A

Absolute return

The total amount gained or lost from an investment, often expressed as a percentage.

ACD

Authorized Corporate Director, which independently oversees the running of a company’s investment funds, ensuring that they are managed in line with industry standards and regulations.

Active investing

A style of investing in which the fund manager individually chooses each asset the fund will invest in. See also passive investing.

Active share

A statistical measure of the percentage of holdings in a portfolio that differs from the benchmark’s holdings. It is a way to quantify the degree of active management in a portfolio. See also active investing.

Accumulation (Acc) shares

Shares or fund units where any income earned is reinvested in buying additional shares or units, rather than being paid out as cash. See also Income (Inc) shares.

Alpha

A statistical measure of the excess return a fund has generated over the return of its comparative index. See also beta.

Alternative investment

A financial asset that does not fall into the category of stocks, bonds or cash. Examples include commodities, art, property and infrastructure.

Annual management charge (AMC)

A deduction made by the fund provider from invested assets, normally expressed as a percentage of the assets. The AMC is generally how the investment manager is paid for their services.

Annualised performance

The percentage movement of an investment over a defined period, calculated as an average per annum.

Asset allocation

The act of determining which assets (for example equities, bonds and cash) to invest in, and what percentage of the fund to dedicate to each. See also stock selection.

Asset-backed securities (ABS)

A financial asset comprising a group of loans, most often mortgages or credit-card balances, packaged together.  ABS investments are a category of bond investment, paying income at a fixed rate for a set amount of time.

Asset class

The category into which an investment falls, such as equities, bonds and commodities. Asset classes are often divided geographically, such as US equities or emerging-market debt.

B 

Balanced fund

A diversified fund that targets a mix of equity and fixed-income holdings. The investment objective of a balanced fund is to grow your initial investment, often while generating income.

Base currency

The currency a fund and its assets are priced in, typically sterling (GBP), euros (EUR) or US dollars (USD). See also share classes.

Base rate

The interest rate that a central bank, such as the Bank of England, will charge to lend money to a commercial bank.

Basic materials

A sector of the market that comprises companies working with raw materials. This includes industries such as metals & mining, forestry and chemical products.

Basis point

A unit of measurement of the difference between two percentages. Basis points are often used when discussing fund or index performance, or interest rates. One basis point is equal to 1/100^th of a percentage point. So, if a central bank raises its benchmark interest rate from 3% to 3.5%, it has increased the rate by half a percentage point or 50 basis points.

Bear market

When a market experiences prolonged price declines. It typically describes a situation where a stock market has fallen at least 20% from recent highs. Bear markets reflect negative sentiment about financial markets and the economy. See also bull market.

Benchmark

A standard against which something is compared. Fund managers use benchmarks to compare the performance of funds. These benchmarks are usually market indexes, although can sometimes be based on interest rates, peers or composed of several different elements.

Best-in-class ESG funds

A category of responsible investment funds which select investments with relatively superior environmental, social and governance profiles based on financially material ESG issues.

Beta

A measure of the volatility of a security or portfolio when compared with the volatility of the overall market. A portfolio with a beta of 1 indicates that it tends to move with the market.  A beta of greater than 1 indicates that the portfolio's price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market. See also alpha.

Blue bonds

Bonds where the proceeds are used to support the sustainable use of ocean resources and protect marine ecosystems. See also green bonds, sustainable investing.

Bond

Essentially, a loan provided by an investor to a company or government, where the investor receives fixed interest payments and the initial amount is repaid at the end of an agreed period. See also fixed income.

Bottom-up stock selection

An investment strategy in which the portfolio manager chooses the fund’s investments on a stock-by-stock basis, rather than by looking at the wider economy or industry. See also top-down investment approach.

Bull market

A sustained period of rising prices in a financial market. Bull markets reflect positive sentiment about the economy and are typically characterised by increased investor confidence and an overall optimistic outlook for potential gains. See also bear market.

Bund

A bond issued by the German government.

Buyback

The re-purchasing of a company’s own stock from its shareholders, which can lift the stock’s price on the open market.

C

Call

To redeem a bond before it reaches its maturity date, which entails paying investors the face value of the bond plus interest accrued to date and any applicable fees.

Call option

A financial contract that gives a holder of the option the right, but not the obligation, to buy an asset at a certain price within a specific timeframe. Call options are often used to speculate on price increases or protect against potential losses.

Capital

Money used or available for the purpose of growing wealth.

Capital-gains tax (CGT)

A government tax imposed on profits earned from the sale of an asset that has increased in value since it was acquired. The rules and rates relating to CGT differ greatly by country.

Carbon risk rating

A rating which provides investors with a comprehensive assessment of the climate-related performance of companies and allows important conclusions to be drawn about CO₂-related risks. See also ESG, sustainable investing, weighted-average carbon intensity.

Carry

The potential profit, or cost, associated with holding an investment over a certain period. It can be influenced by such factors as interest rates, dividends or currency exchange rates.

Cash equivalent

A lower-risk, low-return asset that can be quickly converted into cash.

Cashflow

Money flowing into and out of a company, after accounting for all transactions, during a set period.

Climate transition funds

A category of responsible investment funds which select investments which are better prepared to manage climate-related risks.

Collateralised loan obligation (CLO)

A financial product that combines multiple loans and then issues securities backed by those loans. Investors buy these products to receive income from the loan repayments.

Commercial mortgage-backed security (CMBS)

A financial asset comprising a group of mortgages on commercial properties packaged together. It behaves like a bond, paying income at a fixed rate for a set amount of time.

Commercial paper

A short-term fixed-income product issued by corporations, financial institutions and governments to raise funds for their immediate financing needs.

Collateral

An asset that a borrower pledges as insurance for a loan. If the borrower fails to repay the loan, the lender can sell the collateral to recover lost funds.

Commodities

Raw materials that can be bought and sold. Often agricultural products, like coffee or wheat, or natural resources such as oil and precious metals.

Comparative benchmark

The standard against which a fund’s performance is measured for illustrative purposes. Most comparative benchmarks are market indexes.

Composite benchmark

A combination of more than one index against which a fund’s performance is measured.

Compounding

The process of reinvesting profits from an investment, so that they can potentially generate further gains.

Consumer loan

Any type of loan made to a consumer by a creditor.

Convertible bond

A corporate bond that gives investors the opportunity, under certain circumstances, to exchange the bond for equity (shares in the company).

Consumer cyclicals

Stocks related to businesses that rely heavily on current business and economic conditions. Industries in this category include real estate, automotives and consumer discretionary.

Consumer Price Index (CPI)

A measurement of price variations for goods and services that consumers commonly buy, such as food, clothing and transportation. It is used to assess changes in the cost of living and identify periods of inflation or deflation.

Contingent convertible bonds

A corporate bond that gives investors the opportunity, under certain circumstances, to exchange the bond for equity (shares in the company), if a specific trigger event occurs.

Counterparty risk

The possibility that one party in a transaction may default on its contractual obligation. Counterparty risk can exist in credit, investment and trading transactions. A borrower’s credit rating reflects the level of counterparty risk to the lender or creditor.

Corporate bond

A bond issued by a company rather than a government or supranational organisation.

Correlation

A statistical measure of the degree to which two asset prices move in relation to each other.

Coupon

The annual interest an investor receives from owning a bond.

Credit default swap (CDS)

A financial agreement that enables an investor to transfer or ‘swap’ the risk of an asset defaulting with another investor who agrees to reimburse them if a default does occur. In CDS agreement, the initial investor provides regular premium payments to the second investor, who in turn commits to reimbursing the value of the security, inclusive of interest payments, in the event of a default.

Credit maturity

The length of time until the initial investment in a bond is repaid to the bondholder. It represents the date on which the bond issuer is obligated to return the borrowed funds to the bondholder (lender). On reaching maturity, the bondholder recoups the principal amount, and the bond ceases to accrue interest.

Credit rating

An assessment of the soundness of a borrower (such as a company) with respect to its ability to fulfil financial obligations. Bonds issued by businesses and governments are rated by credit agencies using letter-based systems ranging from AAA to D. See also investment-grade bond, sub-investment-grade bond.

Credit risk

The possibility of a loss resulting from a company's (borrower’s) failure to repay a loan. Lenders can mitigate credit risk by analysing factors about a borrower's creditworthiness, such as their current debt load and income.

Credit spreads

The difference in yield between two bonds of similar maturity, but different credit quality. Credit spreads are measured in percentage points or basis points. See also yield curve.

Cryptocurrency

A digital form of currency that uses coding and encryption to ensure the security of transactions. It is decentralised, meaning it is not controlled by any government or financial institution.

Cumulative performance

The total aggregate return over a set period, typically expressed as a percentage. See also annualised performance.

Currency exposure

The potential for investments in overseas assets to lose or gain money because of fluctuations in the currency exchange rate.

G

Gilts

Bonds issued by the government of the United Kingdom.

Government bonds

Bonds issued by a country’s government for the purpose of raising capital. Also called sovereign bonds, they are generally considered lower-risk investments, as they are backed by the creditworthiness and taxing power of the issuing government. Government bonds typically have fixed interest payments and a specified maturity date, upon which the principal amount is repaid to the bondholder.

Green bonds

Bonds used to generate income for projects that have positive environmental impacts, such as funding renewable energy or sustainable agriculture ventures. See also sustainable investing.

Gross return

The total rate of return on an investment before any fees are deducted. See also net return.

H 

Hawkish

Advocating stricter monetary policies, such as higher interest rates to control inflation, even at the expense of economic growth. See also dovish.

Hedging

A risk management strategy to help reduce the risk of loss of an existing position, for example in currencies or to factors such as interest rates.

High-yield bonds

Bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds and are therefore riskier.

Historical yield

The income returned by an investment over a specific period, calculated as a percentage of its price. See also distribution yield, yield-to-worst.

I 

Illiquid security

An asset that cannot be easily sold on the market because of low trading activity or limited potential buyers.

Impact investing

A category of responsible investment funds which select projects, borrowers or issuers that are able to demonstrate measurable social or environmental impact.

Income (Inc) shares

Shares or fund units where any income earned can be paid out to investors as cash distributions, rather than being reinvested in buying additional shares or units. See also Accumulation (Acc) shares.

Income stocks / shares

Investments intended to generate income, usually in the form of dividends, rather than growing capital.

Index

A group of stocks representing a particular market, sector or asset class. Often used as a benchmark for evaluating the overall performance of an investment fund.

Index-linked bond

Also called an inflation-linked bond, a fixed income investment in which both the bond’s value and interest payments are adjusted in accordance with inflation until the maturity date.

Industrials

A sector comprising companies that produce goods used primarily in manufacturing and construction, such as machinery or equipment.

Inflation

The rate at which the prices of goods and services rise, expressed as a percentage. See also deflation, consumer price index.

Information ratio

A figure that reflects the ability of a fund manager to consistently generate superior returns compared to those of a benchmark. A higher information ratio indicates that the fund manager has outperformed his or her peers and consistently delivered favourable returns over a specific timeframe.

Initial charge

The fee payable to a fund’s management company upon the original purchase of assets. This pays for the administration of the fund.

Interest-rate risk

The risk associated with how interest-rate fluctuations could affect asset prices. See also duration.

Investment Association (IA)

A trade body that represents investment managers and investment management firms in the UK.

Investment grade bond

A sovereign or corporate bond that presents a relatively low risk of default. Credit-rating firms such as Standard & Poor’s and Moody's use different designations, consisting of letters, to identify a bond's credit-quality rating.

ISIN

International Securities Identification Number. A 12-digit alphanumeric code that uniquely identifies a specific security.

Issuer

A legal entity such as a corporation, investment trust or government that sells securities (such as bonds) to finance its operations.

M

Macroeconomic

Related to overall trends in an economy and comprising factors such as inflation rates, GDP growth, unemployment and monetary policy.

Management fee

The price an asset manager charges for the professional management of an investment fund, usually expressed as an annual percentage. See also annual management charge and ongoing charge.

Market capitalisation

A representation of a company’s size as determined by the total value of its shares on the open market. It is also a measure commonly used to reflect the size of a company.

Market risk

The possibility that an investor will experience losses due to factors that affect the overall performance of investments in financial markets.

Market share

The portion or percentage of total sales within a specific market or industry that a company captures. A reflection of how successful that company is compared with its competitors.

Maturity

The agreed-upon date at which an investment ends, often triggering the repayment of a loan or bond, or some other payment or settlement term.

Maturity date

The date upon which the initial investment is repaid to a bondholder.

Median

The middle value in a set of data, such as a group of investment funds.

Mortgage-backed security (MBS)

A financial asset derived from a group of mortgages on residential real estate packaged together. It behaves like a bond, paying income at a fixed rate for a set amount of time.

Modified duration

A calculation that expresses the measurable change in the value of a security or portfolio of securities in response to a change in interest rates. See also duration, interest-rate risk.

Money markets

Financial markets in which participants trade short-term, low-risk fixed-income assets. These can include short-term government and corporate bonds.

Money-market deposits

Short-term, easily sellable investments that are subject to an insignificant risk of change in value. They can be considered a cash equivalent.

Monetary policy

The actions and decisions taken by a central bank to manage and regulate a country’s money supply, interest rates and credit conditions with the goal of growth and stability. See also quantitative easing.

Multi-asset fund

A fund that is invested across different asset classes, such as stocks, bonds, commodities and real estate. By investing in a variety of assets, these funds aim to achieve a balanced portfolio by reducing risk while pursuing returns.

Multi-strategy fund

A fund that employs different investment strategies simultaneously, with the aim of generating returns. The goal is to diversify the fund’s holdings and therefore potentially benefit from different market conditions and opportunities.

N 

Net asset value (NAV)

The total value of a fund’s assets, minus any debts outstanding. This figure is divided by the number of holdings in the fund to get a per-share price. It is typically calculated at a fixed point in each working day.

Net return

The total rate of return on an investment after any fees, commissions or expenses are deducted. See also gross return.

Number of issuers

The total number of distinct entities (for example, governments or companies) of which securities are held within the portfolio. A higher number of issuers generally implies a more diversified portfolio.

Number of stocks

The total number of distinct entities (for example, company shares) of which securities are held within the portfolio.

O 

Open-ended investment company (OEIC)

A type of UK-domiciled investment fund that is structured as a company to invest in stocks and other securities. Shares in OEICs do not trade on the London Stock Exchange.

Ongoing charge

The charge an investor will pay over a year for as long as the investment is held. The total ongoing charge is based on actual expenses for a defined 12-month period and includes the annual management charge. The ongoing charges figure for a fund is quoted on the KIID and relates to the costs of running the fund. See also annual management charge.

OPEC

The Organisation of the Petroleum-Exporting Countries, a group of 13 oil-producing nations that coordinate and manage oil-production levels to stabilise prices in the global oil market. Collectively, OPEC member countries account for a significant portion of the world's oil reserves and production.

Outperforming

Generating a higher return than that of peers or the market, typically expressed through a comparative index. See also underperforming.

S

Sector

A way of grouping companies with similar business activities, such as technology, energy, industrials and financials.

Sector allocation

The breakdown of the industries represented within a fund or portfolio, usually expressed as a percentage. See also asset allocation.

Securities

Tradable assets that can be bought and sold in financial markets, such as a company’s stock or bonds.

Securities lending

The practice of loaning financial assets to other investors or firms. Securities lending requires the borrower to put up collateral, whether cash, other securities or a letter of credit.

Stock Exchange Daily Official List (SEDOL)

A unique seven-character alphanumeric identifiers assigned to securities that trade on the London Stock Exchange and other smaller exchanges within the UK.

Service fee

The price that customers or clients pay in exchange for financial services or assistance. This typically covers the costs associated with account management and maintenance, transaction fees and advice.

Sustainable Finance Disclosure Regulation (SFDR)

The SFDR is a major piece of EU legislation which sets out sustainability-related disclosure requirements for financial market participants, such as asset managers. These regulations aim to:

• Build trust in sustainability and fight so-called ‘greenwashing’.
• Increase transparency and disclosure around sustainable finance products and investments.
• Give investors more information to make informed investment decisions.

At a fund-level classifications include Article 6 funds without a sustainability scope; Article 8 funds that promote environmental or social characteristics; and Article 9 funds that have sustainable investment as their objective. See also ESG, sustainable investing.

Share

A portion of a company owned by an investor. See also stock.

Share class

A designation used to distinguish the different classes of shares that can be held by investors in a fund. These are typically distinguished by currency, whether income or accumulation, minimum investment levels and charging levels. See also Accumulation shares and Income shares.

Share class launch

The introduction of a new type of share within a company or fund, for example, during a company’s initial public offering on the stock market.

Shareholder

A person or organisations which holds one or more shares in a company.

Sharpe ratio

A statistical measure that indicates how well an investment has performed in comparison with the rate of return on a risk-free investment, such as a government bond.

Short-dated

Typically referred to in the context of bonds or portfolios of bonds which have maturity dates in the near term, typically up to 5 years. See also duration, long-dated.

Short position

A position created when an investor borrows and sells an asset with the intention of buying it back later at a lower price, thereby profiting from the difference between the sale price and the lower repurchase price. See also long position.

Sterling Overnight Index Average (SONIA)

A benchmark UK interest rate that reflects the average interest rate at which banks lend to one another overnight. SONIA is widely used in financial markets as a reference rate for various financial products, including loans and bonds.

Sovereign bonds

Bonds issued by a country’s government for the purpose of raising capital. Also called government bonds, they are considered low-risk investments as they are backed by the creditworthiness and taxing power of the issuing government. Sovereign bonds typically have fixed interest payments and a specified maturity date, upon which the principal amount is repaid to the bondholder.

Spread

The difference between the yield of two bonds of the same maturity (for example, a government bond and a corporate bond). Spreads are measured in percentage points or basis points. See also yield curve.

Stagflation

A period of sustained high inflation.

Standard deviation

A statistical measure that helps determine market volatility or how much an asset price will vary from its average price. When prices move sharply, standard deviation is high, meaning an investment is riskier. A low standard deviation means prices fluctuate less, so investments come with lower risk.

Stock

Another word for share.

Stock lending

Loaning stocks to another investor in exchange for a fee. The borrower uses the stocks for various purposes (such as opening short positions), and the lender receives compensation, typically a fee.

Stock selection

The process of deciding in which securities a particular fund will invest. See also asset allocation.

Sub-fund

A subset or component of a larger, broader fund. A sub-fund can have its own investment objectives, policies and strategies.

Sub-investment-grade bonds

Fixed-income securities issued that have a low credit rating. They are considered higher risk, as a lower rating indicates a higher probability of the bond issuer being unable to meet its payment obligations. Also known as high-yield bonds.

Subordinated debt

A type of loan that has a lower priority compared with other loans if a company faces financial trouble. If a company goes bankrupt, subordinated debt holders will be paid back after other lenders have been fully repaid. Because of this, subordinated debt usually offers higher interest rates to compensate lenders for the increased risk of not being fully repaid.

Supranational organisation

A large organisation that operates across multiple countries. These organisations typically have authority and decision-making power and can impose policies or regulations on member states. Examples include the International Monetary Fund (IMF) and World Trade Organisation (WTO).

Sustainable Development Goals (SDGs)

In 2015 the United Nations member states created 17 Sustainable Development Goals (SDGs) which provide a blueprint for achieving a more sustainable future. The Goals address a range of global challenges, including poverty, inequality, climate change, environmental degradation, peace and justice.

Sustainable investing

A category of responsible investing funds which select investments that are aligned to sustainable economic activities or the Sustainable Development Goals. See also ESG, green bonds.

T

Treasury inflation-protected securities (TIPS)

A type of US government bond in which the original value and any interest payments are adjusted based on changes in inflation, as indicated by the Consumer Price Index.

Top-down investment approach

An investment strategy in which the portfolio manager chooses the fund’s investments by analysing the wider economy and market trends, before selecting individual securities. See also bottom-up stock selection.

Total emissions

A measure of the most recently reported or estimated scope 1 (direct energy use) and scope 2 (indirect from purchased energy) emissions available for issuers, allocated by exposure. See also ESG, SFDR classification, Weighted average carbon intensity (WACI).

Tracking error

A statistical measure of the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark that has resulted from active management decisions made by the portfolio manager. It serves as an indicator of how closely the portfolio deviates from the benchmark index it aims to track.

Transaction costs

Expenses incurred when buying or selling financial assets.

Turnover

A measurement of the level of trading activity in a portfolio over a given period, usually one year. A high turnover ratio indicates vigorous trading activity, while a low turnover ratio indicates a lower level of trading activity.

U

UCITS

The Undertakings for the Collective Investment in Transferable Securities (UCITS) is the European Commission's regulatory framework for managing and selling mutual funds. UCITS funds can be registered and sold in any country in the European Union, using investor-protection requirements established by the European Commission’s regulatory framework for managing and selling mutual funds.

Underlying yield

The rate of return on an investment or fund excluding any fees, expenses or taxes associated with the investment. It represents the gross return generated by the investment. See also yield, yield-to-worst, distribution yield, yield curve.

Underperforming

Generating a lower return than that of the market, a comparative index or peers. See also outperforming.

Unhedged

Not balanced by a potentially equal and opposite holding (a ‘hedge’) that could help to compensate for losses incurred (for example, by investing in one currency to offset potential losses from another).