Absolute Return Fund
These funds aim to deliver positive returns in all market conditions with low volatility. The funds often uses derivatives to protect against falling markets. Accumulation Share Class
Any income generated by the fund is automatically reinvested instead of being paid out, which increases the value of your units.
Where a professional fund manager chooses the companies and amounts in which to invest, instead of simply buying the same companies in the same amount as a market index, such as the FTSE 100. The opposite of active management is passive management.
Active share measures how much an equity portfolio's holdings differ from the benchmark index. A tracker fund which matches the index perfectly will have an active share of zero. Most actively managed funds will have an active share of between 50-90%. Research has shown that funds with an active share consistently below 60%, typically struggle to beat their benchmark index over a long period.
Alpha is a word commonly used to describe a fund manager's skill. Alpha is the excess risk- adjusted return of a fund relative to the return of a benchmark index. The higher a fund managers Alpha, the better their performance is.
Annual Management Charge
The annual charge paid to a fund management company for managing the fund. It is calculated as a percentage of the value of the fund. The annual management charge is less than the Total Expense Ratio (TER) and Ongoing Charge Figure (OCF).
A word used to describe the measure of a fund's volatility in comparison to the market as a whole. A beta score above 1 means the fund is more volatile than the overall market, while a beta score below 1 means it is less volatile.
A standard against which the performance of a fund can be measured. The FTSE 100 is an example of a benchmark index. Bid Price
The price paid by the fund manager to buy back your units when you choose to sell some or all of your holding in a fund. The current value of your holdings in a fund is based on the current bid price.
Bond (see fixed interest securities)
The total value of the company's assets that shareholders would theoretically receive if a company were liquidated and all creditors were paid.
A management style where the manager prioritises individual stock selection over industry, sector or wider economic factors.
An agreement that gives an investor the right, but not the obligation, to buy a company, bond, commodity, or other instrument at a specified price, within a specific time period. In return for this right the seller, or option ‘writer’, receives a payment from the buyer. The value of a call rises when the underyling asset increases in price.
A bond, which can be bought back by the issuer prior to its maturity date. The issuer will usually 'call' the bond if interest rates fall and they can re-issue the bond at a cheaper rate. The call feature is an advantage for the issuer and consequently investors will demand a higher yield as compensation to hold these bonds.
Can refer to many things. Its meaning is context dependent, and in general refers to financial resources which are available for use. It can be divided into (1) Financial assets or the financial value of assets, such as cash; and (2) the factories, machinery and equipment owned by a business and used in production.
Capital is distinct from Money, which is simply used to purchase goods and services for consumption. In contrast, Capital is more durable and is used to generate wealth through investment. It includes, for example, cars, patents, software and brand names.
Clean Share Class
Where the only annual cost that comes out of a fund automatically is that charged by the fund manager for managing the assets. In the past, shares class costs also included those of the intermediary and platform. These charges are now made separately.
An investment style which goes against prevailing opinion. Contrarian investors often invest in out of favour sectors or companies, which have recently performed poorly.
A bond, issued by a company, that may be converted into shares in that company for a pre-stated price.
When a company wants to borrow some money it can issue a bond to do so. This bond is called a corporate bond. People buying the bond lend money to the company in return for regular interest payments and the promise that the capital will be repaid on a specified later date.
A coupon is a periodic payment an investor receives for holding a bond – in other words, the interest. The coupon 'rate' is the total coupons paid per year, divided by the face value of the bond. A bond with a high coupon rate, also known as high yield, will be less sensitive to changes in interest rates.
A strategy which involves buying shares in a company and simultaneously selling a call option for those shares. Selling the call option generates an income but means the fund will potentially miss out on some of the gains should the company’s shares increase in value.
The lowest price at which units can be bought from the fund manager; it is simply the cost of creating a unit.
An assessment of the credit worthiness – or ability to pay interest on loans - of a borrower. Assessment is undertaken by a credit ratings agency such as Standard and Poors's, Fitch or Moody's.
The aggregate performance of a fund or company. For example, company X had a cumulative return of 20% over the past three years.
A word to describe an industry or company that is sensitive to the business cycle. Revenues are generally higher during times of economic prosperity, but lower during times of contraction or recession. The airline industry is one example of a cyclical industry. The opposite of cyclical is defensive.
A word to describe an industry or company that can outperform in difficult economic conditions. They will typically underperform cyclical stocks during periods of economic expansion. The utility industry is an example of a defensive sector. Defensive stocks typically have a Beta of less than 1.
A derivative is a contract between two or more parties, the value of which is determined by fluctuations in the underlying asset. The most common forms of derivatives are futures contracts and options, amongst others. Underlying assets may include company shares, bonds and currencies, to name a few.
An additional charge to investors, levied by fund managers, buying or selling units in a fund, in order to counter any potential effect on the value of the fund such sales or purchases may have. This additional charge is used as a means to protect existing investors in a fund and is usually only applied if there are large numbers of sales or purchases at one time.
The returns of a fund or company over several separate periods of time. For example company X returned 15% in 2013, 12% in 2012 and 5% in 2011.
Calculated by expressing a company’s declared dividends per share as a percentage of the current share price.
Used when describing the average time to maturity of a bond measured in years. The longer the duration, the more sensitive the bond is to changes in interest rates.
Earnings per Share
The amount of profit attributable to each share, calculated by dividing net profit of a company by the number of ordinary shares in issue.
Also known as shares or stocks, equities represent a stake in the ownership of a company.
Exchange-Traded Fund (ETF)
An investment vehicle, the units of which are traded on a stock exchange. An ETF can hold a range of assets such as stocks or bonds. Most ETFs track an index, such as the FTSE All share or the S&P 500, so they are typically passive investments.
Fixed Interest Securities
These are more commonly known as “bonds” and are loans issued by companies or governments in order to raise money, in return for regular interest payments and the promise that the initial investment will be repaid on a specified date in the future. All bonds are essentially IOUs.
A financial portfolio which pools money from many individuals to buy a broad range of assets. Funds are designed to grow an investor’s money, and in some cases, to provide them with a regular income.