Welcome to our investment glossary. Here we de-bunk some of the industry's most common terms.
A type of investment strategy that aims to make a positive return on investment regardless of how well the overall market is performing. This means that even if the market is going down, an absolute return strategy will still try and make money.
An investment management approach where a portfolio manager aims to beat the market through research, analysis and their own judgement. For example, an active UK equities portfolio manager may aim to beat the performance of the FTSE All-Share index. See also passive management.
A measure of investment performance relative to a market. For example, an equity fund delivers returns of 9%. If the broader equity market has delivered 4%, the fund has delivered 5% of alpha.
Investments outside of the traditional asset classes of equities, bonds and cash. Alternative investments include property, hedge funds, commodities, private equity, and infrastructure.
The amount of money an investment makes on average each year (expressed as a percentage). For example, over three years a fund delivers returns of 4%, 6% and 3% - its annualised return is 4.3%.
The target investment split between different asset classes in a portfolio. This is based on the long-term risk and return characteristics of asset classes and is designed to reflect an investor’s investment objectives and attitude to risk.
Broad groups of different types of investments. The main investment asset classes are equities, fixed income, cash and alternatives (such as property and commodities).
Assets under management (AUM)
The value of an entity's entire assets for which it is responsible.
A standard, usually an investment index, that a fund's performance can be measured against. For example, a UK equity fund is managed against the FTSE100 index. If the fund does better than the index, it has outperformed; if the fund has done worse, it has underperformed.
A measurement of an investment's volatility relative to the broader market. The market's beta is always 1 - if an investment has a beta of more than 1, it is more volatile than the market. In other words, if the market rises, the investment also rises but to a greater extent; a beta of less than 1 and the investment moves to a lesser extent. If the beta is below zero, this indicates the investment will likely move in the opposite direction to the market.
A loan where the issuer agrees to pay the investor a fixed amount of interest at regular intervals and to repay the initial investment amount (principal) at a specified date in the future (maturity date).
When the issuer of a bond is unable to pay back the bondholder, the bond is said to have defaulted.
An investment approach that focuses on analysing individual companies or securities, rather than making investment decisions based on broader economic or market trends.
The amount by which an asset increases in value over its purchase price. The gain is not realised until the asset has been sold.
An asset class which encompasses a broad range of physical assets including oil and gas, metals and agricultural produce.
Funds that are used as building blocks to create a diversified investment portfolio. These funds typically invest in a specific asset class or sector, such as large-cap stocks, small-cap stocks, or bonds. These funds are not available in the retail marketplace.
A category of companies that provide goods and services that are considered non-essential or discretionary, meaning they are not necessary for basic living but are purchased by consumers when they have extra income. Examples include clothing and accessories, cars and entertainment. Companies in the consumer discretionary sector may be involved in the design, manufacture, marketing, and sale of these products and services.
A category of companies that provide goods and services that are considered essential or staples, meaning they are necessary for basic living and are purchased by consumers regardless of economic conditions. Examples include food, beverages, household products and healthcare products. Companies in the consumer staples sector may be involved in the production, processing, marketing, and distribution of these products and services.
A type of fixed income investment that companies issue to raise capital. When an investor buys a corporate bond, they are essentially lending money to the company that issued the bond. In return, the company promises to pay back the principal amount of the bond (the initial investment) plus interest over a set period of time.
A statistic that measures the degree to which two investments (for example equities and bonds) move in relation to each other.
The regular interest payment paid on a bond. It is described as a percentage of the face value of an investment. So a bond with a face value of £100 with a 5% coupon will pay £5 a year.
Debt investments that are issued by companies, governments, or other entities. Credit investments are essentially loans that investors make to the issuer, and in return, the issuer promises to pay back the principal amount of the loan plus interest over a set period of time.
An indicator of how likely a borrower is able to repay a loan. The higher the rating, the more likely the borrower will be able to meet their debt obligations. Credit ratings agencies, such as Standard & Poors, Moody's and Fitch Ratings are well-known entities that issue ratings to companies and governments.
The difference in the income return on an investment between two types of debt investments, typically bonds. The spread is calculated by subtracting the income return of a lower-risk investment from the income return of a higher-risk investment. If credit spreads are widening (i.e. the difference between the income return of two investments is increasing), it is typically a sign that investors are becoming more risk-averse and are demanding a higher premium for investing in riskier products. Conversely, if credit spreads are narrowing (i.e. the difference between the income return of two securities is decreasing), it is typically a sign that investors are becoming more optimistic about the economy and are willing to take on more risk.
A risk that an investment's value will be affected by changes in currency exchange rates.
A period of economic contraction that is part of the normal business cycle. In a typical business cycle, there are periods of expansion (when the economy is growing) and periods of contraction (when the economy is shrinking). A cyclical slowdown is a type of contraction that occurs when the economy slows down after a period of growth.
The legal limit on the amount of money that a government is allowed to borrow to fund its operations.
The risk that an individual or entity is unable to meet their debt obligations, i.e. unable to pay back what they owe, including interest payments.
Stocks of companies that tend to do well during tough economic times. These companies are often in industries that provide essential goods or services that people need no matter what's going on with the economy, like utilities, healthcare, and consumer staples. Defensive stocks are considered less risky than other stocks because they are less sensitive to changes in the economy.
Derivatives are financial instruments that get their value from other things, like equities, bonds or commodities. They can be used for different purposes, like protecting against changes in the price of an asset, trying to make money by predicting the future price of an asset, or getting exposure to an asset without actually owning it.
Spreading your money across different types of investments within your portfolio in order to reduce risk. If your portfolio only consists of a shares in a single company, you risk losing all your money if that company goes bankrupt. By diversifying and owning shares in different companies, you can reduce the negative impact that any single company will have on your portfolio should it suffer a downturn. Ideally, you will own a mixture of investments and asset classes which react differently to the same event, so a loss in one investment can be offset by gains in another.
A sum of money paid regularly by a company to its shareholders out of its profits.
The potential loss that an investor may incur from an investment. It is the opposite of upside, which refers to the potential gain that an investor may achieve from an investment.
A policy stance that is supportive of low interest rates and other measures designed to stimulate economic growth. For example, by lowering interest rates to make borrowing cheaper and encourage businesses and consumers to spend more. This can help to stimulate economic growth and reduce unemployment.
The sensitivity of the price of a bond to changes in interest rates. A bond with a longer duration will typically be more sensitive to changes in interest rates than a bond with a shorter duration.
Dynamic asset allocation
A more tactical approach to asset allocation that involves making adjustments to the portfolio's allocation based on short-term market conditions or other factors.
The natural pattern of growth and contraction that happens in the economy over time. It has four stages: expansion, peak, contraction, and trough. During the expansion phase, the economy is growing and during the contraction phase the economy is shrinking. The length and severity of each phase can vary, and the cycle can be influenced by various factors.
Countries that have fast-growing economies and may be going through the process of industrialisation. Examples include Brazil, Russia, India and China (often referred to as BRIC).
Also known as 'stocks' or 'shares', equities represent an ownership interest in an entity, such as a company. In other words, if you own equity in a company, you own part of that business.
Stands for Environmental, Social and Governance. It’s a way for investors to evaluate companies based on how they impact the environment, society, and their own corporate management[OV1] . Governance factors include remuneration, board structure and corporate strategy. Investors use ESG criteria to make investment decisions that align with their values and beliefs.
Exchange traded funds (ETFs)
Funds that track indices, sectors or commodities and are bought and sold on the stock exchange.
A monetary union of 19 European Union (EU) countries that have adopted the euro as their official currency.
A security which requires the issuer to pay a fixed rate of interest (coupon) at regular intervals. Bonds are the most common type of fixed income security.
Financial contracts that stipulate that an asset that must be bought or sold for a predetermined price on a future date.
Gross domestic product (GDP)
A measure of how much a country's economy is producing. GDP helps us understand how well the economy is doing and how much it is growing.
A type of fixed income investment issued by the UK government. They are considered to be among the safest investments available. They have a fixed interest rate and a specific maturity date, which can range from a few months to several decades.
Essentially an “I owe you” issued by a government to borrow money from investors. When you buy a government bond, you're basically lending money to the government for a set period of time, and in return, you'll receive interest payments. Government bonds are considered to be less risky[OV1] investments.
Investing in companies that are expected to offer future growth prospects that are above the average in their industry or sector.
A policy stance that is supportive of higher interest rates and other measures designed to control inflation. For example, a central bank may take a hawkish stance by raising interest rates in order to slow down economic growth and prevent inflation from rising too quickly.
Funds that target high positive returns in any market environment through the use of non-traditional portfolio management techniques. They are typically only suitable for sophisticated investors as hedge funds can be more complex compared to traditional investments such as mutual funds.
High yield bonds
Issued by companies that have a lower credit rating than investment-grade bonds. These companies typically have a higher risk of defaulting on their debt obligations, which is why high income return bonds are considered to be a higher-risk investment. Because of the higher risk involved, they generally offer higher yields than investment-grade bonds to compensate investors for the added risk.
An index is a collection of securities used to track a particular market, asset class, sector or industry. For example, the FTSE 100 tracks the performance of the 100 largest companies in the UK. Many funds are measured against an index in order to assess how well that fund has actually performed relative to a relevant market.
Bonds issued by the UK government that are designed to protect investors against inflation. Unlike conventional gilts, which pay a fixed rate of interest, the interest payments on index-linked gilts are adjusted for inflation.
A type of financial measure that tracks the performance of a group of investments, such as equities, bonds, or commodities. An index is designed to provide a snapshot of how the overall market or a specific segment of the market is performing. Also known as indexes.
A measure (in percentage terms) of the rise in the price of goods and services over a period of time.
Investment Association (IA)
A trade association for the UK's investment management industry. The IA maintains a set of benchmarks for different types of investment products. A benchmark is a standard against which the performance of an investment product can be measured.
Investment grade bonds
A type of bond that is considered to be a less risky[OV1] investment because the issuer has a good credit rating so is more likely to be able to pay back the money they have borrowed. They are usually issued by large, well-established companies or governments with a strong track record of financial stability.
A set of investment strategies and techniques used by fund managers to manage portfolios. There are several different investment styles, each with its own approach to investing and set of characteristics. See value and growth investing.
A type of collective investment fund that pools money from many investors to buy a portfolio of different assets, such as equities, bonds, and property. They are similar to mutual funds, but are structured as companies and are traded on stock exchanges like individual stocks.
An entity, typically a company or government, that sells securities (e.g. shares or bonds) in order to finance its operations.
The degree to which how quickly an asset can be bought or sold without impacting its price. For example, shares in very large corporations are highly liquid as they can be bought and sold almost as soon as you request. Real estate is illiquid since buying or selling property can take months if not years.
The study of an economy's behaviour as a whole. Key factors that are examined include inflation, unemployment and growth.
A measure of a company's size, calculated by multiplying the total number of shares a company has in issue by its current share price. Companies are commonly classified as either small cap, mid cap or large cap. There is no standard definition of these ranges but as a rough guide: large cap is over $10bn, mid cap is $2bn–$10bn and small cap is $250m–$2bn. The largest companies in the world have a market capitalisation in the hundreds of billions of dollars.
The term used for the cyclical and repeating pattern of markets which has four phases: slowdown, recession, recovery and expansion. See economic cycle.
A type of investment strategy that involves investing in a diversified portfolio of different asset classes, such as equities, bonds, property, and commodities. The goal of a multi-asset investment strategy is to achieve a balance between risk and return by spreading investments across different asset classes that behave differently in different market conditions.
Mutual funds pool money from a large number of investors with similar goals into a single investment product. They are managed by a dedicated investment professional (commonly know as the portfolio or fund manager) and can invest in tens to thousands of securities from a specific asset class or a range of asset classes.
Net asset value (NAV)
A term used to describe the value of all the investments held by a fund, minus any fees, expenses, or other liabilities. It's usually calculated on a per-share basis, which means it represents the value of one share in the fund. The NAV is calculated at the end of each trading day.
A financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price, on or before a specific date.
Ongoing charge figure (OCF)
The OCF is a measure of the total costs associated with managing and operating an investment portfolio. These costs include the management fees and additional expenses of the underlying funds but exclude any advice, platform charges, transaction fees or incidental costs.
Where an investment or investment portfolio has achieved a higher return than a benchmark or peer group over a specified period of time.
An investment management style that aims to replicate the performance of a market or index. For example, a passively managed UK equity fund may be expected to track the performance of the FTSE100 index. So if the FTSE100 was to rise, a passive fund would be expected to rise by a similar amount and vice versa.
A digital tool that allows investors to access a range of investment products and services from different providers in one place.
Where a government or central bank take steps to slow down the economy and control inflation. This is done by increasing interest rates, which makes it more expensive to borrow money and can slow down spending and investment.
A collection of investments
Involves investing in private companies, i.e. whose shares are not offered on a public exchange nor made available to the general public. Given the complexity and highly illiquid nature of private equity, it is typically only suitable for sophisticated investors.
Property, as an asset class, refers to real estate investments that are intended to generate income and/or capital growth. Property investments can take many forms, including residential, commercial, industrial, and retail properties.
Something that is developed and owned by a particular company and is not available to competitors.
Quantitative easing (QE)
A monetary policy tool used by central banks to stimulate the economy. In QE, the central bank buys financial assets, such as government bonds, from banks and other financial institutions, thereby increasing the money supply in the economy. By increasing the money supply, the central bank aims to lower interest rates and encourage lending, which in turn can boost economic activity and inflation. QE is typically used when traditional monetary policy tools, such as adjusting interest rates, have become ineffective.
Stocks of companies that are considered to be financially stable, profitable, and well-managed.
A type of investment that refers to physical assets such as property, commodities, natural resources, and infrastructure. Unlike financial assets such as equities and bonds, real assets have intrinsic value because they have a tangible presence in the real world.
Investments in physical property, such as land, buildings, and other structures. This can take many forms, such as buying and renting residential or commercial properties, investing in real estate investment trusts (REITs), or investing in real estate development projects.
Real estate investment trusts (REITs)
A type of investment fund that owns and operates income-generating residential and commercial properties.
The money an investment makes taking into account inflation (expressed as a percentage). If an investment grows in value by 5% over one year, and the rate of inflation is 2%, the real return is 3%.
Increasing and reducing exposure to asset classes within a portfolio to reflect any changes in the expected long-term returns from asset classes.
A period of economic decline characterised by a decrease in gross domestic product (GDP), employment, and trade lasting for at least two consecutive quarters.
The likelihood of incurring a loss from an investment. All investments carry risk but some are more risky than others.
The process of evaluating and comparing different sectors of the economy as potential investments. The most commons sectors are: consumer discretionary, consumer staples, energy, financials, healthcare, materials and industrials.
While the legal definition can vary, a security is a general term for an equity or fixed income instrument issued by a government or company.
Refers to a specific type of share that is issued. Each share class has unique characteristics, such as voting rights, fees, and dividend payments. Share classes give investors different options for investing in a company and this can impact fees and expenses as well as returns.
An individual or entity that owns a share(s) in a company.
A period of reduced economic activity characterised by a decline in indicators such as gross domestic product (GDP), employment, and consumer spending.
Also known as equities or shares, represent ownership in a company. When an investor buys a share of stock they are buying a small piece of ownership in that company.
Strategic asset allocation (SAA)
An investment strategy that involves setting target allocations for various asset classes (such as equities, bonds, property, and commodities) based on an investor's long-term financial goals, risk tolerance, and investment time horizon. The goal is to create a diversified investment portfolio that balances risk and return, and is aligned with the investor's overall investment objectives. This approach typically involves holding a mix of assets that are expected to perform differently in different market conditions, with the aim of reducing overall portfolio risk and maximising returns over the long term. The target asset allocation may be adjusted periodically (rebalanced) to reflect changes in market conditions.
Sustainable Development Goals (SDGs)
A collection of 17 global goals set by the United Nations General Assembly in 2015 as part of the 2030 Agenda for Sustainable Development. The SDGs are a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.
A financial contract between two parties to exchange cash flows or assets. Swaps can be used for a variety of purposes, such as hedging against risk or gaining exposure to different types of assets.
An investment strategy that focuses on investing in companies that are expected to benefit from a particular trend or theme, such as technological innovation.
An investment approach that starts with an analysis of broader economic and market trends, and then uses this analysis to guide investment decisions.
The total return of an investment comprises any capital appreciation (or depreciation) plus any income from interest or dividends over a period of time. For example, you buy 100 shares in a fund at £8 per share. So your initial expenditure is £800. The fund then pays 5% worth of dividends, so £40, which you then reinvest into the fund by purchasing an additional 5 shares, so now you have 105 shares costing you £840 in total. The value of the fund then increases to £12 a share. So the current value of your investment is £1,260 (£12 a share x 105 shares). Given your initial investment was £800, your total gains are £460 and the total return is £460 / £800 = 57.5%.
UK Consumer Price Index. It is a measure of inflation that tracks the changes in the price of a basket of goods and services purchased by households in the UK.
The potential gain that an investor may achieve from an investment. It is the opposite of downside which refers to the potential loss that an investor may incur from an investment.
Investing in companies that are seen to be undervalued relative to their current trading price. We believe they offer greater return potential in comparison to more expensive areas of the market.
A measure of how much a fund's returns may vary over a year.
In general terms, yield is the income return on an investment and usually expressed as an annual percentage. For example, if you buy a share for £50 and you receive a dividend of £2, the yield is 4% (£2/£50). With bonds, the yield is the bond's annual interest rate expressed as a percentage of its current market price.
The relationship between the yield (or interest rate) and the maturity of a series of fixed income investments.
The difference in yield between two different types of fixed-income investments, such as bonds. Yield spreads are often used as a measure of the risk associated with a particular investment, with higher spreads indicating higher risk.