Jargon flashcards

Funds that are managed by one or more fund managers who use their judgement to pick which investments to hold in the fund. An active fund should be judged against a benchmark and aims to deliver a higher return than that benchmark after fees.

Annual Management Charge. A charge by the fund manager for managing the fund. Investors should be aware that the AMC is not the only charge the investor has to pay. The OCF is a better indication of the total charge.

The mix and proportion of different asset classes that an investor holds in their portfolio. This will vary depending on their risk tolerance and time horizon. You can make your own asset allocation decisions or a professional fund manager or IFA can make the decisions for you.

There are many different types of asset classes available to invest in. The most common ones are equities, bonds, commodities, infrastructure and cash. A single stock, bond, commodity etc is referred to as investment security or security.

The company that manages one or more funds for institutional and/or retail investors. The name of a fund typically includes the name of the asset manager.

Defined by a 20% fall in stock market prices. Bear markets tend to come when investors worry about the prospects for their investments and/or the economy. Just like a Bull market, it can last for a few weeks or for many years. A pessimistic investor can be referred to as “bearish”.

The term is often used interchangeably with index and refers to the chosen index or other metric (like cash or inflation) selected to judge the returns from a particular fund in terms of performance, risk etc. Most benchmarks are indices, but not all indices are benchmarks.

A bond is similar to a loan between a borrower (a company or government) and a lender (the investor). Just like a loan, the bond typically pays the investor interest, which is called a coupon. Bonds are also categorised as investment grade or high yield bonds depending on the ability and willingness of the borrower to repay the debt in full. Bonds are often referred to as fixed income investments.

The middleman between the investor and an exchange (think of it like a market). A broker can be a person or a company, but the main purpose is to help an investor to buy or sell investments.

Defined by a 20% rise in stock market prices. Bull markets tend to come when investors are optimistic about the prospects of their investments and/or the economy. Just like a bear market, it can last for a few weeks or over many years. An optimistic investor can be referred to as “bullish”.

You have to pay this tax on any gains you make on your investments. However, if you invest through an ISA or a SIPP up to the annual limit, this tax does not apply. This is why you should make full use of your ISA and pension allowances.

Assets that have very little differentiation and are often used in the production of other goods or services. Examples include gold, oil, sugar, grains and livestock. They can be traded on specific exchanges, or an investor can get access via commodity focused funds or ETFs.

The process where you earn interest on your interest over time. If you invest £1,000, after one year say it has grown by 10% to £1,100. You keep the money invested and one year later it has grown by another 10% to 1,210. Your investment has now grown by an another £100 (10% of the original investment) + £10, which is 10% on the £100 you earned in the year before. Over time this process has a significant impact on your total returns, even without adding more money. This is why it is important to start saving and investing early.

The process of spreading your risk, ie not putting all your eggs in one basket. Common ways of achieving diversification is to mix your investments across asset classes, countries, sectors and currencies.

A payment, much like interest, made by a company to its shareholders based on its profits. It can be paid annually or more frequently. A dividend yield is a percentage that is calculated by dividing the annual dividend amount by the company’s share price. It is important for income investing.

Can also be referred to as stocks and is an investment security that represents ownership in a company. Equities tend to be higher risk and with the potential for higher returns than assets such as bonds. They are generally considered appropriate for long-term investing.

Environmental, social and governance. ESG is a measure used to evaluate a company’s impact on the environment (E), its social relationships including employees and suppliers (S) and its level of governance and respect for shareholder rights (G). It has become a popular investment style by investors who take a more holistic view on investing, beyond just making money. There are many types of ESG investing including responsible, ethical, sustainable, green and impact investing.

Funds that are structured as an Exchange-Traded Fund (ETF). This type of fund trades on an exchange, just like equities. They are passive investments which automatically track an index or a pre-set group of assets. Exchange-Traded Commodities (ETCs) is a common type of ETF for investors who want exposure to commodities such as gold and silver.

Financial Conduct Authority. The FCA regulates the conduct and behaviour of financial firms in the UK to make sure that consumers are treated fairly.

Financial Times Stock Exchange Group. Pronounced “footsie”, FTSE creates indices for global financial markets. The most well-known FTSE index is the FTSE 100 which consists of 100 companies with the largest market cap listed on the London Stock Exchange. The FTSE 100 and other FTSE indices are sometimes used as benchmarks. Their movement (up or down) can give an indication of the health of the UK’s economy.

A pool of money set aside for a specific purpose. It can be professionally managed by a fund manager or passively track an index and it can be invested in a wide variety of assets, geographies and styles.

Also referred to as investment manager (IM), portfolio manager (PM) or just FM for short. It is the person who manages the fund and makes decisions for what to buy and sell.

General Investment Account. A GIA is a standard investment account. The investor has to pay CGT on any gains made in this type of account. In contrast to an ISA account where there is no tax, a GIA doesn’t have any limits on how much money you can put into it.

A collection of securities (stocks, bonds etc) with common characteristics. The FTSE 100, for example, comprises the 100 largest UK companies measured by their market cap. An investor cannot buy the actual index, but there are passive funds and ETFs which try to replicate indices.

In the most basic sense, it means to allocate money to something with the expectation that the value will grow and/or generate income over time. An investor can invest in real estate, start-ups or in securities in the public markets. With all types of investing, the value of the investment can rise or fall.

Individual Savings Account. A tax-efficient savings or investment account. The investor does not have to pay CGT on any gains made. There are different kinds of ISAs: Cash ISA, Stocks & Shares ISA, Help to Buy ISA, Innovate Finance ISA, and Lifetime ISA. There is also a Junior ISA (JISA). Each comes with a different set of rules, but all have caps, called an ISA allowance, on how much money you can put into them.

Ongoing Charges Figure. This was previously called the total expense ratio (TER) and is used to show the cost of investing in a fund. It is expressed as a percentage and includes the AMC, administration, regulatory and custody charges. It does not include other costs such as trading or performance fees, which can be large additional costs.

Funds that aim to replicate an index or otherwise predefined group of assets. Passive funds are usually cheaper than active funds as there are no research and management costs involved.

A pension is a pot of money which is invested to give a person an income in retirement. There are three main types of pensions: workplace/defined contribution pensions, personal/private pensions and state pensions. For the first two, the size of the pension depends on how much money has been contributed over time and how the investments have performed.

Funds that invest in property. Property funds can come in both ‘open-ended’ (typically OEIC) and closed-ended (typically REITs) structures and can invest in different types of properties, either in one specific country or across different regions. They may be able to invest either directly in property and/or through listed property companies.

An online platform using an algorithm to provide automated investment services to retail investors usually with low, or no human supervision. The investor’s money is usually invested in passive investment securities like ETFs.

Self-Invested Personal Pension. A type of pension plan which gives the holder control over their pension and what it invests in. In short, a DIY pension.

A measure of how much the price of a security has swung up or down in the past. There is usually a trade-off between volatility and return so investors who seek a higher return tend to have to also accept higher volatility.

A calculation of how much income an asset or investment has generated in the form of interest or dividends in relation to the price paid. It is shown as a percentage. Yield is therefore a common term in income investing.

Most funds offer a range of share classes to investors depending on how they would like their returns to be paid and/or what kind of fees they will be charged. The acc share class is for investors wanting income generated by their investment to be automatically reinvested. The inc share class is for investors who want that income paid out to them.

The additional return of an investment/fund over and above its chosen benchmark return.

A subset of Behavioural Economics that studies how human psychology and subconscious bias can influence fund managers’ and investors’ decisions and behaviour. The core argument is that investors do not always make rational decisions.

Most bonds are fixed income assets and are similar to a loan between a borrower (in this case, a company) and a lender (the investor). Just like a loan, the bond typically pays the investor interest, which is called a coupon. Bonds are also categorised as investment-grade or high-yield bonds depending on the ability and willingness of the borrower to repay the debt in full.

They analyse the creditworthiness of companies and governments and given them a credit rating. This rating then tells if their bonds will be defined as high yield or investment grade. The best-known credit rating agencies are Moody’s, Standard & Poor’s and Fitch.

A financial institution responsible for protecting investors’ assets from theft or loss. Custodians tend to be large and reputable financial institutions and are strictly regulated.

A country that has a stable, highly industrialised economy and relatively high GDP per capita. It also has advanced and regulated capital markets (or stock markets) with good liquidity. Examples include North America, Japan, UK, Australia and Germany.

An emerging market is a country that is like a developed market (such as the US and UK) but is less advanced. Usually, regulation and market liquidity tend to be less developed than in developed markets. But, as emerging markets tend to grow faster than developed markets, they have the potential to deliver higher returns (and risk) for investors. Current examples include China and India.

A trading service (like a broker) which simply executes (buys or sells) the investor’s chosen trades without offering any personal advice.

Can also be described as leverage, debt or borrowings. It is calculated based on a company’s debt relative to its equity and other liquid assets like cash. If the company has a high proportion of debt relative to its equity, it is considered highly geared. Companies and investment trusts may use gearing.

A type of bond issued by the UK government. The US equivalent is called Treasury Bills/Bonds (based on time horizon). Government bonds are considered one of the safest investments in the market with low risk and low return characteristics. However, depending on the country that has issued the bond, the risk (and return) may be a lot higher. High-risk government bonds tend to be issued by emerging market countries and are called emerging market debt.

Most bonds are fixed income assets and are similar to a loan between a borrower (in this case, a government) and a lender (the investor). Just like a loan, the bond typically pays the investor interest, which is called a coupon. Bonds are also categorised as investment-grade or high-yield bonds depending on the ability and willingness of the borrower to repay the debt in full. UK government bonds are referred to as Gilts.

When a company or fund makes exaggerated claims and/or mislead consumers about how environmentally friendly their product or fund is.

In simple terms, this means that the fund manager or team focuses on buying stocks of companies which have the potential to grow their sales or profits much faster than their competitors or the overall market, regardless of the economic backdrop.

Bonds issued by companies or governments that are rated “high-yield”, which is determined by one or more credit rating agencies. High-yield bonds were historically also referred to as “junk bonds”. This rating suggests that there is more risk of the company or government not being able or willing, to pay back the bond than for investment-grade rated bonds. To compensate the investor for this extra risk, these bonds tend to have a higher yield than investment-grade bonds.

Income share class. When choosing this share class any income generated by the fund is paid out to the investor in cash. This share class can be useful for an investor who wants a regular income, such as in retirement.

Infrastructure is a type of alternative asset class. Infrastructure funds are specialist funds focused only on investing in infrastructure projects such as transportation, schools and other public buildings, energy distribution and waste management.

Organisations or companies which invest money on behalf of other people. This type of investor is considered more knowledgeable than a retail investor. Examples include pension funds, insurance companies and endowment funds (charities, universities etc).

Funds that are structured in what is often referred to as ‘closed-ended’. An investment trust is a company whose shares are listed on the stock exchange and which can be bought and sold like those of any other company. It can invest in different assets, private or publicly listed, and can take on debt, which is expressed as gearing. The value of the underlying investments minus the debt is called the net asset value (NAV). The share price of the trust is determined by the supply and demand of the trust’s shares and can either trade at a premium or discount to the NAV.

Bonds issued by companies or governments that are rated “investment-grade”, which is determined by one or more credit rating agencies. This rating suggests that there is a lower risk of the company or government not being able or willing, to pay back the bond than high-yield rated bonds. Because of this relatively low risk, these bonds tend to offer a lower yield than high-yield bonds.

A measure showing the ease of trading a particular investment security without changing the market price. Cash is considered to be the most liquid asset whereas stocks of small companies (small caps), private assets etc are at the other end of the spectrum. These types of assets can be referred to as illiquid.

Market capitalisation. The total value of a company’s outstanding shares. It is calculated by multiplying the share price with the total number of shares outstanding. It can be used to define a company as a small cap, mid cap or large cap. It can also determine which index the stock should be listed in.

Funds that invest in more than one asset class. Most funds are dedicated to investing in one type of asset class. Equity funds invest in equities/stocks/shares, bond funds invest in bonds and so on. This combination of various asset classes can increase diversification and reduce volatility because different asset classes tend to perform differently.

This includes Open Ended Investment Companies (OEICs) and Unit Trusts. This is a common structure for funds based in the UK and it allows investors to pool their money in order to invest in a particular country, sector or style. The price an investor pays reflects the price of the underlying investments at a fixed point every day. These funds can provide exposure to a wide range of different markets and asset classes.

Real Estate Investment Trust. A REIT is a listed company that invests in property. It can own property assets directly, it may be an operator, or simply invest in in different real estate related companies. The focus tends to be on generating an income, and the listed structure can offer liquid access to what are often a highly illiquid assets.

This means you and me. Another term used is individual investor, but basically it is a person who invests their own money in investment securities such as funds, stocks, bonds and so on.

Funds that focus on generating a positive total return regardless of the market conditions. These funds are typically measured against cash and tend to be multi-asset funds.

In simple terms, this means that the fund manager or team typically focuses on buying stocks whose share price appears to be below the intrinsic value of the company, as calculated from its profits or its assets and liabilities.

A measure showing the difference between a fund’s holdings and their weightings and those of the benchmark it is judged against. As a general rule of thumb, it is thought that an active fund should have a long-term average active share of 70% or higher to be considered genuinely active and not just copying the benchmark. Active share is often confused with tracking error.

Funds that can invest across the market cap spectrum. Market cap is short for “market capitalisation” and means the total value of a company’s outstanding shares. It’s calculated by multiplying the share price with the total number of shares outstanding. Funds that invest across the market cap spectrum therefore tend to invest in companies of all sizes. The definition of “All-cap” varies from fund to fund.

The difference between the price which you pay to buy a security and the price you pay to sell it. Frequently traded assets are considered to have high liquidity which results in a small price difference between the buy and sell price. If the bid-offer spread is big, you may end up paying more than the fair value.

Disinflation refers to a slowdown in the rate of inflation. This is a temporary state and many confuse this with deflation. But whilst deflation refers to a decrease in the price of goods and services, disinflation merely refers to a slower rate of inflation. So prices are still going up, but not as fast.

Funds that invest with sustainability in mind. These funds explicitly exclude certain industries, determined by the mandate of the fund, from investment. These industries are excluded based on one or more of Environmental, Social, or Governance (ESG) related reasons. Sectors that are typically excluded include tobacco, weaponry, fossil fuels, etc. These funds can be focused on any kind of asset class, but the common denominator is that they exclude certain sectors of the market.

A frontier market is a country that is like an emerging market (such as China and India) but less advanced and is sometimes called a ‘pre-emerging market’. It tends to be smaller, less liquid and less accessible for investors and normally riskier than an emerging market. Growth and development in these countries tend to be volatile so if you are thinking about investing in these countries you should take a very long-term view (sometimes several decades) to have time to ride out any volatility. Current examples include Vietnam and Kenya.

The investment mandate is a set of rules, instructions, limits and restrictions for how a fund should be managed by a fund manager. It can specify things such as minimum and maximum number of holdings, how much it's allowed to stray from the benchmark it is measured against, and any sectors it isn't allowed to invest in.

International Securities Identification Number. It is a unique code which identifies an investment security or fund. It can sometimes be confused with the “ticker”, which is a short ID used to identify a security on an exchange. The difference is that an ISIN is unique and always the same regardless of which exchange the security is trading on. In contrast, the ticker can be different on different exchanges.

Funds that invest in companies with a large market cap. Market cap is short for “market capitalisation” and means the total value of a company’s outstanding shares. It’s calculated by multiplying the share price with the total number of shares outstanding. Large-cap companies tend to be (but not always) large companies. The definition of “Large-cap” varies from fund to fund.

Funds that invest with sustainability in mind. These funds take “Positive change” one step further by producing regular qualitative and quantitative reports detailing how their investments have made a positive impact in the world. These funds can be focused on any kind of asset class, but the common denominator is that they focus on investing in assets with clear positive impact in the world, and they regularly measure that impact and share the results publicly.

Funds that invest in companies with a mid-sized market cap. Market cap is short for “market capitalisation” and means the total value of a company’s outstanding shares. It’s calculated by multiplying the share price with the total number of shares outstanding. The definition of “Mid-cap” varies from fund to fund.

Net Asset Value. It is the total value of a company’s assets minus its debt, used when evaluating a company’s balance sheet, investment trusts or ETFs. These kinds of investments are bought and sold as stocks and the price should be as close as possible to the value of the underlying assets, the NAV. A difference is described as a premium or a discount to NAV.

Price-to-earnings ratio. This is one of the most common ways professional investors assess whether the share price of a particular company is cheap or expensive compared to the actual money it makes. It is also referred to as a price multiple or earnings multiple, and it is calculated by dividing the share price with the earnings (profits) per share (EPS). It can also be used to get a sense of the overall value of a particular stock market as the market P/E is a kind of average of all the P/Es of the securities in that market index.

Funds that invest with sustainability in mind. These funds focus on investing in companies and assets that aim to make a positive impact on society and/or the environment. These funds can be focused on any kind of asset class, but the common denominator is that they focus on investing in assets with clear positive impact in the world.

This term is most commonly used in the context of investment trusts. If the share price of the investment trust is higher than the NAV, the trust is trading at a premium. If the share price is lower than the NAV, then it is trading at a discount. In simple terms, buying an investment trust at a discount can be a bit like shopping on sale. In contrast, if the investor is paying a premium, it means that they pay more than the underlying assets. This may be justifiable if, for example, the assets in the investment trust cannot be accessed directly.

Sustainable Finance Disclosure Regulation. SFDR is a new set of EU rules whose purpose is to increase disclosure and make it easier to compare sustainable investment options.

SFDR has also revealed three classifications for funds and mandates, depending on the level of integration of ESG factors in the investment process and philosophy: Article 6, 8 and 9.

In short, these classifications can be described as:

Article 6 funds are those that don’t include any sustainability considerations;

Article 8 funds are those that in one way or another promote good environmental, social and governance characteristics;

Article 9 funds are those that specifically target sustainable investments.

Funds that invest in companies with a small market cap. Market cap is short for “market capitalisation” and means the total value of a company’s outstanding shares. It’s calculated by multiplying the share price with the total number of shares outstanding. Small-cap companies tend to be (but not always) small companies. The definition of “Small-cap” varies from fund to fund.

An investment process combining active and passive management. The aim is to outperform a benchmark, instead of tracking it like a traditional passive fund or ETF, but with lower fees than an active fund. This is usually done by investing in a modified index based on a specific set of rules.

This is a measure that assesses the volatility of returns for a fund or ETF compared to its benchmark or in the case of the ETF, the index it is aiming to track. Passive funds and ETFs should have a tracking error as close to 0% as possible. Tracking error is often confused with active share.