Absolute Return

An approach to investing designed to deliver positive investment performance regardless of the investment environment. This differs from peer group or market index relative investing.

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Active Managers

Refers to investment managers who aim to outperform a particular benchmark/index by making decisions about the type of investment to buy or which stocks to buy.

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Alternative Investments

Asset classes other than bonds, equities and cash.

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Annualised Return

The average or the yearly returns over a number of years.

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Asset

Something owned, such as an investment, property or money in the bank.

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Asset Allocation

The act of deciding which categories of assets and in what proportions the ‘investment’ should be allocated to, at any given time, to yield the most attractive risk adjusted returns. This is one of the most important roles of the investment manager.

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Asset Categories

Types of assets, such as equities, gifts, corporate bonds or cash.

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Benchmark

Benchmarks have different uses in the investment community. One use of a benchmark is to act as a measure of performance, so you can see how the value of a security has changed over time relative to the rest of the market. A second use is to act as a guide or objective for performance of an investment fund.

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Bid

The price that an investor is prepared to pay for a security.

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Bonds

An alternative name for a fixed-income investment. Bonds are a form of debt investment, where the investor lends funds to the bond issuer. In return the lender expects to receive back the principal and interest (also known as coupons). Governments, states, local authorities or companies generally issue bonds.

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Capital

A general term for the financial resources such as cash.

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Cash

Legal tender such as coins and notes that can be exchanged for goods and services.

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Clean Shares

Clean shares, typically have a lower trail commission charge (annual management charge) than similar funds – therefore investment performance could be greater, however this is not guaranteed.

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Commodities

Commodities are raw goods such as oil, grains, metals and foods which can either be bought directly or traded on a commodities exchange. Commodities which are extracted or mined from the ground such as precious metals, coal or oil are usually referred to as ‘hard’ commodities, while those that are farmed or grown on land such as cattle and crops are generally known as ‘soft’ commodities. In terms of commodity investing, investors buy and sell commodities through ‘futures’ and usually do not invest in the underlying products.

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Conventional Gifts

Standard UK Government bonds that offer a fixed rate of interest over the life of the bond. They are not index-linked.

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Corporate Governance

How an organisation is run and how its management is accountable to the shareholders.

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Counterparty Risk

The risk to each party of a contract that the other party will not be able to meet its contractual obligations.

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Consumer Price Index (CPI)

 A measure of the rate of change in the prices of goods and services, including food, gas and electricity. The CPI is a key measure of inflation used by the Bank of England when considering interest rate decisions.

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Credit Rating

A credit rating is a formal evaluation of an individual or company’s credit history and capability of repaying financial obligations. Standard & Poor’s, one of the leading company credit rating agencies, defines their credit rating assessments as their opinion of the borrower’s capacity to meet in financial commitments on a timely basis. Moody’s and Fitch Ratings are two examples of other major credit rating agencies.

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Currency Risk

The risk of having assets or liabilities in another country’s currency which may be affected by strength or weaknesses in that currency relative to sterling.

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Current Yield

Also known as running yield.

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Debenture

A bond issued by a company, secured against the company assets.

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Defensive

Defensive companies are those which are less volatile that the market as a whole because their business remains relatively stable in good times and bad.

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Derivative

 A security, such as an option or futures contract, where the value is derived from the performance of an underlying security.

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Direct Property

Actual property, often described as bricks and mortar.

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Discretionary

Where a client allows their investment manager to make all of the decisions on how the portfolio is run. The investment manager can make investments without asking for the client’s approval, as long as it is a preferred class of investment and appropriate to the client’s requirements, including their risk-return appetite.

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Dividend Yield

The dividend on a share divided by the market price of the share.

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Emerging Markets

These are small stock markets in which investments can be made in newly industrialised countries (NICs) or developing countries.

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Equities

Ordinary shares in a company, which normally give their holders voting rights.

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Exchange-traded Funds (ETFs)

Investment vehicles that track any one of a wide range of sectors or indices. Traded like shares on major stock exchanges across the world, they can be bought or sold any time during the trading day at the market price. Similar to an index fund, an ETF seeks to reflect the performance of an index such as the FTSE All-share index. A good example of ETF offerings would be the Barclays’ iShares.

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Financial Conduct Authority (FCA)

The FCA and the Prudential Regulation Authority (PRA) are the bodies that regulate the financial services industry in the UK. These organisations supersede the Financial Services Authority on April 1 2013.

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Fixed Interest

A security that pays a fixed amount of interest over a given period.

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FTSE 100 Index

A share index of the 100 largest companies listed on the London Stock Exchange in terms of market capitalisation.

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FTSE 250 Index

An index containing the 101st to 350th largest companies listed n the London Stock Exchange in terms of market capitalisation.

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Gearing

Is a term that describes the amount of debt a company owes, usually through issuing corporate bonds, compared with the level of equity left in the company. The higher the amount of debt, the more sensitive the shares are likely to be to earnings growth. If the gearing gets too high, the prospects for the company are unlikely to be bright.

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Gift Edged

A UK Government-Issued fixed-interest security.

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Government Bond

A fixed income security issued by a government in support of national spending and denominated in the country’s own currency.

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Hedge Fund

A term which encompasses a wide range of funds that use non-traditional investment methods. The risks involved and the investments purchased vary considerably, but all share to some degree an absolute return orientation, limited correlation with equity and bond markets and, often, the use of borrowing strategies to enhance returns.

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Inflation

A measure of how fast prices are rising in the economy.

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Investment Trusts

A company quoted on the stock-exchange which invests in other companies and in securities. The value of these investments gives the basic value of the shares of the investment trust. The actual trade price depends on supply and demand.

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Liquidity

The amount of cash or investments that can be readily converted into cash in a portfolio. Can also be used to refer to how easy it is to buy or sell securities in a market without moving the price.

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Management Fees

Fees charged by investment managers for running portfolios or mutual; funds for clients.

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OIEC

Short for Open Ended Investment Company. This is a type of unit trust where the bid price and offer price are the same.

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Offer Price

The selling price of securities.

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Ongoing Charges Figure (OCF)

The OCF is calculated as the ratio of the total ongoing charges (applied to the fund) to the average net asset value (of the fund) calculated over a 12 month period and expressed as a percentage. It includes all payments made to the Fund Manager, the Investment Manager, the depositary or trustee and the custodian. It also includes other charges such as administration, audit and legal fees. However, it does not include all costs. Some of the costs excluded include performance fees, transaction costs (the cost of buying and selling securities) and fees paid directly by investors such as entry/exit fees.

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Overseas Equities

Equities traded overseas – that is, foreign equities.

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Pacific Basin

A term used to refer to those Asian countries which form an arc around the Pacific. Those countries include Thailand, Indonesia, the Philippines, Singapore and Malaysia.

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Passive Funds

Funds aiming to reproduce the performance of a relevant index. This is done by investing in securities in the same proportions as the index and so acting passively (like the index).

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Quantitative Easing

A monetary policy tool whereby a central bank actively increases the money supply in an economy in a bid to stimulate economic growth. This is typically implemented through large-scale purchases of financial assets such as government bonds. Quantitative easing was used by countries such as the UK and United States in the wake of the 2008 credit crisis.

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Quartile

The range of fund performance can be divided into four equal sections called the first, second, third and fourth quartiles. The quarter of funds performing best are in the first quartile.

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Ratings Agency

An agency that formally evaluates the ability of security issuers to meet their obligations with respect to those securities by assigning an appropriate credit rating. The largest ratings agencies are Standard & Poor’s Moody’s and Fitch.

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Retail Prices Index (RPI)

This is the most commonly used measure of inflation. The RPI is an index of the current prices of a representative ‘basket’ of goods. In this way it is possible to compare prices of goods at different times and work out the effect of inflation.

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Sovereign Bond

A fixed income security issued by a government in support of national spending and denominated in a foreign currency. Sovereign bonds are generally regarded as riskier than government bonds as they are subject to movements in exchange rates.

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Stamp Duty

A tax paid in the UK on purchases of investments, such as property and equities.

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Structured Products

These are pre-packaged investment strategies designed to meet the specific needs which cannot be met by standard financial instruments available in the markets. While they vary considerably in nature, they tend to offer a range of outcomes in respect of the return of initial capital invested, which is linked by a pre-set formula to the performance of an index, a combination of indices or other specific factors. Structured products tend to use derivatives to assist in delivering these outcomes. If performance is not within the specified limits the holder could lose some or all capital invested.

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Unit Trust

A pooled investment vehicle created under trust laws. Investors buy and sell units in the fund, based on the bid and offer prices set by the Investment management firm.

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Venture Capital

Capital offered by individual or specialised firms for an equity stake in a growing or developing business.

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Volatility

The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualised standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price rarely changes it is said to have low volatility.

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Yield

Income divided by price. It is often referred to in percentage terms.