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Glossary

Absolute return

The profit or loss on an investment without comparing it to how other investments have performed. Absolute return investing aims to produce a profit over time regardless of what the stock market does. Even when markets are falling, an absolute return fund can still make money, although this is never guaranteed.

Accumulation share/unit

Funds are divided into portions called shares or units. In accumulation shares/units, the income earned by the fund is paid into the fund and reflected by an increase in the value of each share/unit.

Active

Where the fund manager uses their expertise to pick investments to achieve the fund’s objectives rather than copy the investments in a market index.

Advanced/developed markets

Countries with relatively high levels of personal income and established economies.

Alternatives

Any investment that does not fall in the traditional asset classes of stocks, bonds or cash. Alternative investments include private equity, hedge funds, commodities, real estate and infrastructure, but also less usual choices such as art.

Annual management charge (AMC)

An ongoing fee paid to the management company for managing the fund, usually charged as a percentage of the investment.

Asset allocation

Dividing the money invested in the fund across different investments (‘assets’), e.g. in different geographic areas or by industry sectors such as oil and gas or financial companies.

Asset

Anything having commercial or exchange value that is owned by a business, institution or individual.

Asset allocation

Apportioning a portfolio's assets to achieve a defined level of risk tolerance and investment goals.

Asset class

A category of assets, such as cash, company shares, bonds, property and commodities (such as gold).

Bear market

Where the prices of assets are falling and investor sentiment is generally pessimistic.

Beta

A measure of a stock's risk of volatility compared to the overall market.

Bond

A loan, usually to a company or government, that pays interest. Where relevant, consider using ‘bond’ instead of ‘fixed income’, which is a less well understood term.

Bottom-up

An investment approach that focuses on analysing individual shares rather than stock markets.

Bull market

Where the prices of securities are rising, and investor sentiment is generally optimistic.

Capitalisation

The total market value of all of a company's outstanding shares.

Capital markets

Markets that raise money from those who want to invest and make those funds available to businesses or governments.

Consumer Price Index

A measure of inflation constructed by using the price of a basket of goods and services.

Consumer discretionary

Goods and services which are considered non-essential to consumers, such as entertainment or leisure.

Consumer staples

Goods and services which are considered essential to consumers, such as food and beverages.

Convertible bond

A bond that can be exchanged for predetermined amounts of the same company’s shares at certain times during their life.

Corporate bonds

Bonds issued by a company.

Coupon

The interest paid by the government or company that has raised a loan by selling bonds.

Credit

The borrowing capacity of an individual, company or government.

Credit risk

Risk that a financial obligation will not be paid and a loss will result for the lender.

Credit spread

The difference between the yield of a corporate bond (issued by a company), and a government bond of the same life span. Yield refers to the income received from an investment and is expressed as a percentage of the investment's current market value

Currency exposure

The potential for a fund that invests overseas to lose or gain money purely because of changes in the currency exchange rate.

Cyclical companies

A cyclical company is one whose share whose price is heavily dependent upon the strength of the economy and the broader business cycle. Examples include autos, airlines, and luxury retailers.

Defensive companies

A defensive company is one that provides a constant dividend and stable earnings regardless of the state of the overall stock market or economy. Defensive companies are usually found in industries that produce necessary that consumers cannot go without, such consumer staples, pharmaceutical manufacturers and utilities.

Derivatives

Investments whose value is linked to another investment, or to the performance of a stock exchange or to some other variable factor, such as interest rates.

Developed economy/market

Well-established economies with a high degree of industrialisation, standard of living and security.

Diversification

Holding a variety of investments in a portfolio that typically perform differently from one another in order to spread risk.

Dotcom bubble

A period of excessive speculation in the shares of technology companies, mainly in the US.

Dove (dovish)

A central bank policy member who puts more emphasis on maximising employment over controlling inflation. The opposite of hawk.

Drawdown

Drawdown is a measure of the downside risk of a portfolio. It is a measure of decline from a fund’s peak value to its lowest point over a period of time. It is expressed as a percentage from top to bottom.

Duration - A measure of the sensitivity of a bond (or bond fund) to changes in interest rates.

Duration risk
The longer a bond, or bond fund's duration, the more sensitive and therefore at risk it is to changes in interest rates.

Economic cycle


The fluctuation between an economy’s periods of expansion (growth) and contraction (recession).

Emerging economy or market


Countries that are progressing toward becoming advanced, usually shown by some development in financial markets, the existence of some form of stock exchange and a regulatory body.

Equities


Shares of ownership in a company.

Exposure


The proportion of a fund invested in a particular asset class, bond, sector/region, usually expressed as a percentage of the overall portfolio.

Fiscal policy

Government policy on taxation, spending and borrowing.

Fixed income

A sector of investments which offer fixed rates of interest over a specified time period, at the end of which the initial amount is repaid. This may include, but is not limited to, government bonds and corporate debt.

Fundamentals (economic)

Economic fundamentals are factors such as inflation, employment, economic growth.

Growth

The increase in value of investments.

Hawk (hawkish)

A central bank policy member who puts more emphasis on controlling inflation over maximising employment. The opposite of dove.

Hedging

A method of reducing unnecessary or unintended risk on a portfolio.

High yield bonds

Bonds issued by companies with a low credit rating from a recognised credit rating agency. They are considered to be at higher risk of default than better quality (higher-rated) bonds, but have the potential for higher rewards.

 

Income

Money paid out by an investment, such as interest from a bond or a dividend from a share.

Income share/unit

Funds are divided into portions called ‘shares’ or ‘units.’ In income shares/units, the income earned by the fund is paid out to investors.

Index

A representative portfolio of shares, bonds or commodities which helps to track market trends and performance.

Index-linked bonds

Bonds where both the value of the loan and the interest payments are adjusted in line with inflation over the life of the security. Also referred to as inflation-linked bonds.

Inflation

The rate at which the price of goods and services rises.

Investment grade bonds

Bonds issued by a company with a medium or high credit rating from a recognised credit rating agency. They are considered to be at lower risk from default than those issued by companies with lower credit ratings.

Liquidity

The degree to which an investment can be quickly bought or sold on a market without affecting its price. 

Monetary easing

When central banks lower interest rates or buy securities on the open market to increase the amount of money in circulation.

Monetary policy

A central bank's regulation of money in circulation and interest rates.

Monetary tightening

When central banks raise interest rates or sell securities on the open market to decrease the amount of money in circulation.

Money market instruments

Investments usually issued by banks or governments that are a short term loan to the issuer by the buyer. The buyer receives interest and the return of the original amount at the end of a certain period.

Multi asset portfolio

A portfolio that is invested in different types of assets such as company shares, bonds, property or cash amongst others.

Overweight

Holding a larger proportion of a particular asset class, sector or region than that defined by the fund’s asset allocation framework. 

Passive management

Investing according to the stock or sector weightings of an index. Passive management is also referred to as 'indexing' or 'tracking'.

Platform

Software used to manage investments through a financial intermediary.

Private capital/private debt

Investors or funds which invest directly in private companies (i.e. not via a stock exchange).

Real return

The money made or lost on an investment, adjusted for changes in prices in an economy.

Relative return

The profit or loss on an investment compared to how other investments have performed.

Return

The money made or lost on an investment.

Risk

The chance that an investment's return will be different to what is expected. Risk includes the possibility of losing some or all of the original investment.

Risk management

The term used to describe the activities the fund manager undertakes to limit the risk of a loss in a fund.
Risk premium - The difference between the return from a risk-free asset, such as a high-quality government bond or cash, and the return from an investment in any other asset. The risk premium can be considered the 'price' or 'pay-off' for taking on increased risk. A higher risk premium implies higher risk.

Risk/reward ratio

A ratio comparing the expected returns of an investment with the amount of risk undertaken.

Risk-free asset

An asset that notionally carries no risk of non-payment by the borrower such as a high-quality fixed income security issued by a government or cash.

Rolling five-year period

Any period of five years, no matter which day you start on. Rolling returns give you a more realistic idea of what might really happen to your money, depending on the particular period that you are invested.

Safe-haven assets

Assets that investors perceive to be relatively safe from suffering a loss in times of market turmoil.

Sector

An investment category used to define the primary business of a company, such as technology, energy, or healthcare.

Sequence of returns

The order in which investment returns are received.

Sequence of returns risk

The risk of facing lower investment returns at the start of retirement when you begin to draw down income, compared with higher returns in later years.

Share/stock

An equal portion representing part ownership of a company. Can also apply to a fund.

Share class

One of the types of share representing part ownership of the fund that is different to other share classes for some reason, such as it pays out income rather than paying it back into the fund.

Spliced

The combination of model and fund data.

Stock exchange

A market in which shares are bought, sold and issued, such as the London Stock Exchange or New York Stock Exchange.

Top-down investing

An investment approach that looks at the big picture first, such as the economy, then at the detail, such as how individual assets, such as shares, bonds, property or commodities are performing, before selecting which to invest in.

Total return

The term for the gain or loss derived from an investment over a particular period. Total return includes income (in the form of interest or dividend payments) and capital gains.

Unconstrained

The fund manager has the freedom to invest according to the fund’s strategy and is not obliged to allocate capital according to the weightings of any index, for example.

Underweight

Holding a smaller proportion of a particular asset class, sector or region than that defined by the fund’s asset allocation framework.

Valuation

The worth of an asset or company based on its current price.

Volatile

When the value of a particular asset, market or sector moves up and down fairly frequently and/or significantly.

Volatility

The degree to the price of a given asset rapidly changes. The higher the volatility, the riskier the asset tends to be.

Yield (bonds)

The interest received from a bond, which is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

Yield (equity)

The dividends received by a holder of company shares is referred to as the yield and is usually expressed annually as a percentage based on the investment's cost, its current market value or face value.

Yield (income)

The income received from an investment and is usually expressed annually as a percentage based on the investment's cost, its current market value or face value.

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