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 approach where a fund manager actively takes decisions about which and what proportion of investments to hold, often with a goal of outperforming a specific index. It relies on a fund manager’s investment skill. The opposite of passive investing.
This measures how much a portfolio's holdings differ from its benchmark holdings. 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.
Alpha is the difference between a portfolio's return and its benchmark’s return after adjusting for the level of risk taken. A positive alpha suggests that a portfolio has delivered a superior return given the 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.
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.
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 against which a portfolio's performance can be measured. 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. A benchmark is often called an index.
This measures a portfolio’s (or security’s) relationship with the overall market or any chosen benchmark. The benchmark always has a beta of 1. A portfolio with a beta of 1 means that if the market rises 10%, so should the portfolio. A portfolio with a beta of more than 1 will be expected to move more than the market, but in the same direction. A beta of 0 means the portfolio’s returns are not linked at all to the market returns. A negative beta means the investment should move in the opposite direction to the market.
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.
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.
They may also consider economic and asset allocation issues, known as top-down factors, but these are not of primary importance.
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.
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.
Consumer price index (CPI)
A measure that examines the price change of a basket of goods and services over time. It is used to estimate inflation. Headline CPI or headline inflation is a calculation of total inflation in an economy, which includes items such as food and energy, whose prices tend to be more prone to change (volatile). Core CPI or core inflation is a measure of long-run inflation and excludes 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.
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.
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 assigned to a borrower, based on their creditworthiness. It may apply to a government or company, or to one of their individual debts or financial obligations. An entity issuing investment-grade bonds would typically have a higher credit rating than one issuing high-yield bonds. The rating is usually given by credit rating agencies, such as Standard & Poor’s or Fitch, which use standardised scores such as ‘AAA’ (a high credit rating) or ‘B-’ (a low credit rating). 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.
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.