Glossary

Please see below for a glossary of commonly used financial terms.

Absolute return

The change in an asset’s value over a defined period of time in simple terms – in contrast to a relative return, which measures the change in value compared with something else – usually a market index such as the FTSE 100.

ACD

Authorised corporate director. The officially designated manager of an OEIC or ICVC, who is obliged to comply with FCA regulations.

Active management

An investment style that is designed to exceed the return of a benchmark index. The portfolio of an active manager should look different to the benchmark it is judged against. See also passive management.

Active strategy

Strategy that uses active management techniques.

Asset backed securities (ABS)

Bonds that are based on a claim over specific assets or cashflows and are sometimes therefore seen as lower risk than unsecured bonds.

Benchmark

A performance target for investments. This is usually an index or a peer group (an acknowledged selection of similar investments).

Bonds

Defined as fixed income investments issued as debt by companies and public bodies to raise finance. Investors in bonds receive a previously agreed, non-variable interest payment (known as coupon) until the investment matures and the initial investment (or principal) is re-paid. Corporate bonds are those issued by companies to raise finance.

Bond fund

A portfolio composed of fixed income investments.

Capital growth

The rise over time of an investment’s value.

Capital preservation / protection

A conservative approach that prioritises protecting against capital loss over maximising potential gains.

Capital return

The measured performance of an investment according to its change in value over time, without factoring in dividends or any other income.

Cash investments

More liquid, short-term, low-return investments, usually providing a return via interest payments.

Certificates of deposit (CD)

Tradeable documentation provided by a bank, certifying money deposited at a given interest rate.

Closed-end investment company

A type of pooled investment, such as an investment trust, which issues a finite number of shares that are then listed on a stock exchange.

Collateralisation

Investments that protect themselves against risk by associating with other assets.

Collective investment schemes

Where a manager collects the money from multiple investors and uses this pool to buy stocks, bonds or other assets.

Commercial mortgage-backed securities (CMBS)

Investments that are backed by mortgages for commercial rather than residential property.

Commercial paper

Short-term corporate bonds.

Commodities

Resources-related physical investments like oil, gold or wheat.

Common stock

A share that represents partial ownership of a company. Common stock gives the owner a lower level of ownership from holders of preferred stock. Also known as ordinary shares.

Convertible stocks

Preferred shares that come with an option to be converted to common stock at a future date.

Corporate bonds

Fixed income investments issued by a company as a way to raise finance.

Cost and Charges Sheet

A regulatory document that was recently introduced as part of the new MiFID II regulations. The Cost and Charges sheet includes information on the OCFs and Transaction Costs.

Our Cost and Charges sheets are available in the Our funds section of our websites.

Coupon

Annual payments made to a bondholder.

Covered bonds

Bonds issued by mortgage lenders. The bonds are secured on the underlying mortgage payments, meaning that if the issuer fails to meet coupons, the bondholder has claim over the underlying assets. These bonds are regulated by the Bank of England, and are subject to various restrictions aimed at ensuring that these are high quality, resilient bonds.

CPI

Consumer Price Index. For UK investors, this is one of two common inflation measures (the other being RPI). Measures the average rise in prices of a predetermined list of consumer goods or services.

Debt securities

See bonds.

Derivatives

Investments that derive their value from another underlying investment.

Developed markets

Countries with more advanced economies. Developed markets according to the MSCI classification include the UK, US, Hong Kong and most eurozone countries.

Diversification

Investing in multiple asset classes or sectors in order to reduce risk.

Duration

An investment’s sensitivity to interest rate changes.

Economies of scale

Sometimes increasing size can reduce costs. For instance, in an investment fund, as a fund gets larger.

Efficient Portfolio Management

A list of approved investment techniques, including the use of derivatives, used to protect against excessive risk, reduce cost or generate extra income or growth.

Emerging markets

Markets in the developing world that are more advanced than frontier markets. Emerging markets according to MSCI classification include China, Russia, India and Brazil.

Equities

Stocks listed on an exchange.

Equity fund

A portfolio that invests in equities.

ESG

Environmental, social and governance. A list of predefined criteria that determines how a company operates in terms of sustainability and overall corporate governance.

Ethical criteria

Predefined restrictions on sectors or asset classes that a manager may invest in.

Exchange

A market where stocks or other investments are traded.

Exchange rate

One currency’s value compared with another’s.

Exchange-traded funds (ETFs)

A fund that is tradeable on an index in a similar way to individual shares. ETFs track other indices and provide a lower-cost method of diversifying a portfolio.

FCA

Financial Conduct Authority. The UK’s regulator of the finance industry.

Floating rate notes

A fixed income investment with a flexible interest rate linked to a benchmark rate, such as the federal funds rate.

Forward contract/transaction

Agreement to buy or sell an investment at a fixed time in the future at a price agreed in the present.

FTSE 100

Financial Times Share Index. A list of the top 100 UK companies, ranked by market capitalisation.

Gilts

Another name for UK government bonds, so-named as the certificates historically issued for government bonds had gilt edges.

Global Depositary Receipts (GDR)

Tradeable bank certificate that represents shares in a company registered in a different country from that of the issuing bank.

Government and public bonds

Bonds issued by governments or public bodies, not by corporations.

Growth investing

A style of investing that focuses on companies that are growing faster than average. Growth companies typically reinvest profits to support this faster growth, meaning dividends tend to be lower than average.

Hedging

Reducing risk by protecting an investment with another related investment.

Income

A form of payment generated by an investment, such as dividends (paid on shares) or coupons (paid on bonds).

Income investing

Investment style that focuses on generating attractive income, while still having some potential for capital growth.

Index linked bonds

Fixed income investments that are closely tied to an index of consumer prices/inflation.

Inflation

The average rise in prices of a predetermined list (or ‘basket’) of goods.

Interest rates

The cost of borrowing and using money. These are set by central banks and are expressed as a percentage owed of the amount borrowed.

Interest rate risks or exchange rate risks

Risks associated with changes in the level of interest rates or the difference between the comparative value of different countries’ currencies.

Investment grade bonds

Bonds that have been assessed by credit ratings agencies, and which are deemed to be higher quality (and less likely to default).

Large cap

Large capitalisation. These are the largest companies by stock market value, or capitalisation (measured as the number of shares in issue multiplied by the price per share). In the UK, the FTSE 100 is seen as a proxy for large cap UK companies.

LIBOR

London Interbank Offered Rate. The average interest rate at which London banks will borrow from each other in a given currency.

Liquid assets

Assets that are considered to be easily tradeable.

Liquidity

The availability of money for lending or ease of use/buying/selling an investment.

Long-term debt

Fixed income investments with a long maturity, typically of 15 years or more.

Market capitalisation

The number of a company’s shares multiplied by their price to give an overall value of a company.

Maturity

The time at which the principal and all interest related to a bond are to be paid.

Medium-term debt

Fixed income investments with a maturity that is neither short nor long, typically 5-15 years.

Mid cap

A description typically used in the UK only, for medium sized companies that make up the FTSE 250 index.

Money market instruments

Short-term, more liquid investments of high quality, issued by public bodies or corporations.

Multi-asset / multi-asset strategies

Investment approaches that use different asset classes – like shares, bonds and cash – in one portfolio.

Non-sterling bonds

Bonds denominated in currencies other than sterling.

OEIC

Open-ended investment company. A legal structure used for creating and managing investment funds. The OEIC is an ‘umbrella’ structure, with individual sub-funds underneath.

Overseas corporate bonds / overseas government bonds

Bonds from countries other than the UK.

Passive management

A technique that aims to match benchmark performance rather than beat it, by holding the same securities as that underlying benchmark.

Preferred stock

Also known as preference shares. Gives an investor in a company a higher priority and greater protection than common stock.

Price / earnings (pe) ratio

A measure that takes the price of a share and divides it by its earnings per share. Allows investors to measure the value of one company relative to another. Can be looked at for individual companies as well as at aggregate market level. There are a number of variations on the basic p/e ratio, such as the Shiller pe ratio – which uses 10-year, inflation adjusted earnings.

Primary market

The new issue market. So bonds or shares trade for the first time through the primary market, after which they are bought and sold on the secondary market.

Principal

The original payment by an investor to the issuer of a bond. This amount is paid back at the date of maturity.

Portfolio

See fund.

Quoted stocks

Stocks that are listed with a value on an exchange.

Rating

Companies can pay for a rating on its bonds by a ratings agency such as Moody’s or Standard & Poor’s. The rating reflects the likelihood of default (coupons not being paid) on the specific bonds.

Repo

A process of selling a bond and simultaneously agreeing to buy it back at a set point and price in the future, typically the next day. The difference in price is the implicit lending rate. This process is used by banks and other market participants as secured short-term lending / borrowing.

Residential mortgage-backed securities (RMBS)

Investments that are backed by mortgages for residential rather than commercial property.

Reverse repurchase agreements

Investments that are made on the understanding they will be sold at a higher price in future.

RPI

Retail Price Index. For UK investors, this is one of two common inflation measures (the other being CPI). Measures the average rise in prices of a predetermined list of consumer goods. List is slightly different to CPI – RPI includes mortgage costs, for example, whereas CPI does not.

Secondary market

Market where investments are bought and sold by those who already own them as opposed to primary market (issuance).

Securities

Investments, basically.

Short-term debt

Fixed income investments with a relatively short maturity, typically five years or less.

Small cap

Stocks of companies that are listed but not among the largest – often represented in specialist indices such as the FTSE SmallCap index in the UK.

SONIA

Sterling Overnight Interbank Average. The average overnight interest rate UK banks pay for unsecured transactions in sterling, and a proxy for the overnight lending rate available in the market.

Sovereign bonds

Fixed income investments issued by governments.

Spreads

The additional yield available on a bond over an equivalent government bond. Seen as the additional potential reward for the increased credit risk.

Standard deviation

A statistical term used when looking at market or fund prices and how these move relative to the average. A higher standard deviation denotes greater movements and hence higher volatility.

Sterling-denominated fixed income securities

Bonds issued in sterling.

Stocks / shares

Two words that mean the same thing, i.e. equities or common stock.

Sub-investment grade securities / non-investment grade

Bond with a lower rating than investment grade. A greater risk of default usually means a higher yield.

Supranational bonds

Fixed income investments issued by an international union of countries, sometimes for the purpose of developing economic ties.

Time deposits

Deposit that can only be removed after a certain date or time period.

Total Return

A combination of capital growth and income. Capital growth is defined as the rise in an investment’s value over time and income as the payment an investment generates, such as dividends or bond coupons.

Tracking error

The difference between the return of a fund and the reference or benchmark index.

Transferable Securities

Securities that can be readily transferred between two investors.

Treasury Bills (T-bills)

Zero coupon debt instruments issued by governments, T-bills are offered at a discount to their par (face) value. The investor receives the difference between the purchase price of the security and par value when the bill matures.

Treasury Inflation Protected Securities

Index linked bonds issued by the US government.

Unrated (debt securities)

Bonds that haven’t been assessed and rated by one of the key ratings agencies – typically because the company issuing the bond has not paid the ratings agencies to do this.

Value investing

An investment style targeting stocks that are being bought and sold at prices lower than their intrinsic value, i.e. that are undervalued by the market. Typically (but not always) these companies may be more established, and generating cashflows that can support dividend payments.

Volatility

Movements up or down in a market index or price of a bond, equity or fund.