Glossary

A

AAA rated bonds: The highest rating given to bonds by bond rating agencies to indicate their credit quality.Bond ratings are expressed as letters ranging from 'AAA', which is the highest grade, to 'C' ("junk"), which is the lowest grade.
ABI: The Association of British Insurers is the trade association for the UK's insurance industry.
Absolute return fund: An absolute return investment fund aims to offer positive returns to investors, regardless of stock market conditions. The word absolute is used to show that this type of fund is different from investment funds that measure performance in relation to each other or an index.
Accumulation units: You can often hold different types of units in investment funds. Accumulation units reinvest income automatically back into the fund. With income units, the income is distributed to the fund’s investors.
Active fund manager: An active fund manager will select companies whose stocks or shares he or she believes are likely to increase in value the most. He or she will aim to beat the benchmark. A passive manager seeks to match the returns of the benchmark.
Alpha: A positive alpha is a measure of how much a fund has outperformed its benchmark. A negative alpha is a measure of how much a fund has underperformed its benchmark. It is often seen as a key measure of the value of an active fund manager.
Annualised volatility: Investment funds move up and down in value with market conditions. But some move up and down more than others and can therefore be more risky. Annualised volatility is a way to measure this. We measure the annualised standard deviation (see volatility definition) of the monthly returns of a fund over a three-year period. This helps you see which funds move up and down more than others.
Asset: Investment funds are full of assets. An asset is something that you can normally buy and sell, such as shares in a company, or bonds.
Asset allocation/asset mix: The mix of different assets that make up an investment fund. For example, 60% may be in shares and 20% in fixed interest investments and 20% in property. The asset mix can also refer to where in the world your money is invested – the geographical asset allocation. For example, 50% of a fund’s shares may be in the UK, another 40% in North America and 10% in Japan.
Asset class: This refers to the different types of investments that funds or individuals invest in, such as shares, bonds and property.
Asset management: The process in which fund managers buy and sell assets for investment funds. This includes research, building up investment portfolios and keeping an eye on their progress.
Authorised Corporate Director (ACD): A corporate body or an authorised person given powers and duties under Financial Services Authority (FSA) regulations to operate an OEIC. The tasks include managing the company’s investments and pricing its shares accurately so they can be bought and sold.

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B

Benchmark: This is simply how we compare like with like, and is the setting of an appropriate performance target for a fund. The benchmark could be an index such as the FTSE 100 Index, or perhaps a ‘league table’ of similar funds. The benchmark is usually stated when the fund is launched. We can also benchmark an individual fund’s asset allocation. At any time a fund is underweight, neutral or overweight in its holdings of a particular asset.Here’s an example. An average investment fund in a league table has 50% in shares. Our investment fund has 45% in shares. So we say that our fund is underweight in shares. And if our fund also had 50% it would be neutral. If it had 60%, it would be overweight.
Beta: Beta is a measure of how closely the performance of the fund has mirrored its chosen benchmark. If the beta is one then it is exactly the same. If the beta is 1.1, it implies that a fund has risen or fallen by 10% more than the its benchmark. Passive fund managers aim for a beta of one.
Bid price: Some funds have two prices (dual priced). The price at which you can sell units is called the bid price. The price at which you can buy units is higher and called the offer price.
Blue chip: This term is used to describe the shares of the largest, well-established and financially sound companies in any particular industry. In the UK, most blue chip companies form part of the FTSE 100 index.
BNY Mellon CAPS: One of the largest performance measurement and benchmarking services. Often used by trustees of pension funds to measure performance. CAPS stands for Combined Actuarial Performance Services.
Bond rating agencies: As the name suggests, these are companies that specialise in analysing and publishing information about the status of bonds. Such organisations include Standard and Poor’s and Fitch and Moody’s.
Bonds: These are issued by governments or companies in order to raise money. In exchange, the investor(or buyer of the bond) is paid a set amount of interest regularly. This is why they are also known as fixed-interest securities. Bonds issued by the UK Government and traded on the UK stock market are known as gilts. Bonds issued by companies – corporate bonds – usually carry a higher rate of interest since they don’t have the government’s support behind them. Bond prices move up and down with market conditions.
Bottom-up: A bottom-up approach to investing means that the fund manager will normally focus on choosing the shares of specific companies. It’s the company that matters, not the industry or the state of the economy. These issues and asset allocation guidelines are considered, but are not of primary importance. This is a very different approach to a top-down fund manager.
BRIC: A term used to refer to the countries Brazil, Russia, India and China.

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C

Call option: This is a specific type of derivative. A call option is a contract that gives the holder the right to buy an asset at a predetermined price in the future. This is usually a financial asset, such as shares or bonds. It can also be a contract based on an index, such as the FTSE 100 index.
Capitalisation: This is the total market value of a company. It is calculated by multiplying the number of shares by the price of each share. Companies are usually classified as either large cap, mid cap or small cap.
CAPS Pooled Pension Fund Survey: This is a survey provided by Russell/Mellon Europe Ltd, showing the past performance of pension funds. It features rates of return calculated both net and gross of fees. There is a specific CAPS Pooled Pension Fund Survey for each sector.
Certificates of deposit (CDs): These are certificates offered by banks and similar organisations. CDs are similar to time deposits, where the investor must tie-up money for the a set period, but can be sold to other investors if required. They can have a term anywhere from one month to six years.
Closed-end fund: A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded on a stock market.Unlike an open-ended investment company (OE IC), a closed-ended fund has a fixed number of units in issue and the fund manager has no obligation to buy back units from investors. Investors can only buy units if there is a holder of units willing to sell them in the open market. Conversely, holders of units can only sell if they can find an investor willing to buy them.
Collective investment scheme: A generic term for investment funds with many investors, for example unit trusts and investment trusts. These are managed by professional managers. By pooling their investments, investors can gain exposure to a wide number of underlying investments. At the same time, there is the opportunity to spread risk.
Convertible bonds or convertible loan stock: These are bonds issued by companies that pay fixed rates of interest. Later, you can exchange these for shares of the company that issued them.
Corporate bonds: Corporate bonds are issued by companies to raise money. These are similar to government bonds but often carry more risk. Corporate bonds pay a regular rate of interest and are usually redeemed at their issue price on a specific date.
Coupon: The interest payment from a bond.

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D

Dealing cycle: This is the time it takes to buy and sell units in a fund. After that, a unit price will be used for future transactions. The dealing cycle determines which day’s unit price will be used for transactions on your policy.
Debenture: This is a loan made to a company secured against its assets.
Debt Related Securities: Another name for Bonds.
See Bonds
Demutualisation: Building societies and mutual insurers are normally owned by their members or customers. When these organisations demutualise, they become companies listed on the stock market.
Deregulation: Any attempt to make a market more efficient by removing or reducing restrictions.
Derivatives: A derivative is a financial instrument – or more simply, a contract between two parties – that has a value determined by the price of something else (called the underlying – for example in the case of a derivative on a share, the share is the underlying). Its value is based on the expected future price movements of the asset it is linked to – such as a share, a currency, or an index such as the FTSE 100 Index. There are many kinds of derivatives, including put options, call options, futures and warrants.
Diversification: This means spreading risk by investing in many different types of assets. For example, you can diversify across asset classes, by spreading your money across, shares, bonds or property. Whilst there is no guarantee, the logic is that if one asset falls in value, or goes bust, the other assets can compensate.
Dividend yield: This is a measure of the earnings of a particular share. It is calculated by dividing the annual dividends paid out by the share, by the share price. For example, if the share price is 65p and the dividend paid is 4p, the yield is (4/65) x 100 = 6.15%. It should not be confused with percentage returns from deposit based savings accounts.
Dividends: This is a payment from a company’s profits or earnings to its shareholders.
Dow Jones Index: The most quoted US stockmarket index, which measures the performance of 30 top US company shares.

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E

Emerging Markets: The financial markets of developing economies.
Equity/Equities: An equity is a share in a company, and for this reason equities are often referred to as 'shares' or 'stocks'.
Eurobonds: These are bonds issued in a currency other than the issuer’s home currency and outside the issuer’s home country. For example, a Japanese company issuing a Eurodollar bond in the United States. Eurobonds are debt contracts sold by companies, local authorities and utilities across the world. The issuing body has an obligation to pay interest at a specific rate and the principal amount on specified dates.

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F

Fixed income: Refers to any type of bond that yields a regular (or fixed) return.
FIXED INTEREST OR FIXED-INTEREST SECURITIES: See: Bonds
Floating Rate Notes: These are bonds that have a variable interest rate. This is often equal to a money market reference rate, such as LIBOR (the London Inter-Bank Offered Rate of Interest).
Flotation: This is when a company’s shares are sold on a stock market for the first time. It is also called a new issue.
FTSE 100 Index: This index shows the share prices of the UK’s top 100 companies as defined by market capitalisation. It is also known as the footsie.
FTSE All Share Index: An average of share prices of all companies on the London Stock Exchange, about 1,000 companies, often used as a guide to compare the performance of different companies and industries.
Fund management charge: The fund management company responsible for managing a fund will levy a fund management charge on the Fund. This is expressed as an annual percentage.
Fund manager: Fund managers look after investment funds for customers like you. They create portfolios, buy and sell assets and review the performance of the investment funds they manage.
Fund of funds: An investment fund which invests in other funds. This is also known as a multi-manager investment.
Futures: This is a specific type of derivative. A futures contract gives the holder the opportunity to buy or sell an asset at a certain date in the future at a certain price. The asset can be shares, bonds or commodities.

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G

Gilts (Gilt Edged Securities): Bonds issued by the UK government. The name comes from the thin layer of gold on the edges of paper securities issued by the Bank of England.

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H

Hedging: The name given to action taken to protect the value of a fund against changes in market movements. Hedging is normally used to reduce, minimise, or eliminate risk. Similar techniques can also be used to speculate in a market. Investments used can include put options, call options, and futures contracts.
Holdings: The same as assets: the shares, bonds or other investments that make up an investment fund.

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I

Income: The money shareholders receive from dividends is described as income. It can also mean the interest payments from government bonds and other investments.
Income units: You can hold different types of units in investment funds. With income units, the income is distributed to the fund’s investors.
Index-linked gilts or index-linked securities: Bonds issued by the UK Government and other governments and companies that pay regular interest payments, which rise and fall in line with an index, commonly in the UK the Retail Prices Index. The Government or company returns the original investment, normally increased (or decreased) in line with the same index, at a specific future date.
Infrastructure: Certain funds that specialise in sectors with road, rail, air, sea and telecommunications links.
International bond: A bond issued by a government or public company from a country outside the UK.
International securities: Shares, bonds and other investments from countries outside the UK.
Investment grade bond: A term used to describe bonds that meet a certain quality, based on ratings from credit rating agencies such as Standard & Poor's, Fitch or Moody's.
Investment trust: Investment trusts are public companies, listed on the London stock market. Investment trusts have fixed share capital. Its value fluctuates with the level of demand for the shares on the stock market. The price of an investment trust does not necessarily equal the value of its underlying assets.

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J

Junk bonds: See sub-investment grade bonds.

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L

Large cap funds: These are funds invested in larger companies, such as those listed in the FTSE 100 Index.
Liquid/Liquidity: Liquidity refers to how easily an asset can be turned into money. Liquid assets can quickly be converted to cash.
Long term: Long-term investments are normally designed to be held for over ten years.

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M

Manager of Managers: A type of multi-manager fund where the fund manager delegates management of different parts of a fund portfolio to other fund managers.
Market sector: Stock markets are divided into market sectors, showing different industries and services.
Medium term: Investments that are designed to be held for at least five years.
Mid cap funds: These are funds invested in medium-sized companies, such as those listed in the FTSE Mid 250 Index (an index showing the share prices of the UK’s 101st to 350th largest companies, as defined by market capitalisation).
Money market: The money market is the market for short term loans and cash deposits, floating rate notes, commercial paper and other similar instruments. You will sometimes see ‘money market’ as part of an investment fund’s asset mix. The term also covers ‘cash’ assets, which are low risk cash deposits.
Multi-manager: Multi-manager is a term that covers fund of funds and manager of managers, as well as combinations of the two called hybrid funds.

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N

Near cash investments: Highly liquid financial assets which can be easily converted into cash, such as Treasury Bills.
Neutral: Please see the explanation for benchmark.

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O

Offer price: The price at which you can buy units of a fund. This term is usually used when a fund has different prices or buying and selling. Please see bid price.
Open ended fund: The number of units in issue for an open ended fund varies from day to day. Units can be cancelled and created depending upon demand and the fund manager has a legal obligation to buy back units from investors.
Open Ended Investment Company (OEIC): An OEIC is a pooled investment fund of variable size set up as a company. It owns investment assets, for example shares, bonds and other financial instruments. The size of an OEIC varies. As money is invested additional units are created in the fund. As money is disinvested units in the fund are cancelled. OEICs are similar to unit trusts, although OEIC investors own shares in the company rather than units in a unit trust.
Ordinary shares: The most common form of a company’s share capital. The holders of ordinary shares are the owners of that company and can receive dividends.
Overweight: A fund is said to be overweight in an asset when it holds more than the appropriate index or benchmark weight.

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P

Passive fund manager: A passive fund manager seeks to match the returns of the benchmark, such as the FTSE 100 index. Likewise, an active fund manager will aim to beat the benchmark.
Portfolio: A widely-used term to describe a collection of investments.
Preference shares: Preference shares are shares issued by companies in a similar way to ordinary shares. They are different because they pay a predetermined dividend. Preference shareholders receive priority over ordinary shareholders when they receive their dividends. They also have priority when it comes to the distribution of assets.
Privatisation: This is when a state-owned company changes to a public limited company. This often means a flotation of new shares.
Property: Refers to money that is invested in commercial property such as office, retail, leisure and industrial developments.
Put options: This is a specific type of derivative. A put option is a contract that gives the holder the right to sell an asset at a predetermined price in the future. The asset is usually a financial asset, such as shares or bonds.

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Q

Quartile: This is 25% of a ranked list. A fund whose performance is 1st quartile in its sector is among the top 25% performers of all similar funds. A fund whose performance is 4th quartile in its sector is among the bottom 25% performers of all similar funds.

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R

Rank: This is where the fund ranks in comparison with its competitors. Most commonly used to compare performance over a specified time period. For example, a ranking of 16/144 means that the fund is in 16th position out of a total of 144 funds within its sector.
Real Estate Investment Trusts (REITs): Securities that are bought and sold like shares on the major exchanges. REITs invest directly in property.
Retail Prices Index (RPI): An index that measures changes in the cost of a basket of retail goods.

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S

Sector: Pension and investment funds are grouped by the ABI into different sectors. Each sector is based on a fund’s investment strategy and objectives. Dividing funds into sectors makes it easier to make comparisons between similar funds.
Securities: A widely-used term for both stocks and shares.
Shares: Owning shares in a company means you own part of it. It also means you can have a share of the company’s profits by receiving dividends. You can also have a share in the value of the company’s assets, through its share price. In the investment industry, shares are widely known as equities.
Short term: In investment terms, this usually means less than five years.
Single priced fund: A fund with the same price for buying and selling units.
Small cap funds: These are funds invested in smaller companies, such as those listed in the FTSE Small Cap Index.
Sovereign debt: Sovereign debt is issued by a national government within a specific country.
Stock selection: The process of choosing individual shares from a specific area of the market.
Stocks: In the UK, stocks means both shares and bonds. In the past, stocks meant UK government bonds only, when the term stocks and shares was widely used. In the US, shares are widely known as stocks.
Structured products: A pre-packaged investment product which is based on derivatives. Some structured products offer protection of the original investment if it is held for a specific timescale.
Sub-fund: An OEIC can be made up of a single fund or a series of funds called sub-funds.
Sub-investment grade bonds: A term used to describe bonds that fail to meet a certain quality, based on ratings from credit rating agencies such as Standard & Poor’s and Moody’s. Bonds rated BB down to D are known as ‘sub-investment grade’ or ‘junk’ bonds. A term used to describe bonds that fail to meet a certain quality, based on ratings from credit rating agencies such as Standard & Poor’s and Moody’s. Bonds rated BB down to D are known as ‘sub -investment grade’ or ‘junk’ bonds.

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T

Time deposits: Please see the explanation for certificates of deposit (CDs).
Top-down: This is a popular approach to fund management. A ‘top-down’ fund manager will construct a portfolio by focusing on a country’s economy before deciding which industries or sectors to invest in. It’s only then that individual assets will be chosen. This is a very different approach to a bottom-up fund manager.
Total Expense Ratio (TER): This is a measure of the total annual cost of investing in a fund. It includes the fund management charge and additional expenses such as trading fees, legal fees, and other operational expenses. The fund management charge is the charge the fund manager deducts to cover the management of the fund. The total cost of the fund is divided by the fund’s total assets to arrive at a percentage, which represents the TER.
Total return: This is the overall return on an investment or portfolio of investments, taking into account changes in capital values and income earned.
Treasury Bills: Short-term government bonds that bear no interest. They are sold at a discount and then redeemed at a predetermined price.

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U

UK fixed interest: Please see the explanation for bonds.
Underlying fund: For multi-manager investments or externally managed life and pension funds, the underlying fund is one of the choices the fund manager makes.
Underweight: A fund is said to be underweight in an asset when it holds less than the appropriate index or benchmark weight.
Unit price: The unit price is calculated by taking the value of the total fund, minus any charges, divided by the total number of units held in the fund. If the fund is not a single priced fund, the buying (or offer) price will differ from the selling (or bid) price.
Unit trust: This is a collective investment scheme. Investors’ monies are pooled together and invested according to set investment guidelines. Investors buy units, which represent their share of the underlying assets in the fund. The changing price of the units represents the rise and fall in the value of underlying assets of the fund.
Units: A collective investment is divided into equal parts called units. These units are then bought and sold by investors in a fund. The number of units held is multiplied by the unit price to determine the value of the investors’ holding in the fund.

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V

Volatility: Stockmarkets are described as volatile if they move up and down quickly. An asset that has many variations in its price is also described as volatile. The volatility of a fund depends on the assets in which it invests, for example a fund that invests totally in equities is likely to have a higher volatility than a fund solely invested in money market or cash investments. We measure volatility over what is known as a three-year standard deviation. This demonstrates a fund’s tendency to rise or fall in value over a specified period of time. Standard deviation measures how far actual fund returns have deviated from the sector average. This is so we can help compare like with like. The more a fund’s returns have varied from the sector average, the higher the volatility.

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W

Warrants: This is a specific type of derivative. A warrant is a contract that gives the holder the right, but not the obligation, to buy an investment trust, or company shares at a pre-determined price within a set period. Buying the shares is called ‘exercising’ the warrant. Warrant holders don’t have any of the rights that ordinary shareholders enjoy.

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Y

Yield: The yearly rate of income return on an investment. There are many different ways to calculate yield, depending on what type of investment it is.

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