.

A trust which allows investors to pool their assets together and invest in a broad number of securities. Unit trusts are dual priced and have both a buy (offer) and sell (bid) price as opposed to OEICs.

These stocks often have low P/E ratios and above-average dividend yields. They typically have slower earnings growth and low price to book ratios. Value investing is essentially buying stocks which are cheap.

How fast, and by how much, the price of a security, sector or market changes over a period of time. A price that often moves significantly will be considered to have a high level of volatility.

The yield curve is a graph which plots interest rates for similar bonds which have different contract dates and mature on different dates. Typically bonds which mature sooner will have lower yields because investors' money is tied up for a shorter amount of time. However, this is not always the case and yields can vary for a variety of reasons.