Glossary

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.

A    B   C   D   E   F   G   H   I   J   K   L   M   N   O   P   Q   R   S   T   U   V   W   X   Y   Z

A

Absolute return

The total return of a portfolio over a specified period, 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.

Absolute return investing

A type of investment strategy that seeks to generate a positive return over time, regardless of market conditions or the direction of financial markets, typically with a low level of volatility.

Active investing

An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis and the investment choices they make. The opposite of Passive Investing.

Active share

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.

Alpha

Alpha is the difference between a portfolio’s return and its benchmark index, after adjusting for the level of risk taken. The measure is used to help determine whether an actively managed portfolio has added value relative to a benchmark index, taking into account the risk taken. A positive alpha indicates that a manager has added value.

Alternatives

An investment that is not included among the traditional asset classes of equities, bonds or cash, such as property or infrastructure, hedge funds, commodities, private equity, art, derivatives, or cryptocurrencies.

Animal spirits

A term coined by economist John Maynard Keynes to refer to the emotional factors that influence human behaviour, and the impact that this can have on markets and the economy.

Arbitrage

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.

Asset allocation

The allocation of a portfolio between different asset classes, sectors, geographical regions, or types of security, to meet specific objectives of risk, performance or time horizon.

Asset-backed securities (ABS)

A financial security that is ‘backed’ (or collateralised) with existing assets (such as loans, credit card debts or leases), usually ones that generate some form of income (cash flow) over time.

B

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.

Balance sheet strength

A company’s financial position. See also: balance sheet.

Barbell strategy

An investment strategy that advocates investing in a mix of high-risk and no-risk assets, while avoiding those investments that might fall in between. It usually refers to a fixed income portfolio comprising 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 that can prevent or hinder new competitors from entering into an industry or business area, such as high start-up costs, patents, technical knowledge, brand loyalty etc.

Base Market Value

The average market price of a group of securities in an index at a fixed moment in time.

Basis point (bp)

One basis point equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.

Bear market/bull market

A bear market is one in which the prices of securities are falling in a prolonged or significant manner. A generally accepted definition is a fall of 20% or more in an index over at least a two-month period. A bull market is one in which the prices of securities are rising, especially over a long time.

Benchmark

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 the FTSE 100 Index, which represents the 100 largest companies listed on the London Stock Exchange.

Beta

Measure of the relationship that a portfolio or security has 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 portfolio with a beta more than 1 means it will likely move more than the market average (ie. more volatility). A beta less than 1 means that a security is theoretically less volatile than the market.

Bloomberg Aggregate Bond Index

A leading index that tracks the performance of the US investment-grade bond market, inclusive of government and corporate bonds, plus various other fixed income securities.

Blue chip stock

Stock issued by a widely known, well-established, and financially stable company, typically with a long record of reliable and stable growth, and often with a track record of paying dividends to investors.

Bond

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 (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.

Bond proxy

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 staples and pharmaceutical sectors. They might be added to a portfolio to imitate bonds, hence their name.

Bond yield

The level of income on a security expressed as a percentage rate. For a bond, this is calculated as the coupon payment divided by the current bond price. There is an inverse relationship between bond yields and bond prices. Lower bond yields mean higher bond prices, and vice versa.

Book value

The value of a business or asset according to its balance sheet, inclusive of any debt, depreciation or liabilities.

Borrowing

Where a company, individual or government temporarily takes on debt to fund spending or investment, in exchange for some other form of remuneration, usually income. See also leverage.

Bottom-up (investing)

Bottom-up fund managers build portfolios by focusing on the analysis of individual securities, rather than broader macroeconomic or market factors, in order to identify the best opportunities in an industry or country/region. The opposite of top-down investing.

Buy and hold

An investment strategy where an investment is purchased with the intention of retaining for a long period of time, regardless of short-term fluctuations in the market.

C

Callable bonds

Bonds that can redeemed or paid off by the issuer prior to the agreed maturity date.

Capital

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.

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.

Capital investment cycle

The purchasing of fixed assets by a company for the purpose of supporting day-to-day operations.

Capital ratio

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.

Carry

The meaning of ‘carry’ is dependent on the context used. For a bond investor, a typical definition would be the benefit or cost of holding an asset, including any interest paid, the cost of financing the investment, and potential gains or losses from currency changes.

Case-Shiller Housing Index

An index that tracks monthly changes in the value of single-family homes in the US, commonly used as a barometer of US housing prices.

China A shares

The shares of companies listed on the Shenzhen or Shanghai stock markets.

Cloud computing

The provision of IT services remotely by specialised service providers over the internet.

Coincident indicator

Economic data that reflects or confirms the current state of the economy.

Collateralised Loan Obligation (CLO)

A bundle of generally lower quality leveraged loans to companies that are grouped together into a single security, which generates income (debt payments) from the underlying loans. The regulated nature of the bonds that CLOs hold means that in the event of default, the investor is near the front of the queue to claim on a borrower’s assets.

Collateralised Debt Obligation (CDO)

A structured finance product that is backed by a pool of loans and other assets, such as mortgages, unsecured credit card debt or personal loans. Although similar to CLOs, CDOs tend to be considered riskier given their concentrated focus and the use of complex derivatives that can obscure the relevant risk factors.

Collective investment scheme (CIS)

An investment vehicle that pools money from investors to invest in shares, bonds, cash and/or other securities from the UK and elsewhere.

Commercial property

Any real estate asset used for commercial purposes. Commercial property has three main sectors: retail, office and industrial. It excludes residential property.

Commodity

A physical good such as oil, gold or wheat.

Compound Annual Growth Rate (CAGR)

Measures an investment’s annual growth rate over time, including the effect of compounding (where any income is reinvested to generate additional returns). CAGR is typically used to measure and compare the past performance of investments or to project their expected future returns.

Concentrated portfolio

A portfolio concentrated in a small number of holdings or with high weightings to its largest holdings. These portfolios typically carry greater risk than more diversified portfolios, given that an adverse event could result in significant volatility or losses, but the potential 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 inflation is a calculation of total inflation in an economy, and includes items such as food and energy, where prices tend to be more volatile. ‘Core’ CPI inflation is a measure of inflation that excludes transitory/volatile items such as food and energy.

Contract for difference (CFD)

A financial contract between two parties where the profit or loss depends on the changing price of an underlying security, with the difference paid in cash. It provides exposure to the benefits and risks of taking a long or short position in a security, without needing to own it.

Contingent convertible bonds (CoCos)

A type of bond that can be converted into equity (shares) if a predetermined ‘trigger event’ occurs, but which can potentially be written off in the event of a capital shortfall (insolvency) for the underlying company. Also known as an enhanced capital note (ECN).

Contrarian investing

An investment style that involves going against market consensus to purchase or sell assets. Contrarian investors believe that crowd behaviour can lead to mispricing opportunities in financial markets.

Core Personal Consumption Expenditure Price Index

A measure of prices that people living in the US pay for goods and services, excluding food and energy.

Corporate bond

A bond issued by a company. Bonds offer a return to investors in the form of periodic payments and the eventual return of the original money invested at issue on the maturity date.

Correlation

How far the price movements of two variables (eg. equity or fund returns) move in relation to each other. A correlation of +1.0 means that both variables have a strong association in the direction they move. If they have a correlation of -1.0, they move in opposite directions. A figure near zero suggests a weak or non-existent relationship between the two variables.

Coupon

A regular interest payment that is paid on a bond, 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

Credit is typically defined as an agreement between a lender and a borrower. It is often narrowly used to describe corporate borrowings, which can take the form of corporate bonds, loans or other fixed interest asset classes.

Credit default swap (CDS)

A form of derivative contract between two parties, used to manage the credit risk of a bond. The buyer makes regular payments to the seller, while 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.

Credit market

A marketplace for investment in corporate bonds, government debt and associated derivatives.

Credit rating

An independent assessment of the creditworthiness of a borrower by a recognised agency such as Standard & Poors, Moody’s or Fitch. Standardised scores such as ‘AAA’ (a high credit rating) or ‘B’ (a low credit rating) are used, although other agencies may present their ratings in different formats.

Credit risk

The risk that a borrower will default on its contractual obligations to make the required interest payments or repay the loan. Anything that improves conditions for a company can help to lower credit risk.

Credit spread

The difference in yield between securities with similar maturity but different credit quality, often used to describe the difference in yield between corporate bonds and government bonds. Widening spreads generally indicate a deteriorating creditworthiness of corporate borrowers, while narrowing indicate improving.

Crowded trade

A position held by a significant proportion of investors, which can have an impact on pushing up prices, but also potentially make it difficult to sell if sentiment changes.

CSI 300 Index

A stock market index designed to replicate the performance of the largest 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Currency hedge

A transaction that aims to reduce the impact of currency fluctuations on the value of an investment. 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.

Cyclical stocks

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

D

Deep learning

A type of programming that uses a layered series of algorithms to create an artificial ‘neural network’ that enables computers to analyse and learn from multiple data sources without the need for human intervention.

Decarbonisation

The process of reducing the amount of carbon, mainly carbon dioxide (C02), sent into the atmosphere.

Default

The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due.

Deficit

A deficit occurs when expenses exceed revenues (or taxation), imports exceed exports, or liabilities exceed assets, over a specific time period.

Deflation/negative inflation

A decrease in the price of goods and services across the economy, usually indicating that the economy is weakening. It differs from ‘disinflation’, which implies a decrease in the level of inflation. Deflation is the opposite of inflation.

Deleveraging

A company reducing its borrowing/debt as a proportion of its balance sheet. The opposite of leveraging.

Depositary receipt

A security issued by a bank, which can be traded on an exchange to represent the underlying securities of a foreign company.

De-rating

The downward adjustment of a company’s financial ratios, such as the price-to-earnings (P/E) ratio, in response to business or market uncertainty. Or, in the case of a bond, lowering the credit rating.

Derivatives

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.

Direct property

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’.

Discount

Refers to a situation when a security is trading for lower than its fundamental or intrinsic value. The opposite of trading at a premium.

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.

Discounting mechanism

Where stock market participants attach a lower value to a security after considering all available information and events, current and future into their valuations and positioning.

Discount rate

The process of determining the present value of future earnings, which allows an investor to have a better idea of the value of a business today.

Disinflation

A fall in the rate of inflation.

Disruptive technology

A technology that displaces an established technology, or significantly changes industry or consumer behaviour. This includes the creation of a new industry by a ground-breaking product or service.

Distressed debt

A security issued by a company that is either in default or in high risk of default and involves significant investment risk.

Distribution yield

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.

Diversification

A way of spreading risk by mixing different types of assets/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.

Dividend cover

The ratio of a company’s net profits relative to its dividend payment. The measure helps indicate how sustainable a company’s dividend is.

Dividend payout ratio

The percentage of earnings (after tax) that are 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 down-market ratio below 100 indicates that the portfolio has outperformed. A down-market capture ratio of 70, for example, would indicate that the portfolio was down 7%, when the index was down 10%.

Downside protection

Limiting or reducing losses in the case of a decline in the value of the underlying security.

Downside risk

An estimation of how much a security or portfolio may lose if the market moves against it.

Drawdown

A measure of historic risk that looks at the difference between the highest and lowest price of a portfolio or security during a specific period. It is used to evaluate the possible risk and reward of an investment.

Duration

Duration can measure how long it takes, in years, for an investor to be repaid a bond’s price by the bond’s total cash flows. Duration can also measure the sensitivity of a bond’s or fixed income portfolio’s price to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa. ‘Going short duration’ refers to reducing the average duration of a portfolio, while ‘going long duration’ refers to extending a portfolio’s average duration.

E

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.

EBITDA

Earnings before interest, tax, depreciation and amortisation (EBITDA) is a metric used to measure a company’s profitability net of expenses and associated costs, taxes or debts.

Economic cycle

The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.

EEA

The European Economic Area. The EEA provides for the free movement of persons, goods, services and capital within EU countries, plus Iceland, Liechtenstein and Norway.

Effective duration

Effective duration measures the duration of bonds with embedded options (such as callable bonds). It is used to evaluate the sensitivity of the bond’s price to changes 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 risk or minimise costs.

Emerging market

The economy of a developing country that is transitioning to become more integrated with the global economy. This can include making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.

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, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.

ESG

Environmental, Social and Governance (ESG), also known as sustainable investing, considers ethical factors beyond traditional financial analysis.

ESG rating

Third parties provide ratings that score companies according to their commitment to ESG factors.

EV/EBITDA

A valuation ratio calculated by dividing enterprise value (EV) by earnings before interest, taxes, depreciation and amortisation (EBITDA). EV/EBITDA is used to assess a company’s total value from the perspective of a buyer, taking into account any debt or cash levels, in addition to its stock price.

EV/sales

The enterprise value-to-sales (EV/sales) ratio is a quantifiable metric of a company’s valuation that measures the company’s market value, debt, and cash (or cash equivalents), divided by its annual sales.

Excess return

The difference in return between an investment (whether that is an individual security or portfolio) and a relevant benchmark. Also often called ‘relative return’.

Exchange traded fund (ETF)

A security that tracks an index, sector, commodity or pool of assets (such as an index fund). 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

Economic measures undertaken 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.

Exposure

The amount an investor stands to lose should an investment fail. It is another way of describing financial risk.

F

Factor risk

Any variable that contributes risk to a particular asset or asset class.

Factor investing

Factor investing involves targeting unique characteristics or factors that constitute defined sources of risk or return, which in simpler terms could include size (large vs small cap), style (growth vs value) or market beta.

Financial year/fiscal year (FY)

A 12-month accounting period used for financial and tax reporting by businesses and individuals. The relevant dates vary between countries.

Fiscal multiplier

The ratio of change to a nation’s economic output (eg. gross domestic product) as a consequence of any change in government spending. The fiscal multiplier is commonly used as a measure of the efficacy and impact of that spending to generate economic activity.

Fiscal/Fiscal policy

Describes government policy relating to setting tax rates and spending levels. Fiscal policy 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.

Fiscal reflation

An attempt by the government to stimulate the economy out of recession by using fiscal measures, such as tax cuts.

Fixed income/fixed interest

See bond.

Fixed interest rate

A fixed interest rate is a rate of interest charged on a debt, that will remain unchanged for a pre-agreed period, such as you might find on a mortgage or loan.

Forward dividend yield

This is an estimation of a projected dividend for a full year, expressed as a percentage of the current stock price. The projected dividend is estimated by annualising the most recent dividend payment. This can be a useful indicator of expected future dividend growth.

Forward earnings

An estimate of the future earnings of a business, usually covering the present financial year or the next one.

Forward price-to-earnings (P/E) ratio

A version of the price-to-earnings (P/E) ratio, used to value a company’s shares, that utilises forecasted earnings in its calculation.

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.

Front end

Refers to those bonds with a maturity date on the yield curve that falls within the next few years.

Fundamental analysis

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.

Future/futures contract

A contract between two parties to buy or sell an asset, such as shares or commodities, at a specified later date, using a price agreed today. A future is a form of derivative.

G

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. 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.

General administration charge (GAC)

This charge reflects a number of costs associated with administering and servicing a fund and is a component of the Ongoing Charges Figures (OCF). The purpose of the GAC is to reimburse the Manager for administrative costs, charges, fees, and expenses that the Manager pays on behalf of its funds (such as fund accounting costs, printing costs, costs incurred in distributing income to investors, and legal and audit fees). Further information can be found in the Prospectus for each fund, or the “Simple Guide on Fund Charges“.

Gilts

UK government bonds sold by the Bank of England, used to finance public spending.

Global financial crisis (GFC)

The global economic crisis from mid-2007 to early 2009 that began with losses related to mortgage-backed financial assets in the US and spread to affect financial markets and banks globally. Also known as the ‘Great Recession’.

Golden share

A type of share that gives its shareholder the power to veto 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).

Green bonds

Fixed income instruments that are used to fund projects expected to have a positive impact on the environment or climate.

Greenium

A blend of ‘green’ and ‘premium’, used to illustrate the fact that green bonds often trade at a higher price (or with a lower coupon) than non-green bonds as investors are often willing to accept lower yields for debt that is attached to green projects.

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). When GDP is increasing, people are spending more, and businesses may be expanding, and vice versa. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.

Growth At a Reasonable Price (GARP)

GARP investors seek companies offering consistent earnings growth that is higher than the broader market level, while excluding companies with high valuations.

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.

H

Hard landing

A situation in which measures to bring down inflation lead to negative economic growth and a rise in unemployment.

Hawkish/dovish

An indication that policy makers are looking to tighten financial conditions, for example, by supporting higher interest rates to curb inflation. The opposite of dovish, which describes policymakers loosening policy, ie. leaning towards cutting interest rates to stimulate the economy.

Hedge

A trading strategy that involves taking an offsetting position to another investment that will lose value as the primary investment gains, and vice versa. These positions are used to reduce or manage various risk factors and limit the probability of overall loss in a portfolio. Various techniques may be used, including derivatives.

High conviction

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 with a lower credit rating than an investment grade bond, also known as a sub-investment grade bond, or ‘junk’ bond. These bonds usually carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher interest rate (coupon) to compensate for the additional risk.

High yielding sectors

Sectors with stocks that have a high dividend yield compared to a benchmark average.

Hype cycle

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.

I

Idiosyncratic risk

Factors that are specific to a particular company and have little or no correlation with market risk.

Illiquid assets

Securities that cannot be easily bought or sold in the market, such as real estate, art or other valuables, as well as shares in some smaller companies, private company interests and some forms of debt instruments.

Index

A statistical measure of group of basket of securities, or other financial instruments. For example, the S&P 500 Index indicates the performance of the largest 500 US companies’ stocks. Each index has its own calculation method, usually expressed as a change from a base value.

Index-aware

While portfolios are often built based on a benchmark, with index-aware strategies stocks are mainly chosen and weighted based on the managers’ fundamental stock evaluation.

Inflation

The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.

Inflation hedge

An asset or investment that is expected to maintain or increase in value relative to the level of inflation over time.

Inflation-linked bonds

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’.

Information ratio (IR)

A ratio measuring a portfolio’s returns above that of a benchmark, relative to the risk taken. The ratio attempts to identify the skill of a fund manager in how they generate excess performance. It is calculated by dividing a portfolio’s excess return by the tracking error.

Infrastructure investment

Investment into the physical assets of a nation or company, such as roads, railways, bridges, water, sewerage, port facilities or telecommunications. Given that it usually requires large amounts of money, it is typically undertaken by governments, or specialised investment strategies.

Interbank market

The global foreign exchange market where different currencies are traded between banks.

Interbank rate

Rate of interest charged on short-term loans made between banks.

Interest rate markets

Government bond and interest rate derivative markets (or just ‘rates markets’) are a marketplace for investment in government bonds and associated derivatives.

Interest rate swap

A type of derivative contract where two parties agree to exchange one stream of interest payments for another, for a fixed period of time.

Inventory turnover

A measure of how quickly a business sells (and restocks) its inventory during a given period of time.

Investment-grade

A bond typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments, reflected in the higher rating given to them by credit ratings agencies.

Investment trust

An investment trust is a form of investment fund, specifically a publicly traded collective investment scheme that invests its shareholders’ money in the shares of other companies.

Initial Public Offering (IPO)

The process of issuing shares in a private company to the public for the first time.

J

No glossary definitions are available for J.

K

No glossary definitions are available for K.

L

Large caps

Well-established companies with a valuation (market capitalisation) above a certain size, eg. $10 billion in the US. It can also be used as a relative term. Large-cap indices, such as the UK’s FTSE 100 or the S&P 500 in the US, track the performance of the largest publicly traded companies, rather than all stocks above a certain size.

Lead/lagging indicator

A lead indicator is a piece or set of economic data that can help provide an early signal of where we are in an economic cycle. The opposite of a lagging indicator; economic data that confirms a pattern that is already in progress.

Leverage

Leverage has multiple meanings:

1. 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.
2. Leverage is also 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.
3. For investment trusts: The Company’s leverage sum of financial gearing and synthetic gearing. Where a company utilises leverage, the profits and losses incurred by the company can be greater than those of a company that does not use leverage.

Leveraged loan

Privately issued debt from non-investment grade (lower quality) companies that is secured against company assets and that ranks first in priority of payment in the event of default. These types of loans generally offer a higher interest rate to offset the perception of higher risk.

LIBOR

London Inter-Bank Offered Rate (LIBOR) is an interest rate benchmark that banks used for decades to determine to rates they offer on different financial products, such as mortgages and consumer loans. It has been phased out, to be replaced by alternative ‘near risk-free’ reference rates (RFRs) such as the Secured Overnight Financing Rate (SOFR) and the Sterling Overnight Interbank Average Rate (SONIA).

Securities that can be quickly turned into cash without any loss of value.

Liquidity/Liquid assets

Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.

Listed property/listed real estate

In property investing, this refers to real estate companies (including REITs) listed on a stock exchange, which derive most of their revenue from owning, managing or developing property.

Loan

A form of credit, where an amount of money is borrowed by one party in exchange for future repayment, with the addition of charges, commonly interest payments.

Long-only

A portfolio that only invests in long positions.

Long position

A security that is bought with the intention of holding over a long period, in the expectation that it will rise in value.

Long/short

A portfolio that can invest in both long and short positions. The intention is to profit from combining long positions in assets in the expectation that they will rise in value, with short positions in assets expected to fall in value. This type of investment strategy has the potential to generate returns regardless of moves in the wider market, although returns are not guaranteed.

Low duration/high duration stocks and stocks

Typically high value, high profitability, low investment and low risk stocks.

M

Macroeconomics/Microeconomics

Macroeconomics is the branch of economics that considers large-scale factors related to the economy, such as inflation, unemployment or productivity. Microeconomics is the study of economics at a much smaller scale, in terms of the behaviour of individuals or companies.

Market capitalisation (market cap)

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’. Investment trusts: Market capitalisation is the share price multiplied by the number of shares in issue, excluding treasury shares, at month end. Shares typically priced mid-market at month-end closing.

Market liquidity

Market liquidity is a measure of how easily assets can be traded or converted into cash.

Market value

A term used to describe how much an asset or company might be worth in the open market. In the case of a company, the market value is the same as market cap.

Mega caps

The largest designation for companies in terms of market capitalisation. Companies with a valuation (market capitalisation) above $200 billion in the US are considered mega caps. These tend to be major, highly recognisable companies with international exposure, often comprising a significant weighting in an index.

Micro caps

Companies with a valuation (market capitalisation) within a certain scale, eg. between $50 million and $300 million in the US. Information on these companies can be scarce or unreliable, due to the lack of research coverage by analysts. Liquidity may also be limited.

Mid caps

Companies with a valuation (market capitalisation) within a certain scale, eg. $2-10 billion in the US, although these measures are generally an estimate. Mid-cap indices, such as the S&P MidCap 400 in the US, track the performance of these mid-sized publicly traded companies. Mid-cap stocks are generally perceived to offer better growth potential than their larger peers, but with some additional risk.

Micro-lending

Small-scale lending to people without access to conventional finance, usually by individuals or small businesses.

Monetary aggregates

These measures refer to the amount of money circulating in the economy.

Money market instrument

A short-term and highly liquid fixed income instrument that can be quickly and easily converted to cash.

Monetary policy

The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling 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.

Momentum investing

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

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.

Monetary policy reaction function

The way in which a central bank adjusts policy in response to a given change in macroeconomic conditions.

Moore’s Law

Coined in 1965 by Intel co-founder Gordon E. Moore, it is the principle that the number of transistors that can fit onto a microchip will double 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 the coupon on bonds. Similar to an asset-backed security. Mortgage-backed securities may be more sensitive to interest rate changes. They are subject to ‘extension risk’, where borrowers extend the duration of their mortgages as interest rates rise, and ‘prepayment risk’, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.

MSCI ESG Quality Score

Measures the ability of underlying holdings in a portfolio to manage key medium to long-term risks and opportunities arising from ESG (environment, social or governance) factors. It is measured on a scale of 0 to 10 (worst to best).

N

NAIRU

Non-accelerating inflation rate of unemployment (NAIRU) is the lowest rate of unemployment within an economy that does not cause inflation to rise. In effect, a state of equilibrium between the state of the economy and the labour market.

NBER

The National Bureau of Economic Research is a private US-based, non-profit organization dedicated to conducting and disseminating non-partisan economic research.

Net/gross exposure

The amount of a portfolio’s exposure to the market. Net exposure is calculated by subtracting the amount of short exposure as a percentage of a portfolio, from the amount of long exposure. For example, if a portfolio is 100% long and 20% short, net exposure is 80%. Gross exposure is calculated by combining the total value of both long and short positions, as a percentage of a portfolio. For example, if a portfolio is 100% long and 20% short, gross exposure is 120%.

Net asset value (NAV)

The total value of a fund’s (or company’s) assets less its liabilities.

Net asset value (NAV) Cum Income (investment trusts)

The value of investments and cash, including current year revenue, less liabilities (prior charges such as loans, debenture stock and preference shares at fair value).

Net asset value (NAV) Ex Income (investment trusts)

The value of investments and cash, excluding current year revenue, less liabilities (prior charges such as loans, debenture stock and preference shares at fair value).

Net asset value (NAV) total return (investment trusts):
The theoretical total return on shareholders’ funds per share reflecting the change in Net Asset Value (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.

Net assets (investment trusts)

Total assets minus any liabilities such as bank loans or creditors.

Net cash (investment trusts)

A Company’s net exposure to cash/cash equivalents expressed as a percentage of shareholders’ funds, after any offset against its gearing. This is only shown for Companies that have gearing in place.

Net interest margin (NIM)

An indicator of a bank’s profitability. It compares the amount of money the bank is earning in interest on loans and other interest-bearing securities relative to interest paid towards sourcing its own funding (such as interest on bank accounts).

Net zero

A state in which greenhouse gases, such as Carbon Dioxide (C02) that contribute to global warming, going into the atmosphere are balanced by their removal out of the atmosphere.

Next-generation infrastructure

The infrastructure needed to meet the evolving needs of businesses. It includes the shift to cloud infrastructure; large industrial scale computing and storage that enables cheap and fast computing and access to machine learning.

Nominal/real return

‘Real return’ is the return on an investment after taxes and inflation. ‘Nominal return’ is the return on an investment before taxes and inflation.

Nominal/real yield

The nominal yield on a bond is the coupon, essentially the interest rate that the bond issuer promises to pay the holder. The real yield is the nominal yield minus the rate of inflation.

Nominal value

A value that has not been adjusted for inflation or other factors. Within fixed income investing it refers to a bond’s par value rather than its current (‘market’) value.

Non-cyclical

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.

Non-deliverable forward (NDF)

A type of forward or futures contract (derivative) where each party agrees to settle the difference between a pre-agreed price and the prevailing price on an asset, usually a currency, at a specific date. They are commonly used to help manage exchange rate volatility.

Non-farm payrolls

The payrolls series that measures jobs in the US. The surveys is conducted for the Bureau of Labor Statistics. A representative sample of businesses in the US provides data for the payroll survey.

Non-performing loan (NPL)

A loan where the borrower has failed to make scheduled payments for a specified period of time (ie. it is in default).

O

OEIC

An Open-Ended Investment Company (OEIC) is a type of collective investment scheme that pools the money of a group of investors, who count as shareholders. It 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 which may be important to assess the financial health of a company.

Ongoing charges (investment trusts)

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

Operating expenses

The value of fixed costs for a business that are not directly related to the cost of production (ie. purchasing materials).

Option

A contract between two parties that gives one of them the right to buy or the right to sell a specific asset, such as shares, bonds or currencies, at a date and price that is fixed when the option is bought. Option trading can be speculative in nature and carries a substantial risk of loss. An option is a form of derivative.

Organic growth

A company’s internally generated growth.

Outperform

This has multiple meanings:

1. To deliver a return greater than that of a portfolio’s assigned benchmark. Also often called excess return.
2. A rating that can be assigned to a company’s stock by analysts, implying an expectation that the stock will produce better returns than the market (or another relevant benchmark).

Over the counter (OTC)

The trading of securities such as equities, bonds or derivatives directly between two parties rather than a formal centralised exchange, eg. the London Stock Exchange.

Overweight

Having a relatively large exposure to an individual security, asset class, sector, or geographical region than a relevant benchmark, such as an index.

P

PAIF

A Property Authorised Investment Fund (PAIF) is an open-ended investment vehicle designed to provide eligible investors with income from the fund’s property investments before tax.

Pairs trade

A trade that matches a long position with a short position in two highly correlated securities (or assets) with the aim of profiting from an identified deviation in that correlation.

Par value

The original value of a security, such as a bond, when it is first issued. Bonds are usually redeemed at par value when they mature.

Passive investing

An investment approach that involves tracking a particular market or index. It is called passive because it seeks to mirror an index, either fully or partially replicating it, rather than actively picking or choosing stocks to hold. The primary benefit of passive investing is exposure to a particular market with generally lower fees than you might find on an actively managed fund. The opposite of active investing.

Peer-to-peer lending

Money that is lent to individuals or businesses through online services that match lenders with borrowers.

Performance fee

An incentive fee paid to an asset management company if a portfolio outperforms a specified level or benchmark (known as a ‘hurdle rate’). Usually it is expressed as a percentage of the excess return above the benchmark.

Personal Consumption Expenditure (PCE)

A measure of how much consumers in the US spend on goods and services. It constitutes a significant component of overall GDP.

Personal Consumption Expenditure (PePP) Price Index (also known as the PCE Deflator)

This is a measure of inflation that is based on changes in personal consumption.

Philips Curve

The Philips Curve plots inflation against unemployment to indicate the inverse relationship between inflation and unemployment. Higher inflation is associated with lower unemployment and vice versa.

Portfolio

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

Position

An investment in a single financial instrument or group of financial instruments, such as shares or bonds. For example, a portfolio can have a position in a technology company or hold several different stocks to take a position in the technology sector.

Precariat

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.

Preference shares

Securities that represent fractional ownership of a company and typically pay a fixed dividend but do not offer voting rights. Preference shares are given priority when it comes to dividend payments and bankruptcy liquidation.

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.

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 its book value (the value of all a company’s assets minus its liabilities). A P/B value below one indicates a firm is valued at less than the sum of its assets, either because it is undervalued, or because the market has doubts about its future profitability. P/B is generally used to compare similar companies within the same sector, as it can vary significantly between industries.

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. It is calculated by dividing the current share price (P) by its earnings per share (E).

Price-to-sales (P/S) ratio

A financial ratio used to value a company’s shares. It is calculated by dividing a company’s market cap (number of total shares multiplied by the share price), by total sales or revenue over the past 12 months. In general, a lower ratio is considered better, although it varies across industries/sectors.

Pricing power

A company has pricing power when it can raise prices regardless of the economic backdrop, without losing out to competitors, whether that is due to the unique nature of its product, or specific market demand.

Primary market/secondary market

Newly issued bonds are traded on the primary market, with issuers selling their bonds directly to investors to raise capital (borrow). The purchase or sale of any existing bond occurs in the secondary market, between investors.

Principal

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.

Private credit

An asset defined by non-bank lending where the debt is not issued or traded on the public markets.

Private placements

A means of raising funds through the sale of securities directly to a select number of individuals, or private investors, rather than as part of a public offering.

Profit margin

The amount by which the sales of a product or service exceeds business and production costs.

Private equity

An investment in 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 covers a range of activities, including renegotiating existing leases with tenants (to deliver longer or more favourable terms), and refurbishments.

Protectionism

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).

Purchasing Managers’ Indices

The Purchasing Managers’ Index (PMI) is a survey that acts as a leading insight into the prevailing direction of economic trends, based on the view of managers across 19 industries. The index is based on five indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Q

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.

Quantitative Tightening (QT)

A government monetary policy occasionally used to decrease the money supply by either selling government securities or letting them mature and removing them from its cash balances.

R

R-Squared (R²)

A measurement of how closely the performance of one variable can be explained by the performance of another variable. For example, in investing it can be used to measure the percentage of a portfolio’s movements that can be attributed to changes in its benchmark index.

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 shares. Real estate securities, including REITs may be subject to additional risks, including interest rate, management, tax, economic, environmental and concentration risks.

Real return/nominal return

‘Real return’ is the return on an investment after taxes and inflation. ‘Nominal return’ is the return before factoring in taxes and inflation.

Rebase/rebased to 100

A statistical method of creating a single starting point for different groups of data, making it possible to compare performance as a percentage from that point onwards.

Reflation

Government policies intended to stimulate an economy and promote inflation.

Regression analysis

A statistical process for estimating the relationship between different variables, quite often over time.

Relative valuation

Comparing the price of an asset to the market value of similar assets.

Re-rating

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)

A company’s net income (income minus expenses and taxes) over a specified period, divided by the amount of money its shareholders have invested. It is used as a measurement of a company’s profitability, compared to its peers. A higher ROE generally indicates that a management team is more efficient at generating a return from investment.

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 relative to the amount that it lends. It is a monetary policy tool used to increase or decrease the money supply, as well as to ensure that banks retain sufficient money on hand to meet the needs of depositors.

Reshoring

Transferring business operations that were moved overseas back to the home country.

Return-on-capital (ROC)

A profitability ratio that measures a company’s net income relative to the total value of its equity and debts. It is used as an indicator of how effective a company is at turning capital into profits.

Rights issue

An offer made to existing shareholders that provides an opportunity to buy additional new shares, usually at a discount to the market price. Investors can choose to purchase these shares, or sell the right to purchase those shares, but a rights issue can dilute the value of existing holdings for those investors who choose to not participate.

Risk-adjusted return

A calculation of an investment’s return, or potential return, that takes into account the amount of risk required to achieve it. Typical risk measures include alpha, beta, volatility, Sharpe ratio and R2.

Risk assets

Financial securities that may be subject to significant price movements (ie. carrying a greater degree of risk). Examples include equities, commodities, property lower-quality bonds or some currencies.

Risk-free rate

The rate of return of an investment with, theoretically, zero risk. The benchmark for the risk-free rate varies between countries. In the US, for example, the yield on a three-month US Treasury bill (a short-term money market instrument) is often used.

Risk premium

The additional return an investment is expected to provide in excess of the risk-free rate. The riskier an asset is deemed to be, the higher its risk premium, to compensate investors for the additional risk.

Risk/risk taking

The acceptance of greater risk in exchange for potentially higher returns. This can apply to both individual investors and companies. An assessment of investors’ attitude to risk forms a fundamental part of identifying a suitable investment strategy for their objectives. For investment trusts: Risk taking is the key measure used to assess risk is volatility of returns, using historic net asset value (NAV) performance of the Company over 1 and 3 years. In this instance volatility measures how much a company’s NAV fluctuates over time in relation to the UK Equity market. The higher a volatility figure, the more the NAV has fluctuated (both up and down) over time. Please note that risk categorisations are indicative and based principally on historic data and should not be solely relied upon when making investment decisions.

RPI-linked leases

In property investing, this refers to rental increases based on the Retail Price Index (RPI) measure of inflation.

S

Software as a Service (SaaS)

A form of subscription-based software licensing accessed over the internet rather than installed on individual computers.

Safe-haven asset

An asset that is expected to retain its value or potentially even gain value, during periods of economic uncertainty or market turbulence, eg. gold, US government debt, the US dollar, cash, etc.

Scope 1 carbon emissions

Direct Green House Gas (GHG) emissions from owned or controlled sources.

Scope 2 carbon emissions

Indirect Green House Gas (GHG) emissions, such as that created through the generation of purchased energy (eg. electricity).

Scope 1-2 carbon emissions (measurement)

The tonnes of carbon dioxide equivalent per million US$ of total revenue, on a scope 1 & 2 basis. For those companies that do not report figures, emissions are based on proprietary estimation models.

Scope 3 carbon emissions

Associated Green House Gas (GHG) emissions related to the entire value chain of a business that it is indirectly responsible for, from products purchased from suppliers to its own products when consumers use them.

Secular stagnation

A prolonged period of low or no economic growth within an economy.

Secular themes/trends

Long-term investment themes with strong growth potential, such as climate change, AI, clean energy, or changing demographics.

Secured loan

A loan where the borrower has promised to give the lender specific assets, such as a house or vehicle, if they fail to make repayments.

Secured Overnight Financing Rate (SOFR)/Sterling Overnight Interbank Average Rate (SONIA)

Security

A broad term that refers to shares, bonds, 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. These 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. There are other similar collaborations, such as the Shenzhen-London Stock Connect.

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.

Shares/stocks

See equity.

Share price

The price to purchase (or sell) one share in a company, not including fees or taxes. For investment trusts: The closing mid-market share price at month end.

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.

Share split/Stock split

Where a company increases the number of shares available to buy or sell in the market, commonly to try and make the price more appealing to more investors. A stock split lowers (‘dilutes’) the value of each existing share, without reducing the value to existing investors. In the case of a 2 for 1 split, for example, existing investors receive two shares in exchange for each share they hold, but the share price is cut in half. The total value of the stock remains unchanged.

Sharpe ratio

This measures a portfolio’s risk-adjusted performance, for the purpose of measuring how far a portfolio’s return can be attributed to fund manager skill as opposed to excessive risk taking. A high Sharpe ratio indicates a better risk-adjusted return.

Short position (shorting)

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.

Shorting (US government bond futures)

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 (interest rate futures)

If you short an interest rate future you are investing in the expectation that yields will rise and hence prices will fall.

SICAV

A Société d’investissement à Capital Variable (SICAV) is a common structure for publicly traded open-ended funds domiciled in Europe. Most are compliant with UCITS regulations.

Small caps

Companies with a valuation (market capitalisation) within a certain scale, eg. $300 million to $2 billion in the US, although these measures are generally an estimate. Small cap stocks tend to offer the potential for faster growth than their larger peers, but with greater volatility.

Soft landing

A situation in which a central bank succeeds in bringing down inflation without significantly harming employment and economic growth levels.

Sortino ratio

A ratio used to evaluate the return on an investment or portfolio relative to the risk-free rate, factoring in just the negative movements in market prices during the period under review. It is a modification of the Sharpe ratio, designed to quantify the downside risk in evaluating the performance of a portfolio manager. The higher the Sortino ratio, the greater the expected returns compared to the downside risk taken.

Sovereign bonds

Bonds issued by governments to raise money to pay off debt or finance spending. Sovereign debt can also refer to the total of a country’s government debt.

Spread/credit spread

The difference in the yield between two bonds with the same maturity, but different credit quality. It is often used to describe to difference in yield between a corporate bond and an equivalent government bond.

Stagflation

A relatively rare situation where rising inflation coincides with anaemic economic growth.

Standard deviation

A statistic that measures the variation or dispersion of a set of values/data in relation to a mean. 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.

Stock dispersion

How much the returns of each variable (eg. stocks in a benchmark) differ from the average return of the benchmark.

Structural factor/change

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.

Structured products

Customised investments that incorporate derivatives, where an investors’ return is linked to the performance of an underlying asset (or assets). They can be structured to meet specific risk-return profiles and can enable investment in a wide range of assets that are often difficult to access.

Sustainable/Socially responsible investment (SRI)

An investment that considers both financial and moral objectives in investment decisions. An example would be to avoid companies that are involved in the tobacco, firearms or fossil fuel industries, while actively seeking out companies engaged with environmental factors or socially sustainable projects.

Systemic risk

The risk of a critical or harmful change in the financial system as a whole, which would affect all markets and asset classes.

T

Tail risk

Tail risk events are those 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.

Taper tantrum

A term used to describe when investors react negatively to news that a central bank, such as the US Federal Reserve, is slowing or stopping bond purchases.

Targeted Longer-Term Refinancing Operations (TLTRO)

A policy from the European Central Bank (ECB) to provide financing to banks in Europe. By offering long-term funding on attractive terms, they were designed to support borrowing conditions for banks and stimulate bank lending to the real economy.

Technical analysis

The analysis of esoteric factors such as market liquidity and investor behaviour, in an effort to identify how they influence security prices. This contrasts with fundamental analysis, which looks at factors such as corporate health and the quality of management teams.

Terminal rate

Economists refer to the terminal rate as the neutral interest rate where prices are stable and full employment is achieved. In other words, it is a natural interest rate that is neither accommodative nor restrictive, and as such is regarded as an equilibrium rate.

Tier 2 bonds

Tier 2 bonds are a form of fixed income asset (bond) issued by commercial banks that is categorised as subordinated debt. This means that in the event of a borrower’s bankruptcy or liquidation, the lenders will only be paid back once higher-ranking debts have been settled.

Tight labour market

An environment where the unemployment is low and there are numerous unfilled job vacancies. Typically, tight labour markets mean that employers need to compete for workers, which can give employees bargaining power in terms of wages.

Top-down (investing)

A type of investing that prioritises a focus on large-scale macroeconomic factors across the economy, such as GDP, exchange rates, interest rates or trade balances. This contrasts with bottom-up investing which focuses on individual security-specific criteria instead.

Total assets (investment trusts)

Cum Income NAV multiplied by the number of shares, plus prior charges at fair value.

Total return swap

A derivative instrument where one party pays/receives the total return (income plus capital gain) of an underlying asset (such as a market index), in exchange for payments at an agreed rate, either fixed or variable.

Tracking error

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.

Treasuries/US Treasury securities

Debt obligations issued by the US government. With government bonds, the investor is a creditor of the government. Treasury Bills and US Government Bonds are guaranteed by the full faith and credit of the United States government. They are generally considered to be free of credit risk and typically carry lower yields than other securities.

Trade deficit

When a country’s imports exceed the value of its exports.

Trading sideways

Where there is no clear trend in the direction of a market or security, where price movements are relatively small (either upwards or downwards).

Transferable securities

Securities that can be transferred from one party to another without restrictions.

U

UCITS scheme

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.

Underweight

To hold a lower weighting of an individual security, asset class, sector, or geographical region than a portfolio’s benchmark.

Underlying yield

The underlying yield calculates the annualised income of a fund, including expenses, as a percentage of the unit price. It provides a snapshot of the fund at the given date, as an indicator of the potential income that investors they could expect to receive. It is not guaranteed and does not include any tax that investors may be liable to pay.

UN Global Compact (GC) Principles

A list of 10 principles designed to determine a company’s value system and approach to doing business, covering the environment, treatment of workers, corruption, and human rights.

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%).

V

Vacancy rate

The percentage of all available units in a rental property asset that are unoccupied, including those that are being refurbished or renovated.

Valuation metrics

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 investing

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) or price to book (P/B) ratios. See also growth investing.

Value trap

A stock that appears to be cheap due to an attractive valuation metric (such as a low P/E ratio). However, rather than representing good value, a value trap is often just a poor investment, 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 coupon payments that are adjusted at specific intervals over time.

Venture capital funds

A type of private equity investing that typically involves investment in earlier-stage businesses that require capital, often before they have begun production or started generating revenues. Deemed a high-risk, high-reward investment it can entail greater risk of capital loss.

Volatility

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. The higher the volatility the higher the risk of the investment.

W

Weighted Average Maturity (WAM)

The average time remaining until the maturity of assets in a portfolio, weighted by the size of each security as a proportion of net assets.

Weighted average lease length

In property investing, this describes the average time of the expiry of leases across the portfolio, taking into account the relative size of each lease.

Weighted average market cap

A type of market index where each stock is weighted according to its size, relative to the total market capitalisation of the index.

Weighted average unexpired lease term (WAULT)

A measure used to calculate the value of contracted rents until the leases expire in a property or property portfolio, weighted for size as a proportion of the total annual income of the property or portfolio.

Well-capitalised company

A company that has sufficient cash to maintain its operations without major constraints.

Windfall

To receive a large or unexpected amount of money.

Wind down

The process by which a company ceases operations.

X

No glossary definitions are available for X.

Y

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.

Yield curve

A graph that plots the yields of similar quality bonds against their maturities, commonly used as an indicator of investors’ expectations about a country’s economic direction. In normal conditions, you can expect to see a normal/upward sloping yield curve, where yields for shorter-maturity bonds are lower than yields for bonds with a longer maturity. The shape of the yield curve can vary significantly, depending on where investors expect yields to trend in future.

Yield to worst (YTW)

The lowest yield a bond with a special feature (such as a call option) can achieve provided the issuer does not default. When used to describe a portfolio, this statistic represents the weighted average across all the underlying bonds held.

Z

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.