This glossary has been developed as part of our commitment to providing you with the highest level of service. Whilst not exhaustive, it does define some key investment terms and we hope that you find it useful.
A market indicator used to determine volatility levels in the market without factoring in price direction. It is calculated by taking the absolute value of the difference between the number of advancing issues and the number of declining issues. Typically, large numbers suggest volatility is increasing which is likely to cause significant changes in stock prices in the coming weeks.
A change in value of an investment measured in absolute, not relative, terms. An absolute return fund looks to make positive returns in all market conditions.
Pension benefits earned by an employee based on the terms of his/her employer's pension scheme e.g. the monthly pension received, which could be based on final salary and length of service, if the employee is in a defined benefit scheme.
Interest that has been earned but not yet paid.
Approach to investment management which aims to outperform rather than match the return of a particular market index or benchmark. See also index-tracking fund and passive management.
The portion of returns that result from the active management of an investment portfolio. Also known as residual return.
The risk arising from active management in excess of the risk that would be incurred if the portfolio were passively managed.
A valuation which analyses pension scheme membership by type, assesses a scheme’s financial position (i.e. are the fund’s assets sufficient to meet its projected liabilities), sets out the assumptions for future inflation and investment returns and then provides a schedule of the contribution rates for each of the fund’s employing bodies. These rates are set at a level sufficient to secure the ongoing viability of the fund. Scheme members are reminded that their own contribution rates are fixed by statute and that it is the employing bodies who must make good any shortfall in fund assets relative to liabilities.
Adviser on financial issues relating to risk, probabilities and mortality, most frequently in relation to the financing of pension schemes and insurance companies.
Performance in excess of a stated benchmark or index.
Employee contributions, over and above any compulsory contributions, to a tax-approved occupational pension scheme. An employee may choose to pay AVC in order to secure additional pension benefits in the future.
The additional return generated by manager skill as opposed to general market movements. Historical alpha measures the returns achieved by active management over time.
Investments that do not fit into traditional categories of equities, bonds and cash, examples are private equity, venture capital, hedge funds, absolute return funds and property.
Certificates that are issued by a US bank stating that a specific number of non-US company’s shares have been deposited with them. These certificates are denominated in dollars and traded on US exchanges as if they were US securities. This enables US investors to trade non-US securities via a simple dollar denominated vehicle
Interest calculated under the assumption that interest is paid and compounded per year.
Cost of debt that is paid by borrowers, expressed as an annual percentage.
The average return over a given period scaled up or down to an annual figure.
An annual payment/receipt. Normally paid in the form of a pension.
Profiting from differences in price when the same security, currency or commodity is traded on two or more markets. By taking advantage of monetary disparities in prices between markets, arbitrageurs perform the economic function of making these markets trade more efficiently.
The distribution of investments across categories of assets, such as equities, bonds and cash. Asset allocation affects both risk and return and is a central concept in financial planning and investment management. See also strategic asset allocation and tactical asset allocation.
Category of assets, for example, equities, bonds, property and cash.
Bonds or notes backed by a pool of assets, such as car loans or credit card receivables
A technique that involves comparing projections of the future financial position of a particular scheme with regard to its future assets and liabilities in order to gauge the suitability of various investment policies.
Decomposing the return achieved by a portfolio manager into its constituent parts (for example, asset allocation and stock selection) to show where value was added and lost.
Status required by the Financial Services Act 1986 for any firm that want to conduct investment business. It is achieved by direct application to the Financial Services Authority (FSA) or by becoming a member of a Self-Regulating Organisation (SRO).
The nominal amount of share capital a company is authorised to issue. This does not provide any indication of the worth of the company.
A unit trust that is subject to certain Financial Services Authority regulations so that it can be marketed to the general public.
Maximum drawdown refers to the greatest possible percentage loss of capital an investor could have experienced from owning a particular asset. It can be calculated as the percentage drop from the asset’s highest achieved unit price to any subsequent lowest unit price.
