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.
The total return of a portfolio, as opposed to its relative return against a benchmark. It is measured as a gain or loss, and stated as a percentage of a portfolio's total value.
An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis and the investments they hold. The opposite of Passive Investing.
This measures how much a portfolio's holdings differ from its benchmark index. For example, a portfolio with an active share of 60% indicates that 60% of its holdings differ from its benchmark, while the remaining 40% mirror the benchmark.
A measure that can help determine whether an actively-managed portfolio has added value in relation to risk taken relative to a benchmark index. A positive alpha indicates that a manager has added value. Alpha is the difference between a portfolio's return and its benchmark’s return after adjusting for the level of risk taken.
An investment that is not included among the traditional asset classes of equities, bonds or cash. Alternative investments include property, hedge funds, commodities, private equity and infrastructure.
A term coined by John Maynard Keynes to refer to the emotional mindsets of investors and consumers, where confidence, or lack of it, can drive or hamper economic growth.
Arbitrage refers to the practice of simultaneously buying and selling identical (or similar) financial instruments in different markets in order to profit from a difference in price.
The allocation of a portfolio according to an asset class, sector, geographical region, or type of security.
Asset-backed securities (ABS)
A financial security which is ‘backed’ with assets such as loans, credit card debts or leases. They give investors the opportunity to invest in a wide variety of income-generating assets.
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.
Balance sheet strength
A company's financial position. See also: balance sheet.
An investment strategy usually referring to a fixed income portfolio of half in long-term bonds and half in very short-term bonds. The aim is to achieve improved risk-adjusted returns.
Barriers to entry
Factors hindering the ease of entering into an industry or business area such as high start-up costs, patents, brand loyalty etc.
A financial market in which the prices of securities are falling. A generally accepted definition is a fall of 20% or more in an index over at least a two-month period. The opposite of a bull market.
A standard (usually an index) that an investment portfolio’s performance can be measured against. For example, the performance of a UK equity fund may be benchmarked against a market index such as the FTSE 100, which represents the 100 largest companies listed on the London Stock Exchange.
Measure of a portfolio's or security relationship with the overall market. The beta of a market is always 1. A portfolio with a beta of 1 means that if the market rises 10%, so should the portfolio. A portoflio with a beta more than 1 means it will likely move more than the market average. A beta less than 1 means that it is likely the portfolio and market move in the opposite directions.
Blue chip stocks
Stocks in a widely known, well-established, and financially stable company, with typically a long record of reliable and stable growth.
A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments, and the eventual return at maturity of the original money invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.
An equity perceived to pay safe and predictable income with low volatility – characteristics that are more commonly associated with bonds. They are typically drawn from the utility, consumer staple and pharmaceutical sectors. They might be added to a portfolio to imitate bonds, hence their name.
The level of income on a security, typically expressed as a percentage rate. For a bond, this is calculated as the coupon payment divided by the current bond price. Lower bond yields means higher bond prices.
A term used to describe how much a business or asset is worth according to its balance sheet, this may differ from its market value.
Bottom-up fund managers build portfolios by focusing on the analysis of individual securities, in order to identify the best opportunities in their industry or country/region. The opposite of top down investing.
A financial market in which the prices of securities are rising, especially over a long time. The opposite of a bear market.
Buy and hold
An investment strategy where a long-term view is taken, regardless of short-term fluctuations in the market.
When referring to a portfolio, the capital reflects the net asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.
Spending on fixed assets such as buildings, machinery, equipment and vehicles in order to increase the capacity or efficiency of a company.
A measure of the funds a bank has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.
A typical definition is the benefit or cost of holding an asset. For a bond investor this includes the interest paid on the bond together with the cost of financing the investment and potential gains or losses from currency changes. Note that the meaning of ‘carry’ is dependent on the context used.
China A shares
Stocks listed on the Shenzhen and Shanghai stock markets.
Managing IT services remotely by buying computing and storing technology from specialised service providers over the internet.
Collective investment scheme (CIS)
A fund that pools money from investors to invest in shares, bonds, cash and/or other securities from the UK and elsewhere.
Any property used for commercial purposes. Commercial property has three main sectors: retail, office and industrial. It excludes residential property.
A physical good such as oil, gold or wheat. The sale and purchase of commodities in financial markets is usually carried out through futures contracts.
Compound Annual Growth Rate (CAGR)
Measures an investment’s annual growth rate over time, including the effect of compounding. CAGR is typically used to measure and compare the past performance of investments or to project their expected future returns.
A portfolio with a low number of holdings or with high weightings to its largest holdings. Such a portfolio would typically carry greater risk than a similar but more diversified portfolio; an adverse event impacting even a small number of holdings could create significant volatility or losses, but by contrast the potential for the portfolio to outperform is also greater. See also high conviction.
Consumer price index (CPI)
A measure that examines the price change of a basket of consumer goods and services over time. It is used to estimate ‘inflation’. Headline CPI or inflation is a calculation of total inflation in an economy, and includes items such as food and energy, in which prices tend to be more prone to change (volatile). Core CPI or inflation is a measure of long-run inflation and excludes transitory/volatile items such as food and energy.
Contract for difference (CFD)
A form of derivative between two parties. Profit and loss depends on the changing price of an underlying security, with the difference paid in cash. It provides exposure to all the benefits and risks of owning a security, but with neither party needing to actually own it.
Contingent convertible bonds (CoCos)
Bonds that, upon a predetermined ‘trigger event’ can be converted into shares of the issuer or are partly or wholly written off.
An investment style that goes against market consensus or a conventional approach. Contrarian investors believe that crowd behaviour can lead to mispricing opportunities in financial markets.
A bond issued by a company.
How far the price movements of two variables (eg, equity or fund returns) match each other in their direction. If variables have a correlation of +1, then they move in the same direction. If they have a correlation of -1, they move in opposite directions. A figure near zero suggests a weak or non-existent relationship between the two variables.
A regular interest payment that is paid on a bond. It is described as a percentage of the face value of an investment. For example, if a bond has a face value of £100 and a 5% annual coupon, the bond will pay £5 a year in interest.
Refers to bonds within fixed income markets where the borrower is not a sovereign or government entity. Typically, the borrower will be a company or an individual, and the borrowings will be in the form of bonds, loans or other fixed interest asset classes.
Credit default swap (CDS)
A form of derivative between two parties, designed to transfer the credit risk of a bond. The buyer of the swap makes regular payments to the seller. In return, the seller agrees to pay off the underlying debt if there is a default on the bond. A CDS is considered insurance against non-payment and is also a tradable security. This allows a fund manager to take positions on a particular issuer or index, without owning the underlying security or securities.
A marketplace for investment in corporate bonds and associated derivatives.
A score usually given by a credit rating agency such as Standard & Poors, Moody's and Fitch on their creditworthiness of a borrower. Standardised scores such as 'AAA' (a high credit rating) or 'B' (a low credit rating) are used however can vary depending on the credit rating agency. Moody's, another well known credit rating agency, uses a slightly different format with Aaa (a high credit rating) and B3 (a low credit rating).
The risk that a borrower will default on its contractual obligations to investors, by failing to make the required debt payments.
The difference in the yield of corporate bonds over equivalent government bonds.
A transaction that aims to protect the value of a position from unwanted moves in foreign exchange rates. This is done by using derivatives.
Current account deficit
Where the value of goods and services that is imported by a country exceeds the value of the goods and services that it exports.
Companies that sell discretionary consumer items, such as cars, or industries highly sensitive to changes in the economy, such as miners. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by ups and downs in the overall economy, when compared to non-cyclical companies.
Involves feeding a computer system a lot of data, which it can use to make decisions about other data. This data is fed through neural networks – logical constructions which ask a series of binary true/false questions, or extract a numerical value, from all the data which pass through them, and classify it according to the answers received.
The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due.
A decrease in the price of goods and services across the economy, usually indicating that the economy is weakening. The opposite of inflation.
A company reducing its borrowing/debt as a proportion of its balance sheet. It is the opposite of leveraging.
A security issued by a bank, which can be traded on an exchange to represent the underlying securities of a foreign company.
Investors wanting to pay less for a stock/ or, in the case of a bond, lowering the credit rating.
A financial instrument for which the price is derived from one or more underlying assets such as shares, bonds, commodities or currencies. It is a contract between two or more parties which allows investors to take advantage of price movements in the asset(s). Futures, options and swaps are all examples of derivatives.
Within property investing, this refers to investments in physical property assets (ie. buildings), as opposed to listed property shares. Also referred to as ‘bricks and mortar property’.
When the market price of a security is thought to be less than its underlying value, it is said to be ‘trading at a discount’. Within investment trusts, this is the amount by which the price per share of an investment trust is lower than the value of its underlying net asset value. The opposite of trading at a premium.
Discount rate: “discounts” future cash flows to a present value. Measuring the present value of future earnings allows an investor to have a better idea of the value of a business today.
A fall in the rate of inflation.
A technology that displaces an established technology and shakes up the industry; or the creation of a new industry by a ground-breaking product or service.
A security issued by a company that is either in default or in high risk of default and involves significant investment risk.
The income received on an investment relative to its price, expressed as a percentage. It enables comparisons of the level of income provided by different investments such as equities, bonds, cash or property, or between funds at a point in time.
A way of spreading risk by mixing different types of assets/asset classes in a portfolio. It is based on the assumption that the prices of the different assets will behave differently in a given scenario. Assets with low correlation should provide the most diversification.
A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.
The ratio of a company’s income to its dividend payment. The measure helps indicate how sustainable a company’s dividend is.
Dividend payout ratio
The percentage of earnings distributed to shareholders in the form of dividends in a year.
Down-market capture ratio
This measures how well a portfolio performs in relation to an index when the index falls. A portfolio with a down-market capture ratio of 90 indicates that in periods when the benchmark was down -10%, the portfolio was down -9% (so it outperformed the benchmark by 1%).
Limiting or reducing losses in the case of a decline in the value of the underlying security.
An estimation of how much a security or portfolio may lose if the market moves against it.
Dynamic Random Access Memory is a low-cost and high-capacity memory used in digital electronics, including the main memory in computers.
The difference between the highest and lowest price of a portfolio or security during a specific period. It can help evaluate an investment's possible reward to its risk.
How far a fixed income security or portfolio is sensitive to a change in interest rates, measured in terms of the weighted average of all the security/portfolio’s remaining cash flows (both coupons and principal). It is expressed as a number of years. The larger the figure, the more sensitive it is to a movement in interest rates. ‘Going short duration’ refers to reducing the average duration of a portfolio. Alternatively, ‘going long duration’ refers to extending a portfolio’s average duration.
Earnings per share (EPS)
The portion of a company’s profit attributable to each share in the company. It is one of the most popular ways for investors to assess a company’s profitability. It is calculated by dividing profits (after tax) by the number of shares.
Earnings before interest, tax, depreciation and amortisation is a metric used to measure a company’s operating performance that excludes how the company’s capital is structured (in terms of debt financing, depreciation, and taxes).
The fluctuation of the economy between expansion (growth) and contraction (recession). It is influenced by many factors including household, government and business spending, trade, technology and central bank policy.
The European Economic Area. The EEA provides for the free movement of persons, goods, services and capital within specific countries.
Effective duration measures the duration of a bond with embedded options and helps to evaluate the sensitivity of the bond's price relative to a change in the benchmark yield curve.
Efficient portfolio management
The idea of investing in a range of assets likely to deliver the best risk-adjusted returns and operate efficiently, ie, to reduce its risk or minimise its costs.
Countries that are transitioning away from being a low income, less developed economy to one that is more integrated with the global economy and is making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.
Enterprise Value/Earnings Before Interest, Taxes, Depreciation & Amortisation (EV multiple). The enterprise multiple is a company valuation metric taking into account a company's debt and cash levels in addition to its stock price, and relates that value to the firm's cash profitability.
Enterprise Value/Sales multiple is a quantifiable metric of a company's valuation based on its annual sales taking into account the company's equity and debt.
The difference between a security or portfolio’s return and the relevant benchmark’s return. Also often called ‘relative return’.
Exchange traded fund (ETF)
A security that tracks an index (such as an index of equities, bonds or commodities). ETFs trade like an equity on a stock exchange and experience price changes as the underlying assets move up and down in price. ETFs typically have higher daily liquidity and lower fees than actively managed funds.
Expansionary policies are usually introduced by monetary authorities with the aim to expand money supply and boost economic activity. This is achieved by mainly keeping interest rates low to encourage borrowing by companies, individuals and banks.
This refers to the part of a portfolio that is subject to the price movements of a specific security, sector, market or economic variable. It is typically expressed as a percentage of the total portfolio, eg, the portfolio has 10% exposure to the mining sector.
When money is spent in an economy, the spending results in a multiplied effect on economic output. Fiscal multiplier is the ratio in which the change in income is affected by government spending.
Connected with government taxes, debts and spending. Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.
An attempt by the government to boost the money supply in the economy through fiscal policies (tax rates, spending levels, etc) in order to reverse a deflationary trend.
Free cash flow (FCF)
Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.
The analysis of information that contributes to the valuation of a security, such as a company’s earnings or the evaluation of its management team, as well as wider economic factors. This contrasts with technical analysis, which is centred on idiosyncrasies within financial markets, such as detecting seasonal patterns.
A contract between two parties to buy or sell a tradable asset, such as shares, bonds, commodities or currencies, at a specified future date at a price agreed today. A future is a form of derivative.
Gearing is the measure of a companies debt level. It is also the relationship between a companies leverage, showing how far its operations are funded by lenders versus shareholders. Within investment trusts it refers to how much money the trust borrows for investment purposes.
British government bonds sold by the Bank of England, done to finance the British national debt.
A type of share that gives its shareholder veto power over changes to the company's charter. One golden share controls at least 51% of voting rights, and may be issued by private companies or government enterprises (typical in the UK and Brazil).
Gross domestic product (GDP)
The value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). It is usually expressed as a percentage comparison to a previous time period, and is a broad measure of a country’s overall economic activity.
Growth At a Reasonable Price (GARP)
GARP investors seek companies that are undervalued (value investing) with solid sustainable growth potential (growth investing).
Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value. See also value investing.
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 which has a lower credit rating below an investment grade bond. It is sometimes known as a sub-investment grade bond. These bonds usually 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.
Securities that cannot be easily bought or sold in the market. For example, shares with a high market capitalisation are typically liquid as there are often a large number of willing buyers and sellers in the market.
A statistical measure of the change in a securities market. For example, in the US the S&P 500 Index indicates the performance of the largest 500 US companies’ shares, and is a common benchmark for equity funds investing in the region. Each index has its own calculation method, usually expressed as a change from a base value.
While portfolios are built based on the benchmark, stocks are mainly chosen and weighted based on the managers’ fundamental stock evaluation.
The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures. The opposite of deflation.
An asset or investment that is expected to maintain or increase in value relative to the level of inflation over time.
Bonds where the coupon and principal payments are adjusted in line with the rate of inflation. For example, Treasury inflation protected securities (TIPS), issued by the US government. Inflation-linked bonds are also known as index-linked bonds, or ‘linkers’.
A ratio measuring a portfolio’s returns above that of a benchmark, relative to the level of risk taken. The ratio attempts to identify the consistency of a fund manager’s returns. It is calculated by dividing a portfolio’s excess return by the tracking error.
Investment into the physical assets of a nation or company, such as roads, bridges, water, sewerage and telecommunications. It tends to involve investors committing large amounts of money for long periods of time, but being rewarded with long-term and fairly predictable cash flows.
The foreign exchange market where banks exchange different currencies.
Rate of interest charged on short-term loans made between banks.
Measures how many times in a given period a company can replace the inventories sold. Retail companies and supermarkets are high volume, low margin businesses and typically have high inventory turnover.
A bond typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments. The higher quality of these bonds is reflected in their higher credit ratings when compared with bonds thought to have a higher risk of default, such as high-yield bonds.
An investment trust is a publicly quoted closed ended collective investment scheme that invests its shareholders' money in the shares of other companies.
Initial public offering; when shares in a private company are offered to the public for the first time.
No glossary definitions are available for J.
No glossary definitions are available for K.
Asset performance is often driven largely by cyclical factors tied to the state of the economy. Economies and markets are cyclical and the cycles can last from a few years to nearly a decade. Generally speaking, early cycle is when the economy transitions from recession to recovery; mid-cycle is when recovery picks up speed while in the late cycle growth slows, wages start to rise and inflation begins to pick up. At this stage, investors become invariably bullish believing that prices will continue to rise.
Large capitalisation stocks (large caps)
Market capitalisation, or market cap is a measure of a company's size. It is calculated by multiplying the number of shares in issue by the current price of the shares. Large cap stocks tend to be easily bought or sold in the market (highly liquid).
Leverage has multiple meanings:
- An interchangeable term for gearing: the ratio of a company's loan capital (debt) to the value of its ordinary shares (equity); it can also be expressed in other ways such as net debt as a multiple of earnings, typically net debt/EBITDA (earnings before interest, tax, depreciation and amortisation). Higher leverage equates to higher debt levels.
- The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.
London interbank offered rate. A widely-used benchmark rate that banks use to charge each other for short-term loans. It serves as a reference for short-term interest rates more widely.
Securities that can be easily bought or sold in the market.
The ability to buy or sell a particular security or asset in the market. Assets that can be easily traded in the market (without causing a major price move) are referred to as ‘liquid’.
In property investing, this refers to companies (including REITs) listed on a stock exchange, which derive most of their revenue from owning, managing or developing property.
Privately issued debt from non-investment grade companies, generally secured against company assets and that rank first in priority of payment. Interest payments are linked to money market rates.
A portfolio that only invests in long positions.
A security that is bought in the expectation that it will rise in value.
A portfolio that can invest in both long and short positions. The intention is to profit from price gains in long positions, and price declines in short positions. This type of investment strategy has the potential to generate returns regardless of moves in the wider market, although returns are not guaranteed.
Long the US dollar
Being long the US dollar implies buying/holding a position in the currency on the expectation that it will gain in value.
Low duration sectors/equities
Typically high-value, high-profitability, low-investment and low-risk stocks.
The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size, and is often abbreviated to ‘market cap’.
Small-scale lending to people without access to conventional finance, usually by individuals or small businesses.
Are used to measure the amount of money circulating in the economy.
Money market instrument
A short-term and highly liquid fixed income instrument.
The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money. See also fiscal policy.
An investment strategy which is based on the idea that perceived trends are more likely to continue than reverse. It is the expectation that buying stocks that are rising in price will continue to rise and ones which are falling will continue to underperform.
Money supply is the total amount of money within an economy. The narrow definition of money supply includes notes and coins in circulation and money equivalents that can be converted into cash easily. The broader definition includes various kinds of longer-term, less liquid bank deposits.
Monetary policy normalisation
The phasing out of central banks’ unconventional monetary policies (zero or low interest rates and purchase of short-term government bonds) that were put in place to stimulate the global economy following the 2008 Global Financial Crisis.
Coined in 1965 by Intel co-founder Gordon E. Moore, it is the ability to roughly double the number of transistors that can fit onto a chip (aka integrated circuit) every two years, enabling technology to become smaller, faster, and cheaper over time.
Mortgage-backed security (MBS)
A security which is secured (or ‘backed’) by a collection of mortgages. Investors receive periodic payments derived from the underlying mortgages, similar to coupons. Similar to an asset-backed security.
Non-accelerating inflation rate of unemployment (NAIRU) this is a level of unemployment within an economy that does not cause inflation to rise up. In effect, representing equilibrium between the state of the economy and the labour market.
Navigating the hype cycle
The hype cycle is a visual representation of the maturity, market perception and adoption of new technologies. Typically, markets overestimate the short-term potential of a new technology or innovation and underestimate its long-term potential, creating volatile movements both up and down for underlying stocks exposed to these technologies.
Negative inflation occurs when the overall price level decreases resulting in a negative inflation rate. This is different from ‘disinflation’, which implies a decrease in the level of inflation.
Net and gross exposure
The amount of a portfolio's exposure to the market. Net exposure is calculated by subtracting the amount of the portfolio with short market exposure from the amount of the portfolio that is long. For example, if a portfolio is 100% long and 20% short, its net exposure is 80%. Gross exposure is calculated by combining the absolute value of both long and short positions. For example, if a portfolio is 100% long and 20% short, its gross exposure is 120%.
Net asset value (NAV)
The total value of a fund's assets less its liabilities.
Next generation infrastructure
Includes the shift to “cloud infrastructure” - large industrial scale computing and storage that enables cheap fast compute power and access to machine learning
‘Real return’ is the return on an investment after taxes and inflation. ‘Nominal return’ includes taxes and inflation.
A value which has not been adjusted for inflation. Within fixed income investing it refers to a bond’s par value rather than its current (‘market’) value.
Companies/industries that provide essential goods such as utilities or consumer staples. While cyclical businesses produce goods and services that consumers buy when confidence in the economy is high, non-cyclicals produce items and services that consumers cannot put off buying regardless of the state of the economy, such as gas, food and electricity.
A derivative instrument used to obtain exposure to foreign currencies, which are not internationally traded.
Non-performing loan (NPL)
A loan where the borrower is failing to make interest payments, or where they have failed to repay the amount borrowed within the timescale agreed.
In a normal distribution, most of the examples in a set of data are close to the mean while relatively few examples tend to be further from the mean.
An Open Ended Investment Company (OEIC) is a type of collective investment scheme and is a common structure for UK-Domiciled Funds. Most are UCITS-compliant.
Off-balance sheet lending
Assets or liabilities that do not appear on a company's balance sheet but may be important to assess the financial health of a company.
A contract in which two parties agree to give one of them the right to buy or the right to sell a specific asset, such as shares, bonds or currencies, within a stated time period at a price that is fixed when the option is bought. An option is a form of derivative.
A company's internally–generated growth.
To deliver a return greater than that of a portfolio’s assigned benchmark. Also often called excess return.
Over the counter (OTC)
The trading of securities such as equities, bonds, derivatives directly between two parties rather than a formal centralised exchange e.g. London Stock Exchange.
To hold a higher weighting of an individual security, asset class, sector, or geographical region than a portfolio’s benchmark which it is measured against.
Property authorised investment fund. A fund designed to allow eligible investors to receive income from property investments tax efficiently.
A trade where a long position and a short position in two highly correlated securities (or assets) are matched with the aim of profiting from any market condition.
Bonds are usually redeemed at par value when they mature. For example, if they are issued at £100, they should pay back £100 par when redeemed at maturity. Also commonly called ‘maturity value’.
An investment approach that tracks an index. It is called passive because it simply seeks to replicate the index. Many exchange traded funds are passive funds. The opposite of active investing.
Money that is lent to individuals or businesses through online services that match lenders with borrowers.
An incentive fee paid to an asset management company if a portfolio outperforms a stated benchmark. Usually it is expressed as a percentage of the excess return above the benchmark.
A grouping of financial assets such as equities, bonds and cash. Also often called a ‘fund’.
An investment in a single financial instrument or group of financial instruments, such as a share(s) or bond(s). For example, a portfolio can have a position in a technology company, or through several different shares take a position in the technology sector.
A class of workers defined in many ways, such as by the instability and insecurity of their jobs, and the lack of benefits such as work pensions and paid holidays.
Securities that represent fractional ownership of a company and typically pay a fixed dividend but do not offer voting rights.
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’. Eg. within investment trusts, this is the amount by which the price per share of an investment trust is higher than the value of its underlying net asset value. Premium is the opposite of discount (security price trading lower than the underlying value).
Price-to-book (P/B) ratio
A financial ratio used to value a company's shares. It is calculated by dividing a company’s market value (share price) by the book value of its equity (value of the company's assets on its balance sheet). A P/B value <1 can indicate a potentially undervalued company or a declining business. The higher the P/B ratio, the higher the premium the market is willing to pay for the company above the book (balance sheet) value of its assets.
Price-to-earnings (P/E) ratio
A popular ratio used to value a company’s shares, compared to other stocks, or a benchmark index. It is calculated by dividing the current share price by its earnings per share.
Within fixed income investing, this refers to the original amount loaned to the issuer of a bond. The principal must be returned to the lender at maturity. It is separate from the coupon, which is the regular interest payment.
A means of raising funds through the sale of securities to a select number of individuals (opposite of a public offering).
The amount by which sales of a product or service exceeds business and production costs.
Investment into a company that is not listed on a stock exchange. Like infrastructure investing, it tends to involve investors committing large amounts of money for long periods of time.
Property asset management
In property investing, this refers to the ongoing management of properties. It may include renegotiating existing leases with tenants (to deliver longer or more favourable terms) or doing refurbishments.
The practice of restraining trade between countries, usually with the intent of protecting local businesses and jobs from foreign competition. Measures taken typically include quotas (limits on the volume or value of goods and services imported) or tariffs (tax or duty imposed on imported goods and services, which typically renders them more expensive to domestic consumers).
Purchasing Managers’ Indices
The Purchasing Managers' Index (PMI) is an early indicator of the economic health of the manufacturing sector within an economy. The index is based on five indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Quantitative easing (QE)
An unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.
A statistical measure of an asset’s price movements that can be explained by another asset’s price movements. For example, it measures the percentage of a portfolio’s movements that can be attributed to changes in its benchmark.
A marketplace for investment in government bonds and associated derivatives.
The way in which a central bank adjusts policy in response to a given change in macroeconomic conditions.
Real estate investment trust (REITs)
An investment vehicle that invests in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like a normal share.
Real return/nominal return
‘Real return’ is the return on an investment after taxes and inflation. ‘Nominal return’ includes taxes and inflation.
Government policies intended to stimulate an economy and promote inflation.
A statistical process for estimating the relationship between different variables, quite often over time.
Comparing the price of an asset to the market value of similar assets.
Occurs when investors are willing to pay a higher price for shares, usually in anticipation of higher future earnings. In terms of bonds a re-rating can be assigned when the bond issuer's ability to service and repay its debt improves (credit quality). Also see de-rating.
Retail price index (RPI)
A measurement of inflation that examines the price change of a basket of goods and services over time. It differs from the CPI measure of inflation mainly in its calculation method and the inclusion of mortgage interest payments.
Return on equity (ROE)
The amount of profit a company generates with the money its shareholders have invested. It is also a measure of a company's profitability.
Reserve ratio / reserve requirement ratio
A regulatory requirement typically imposed by a central bank that sets the minimum amount of cash reserves that a bank must hold. It is a monetary policy tool used to increase or decrease the money supply.
Transferring business operations that were moved overseas back to the home country.
A profitability ratio used to indicate how effective a company is at turning capital into profits.
Rights to buy additional shares made to existing shareholders.
A calculation of an investments return or potential return taking into account the amount of risk willing to be accepted to achieve it. Typical risk measures include alpha, beta, volatility, Sharpe ratio and R2.
Financial securities that can have significant price movements (hence carry a greater degree of risk). Examples include equities, commodities, property and bonds
The rate of return of an investment with, theoretically, zero risk. Typically defined as the yield on a three-month US Treasury bill (a short-term money market instrument).
The additional return over cash that an investor expects as compensation from holding an investment that is not risk free. The riskier an asset is deemed to be, the higher its risk premium.
In property investing, this refers to rental increases based on the Retail Price Index (RPI) measure of inflation.
Software as a Service is subscription-based software accessed over the internet rather than installed on individual computers.
An asset that is generally uncorrelated with the performance of stocks and bonds eg gold, US government debt, the US dollar, cash, etc.
A prolonged period of low or no economic growth within an economy.
Long-term investment themes with strong growth potential.
A loan where the borrower has promised to give the lender certain assets if they fail to make repayments.
A share, bond, or any other financial instrument.
Shanghai/Shenzhen Stock and Bond Connect
A collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges and China interbank bond market. The market access schemes allow international and mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange.
The repurchase of shares by a company, thereby reducing the number of shares outstanding. This gives existing shareholders a larger percentage ownership of the company. It typically signals the company's optimism about the future and a possible undervaluation of the company’s equity.
See equity. Also commonly called ‘stocks’.
Shared mobility as a service
Services that provide users with short-term transportation on an 'as/when needed' basis.
This measures a portfolio's risk-adjusted performance. A high Sharpe ratio indicates a better risk-adjusted return. The ratio is designed to measure how far a portfolio’s return can be attributed to fund manager skill as opposed to excessive risk taking.
Fund managers use this technique to borrow then sell what they believe are overvalued assets, with the intention of buying them back for less when the price falls. The position profits if the security falls in value. Within UCITS funds, derivatives – such as CFDs – can be used to simulate a short position.
Short positions in US government bond futures
US government bond futures are standardised derivative contracts for the purchase and sale of US government bonds for future delivery. A short position in US government bond futures is a trading strategy aimed at taking advantage of an expected fall in prices of the underlying bonds.
Shorting US Treasury interest rate futures
Selling a derivative contract on the hope the price will fall, which subsequently can be bought back at a profit. If you are short an interest rate future you hope yields rise and hence prices will fall.
Société d'investissement à capital variable. This is a common structure for European-domiciled funds. Most are UCITS-compliant.
A ratio used to evaluate a portfolio’s return for a given level of ‘bad’ (downside) risk. It is a modification of the Sharpe ratio, quantifying only the downside risk, as measured by returns below the risk-free rate. A high Sortino ratio indicates the return is high compared to the downside risk taken.
Bonds issued by governments and can be either local-currency-denominated or denominated in a foreign currency. Sovereign debt can also refer to the total of a country's government debt.
The difference in the yield of a corporate bond over that of an equivalent government bond.
A relatively rare situation where rising inflation coincides with anaemic economic growth.
A statistic that measures the variation or dispersion of a set of values/data. A low standard deviation shows the values tend to be close to the mean while a high standard deviation indicates the values are more spread out. In terms of valuing investments, standard deviation can provide a gauge of the historical volatility of an investment.
Steepening yield curve
A yield curve graph plots the yields of similar quality bonds against their maturities. A steepening yield curve typically indicates that investors expect rising inflation and stronger economic growth.
How much the returns of each variable (eg stocks in a benchmark) differ from the average return of the benchmark.
An economic condition arising when an industry or market changes how it functions or operates. This could be attributed to new economic development, shifts in the pools of capital and labour, demand and supply of natural resources, political and regulatory change, taxation, etc.
Investments that are highly customised with specific risk-return profiles, usually taking a traditional security such as a corporate bond and replacing the normal payments from the investment with non-traditional payoffs based on the performance of one or more underlying assets.
Sustainable and responsible investment (SRI)
An investment considered to improve the environment and the life of a community. A common strategy would be to avoid investing in companies that are involved in tobacco, firearms and oil, while actively seeking out companies engaged with environmental or social sustainability.
The risk of a critical or harmful change in the financial system as a whole, which would affect all markets and asset classes.
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.
Tight labour market
Occurs when the demand for labour is at least as strong as supply. Typically when employment conditions are stronger, employers need to compete for workers, which means employees gain bargaining power in terms of 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.
The European Union (EU) has issued directives that allow carefully regulated funds to operate freely throughout the EU. A fund operating in line with the directives is known as an Undertaking for Collective Investment in Transferable Securities (UCITS) scheme. The regulations aim to give investors a high level of protection.
To hold a lower weighting of an individual security, asset class, sector, or geographical region than a portfolio’s benchmark.
Up-market capture ratio
This measures the overall performance of a portfolio in relation to an index when the index has risen. A portfolio with an up-market ratio of 110 indicates that if the benchmark returned 10%, the manager typically returned 11% (and so outperformed the benchmark by 1%).
The average time to expiry of leases across the portfolio weighted by contracted rental income.
Metrics used to gauge a company’s performance, financial health and expectations for future earnings eg, price to earnings (P/E) ratio and return on equity (ROE).
Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase. One of the favoured techniques is to buy companies with low price to earnings (P/E) ratios. See also growth investing.
An equity that appears to be cheap due to an attractive valuation metric (such as a low P/E ratio) may attract investors who are looking for a bargain. However, this may turn out to be a ‘trap’ if the share price does not improve or falls, which may happen if the company or its sector is in trouble, or if there is strong competition, lack of earnings growth or ineffective management.
Variable rate securities
Securities with terms that allow for the adjustment of the interest rate on set dates.
The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. Higher volatility means the higher the risk of the investment.
WAM (weighted average maturity)
The average time remaining until the maturity of assets in a portfolio.
Weighted average lease length
In property investing, this describes the average time of the expiry of leases across the portfolio, weighted by rental income.
Weighted average market cap
The average market capitalisation of a holding, weighted by the size of that position in a portfolio or index.
Weighted average unexpired lease term
The proportion, usually expressed as a percentage, of a property or property portfolio that is without a tenant.
A company that has sufficient cash to maintain its operations without major constraints.
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The level of income on a security, 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.
A graph that plots the yields of similar quality bonds against their maturities. In a normal/upward sloping yield curve, longer maturity bond yields are higher than short-term bond yields. A yield curve can signal market expectations about a country’s economic direction.
Yield to worst
If a bond has special features, such as a call (ie, the issuer can call the bond back at a date specified in advance), the yield to worst is the lowest yield the bond can achieve provided the issuer does not default.
Zero lower bound
This term refers to short-term interest rates being at, or near, zero, which makes it harder for central banks to stimulate the economy.