Glossary

Active management

An investment management approach where a portfolio manager aims to beat the market through research, analysis and their own judgement. For example, an active US equities portfolio manager may aim to beat the performance of the S&P500 index. See also passive management.

Alpha

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.

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.

Annualised return

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%.

Asset class

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.

Benchmark

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.

Beta

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.

Bond

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).

Bond default

When the issuer of a bond is unable to pay back the bondholder, the bond is said to have defaulted.

Capital gain

The amount by which an asset increases in value over its purchase price. The gain is not realised until the asset has been sold.

Commodities

An asset class which encompasses a broad range of physical assets including oil and gas, metals and agricultural produce.

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 rating

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.

Default risk

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.

Diversification

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.

Dividend

A sum of money paid regularly by a company to its shareholders out of its profits.

Emerging markets

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).

Equities

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.

Fixed income

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.

Hedge fund

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.

Index

An index is a collection of securities used to track a particular market, asset class, sector or industry. For example, the S&P500 tracks the performance of the 500 largest companies in the US. Many funds are measured against an index in order to assess how well that fund has actually performed relative to a relevant market.

Inflation

A measure (in percentage terms) of the rise in the price of goods and services over a period of time.

Issuer

An entity, typically a company or government, that sells securities (e.g. shares or bonds) in order to finance its operations.

Liquidity

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.

Macroeconomics

The study of an economy's behaviour as a whole. Key factors that are examined include inflation, unemployment and growth.

Market capitalisation

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.

Mutual fund

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.

Passive management

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.

Portfolio

A collection of investments

Private equity

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.

Real Return

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%.

Risk

The likelihood of incurring a loss from an investment. All investments carry risk but some are more risky than others.

Security

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.

Shareholder

An individual or entity that owns a share(s) in a company.

Total return

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%.

Yield

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.

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