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.

A collective term for asset classes other than equities, bonds and cash. Alternatives include real estate, private equity, hedge funds and commodities.

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%.

Assets

Any financial instrument that has value and can be used to generate income or grow in value. This can include equities, bonds, property and commodities. The goal of investing in assets is to generate a return on investment, either through capital growth, income, or both.

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.

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).

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 type of fixed-income investment that allow investors to lend money to an issuer, such as a corporation (corporate bonds) or government (gilts or treasury bonds), in exchange for regular interest (coupon) payments and the return of their principal investment at maturity. Bonds are typically issued with a fixed interest rate and a specific maturity date, which can range from a few months to several decades.

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

Bottom up

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.

A type of asset class which are typically raw materials or primary agricultural products that can be bought and sold, such as copper, gold, oil. As an asset class, commodities can provide diversification benefits to an investment portfolio because they often have low correlation with other asset classes.

Component funds

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.

Consumer discretionary

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.

Consumer staples

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.

Corporate bonds

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.

Correlation

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.

Credit

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.

Credit spreads

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.

Currency exposure

A risk that an investment's value will be affected by changes in currency exchange rates. 

Cyclical slowdown

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 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.

Defensive stocks

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

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.

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.

Payments that some companies make to their shareholders as a way to share their profits. When you own a share of a company's stock, you are a part-owner of that company. As a shareholder, you may be entitled to a portion of the company's profits in the form of dividends. Companies typically pay dividends to their shareholders on a regular basis, such as quarterly or annually.

Downside

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.

Dovish

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.

Duration 

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.

Economic cycle

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.

ESG

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.

Eurozone

A monetary union of 19 European Union (EU) countries that have adopted the euro as their official currency.

A type of investment that provides a fixed or predictable return in the form of regular interest payments. Fixed income investments are typically issued by governments, corporations, or other entities as a way to raise capital to fund their operations or growth. The most common type of fixed income investment are bonds.

Futures

Financial contracts that stipulate that an asset that must be bought or sold for a predetermined price on a future date.

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.

Index-linked gilts

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.

Indices

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.

Inflation is when the prices of goods and services go up over time. This means that the same amount of money can buy fewer things than before. Inflation can be caused by various factors, such as an increase in the amount of money in circulation or changes in consumer demand. Inflation is measured using a price index, which tracks the prices of a basket of goods and services.

Insurance Linked Securities (ILS)

These are financial instruments that allow insurance companies to transfer risk to investors. Investors in ILS earn a return for taking on this risk, which is paid out of the insurance premiums the insurance company collects. The return on these securities is dependent on the absence of a triggering event, such as a natural disaster. If such an event occurs, investors may lose part or all of their investment. ILS provide a means of diversification for investors, as their performance is not correlated with traditional financial markets.

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 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. 

Investment style

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.

Investment trusts

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.

Market cycle

The term used for the cyclical and repeating pattern of markets which has four phases: slowdown, recession, recovery and expansion. See economic cycle.

Multi-asset

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.

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.

Platform

A digital tool that allows investors to access a range of investment products and services from different providers in one place. 

Policy tightening 

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

Investments in companies that are not publicly traded and are not easily accessible to individual investors. Private equity firms raise money from investors, such as pension funds and wealthy individuals, and use that money to buy companies or to invest in companies to help them grow and become more profitable. Private equity firms typically hold their investments for several years before selling them for a profit.

Property

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.

Proprietary

Something that is developed and owned by a particular company and is not available to competitors.

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%.

Rebalancing

Increasing and reducing exposure to asset classes within a portfolio to reflect any changes in the expected long-term returns from asset classes.

Recession

A period of economic decline characterised by a decrease in gross domestic product (GDP), employment, and trade lasting for at least two consecutive quarters.

Risk

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

Sector analysis

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.

Share class

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.

Slowdown

A period of reduced economic activity characterised by a decline in indicators such as gross domestic product (GDP), employment, and consumer spending.

Stagflation

A combination of stagnant economic growth, high unemployment, and high inflation. It is a situation where an economy experiences a slowdown or stagnation in economic output (GDP), along with rising prices and a decrease in purchasing power.

Stocks

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.

Swap

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. 

Thematic

An investment strategy that focuses on investing in companies that are expected to benefit from a particular trend or theme, such as technological innovation.

Top down 

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%.

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.

Yield curve

The relationship between the yield (or interest rate) and the maturity of a series of fixed income investments.

Yield spreads

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.