This guide has been created for you to use with your clients to help make investment literature easier to understand and to clarify some of the more common terms. Emphasis has been placed on clarity and brevity rather than attempting to cover every single complex detail.
As you read through, you will notice that some words are hyperlinked. This means that the word or phrase also has its own entry, and that you may need to look this up to gain a fuller understanding.
We hope you find the guide useful and simple to digest. We have made every effort to ensure that the terms are accurately described, however, the descriptions are not definitive, and they may differ from other interpretations used.
Download a PDF version of the glossary here
A
Absolute Return Funds
Funds which are managed with an objective of generating a positive return over rolling 12-month periods.
Absolute return strategy
An absolute return investment strategy aims to deliver positive returns whatever the market does, rather than simply aiming to outperform a benchmark index.
Accumulation units
Units in a collective investment scheme where any income is automatically reinvested into the scheme. See also income units.
Active management
An investment management approach where a manager aims to beat the market through research, analysis and their own judgement. See also Passive management.
Active risk
To try to beat the returns of the benchmark the active investment manager must take different investment positions to the benchmark. Where positions are different, risks are also different. The risk that the manager takes relative to the risk of the benchmark is known as active risk. The higher the level of active risk, the greater the chance that returns will deviate from the benchmark.
Active share
Proportion of stockholdings in the fund that is different from the composition found in the benchmark.
Alpha
A measure fund/portfolio’s ability to outperform (+ value) or underperform (- value) its stated benchmark index. This can help you identify whether an actively managed portfolio has added value in relation to risk taken relative to a benchmark index. A positive Alpha indicates that a manager has added value.
Alternative investments
Investments outside of the traditional asset classes of equities, bonds and cash. Alternative investments include property, hedge funds, commodities, private equity, and infrastructure.
Annual management fee
Every year your investment management company charges an annual management fee, usually a percentage of the amount invested.
Annualized return
For a period of greater than one year, a measure of the level of return that has been achieved on average each year.
Asset allocation
The apportionment of a portfolio's assets between asset classes and/or markets. For example, a fund may hold a combination of shares, bonds and cash. The weightings given vary according to the investment objective and the investment outlook.
Asset-backed security (ABS)
An investment that derives its value and income payments from a pool of illiquid (see liquidity). This allows investors access to a diversified pool of assets that they would not otherwise be able to buy, for example loan repayments.
Asset class
Broad groups of different types of investments. The main investment asset classes are equities, bonds and commercial property.
Authorized fund
A fund that is authorized and regulated by the UK financial regulator, the FCA (Financial Conduct Authority).
B
Benchmark
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.
Beta
Measures the average extent to which a fund moves relative to the broader market. Beta is a coefficient that measures price sensitivity to the market. Coefficient of 1 reflects strong correlation; value of 0 means no correlation; -1 reflects an inverse correlation.
Bid price
The price a buyer is willing to pay. In the context of funds, it is the price received by the investor when redeeming a share or a unit in a dual priced fund. See also offer price.
Bonds
Provide a way for governments and companies to raise money from investors for current spending requirements. In exchange for an upfront payment from investors, a bond will typically commit the issuer to make annual interest payments and to repay the initial investment amount on maturity at a specified date in the future.
Book Cost
The original cost of an investment. While market prices may go up and down, the book cost remains the same.
Bottom up investing
Investment based on analysis of individual companies, whereby that company's history, management, and potential are considered more important than general market or sector trends (as opposed to top down investing).
C
Capital protection
An investment where there is an aim to preserve a specified amount of the initial investment.
Capital discipline
Where a company exercises discipline and prudence in how much money it borrows, raises and spends, in order to deliver the best returns to its shareholders and ensure its long-term stability.
Closed-end fund
Pooled investment vehicles that hold a portfolio of securities managed by an investment adviser and include all management investment companies that do not issue redeemable securities. They usually offer to the public a fixed number of non-redeemable securities.
Collateral
Assets pledged as security against a loan. If the debt can't be repaid, the lender is entitled to take ownership of the collateral.
Collective Investment Scheme (CIS)
A professionally managed fund which combines the money of a broad range of investors in a single investment vehicle. This pools costs and allows access to a wider range of investments than investors would generally be able to achieve individually.
Commodities
An asset class which encompasses a broad range of physical assets including oil and gas, metals and agricultural produce.
Corporate bond
A bond issued by a company.
Correlation
Correlation is a measure of how securities or asset classes move in relation to each other. Highly correlated investments tend to move up and down together while investments with low correlation tend to perform in different ways in different market conditions, providing investors with diversification benefits. Correlation is measured between 1 (perfect correlation) and -1 (perfect opposite correlation). A correlation coefficient of 0 suggests there is no correlation.
Coupon
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.
Credit default swap (CDS)
A CDS is a derivative. It is a type of insurance against the default of debt. The buyer of a CDS pays a premium to a CDS seller in exchange for the insurance that if the debt defaults, the CDS seller will pay it to them. The CDS seller is speculating against the risk of default and hopes to make a profit from the premium payments. The higher the risk of default, the higher the premium.
Credit Rating
Bond issuers can pay to have their bonds rated by a number of credit ratings agencies including Standard & Poor’s, Moody's and Fitch. The credit rating is designed to give investors an indication of the quality of the bond, providing a professional assessment of the risk that the issuer may default on interest and capital repayments. Credit ratings are subject to regular review and can and do change.
Credit rating agency
A company that assigns credit ratings to issuers of debt - such as governments or companies. Well-known credit rating agencies include Standard & Poor's and Moody's.
Credit Risk
The risk that a bond issuer will default on their contractual obligation to make interest payment to investors.
Currency Hedging
Reducing or removing the risk of incurring losses through currency movements. This is typically achieved through the use of derivatives such as futures or options.
Currency Risk
The risk of loss through adverse currency movements where a fund invests in assets which are priced in a different currency or currencies to that which the fund is priced in.
Current Yield
The annual income from an investment, expressed as a percentage of the current price. For example, if a bond that is worth £100 gives you an annual income of £6, the current yield is 6%.