We try to make our marketing materials clear, but some financial jargon is inevitable. This glossary explains some of the most common financial terms. Words in italics within the definitions indicate that they are explained elsewhere in the glossary.
Consists of taking an offsetting position in a related security, allowing risk to be managed. These positions are used to limit or offset the probability of overall loss in a portfolio. Various techniques may be used, including derivatives.
A strategy where a portfolio holds a select number of stocks that represent the portfolio manager’s best opportunities for outperformance. Fewer holdings mean each stock has a larger impact on under/outperformance. A high conviction approach can also lead to higher volatility/risk. See also concentrated portfolio.
High yield bond
A bond that has a lower credit rating than an investment grade bond. Sometimes known as a sub-investment grade bond. These bonds carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher coupon to compensate for the additional risk.
High yielding sectors
Sectors with stocks that have high dividend yield compared to a benchmark average.
The risk that the performance of an investment will move more than three standard deviations away from the mean suggested by a normal distribution curve. These are considered events that have a small probability of occurring, but which could have a significant effect on performance were they to arise. They occur at both ends of a normal distribution curve, with ‘left-hand tail risk’ the term used to describe negative tail risk factors, and ‘right-hand tail risk’ describing unlikely events that would have a positive impact on performance.
Markets’ reaction following the US Federal Reserve Chairman’s comments in May 2013, which suggested that the US was considering tapering (slowing down) the rate of its bond buying programme (quantitative easing).
The analysis of esoteric factors such as market liquidity and investor behaviour, and how they influence security prices. This contrasts with fundamental analysis, which looks at factors such as corporate health and the quality of management teams.
Tightening labour market
When unemployment is falling and there are few job vacancies available, which tends to push up wages.
A top-down fund manager builds a portfolio based mainly on the economic environment and asset allocation decisions. This contrasts with an approach based on individual security-specific criteria, known as bottom-up.
Total return swap
A derivative instrument where one party pays/receives the total return of the underlying asset or market index, in exchange for payments typically linked to LIBOR.
This measures how far a portfolio's actual performance differs from its benchmark index. The lower the number, the more closely it resembles the index.
When a country's imports exceeds the value of its exports.
Where movement in the market is relatively small (either upwards or downwards).
Securities that can be transferred from one party to another without restrictions.