AIC UK Equity Income

The Association of Investment Companies (AIC) UK Equity Income sector defines funds that invest primarily (over 80%) in the shares of larger, quoted UK companies, aiming to generate a yield above the average market yield. These trusts target both capital growth and income, generally focusing on established, dividend-paying companies.

Balance sheet

A financial statement that summarises a company’s assets, liabilities, and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Capital expenditure

Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment, or vehicles in order to maintain or improve operations and foster future growth.

Cyclical stocks

Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as mining.

Discount/premium (investment trusts)

The amount by which the price-per-share of an investment company is either lower (at a discount) or higher (at a premium) than the net-asset value per share (cum income), expressed as a percentage of the net-asset value per share.

Diversification

A way of spreading risk by mixing different types of assets or asset classes in a portfolio on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.

Dividend

A variable discretionary payment made by a company to its shareholders.

Earnings per share (EPS)

EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.

Equity

A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bond. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

FTSE All-Share Index

The FTSE All-Share Index is a market-capitalization weighted index representing the performance of roughly 600–800 of the largest eligible companies listed on the London Stock Exchange (LSE). It covers approximately 98% of the UK’s total market value, combining the FTSE 100, FTSE 250, and FTSE SmallCap.

Gearing

Gearing is a measure of a company’s debt relative to its equity, showing how far its operations are funded by lenders versus shareholders. For investment trusts: The effect of borrowing money for investment purposes (financial gearing). The amount a company can ‘gear’ is the amount it can borrow in order to invest.

Interest rates

The amount charged for borrowing money, shown as a percentage of the amount owed. Base interest rates (the Bank Rate) are generally set by central banks, such as the Federal Reserve in the US or Bank of England in the UK, and influence the interest rates that lenders charge to access their own lending or saving.

Macroeconomics

Macroeconomics is the branch of economics that considers large-scale factors related to the economy, such as inflation, unemployment, or productivity.

NAV total return (investment trusts)

The theoretical total return on shareholders’ funds per share reflecting the change in NAV assuming that dividends paid to shareholders were reinvested at NAV at the time the shares were quoted ex-dividend. A way of measuring investment management performance of investment trusts which is not affected by movements in discounts/premiums.

Ongoing charges (investment trusts)

The total expenses for the financial year (excluding performance fee), divided by the average daily-net assets, multiplied by 100.

Payout ratio

A measure of the proportion of earnings at a company that are paid out as dividends to shareholders, usually calculated as a percentage.

Portfolio

A grouping of financial assets such as equities, bonds, commodities, properties, or cash. Also often called a ‘fund’.

Premium

When the market price of a security is thought to be more than its underlying value, it is said to be ‘trading at a premium,’ the opposite of discount.

Share buybacks

Where a company buys back their own shares from the market, thereby reducing the number of shares in circulation, with a consequent increase in the value of each remaining share. It increases the stake that existing shareholders have in the company, including the amount due from any future dividend payments. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

Share price total return (investment trusts)

The theoretical total return to the investor assuming that all dividends received were reinvested in the shares of the company at the time the shares were quoted ex-dividend. Transaction costs are not taken into account.

UK Equity Income OEIC sector

The IA UK Equity Income sector consists of OEICs (Open-Ended Investment Companies) that invest at least 80% in UK equities and must achieve a historic yield higher than the FTSE All-Share Index (on a 3-year rolling basis). These funds typically focus on large-cap, dividend-paying companies to provide income and potential capital growth, making them suitable for income-seeking investors.

Valuation metrics

Metrics used to gauge a company’s performance, financial health, and expectations for future earnings, e.g. P/E ratio and ROE.

Yield

The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price. For investment trusts: Calculated by dividing the current financial year’s dividends per share (this will include prospective dividends) by the current price per share, then multiplying by 100 to arrive at a percentage figure.