Glossary

Investments Glossary

Active management - Seeks to use stock selection to build portfolios that outperform a market benchmark.

Alpha - A fund's return when its benchmark's return is zero. It represents the performance of the fund in relation to its benchmark and can be used as a measure of the value added by the fund manager.

B

Beta – An estimate of how much a fund's return will move if its benchmark moves by 1 unit. It measures a fund's sensitivity to changes in the market. The higher the beta, the greater potential for outperformance in a rising market, although it carries higher volatility and risk.

Benchmark - A performance comparator used to determine the relative rate of increase/decrease in a market or security. A benchmark is often a target against which investment performance is measured.

Blue Chip - A term used for an investment that is essentially solid and substantial. Blue chip company shares are normally household names with a consistent growth and dividend record, stable management and very substantial assets. Named after a high-denomination gambling chip.

Bottom-up – Stock selection based on the fundamental attributes of a specific company, stock picking.

C

Capitalisation - The value of a limited company as determined by the par value, issue price or market price (whichever is greatest) of its shares and the total number of shares in issue. The size of stock markets is often determined by the total aggregate of the capitalisation of all the shares quoted on that market.

D

Derivatives - Securities whose prices are based on the prices of another underlying investment. They include futures, options, swaps and warrants.

E

Exchange-traded funds - Introduced in the US in 1993 and in the UK in 2000, and based on the idea of gaining exposure to a stock index through a single tradable share (eg, iShares).

F

Fund of Funds - A fund that specialises in buying shares in other funds rather than individual securities.

Futures – A contract to buy or sell a fixed quantity of a particular commodity, currency or security for delivery at a fixed date in the future at a fixed price. Unlike an option, a contract involves an obligation (not an option) to purchase or sell and can generate indeterminate losses; especially where futures are traded on margin, losses can significantly exceed the cost of the initial investment. (see Margin)

G

Gearing – A term used to describe the ratio of a company's borrowings in relation to its market value, and includes fixed capital and net bank borrowings.

Guaranteed funds - These are a type of structured product that promise to return some or all of the capital invested, usually as long as certain criteria are met. For example, the original investment is returned if a set of shares, an index or a combination of share indices reaches a particular level over a certain period.

H

Hedge funds - Vary greatly, but have some or all of the following characteristics. They will be based offshore and are virtually unregulated. They will have small groups of investors, usually rich individuals or institutions. They will aim for an absolute (positive) rather than a relative return; their managers will be incentivised by a performance fee. They will have the ability to go short, and they will have the ability to use leverage.

I

Income funds - Concentrate on finding companies whose dividends are likely to be above average.

Investment Trusts – Company quoted on the London Stock Exchange which has a fixed number of shares. The value of these shares is determined by supply and demand. The shares do not therefore normally reflect the value of its underlying assets and can be at a premium or discount on net asset value. Basically a trading investment company, it can borrow to provide gearing, can invest in a very wide range of securities, both listed and unlisted, and can hedge any currency risks.

J

Junk bond - Corporate debt that offers investors a high rate of interest because of the perceived higher risk of default. Also known as high yield bonds.

L

Large caps - The shares of big companies, the "Blue Chips". Large market capitalisation.

Leverage - An Americanism for gearing where companies will use a limited asset base to generate substantial borrowings for speculative or business purposes. Money is borrowed to increase the amount invested to more than 100% of the fund's net asset value.

Long position - The purchase, ownership of an investment with the expectation of an increase in its price.

M

Manager of Managers - Rather than buying funds, the funds appoint the underlying fund managers directly. The Manager of Managers is responsible, not just for identifying competitive managers, but for monitoring the overall portfolios at a stock-by-stock, manager-by-manager level. The emphasis is on a clear and consistent investment process.

Margin - The minimum amount that a client must deposit in cash or securities, when borrowing to buy securities or trade in futures or options. In futures markets a deposit normally equivalent to 10% of the contract value is required.

Market timing - An investment strategy in which investors switch in and out of securities or between types of funds in the hopes of benefiting from economic and technical indicators.

N

Net Asset Value (NAV) - The valuation of a collective investment based on the market price of securities held in its portfolio. Unit trusts are valued on this basis, whereas investment trusts have a market value.

O

OEIC - Abbreviation for Open Ended Investment Company. OEICs and Unit Trusts, are investment funds that "pool" investor's money. ICVC (Investment Company with Variable Capital) is a newer name for the well-established OEIC structure.
Unit trusts differ from OEICs & ICVCs, in that they have dual pricing, with a bid to offer price spread. OEICs / ICVCs have a single price for buying and selling, based on the daily valuation of the underlying investments carried out at their mid-market price.
While technically speaking the structure of the three types of funds are different, from an investor's perspective they are the same.

Options - An option is the right, but not the obligation, to buy (call option) or sell (put option) a financial asset at a predetermined price (called the exercise price or strike price) at some particular date in the future. The option price will depend on the prospects of changes in the price of the underlying security to which it relates.
In a 'European' option the buyer only has the right to exercise the option on the expiry date, whereas an 'American' option may be exercised at any time up to the expiry date. In both cases, however, they can be traded rather than exercised at any time.

Outperformance - Beating a stock market index or an average of competing funds. Rarely persists. Even where it does, there is no way of predicting in advance which funds will achieve it consistently.

P

Passive managers - Buy and hold portfolios that are designed to replicate the market, or a large proportion of it.

Pound cost averaging – Investing on a regular basis can iron out stock market fluctuations and can help you to avoid investing all of your money when the market is at its peak. Saving regularly enables you to buy more shares when the market and prices are low and less when the market and prices are high. Over time the cost of your units will even out and it is likely that you will end up paying below average prices for your units. This is known as pound cost averaging. Bear in mind however that in a rising market you could pay above average prices for your units, and if you decided to invest on a regular basis rather than making a lump sum investment at the start of a period of increasing unit prices, the capital you have not yet invested will not participate in investment growth. This means that in some circumstances your investment could be worth less if you use this technique.

R

Relative return - A fund's performance relative to the rest of its sector, or an index.

S

Short position – A trader in securities is said to have established a short position when the sales made by the trader exceed holdings, i.e. the trader is selling securities that he or she does not possess. This is done in anticipation that the market will fall so that those securities sold short can be covered (i.e. bought) at a lower price.

SICAV – Abbreviation for the French: Societies d'Investissement a Capital Variable. A UCIT domiciled in Luxembourg or France.

Standard Deviation - Used to evaluate risk. Technically a measure of statistical dispersion of a distribution of values or prices.

Swap - Generally, an exchange of payments between two parties (sometimes called: counterparties), directly or through an intermediary: currency, interest rate or stock.

T

Top-down - Stock selection based on analysis of the overall economy, be it worldwide or country specific. This initial research identifies favourable countries, markets and sectors to allocate funds to.

Tracking error - The difference in returns between a fund and its benchmark; also the extent to which a tracker fund tracks its benchmark.

U

UCIT - Abbreviation for: Undertakings for Collective Investments in Transferable Securities.

UCITs III - The latest version of the regulations which upgrade the list of affordable investments to include money market, index tracking and Fund of Funds products, and allows UCITs funds to use derivatives as part of their investment strategy.

Unit Trust – see OEICs

V

Volatility – An indication of risk measured by calculating the standard deviation of the fund's monthly returns over the time period. The higher the figure, the greater the variability in the fund's performance. (see Beta)

W

Warrant - A stock market security with a quoted market price of its own that can be converted into a specific share at a certain predetermined price and date. The value of the warrant is therefore determined by the premium (if any) of the share price over the conversion price of the warrant.

Wrappers - An arrangement whereby an investment (usually a fund) is sold as an adjunct to a life insurance policy. Fund investors can shelter both capital gains and investment income from tax by making use of the wrappers available.

Y

Yield - The rate of return, expressed as a percentage, paid on an investment.

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