Here is a simple reference guide to some of the technical terms that you may come across as you explore your investment options.
Absolute return funds
Funds managed to increase in value over a certain period of time, regardless of market conditions.
Absolute return strategy
An investment approach that aims to increase a fund’s value over a certain period of time, regardless of market conditions.
An active fund has a manager at the helm (and usually a team of analysts and researchers) who will select the assets he or she believes will increase in value. Actively-managed funds have the capacity to outperform their peers and the market as a whole. They are usually slightly more expensive than passive funds because investors must pay for the manager’s expertise.
Some funds have a benchmark by which they can be measured. If the fund manager intentionally deviates from the performance of the benchmark to achieve higher returns then it is known as active risk.
Active share is the percentage of a fund’s holdings that differs from its benchmark. For example, an active share of 60% indicates that 60% of the fund differs from the benchmark.
There are two main types of investment management: active and passive. An active fund manager will use judgement, research, and analysis in order to select investments for the fund.
Alpha is a measure of performance and is the result of active management. It can be positive or negative. A positive alpha indicates a fund has performed better than its benchmark.
A type of non-traditional investment that includes commodities, infrastructure, private equity, and venture capital.
For a period greater than one year, this measures how much an investment has grown on average each year.
Annual Management Charge (AMC)
The fee paid for having your investment managed – usually a percentage of assets under management (AUM).
A type of insurance providing a regular income in exchange for payment (via a lump sum or instalments).
Investments can be divided into five main groups called asset classes: cash, bonds, property, shares and alternatives.
How an investment is split across asset classes. For example, a fund may hold a combination of shares, bonds and cash.
Assets under management (AUM)
The total value of investments held within a portfolio.
A portfolio combining shares and bonds to even out risk and maximise return.
Accounting statement showing a company’s financial position.
Bank of England
The UK’s central bank, which sets interest rates, issues banknotes and acts as a regulator of the UK’s financial system.
Bank of England base rate
The interest rate at which the Bank of England lends to institutions.
A common term for interest rates and percentages in finance. One basis point equals 0.01%.
Below investment grade bonds
Also known as high yield bonds. These are issued by companies considered to be riskier and therefore generally pay a higher level of interest.
A standard, (usually an index or a market average) that an investment fund’s performance can be measured against. Many funds are managed with reference to a stated benchmark.
Measures the average extent to which a fund moves relative to the broader market. The beta of a market is 1, so a fund with a beta of more than 1 is considered more unpredictable. A fund with a beta of less than 1 is considered less unpredictable.
Bid offer spread
The difference between the buying and selling prices of an investment in a dual priced fund.
Bonds provide a way for governments and companies (issuers) to raise money. For an upfront payment from investors, a bond issuer will make annual interest payments and repay the initial investment amount on a specified date. Also known as fixed income or fixed interest investments.
Another term for profit or loss (this figure is shown on the bottom line of a company’s P&L statement).
When a manager prioritises a company’s financial history, management and potential over general market or sector trends when making investment decisions.
The total assets of a person or company, minus any money they owe or financial obligations they have.
When the current value of an investment is greater than the initial amount invested.
Cash and cash equivalents
Short-term investments that are highly accessible, including deposits, money market instruments and short-term government bonds.
Cash flow statement
A financial statement showing the movements of cash in and out of a business over a given period.
A company that invests in other companies or assets. There are a set number of shares in the fund, and this number does not change regardless of the number of investors.
Collective investment scheme
A fund combining the assets of various individuals and organisations to create a large, diverse portfolio.
Physical materials such as oil, agricultural products and metals.
Interest calculated on an initial loan, and on the accumulated interest of previous periods of the loan. It is the interest on the interest.
Contract for differences (CFD)
A type of derivative which enables investors to trade on the price movements of an underlying investment. If the value of the money invested increases over the given period, then the seller will pay a percentage to the buyer. But if the value of the capital decreases, then the buyer must pay the seller.
Consumer Price Index (CPI)
A measure of UK inflation that reviews the change in the cost of a basket of consumer goods and services. It includes the costs associated with transportation, food and medical care.
Trading against the market. For example, buying a share that most others are selling, and selling a share that most others are buying.
Bonds issued by companies to raise money. The company agrees to pay interest and repay the initial amount invested at a specified point in the future.
A measure of how different investments’ values move in relation to each other. Highly correlated investments move up and down in value together, while investments with low (or negative) correlation tend to perform in different ways.
The regular interest payment paid on a bond until it matures.
An independent assessment of a bond’s quality and the creditworthiness of the issuer. They run from the highest rating AAA through to the lowest D. The higher the rating, the lower the risk of default – i.e. an investor not getting their original investment back.
Credit rating agency
A company that assigns credit ratings to debt issuers. Agencies include Fitch, Moody’s and Standard & Poor’s.
The difference in income (yield) between two bonds that share similar traits – e.g. maturity – but have different credit ratings. For example, if a 10-year UK gilt trades at a 1% yield and a 10-year UK corporate bond trades at a 3% yield, then the credit spread is 200 basis points (2%).
A company whose profits and share performance are relatively dependent on the pace and stage of economic growth.
A company whose profits and share performance are relatively independent of the pace and stage of economic growth.
Derivatives are sophisticated investment instruments linked to the rise and fall of the price of other assets.
Countries that tend to have established industries, good standards of living and stable economies. They are considered safer for investment than less developed markets.
Used to protect existing investors against the costs of buying and selling investments within the fund. It is normally only applied when those costs are significant.
The amount by which the share price is less than the net asset value per share.
Holding a variety of different investments across different asset classes with the aim of reducing risk.
A payment from a company to its shareholders, usually made in cash. Payments are generally made quarterly, bi-annually or annually.
When dividends are automatically invested in additional shares of a fund, instead of a cash payment.
The annual dividend per share divided by the current share price. It is useful for comparing investments.
Dual-priced funds have separate prices for buying (offer price) and selling (bid price) units. The buying price is typically higher than the selling price.
A measure of a bond’s sensitivity to changes in interest rates. The longer the duration, the more sensitive it is.
Earnings per share (EPS)
A financial measure showing a company’s profitability, calculated as income divided by the number of ordinary shares.
The changes that occur over time in an economy. The four main stages of the economic cycle are: expansion, peak, recession and recovery.
Developing countries that have stronger growt