Glossary on investment terms
See below for our easy to understand explanations of some common investment terms.
Absolute return
Absolute return (or return) is a measure of the gain or loss on an investment expressed as a percentage of the amount invested.
Absolute return funds
Absolute return funds are investment strategies that aim to deliver positive returns regardless of the direction of travel of markets. This strategy can employ a wide variety of financial instruments and assets.
Active management
Active management is a traditional investment approach where the manager actively trades the holdings in their fund or portfolio to take advantage of investment opportunities or to minimise potential losses. It is the opposite of passive management.
Active ownership
Active ownership is where investors actively use voting and engagement to influence the management of companies with respect to environmental, social, or governance (ESG) factors. Similar principles are also used by investors in other asset classes such as fixed income, private equity, or property (real estate). This will also involve active participation in industry and peer group collaborative initiatives.
Alpha
Alpha is the additional return generated above and beyond that of a relevant index or benchmark. It relates to an investment manager or investment strategy’s ability to beat the market.
Alpha strategies
Alpha strategies target returns above an index or benchmark. They should deliver positive returns regardless of market direction, but they require markets to be moving.
Alternative fixed income
Alternative fixed income assets provide bond-like income streams from financial institutions and companies. They can include loans – both retail and commercial – as well as income payments generated by infrastructure providers or renewable energy companies.
Alternatives
Alternatives include non-standard asset classes, such as commodities, renewable energy, infrastructure, collectibles, as well as strategies that invest in traditional asset classes such as equities and bonds by using derivatives. The latter are known as hedge funds.
Asset allocation
Asset allocation is the practice of allocating the holdings in a fund or portfolio across different regional markets, sectors, investment strategies/styles, and asset classes to manage risk and achieve a specified objective.
Asset class
An asset class is a group of financial instruments that have similar characteristics. Equities, bonds, alternatives, and cash are all separate asset classes. These can be further sub-divided by country, industry, or other relevant attributes.
Basis point
A basis point (bps) is one hundredth of one percentage point. i.e., one basis point is 0.01%. Changes in interest rates are often stated in basis points.
Bear market
Bear market refers to falling share prices. The technical definition of a bear market is when an index falls by 20% or more from a recent high. It is the opposite of a bull market.
Benchmark
A benchmark is an index or similar measure that forms part of an investment objective. It provides a target for performance to match or exceed.
Beta
Beta is the measurement of the volatility of an investment relative to an index or benchmark. It is used alongside alpha to assess the performance of an investment manager, strategy, or the shares in a company.
Bonds
Bonds are fixed-income investments that represent a loan made by an investor to a borrower such as a government, company, or large institution. In principle, bond investors are lending money (the principal) to the bond issuer in return for a fixed or variable rate of interest (coupon) during the term of the bond. When the term ends (maturity), the issuer repays the principal to the investor.
Bull market
Bull market refers to rising share prices. The technical definition of a bull market is when an index rises by 20% or more from a recent low. It is the opposite of a bear market.
Carbon footprint
Carbon footprint is the total amount of greenhouse gases,including carbon dioxide and methane, that are generated by our actions.
Carbon neutral
Carbon neutral is when the carbon emissions released into the atmosphere and their removal, caused directly and indirectly by people, are in balance. This is not the same as net zero which includes greenhouse gas emissions.
Carbon offsets
Carbon offsets broadly refers to a reduction in carbon emissions or an increase in carbon storage (e.g., through land restoration or the planting of trees – that is used to compensate for emissions that occur elsewhere.
Carbon pricing
Carbon pricing is the price for avoided or released carbon emissions. This may refer to the rate of a carbon tax, or the price of emission permits. In many of the models used to assess the economic costs of mitigating carbon emissions, carbon prices are used as a proxy to represent the level of effort involved in mitigation policies.
Carry strategies
Carry trades try to exploit differences in future pricing points, interest rates, or currencies. Carry strategies seek regular, low-risk returns regardless of market direction.
Cash
Cash is either physical cash or money that’s held on deposit with a bank or in an interest-bearing fund. This can be money held directly by an individual investor or money held on their behalf by an investment manager.
Central bank
A central bank is the institution tasked with managing a country’s currency on behalf of the government. It enforces monetary policy by setting interest rates that are appropriate for its economy and its mandate as a central bank.
Circular economy
Circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing, and recycling existing materials and products for as long as possible. In this way, the life cycle of products is extended.
Climate change
Climate change refers to a change in the state of the climate that can be identified (e.g. by using statistical tests) and that persists for an extended period, typically decades or longer. Climate change may be due to natural internal processes or external forces such as changes of the solar cycles, volcanic eruptions, and persistent environmental change caused or influenced, directly or indirectly, by people.
Closed-end funds
Closed-end funds, also known as investment trusts, are pooled funds like open-ended funds, but their managers do not create new shares to meet demand, hence the name. Their shares are traded on the stock market.
Commodities
Commodities are raw materials or primary agricultural products that can be traded on an exchange. The term can also be used to describe energy supplies.
Compound interest
Compound interest is earning interest on previously accumulated interest that has been reinvested (or retained) with the original sum invested.
Consumer discretionary
Consumer discretionary companies provide goods and services that consumers consider non-essential, but highly desirable if their income allows. Consequently, consumer discretionary companies tend to be the most sensitive to economic cycles.
Consumer Price Index
The Consumer Price Index (CPI) measures the overall change in consumer prices based on a representative basket of goods and services over time.
Consumer staples
Consumer staples companies provide goods and services that are always in demand. Consequently, they are referred to as being non-cyclical or defensive companies and are favoured by investors when economic growth declines.
Contingent convertibles
Contingent convertibles (CoCos) are bonds mainly issued by European banks. The issuing bank has the option to convert them from bonds into equity to help improve their capital buffers in times of stress, which makes them more risky for holders but leads to a higher yield. They are also referred to as Additional Tier 1s(AT1s).
Convexity strategies
Convexity strategies are investment strategies that create positions where the payoff is greater than the potential loss, or that available from its benchmark. They can outperform in rising and falling markets but tend to lag when markets are flat.
COP
COP is an acronym for ‘Conference of the Parties’ that can be used to refer to the meetings of countries as part of the United Nations Framework Convention on Climate Change (UNFCCC).
Core inflation
Core inflation is a measure of the rise in prices, which excludes the more volatile changes in the price of food and energy. It is most often calculated using the consumer price index (CPI).
Corporate bonds
Corporate bonds are bonds issued by companies. They are generally riskier than government bonds, so corporate bonds normally offer higher interest rates (or yields) to compensate for the additional risk.
Coupon
Coupon is the annual interest rate paid on a bond, expressed as a percentage of the initial price, also referred to as the coupon rate.
Covenants
Covenants are conditions that the borrower in a loan agreement must meet throughout the life of the loan. For example, a liquidity covenant sets a condition for the borrower to maintain a specific level of cash reserves. If a covenant is breached, the lender typically has the right to demand early repayment of the loan.
Credit
Credit is the generic term for bonds that are issued by companies (corporate bonds), not governments or government-backed institutions.
Credit rating
Credit rating is the assessment of a government or a company’s creditworthiness, either in general terms or with respect to repaying a particular debt or financial obligation. Bonds issued by governments and companies are rated by credit ratings agencies on a letter-based system ranging from AAA to D. Those with the best credit rating have the highest level of credit quality.
Credit spread
Credit spread is the additional yield offered by a corporate bond (issued by companies) versus a government bond of the same maturity and currency. This compensates the bondholder for the added risk that the company may default on its debt obligations.
Currency strength
Currency strength is when a currency, such as sterling, rises relative to another currency. For example, if a sterling investor holds a US dollar investment, and sterling rises relative to the US dollar, the return from the investment will decrease.
Currency weakness
Currency weakness is when a currency, such as sterling, falls relative to another currency. For example, if a sterling investor holds a US dollar investment, and sterling falls relative to the US dollar, the return from the investment will increase.
Cyclical companies
Cyclical companies are those whose fortunes are closely linked to the economic cycle. This means their revenues generally rise during periods of economic growth and fall during recession.
Deflation
Deflation is an ongoing decline in the price of goods and services. It can arise due to gains in production but is more commonly associated with a contraction in the supply of money and credit in an economy. Deflation is the opposite of inflation.
Derivatives
Derivatives are financial contracts. Their price is derived from one or more underlying asset such as commodities, company shares, or an index.
Developed markets
Developed markets are generally regarded as those with mature industrialised economies, robust infrastructures, and strong political and legal systems such as the UK, Europe, the US, and Japan. This is in contrast to emerging markets.
Diversification
Diversification is the process of investing in a range of different assets or asset classes with the aim of improving performance and/or reducing the overall volatility, or the investment risk, of a fund or portfolio.
Dividend pay-out ratio
Dividend pay-out ratio is the proportion of earnings that a company pays to its shareholders as dividends.
Dividends
Dividends are the payments made when companies distribute their profits to their shareholders.
Dividend yield
Dividend yield is the dividend paid per share. It is expressed as a percentage of a company’s share price.
Dovish
Dovish describes when central bankers lean towards reducing interest rates. It is the opposite of hawkish.
Earnings seasons
Earnings seasons take place quarterly. They are the periods when listed companies release their financial data, including information on company revenues, sales, profits, and margins as well as more granular details of the underlying business, its liabilities, and its forecasts for future revenue growth.
Emerging market bonds
Emerging market bonds, also known as emerging market debt, are bonds issued by the governments or companies of emerging market countries. They can be issued in local currencies or in hard currencies such as the US dollar, the euro, or sterling.
Emerging market corporate bonds
Emerging market corporate bonds are bonds issued by companies from emerging market countries.
Emerging markets
Emerging markets are developing economies that are in the process of transitioning into becoming developed markets by evolving their industries, infrastructure, and political and legal systems.
Engagement
Engagement is a purposeful ongoing dialogue by a shareholder companies, funds, industry bodies, and governments to discuss environmental, social, and governance (ESG) related issues in order to gain more information or to encourage and achieve change.
Environmental, social, and governance factors
Environmental, social, and governance (ESG) factors are a set of considerations that can be used in investing:
- Environmental - relating to the environment such as resource, water and land use, biodiversity, pollution, atmospheric emissions, climate change, and waste.
- Social - relating to the relationship between companies and people, such as their employees, suppliers, customers, and communities. Examples of social issues of interest to investors include health and safety, labour standards, supply-chain management, and consumer protection.
- Governance - relating to the governance of an organisation, also referred to as corporate governance. Examples include board composition, executive remuneration, internal controls, and balancing the interests of all stakeholders.
Equities
Equities are company shares. In most instances, except for private equity, they describe shares in listed companies that are traded on recognised stock markets. Being a shareholder confers a right to a share in a company’s profits that are distributed as dividends.
ESG integration
ESG integration is the systematic and explicit inclusion of material ESG factors into investment analysis and investment decisions.
ESG risks
ESG risks are the factors that could have a material negative impact on the value of a company’s assets or its activities.
Event-driven strategies
Event-driven strategies are hedge funds that aim to take advantage of the short-term mispricing in company stocks that occurs because of corporate events such as restructurings, mergers, acquisitions, takeovers and bankruptcy.
Exchange-traded funds
Exchange-traded funds (ETFs) are investment funds that are traded on a stock exchange in the same way as equities. They operate in much the same way as a passive or tracker fund by tracking a particular index, sector, commodity, or a range of other strategies.
Exclusion
Exclusion is the process of excluding entire sectors, activities, companies, or countries from a fund or portfolio. This can be based on ESG criteria and is known as ESG screening, or on moral, ethical, or religious views and beliefs, which is known as ethical screening.
Extraordinary general meeting
Extraordinary general meetings (EGM) are shareholder meetings called outside of the regular schedule, normally to collate shareholder views on extraordinary matters.
Financial Conduct Authority
The Financial Conduct Authority (FCA) is the regulatory body that supervises financial services firms in the UK. It is responsible for making rules as well as enforcing and overseeing financial regulation. Its aim is to make sure that firms put the wellbeing of their customers at the heart of what they do.
Fiscal policy
Fiscal policy refers to government actions to influence an economy through taxation and spending.
Fixed income
Fixed income is the general term used to describe bonds and bond-like financial instruments. In most instances, the terms fixed-income, fixed-interest, and bonds are interchangeable.
Fixed ongoing charge
The fixed ongoing charge (FOC) is a fixed annual charge that covers the fees and expenses relating to the management, operation, and administration of a fund or portfolio. The fee is a fixed percentage of the value of each fund or portfolio.
Floating-rate notes
Floating-rate notes are bonds that offer variable income payments that are linked to interest rates, unlike fixed-rate bonds whose coupon payments remain the same throughout the life of the bond.
Free cash flow
Free cash flow is a measure of a company’s profitability. It represents the cash that is available after operating costs and other expenses to be repaid to creditors or distributed to shareholders in the form of dividends.
Gated
Gated refers to a scenario whereby investors are temporarily restricted or stopped from redeeming from a fund in which they are invested. This is usually to allow a fund manager time to unwind less liquid assets (such as property) and therefore limit the financial impact to the fund.
Gilts
Gilts is the name given to bonds issued by the UK government.
Government bonds
Government bonds, also known as sovereign bonds, are bonds issued by governments.
Green bonds
Green bonds are types of bonds designated as ‘green’ by the issuer or another entity. A commitment is made to use the proceeds of green bonds in a transparent manner, and exclusively to finance or refinance ‘green’ projects, assets, or business activities with an environmental benefit. Green bonds are usually asset-linked and backed by the issuer’s balance sheet, meaning they normally carry the same credit rating as their issuer’s other bonds.
Greenhouse gases (GHG)
Greenhouse gases (GHGs) are carbon dioxide, methane, nitrous oxide, and ozone. They account for a tiny fraction of the atmosphere, but they are a critical part of the overall atmosphere composition as they play a significant role in trapping the earth’s heat and warming our planet. Since industrialisation, GHG concentrations have rocketed, warming the planet at unprecedented rates. The major cause of the increase in carbon emissions in particular, has been the use of fossil fuels in producing energy.
Greenwashing
Greenwashing describes misleading or unsubstantiated claims made by businesses or investment funds about the environmental performance of their products or activities.
Growth stocks
Growth stocks tend to be younger companies that derive their value from the rate at which they’re expected to grow their future earnings. Generally, they pay limited dividends as they reinvest their profits to grow their businesses.
Hard currency bonds
Hard currency bonds are bonds issued by emerging market countries in hard currencies such as the US dollar, sterling, the euro, or the Japanese yen.
Hard landing
A hard landing is when a central bank, such as the Bank of England, raises interest rates to slow an economy resulting in a recession. Raising rates without causing a recession is called a soft landing.
Hawkish
Hawkish describes when central bankers lean towards increasing interest rates. It is the opposite of dovish.
Hedge funds
Hedge funds is a general term for a diverse range of investment strategies that invest across all major asset classes. They often use derivatives that enable them to take both long and short positions.
High-yield bonds
High-yield bonds are bonds issued by countries, companies, or institutions with lower creditworthiness who must pay greater rates of interest to compensate their bondholders for the increased risk.
Human rights
Human rights are the rights inherent to all human beings, regardless of race, sex, nationality, ethnicity, language, religion, or any other status. Human rights include the right to life and liberty, freedom from slavery and torture, freedom of opinion and expression, the right to work and education, and many more. Everyone is entitled to these rights, without discrimination.
Impact investing
Impacting investing is investments that are made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
Index
An index is a hypothetical portfolio of investment holdings that can be used to gauge the movement and performance of a regional market or market sector. The calculation of its value comes from the prices of the underlying holdings. For example, the MSCI UK Index represents the performance of UK companies.
Index-linked bonds
Index-linked bonds, also known as inflation-linked bonds, make interest payments that are linked to an inflation index such as the Consumer Price Index (CPI). This offers investors protection from rising inflation as bondholders receive what’s called a real rate of return (namely the return after inflation has been deducted).
Inflation
Inflation is the rate of increase in the price of goods and services. For most countries, it’s based on a basket of items that are assumed to represent the cost of living. Inflation increases the cost of goods and services but decreases the real value of cash savings and future bond payments.
Inflation-linked strategies
Inflation-linked strategies aim to deliver returns that rise in line with inflation. Such strategies include commodities-based approaches as well as real assets such as infrastructure or property strategies.
Institutional investor
An institutional investor is a company or organisation that invests money on behalf of others such as a life insurance or pension company. These investors often trade in larger amounts compared to retail investors.
Interest rates
Interest rates are the rates charged by a bank or other lender to borrow money. Central banks set interest rates based upon the prevailing economic environment and use interest rates as a tool to help manage inflation. Such actions by central banks are referred to as monetary policy.
Investment Association
The Investment Association (IA) is the trade body and industry voice for UK investment managers.
Investment Association sector
Investment Association (IA) sectors categorises funds based on the assets in which they invest, such as equities and fixed income and, in some instances, their geographic focus.
Investment-grade bonds
Investment-grade bonds are bonds issued by the most financially-secure countries or companies. As a result, investment-grade bonds have the highest level of credit quality.
Investment strategy
An investment strategy is the investment approach and asset allocation chosen to increase the probability of achieving a stated aim or outcome.
Investment trust discount
An investment trust discount is when the share price of an investment trust is worth less than the net asset value (NAV) of its underlying portfolio. When the opposite is the case, it is said to trade at a premium.
Investment trusts
Investment trusts, also known as closed-end funds, are like open-ended funds, but their managers do not create new shares to meet demand, hence the name (closed-end funds). Their shares are traded on the stock market.
Just transition
Just transition is a framework to ensure the substantial benefits of a green economy transition are shared widely, while also supporting those who stand to lose economically – be they countries, regions, industries, communities, workers, or consumers.
Large-cap
Large-cap describes larger-sized companies as measured by market capitalisation (market cap). While the exact thresholds change with market conditions, large-cap generally refers to companies with a market capitalisation of $10bn to $200bn.
Leverage
Leverage, also known as gearing, is using borrowed money (debt) to buy an investment. The goal is to make a higher return than the cost of borrowing.
Liquidity
Liquidity refers to the ease with which an asset or security can be converted into cash without impacting its market price. Liquid assets are relatively easy to convert to cash whereas illiquid assets take longer to convert and can have higher conversion costs.
Local currency bonds
Local currency bonds are bonds issued by emerging market countries in their local currency.
Longer-dated bonds
Longer-dated bonds, also known as long maturity bonds, are bonds with 10 or more years until they repay their principal. As their prices have higher sensitivity to changes in interest rates, they are more volatile than shorter maturity bonds.
Long investing
Long investing is when an investor takes a long position (buys an asset) with the expectation that it will rise in value. It is the opposite of short investing.
Long/short strategies
Long/short strategies are investment strategies based on buying (going long), on equities or bonds that are expected to rise in value and selling short stocks or bonds that are expected to fall in value.
Magnificent Seven
Magnificent Seven is a term used to describe Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla. They are also referred to as mega-caps.
Market capitalisation
Market capitalisation (market cap) is the size of a company based on the total value of all the shares it has issued.
Market neutral strategies
Market neutral is an investment strategy that aims to generate consistent returns regardless of whether markets are rising or falling. Therefore, funds operating market neutral strategies have returns not closely correlated to the movements of a given index.
Maturity
Maturity is when the principal amount of a bond becomes due to the lender.
Mega-cap
Mega-cap describes the largest companies as measured by market capitalisation. While the exact thresholds change with market conditions, mega-cap generally refers to companies with a market capitalisation above $200bn.
Mid-cap
Mid-cap describes medium-sized companies as measured by market capitalisation (market cap). While the exact thresholds change with market conditions, mid-cap generally refers to companies with a market capitalisation of $2bn to $10bn.
Monetary policy
Monetary policy refers to the tools and actions, such as interest rate changes, that a central bank can take to influence borrowing costs and money supply in its economy.
Multi-asset strategies
Multi-asset strategies are investment strategies that invest across a wide range of different asset classes or investment strategies. They usually include equities, bonds, alternatives, and cash.
Natural capital
Natural capital is stock of renewable and non-renewable natural resources (e.g., plants, animals, air, water, soils, or minerals) that combine to yield a flow of benefits and ecosystem services to society.
Net asset value
Net asset value (NAV) describes the total value of an investment’s underlying holdings, less its liabilities. An investment trust’s NAV can be more than, or less than, the value of its quoted shares.
Net zero
Net zero is the term used to describe when anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period.
New economy stocks
New economy stocks tend to be denoted by their focus on the exchange of information and use of internet technology. This differentiates them from old economy stocks where the emphasis is on the production of goods.
Nominal interest rate
Nominal interest rate is the interest rate before taking inflation in account, in contrast to real interest rates.
Old economy stocks
Old economy stocks are typically mature, established businesses with stable earnings, consistent returns, and steady streams of cash flow that focus on the production of goods. For example, the steel, engineering, extraction, agriculture, and manufacturing sectors.
Ongoing charge
Ongoing charge is the total of the fixed ongoing charge and the underlying closed-ended fund charges. The ongoing charge excludes transaction costs except in the case of an entry or exit charge paid by the fund or portfolio when buying or selling shares in another fund.
Open-ended funds
Open-ended funds invest in a wide range of asset classes. They’re called open-ended because the manager creates new shares to meet investor demand and cancels the shares of investors who choose to exit the fund.
Opportunity cost
Opportunity cost represents the potential benefits that an investor misses out on when they choose to hold one asset class over another.
Overweight
Overweight is when a fund or portfolio holds a larger position in a particular stock, sector, region, or strategy than the index or model against which it’s benchmarked. Underweight means the opposite.
Passive funds
Passive funds, also known as index or tracker funds, aim to mirror or track the performance of a given benchmark or index.
Passive management
Passive management is an investment approach that aims to mirror or track the performance of a given index. Unlike active management, there is no one making decisions as to what happens in a passive fund or portfolio – it is designed to follow its target index regardless of events.
Performance comparator
A performance comparator is an index or similar benchmark against which the performance of a fund or portfolio can be measured. The performance comparator does not form part of the investment objective.
Pivot
Pivot is the term used to describe when central banks turn from being hawkish, (raising interest rates to fight inflation), to being dovish, (reducing interest rates to help support the economy), or vice versa.
Portfolio
A portfolio is the term used to describe the holdings and different types of instruments that make up an investment such as equities, fixed income, or cash.
Price-to-earnings ratio
Price-to-earnings ratio (P/E ratio) provides a valuation for a company, a sector, or a market, by dividing its current share price(s) by its earnings per share (EPS). The P/E ratio is also referred to as the price or the earnings multiple.
Primary share class
The primary share class is the highest charging unbundled (free of any rebates) share class, freely available through third-party distributors in the retail market.
Principal
The principal, also known as par value or face value, is the amount of money the issuer will return to the bondholder at maturity.
Private equity
Private equities are investments into the shares of private companies that aren’t yet listed on a stock exchange.
Property
Property, also known as real estate, is the term for investments in housing or other real-estate assets, such as retail sites and shops, office buildings, warehousing, logistics sites, and industrial premises.
Quality companies
Quality companies are both profitable and stable. They exhibit consistent earnings, high margins, and strong balance sheets, often with minimal debt. This allows them to steadily compound their earnings over time and typically makes their share prices more resilient during market falls.
Quality growth companies
Quality growth companies are growth stocks generally regarded as those with the strongest balance sheets. They tend to exhibit higher margins and lower debt alongside high levels of cashflow stability and return on equity (RoE). Such attributes mean quality growth companies can reinvest profits in their business and so compound their earnings over time.
Quantitative easing
Quantitative easing (QE) is a form of monetary policy applied by central banks where they buy up bonds from the open market to help reduce interest rates, increase the money supply, stabilise financial markets, and spur their economies. It represents an expansion of market liquidity and is the opposite of quantitative tightening (QT).
Quantitative tightening
Quantitative tightening (QT) is a form of monetary policy applied by central banks where they sell bonds from their balance sheet, to help reduce money supply, increase interest rates, and slow down overheated economies. It represents a contraction of market liquidity and is the opposite of quantitative easing (QE).
Quartiles
Quartiles refers to categorisation of funds or portfolios by their performance over different times frames. The top 25% performing funds, over a given time frame, are referred to as the top or first quartile. The bottom 25%, are referred to as the bottom or fourth quartile.
Real assets
Real assets are physical assets with intrinsic worth. They include things like real estate and infrastructure assets, land, natural resources, commodities, and precious metals. They tend to be more stable, but less liquid, than financial assets such as equities and bonds.
Real estate
Real estate (property) is the term for investments in housing or other real-estate assets, such as retail sites and shops, office buildings, warehousing, logistics sites, and industrial premises.
Real-estate investment trust
A real-estate investment trust (REIT) is a closed-end fund that invests in income-producing real-estate assets such as residential, retail, office, and logistical properties. REITs are traded on public exchanges, so they’re far more liquid than physical real-estate investments.
Real interest rate
Real interest rates are interest rates adjusted to remove the effects of inflation. Once expected inflation has been deducted from the nominal interest rate, real interest rates reflect the real cost of borrowing and the real yield to a lender or investor.
Recession
Recession is a significant, widespread, and prolonged downturn in economic activity. Recessions often last six months or more and one popular definition is that two consecutive quarters of economic decline constitutes a recession.
Relative-value strategies
Relative-value strategies are investment strategies that employ pairs trading. Namely taking a long position on one equity or market and a matching short position on another, creating a pair of assets.
Responsible investment
Responsible investment is a strategy and practice to incorporate ESG factors in investment decisions and active ownership.
Return on equity
Return on equity (ROE) is a financial metric used to provide a gauge of how profitable a company might be and how efficiently it generates those profits. The higher the ROE, the more efficient a company's management is at converting its equity financing into profits.
Risk-targeted
Risk-targeted portfolios or funds enforce strict risk boundaries by setting limits to how much exposure the managers can take to different asset classes based on the total risk target of the portfolio.
Scope 1 emissions
Scope 1 emissions are a company’s direct emissions from owned or controlled sources. For example, while running its boilers and vehicles.
Scope 2 emissions
Scope 2 emissions are indirect emissions from the generation of purchased energy. For example, the electricity a company buys for heating and cooling buildings.
Scope 3 emissions
Scope 3 emissions are the result of activities from assets not owned or controlled by a company, but that the company is indirectly responsible for within its value chain. Scope 3 emissions include everything that is not included in Scope 1 and Scope 2 emissions.
Securities
Securities are tradable financial assets or instruments used to raise capital in public or private markets. While the term can be applied to any form of financial instrument, it primarily refers to equities, bonds or hybrid instruments, which combine aspects of both. Definitions of a security can vary slightly by jurisdiction.
Short-dated bonds
Short-dated bonds, also known as short-maturity bonds, are bonds with, generally, five years or less until maturity. They tend to be less volatile than longer-dated bonds as the principal is repaid more quickly, so can be re-invested earlier.
Short investing
Short investing is when an investor sells a security with the intention of repurchasing it later, also referred to as covering, at a lower price. Investors decide to short a security when they believe the price is likely to fall.
Small-cap
Small-cap describes the smallest companies as measured by market capitalisation (market cap). While the exact thresholds change with market conditions, small-cap generally refers to companies with a market capitalisation of $250m to $2bn.
Smart-beta
Smart beta strategies are passive funds that don’t track a traditional index based on market capitalisation. Instead, they track indices constructed to follow factors such as volatility, liquidity, quality, or value in order to provide passive exposure to those factors or tilts.
Soft landing
A soft landing is when a central bank, such as the Bank of England, can successfully slow down inflation, by raising interest rates, without causing a recession. When a central bank raises rates too quickly or by too much, it can cause a recession. This is known as a hard landing.
Sovereign bonds
Sovereign bonds, also known as government bonds, are bonds issued by governments.
Stewardship
Stewardship is the responsible allocation, management, and oversight of capital to create long-term value for investors and beneficiaries leading to sustainable benefits for the economy, the environment, and society.
Stock picking
Stock picking is when an analyst, investment manager, or an investor picks a particular stock (equity) for their fund or portfolio.
Stranded assets
Stranded assets describe the assets on corporate balance sheets that could rapidly lose their value because of forced write-offs. An example of this would be the value of fossil fuel assets that may not be realised owing to efforts to curb climate change.
Strategic asset allocation
Strategic asset allocation (SAA) is a long-term model asset allocation set out for a fund or portfolio. It establishes how much of the fund or portfolio should be held in each asset class such as equities, bonds, alternatives, and cash. Short-term, tactical changes investment managers make to a portfolio are referred to as the tactical asset allocation (TAA).
Sub-advised mandate
A sub-advised mandate, also known as a segregated mandate, is an investment portfolio managed by a third-party asset manager on behalf of an institutional investor. The investor may outsource such managers to access specific expertise or to manage risk.
Sustainability-focused investment
Sustainability-focused investment is an investment approach that selects and includes investments on the basis they fulfil certain sustainability criteria and/ or deliver on specific and measurable sustainability outcomes. Investments are chosen on the basis of what they produce or what services they deliver and on how they deliver their products and services.
Tactical asset allocation
Tactical asset allocation (TAA) refers to the short-term, tactical changes that investment managers make, which deviate from the strategic asset allocation (SAA). When they make such changes, investment managers are said to be overweight or underweight, relative to the SAA.
Task Force on Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board to improve and increase reporting of climate-related financial information to investors.
Task Force on Nature-related Financial Disclosures
The Task Force on Nature-related Financial Disclosures (TNFD) was formed to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature related risks. The ultimate aim is to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.
The Paris Agreement
The Paris Agreement was a global agreement to strengthen the global response to climate change. It was agreed in 2015 that the global temperature rise this century should be kept to well below 2°C above pre-industrial levels and ideally below 1.5°C.
Treasuries
Treasuries are US government bonds. They are issued by the US Treasury.
Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities (TIPS) are US government bonds that are indexed to inflation. Unlike conventional Treasuries, as inflation rises the principal of TIPS rises. This ensures the interest payments keep up with inflation.
Underlying closed-ended fund charges
Underlying closed-ended fund charges are the costs of investing in underlying closed-ended funds (or investment trusts). These costs represent the ongoing charge for the management of the underlying closed-ended funds and may vary over time.
Underweight
Underweight is when a fund or portfolio holds a smaller position in a particular stock (equity), sector, region, or strategy than the index or model against it’s benchmark. Overweight means the opposite.
UN Sustainable Development Goals (SDGs)
The UN Sustainable Development Goals (SDGs) are at the heart of the 2030 Agenda for Sustainable Development adopted by all United Nations member states in 2015. They are an urgent call for action by all countries - developed and developing - in a global partnership. They recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – while tackling climate change and working to preserve our oceans and forests.
US Federal Reserve
The US Federal Reserve, commonly known as the Fed, is the central bank of the United States of America, it operates in a similar way to the Bank of England in the UK.
Value stocks
Value stocks tend to be well-established, mature businesses. They are companies whose share price is low relative to their value. Consequently, value stocks are among those with the highest dividend yields.
Volatility
Volatility is the extent and speed of change in the value of a financial security such as a bond or equity. The greater the movements in the price of a security, and the shorter the timeframe of such changes, the higher its volatility. The higher the volatility of an asset, the more unpredictable and extreme its price movements.
Voting rights
Voting rights are given to investors of shares in listed companies. These can be exercised at the company’s annual general meeting or extraordinary meetings. They can be used as a means of expressing the opinion of the shareholder about how the company is being managed. This also includes proxy voting when voting rights are delegated, (e.g., to investment managers who exercise voting rights on an investor’s behalf).
Weighting
Weighting is the percentage allocation of each sector, region, or investment type in a fund, portfolio, or index.
Yield
Yield is a measure of the income an investment delivers. It is calculated as a percentage of either the original purchase price or the current market value of the asset in question.
Yield curve
A yield curve is a graphical representation of the yields of bonds with similar credit quality across a variety of maturities. An inverted yield curve occurs when the yields on short-term bonds are higher than those of long-term bonds of the same creditworthiness. It reflects investor expectations of a decline in longer-term interest rates and is typically seen as a sign of impending recession.