Glossary of terms

The highest rating assigned by a number of credit rating agencies indicating the financial security of a debt instrument issuer.

Association of British Insurers. Body that represents but does not regulate the collective interests of the UK insurance industry.

These funds offer very good long-term growth potential. Most of them invest in one asset class only (for example North American equities) so returns are likely to change more in day-to-day value than our more diversified funds. This makes them better suited for longer-term investment, and particularly as part of a balanced portfolio.

Absolute return funds seek to achieve positive returns in all market conditions typically over rolling one-year periods.

A type of unit that reinvests the income it earns, instead of paying it out immediately to the investors.

An investment approach where the fund manager decides where to invest in order to outperform an index, market average or benchmark. See also passively managed and aggressively managed.

The name given to the extra money people can pay in to their occupational pension schemes to increase their pension benefits.

An investment approach where the fund manager decides where to invest in order to outperform an index, market average or benchmark. Their investment choice can vary more significantly from that of the average or benchmark than a typical actively managed fund.

Measures a fund manager's ability to add or subtract value to or from a portfolio. It is the portion of a fund's return that can't be explained purely by moves in the market.

An investment in assets considered to be outside of normal shares, bonds and cash, for example, hedge funds and commodities.

The average yearly return on an investment.

The yearly charge for administering your plan/fund that is typically applied daily.

A stream of payments over a given period received in return for a lump sum payment. Commonly used in relation to pension payments.

Choosing which region of the world, mix of investment type (for example shares, bonds and cash) or industry sector to invest in.

Securities backed by debts payable on financial instruments such as credit cards or mortgages.

The different types of investment, for example shares, bonds, fixed interest and cash.

A firm or individual who manages (buys, sells and monitors) a portfolio of assets.

The underlying investments of these funds will typically see average levels of change in day-to-day value (relative to our full fund range). They offer good growth potential, mostly by investing in a diversified spread of assets and are well suited for medium- to long-term investment.

Between 40% and 85% of the fund is invested in equities (including preference shares, permanent interest-bearing shares and convertibles). A minimum of 50% of the fund must be in sterling-based investments (including fixed interest investment hedged back to sterling).

A summary of a company's assets and liabilities. Shows what a company owns and is owed on a particular historical date.

The reference rate of interest set by the Bank of England that forms the basis for UK interest rates.

The retirement pension the government pays to people who have paid enough National Insurance contributions.

One hundredth of a per cent, usually applied to interest rates. For example, 0.01%

Period of sustained stock market decline. The opposite of a bull market.

The underlying investments of these funds will generally see some change in day-to-day value but the movements won't typically be large (in comparison with our full fund range). They try to provide better long-term growth prospects than a cash deposit, but are lower risk than funds investing in shares (equities).

This is the index, fund or market average that we measure a fund against.

Measures the sensitivity of a financial security to market movements.

This is the price you can sell units at (the selling price).

The difference between the bid price and the offer price.

These are also known as fixed interest investments. They're loans issued by the government (also called gilts), local authorities, financial institutions and companies (also known as corporate bonds). In return for the money, they'll pay interest for a given period and return the money at the end of the agreed period of the loan. The price of the loan will vary during its lifetime so there is some element of risk, although not as extreme as for shares (equities).

A credit rating on a bond.

Balance sheet value of a company, which can be expressed on a per-share basis.

An investment management style that concentrates on picking the right selection of stocks rather than the specific region or sector.

A period of sustained stock market growth. The opposite of a bear market.

Wealth and resources.

Tax paid by individuals on all gains from the sale of assets. Each person has a yearly allowance before any tax is payable.

An increase in the value of the underlying investment.

Cash is generally considered the least volatile of all the main investment types. This means its price doesn't tend to move much either up or down on a daily basis. The downside is that cash tends to have far less potential to grow than other investments and it can actually fall in value in real terms because of inflation. This is why it's most suited to investors as a shorter-term investment. Cash generally includes money, typically held in bank deposits, and other types of money market investments, which pay the investor regular interest.

Between 20% and 60% of the fund is invested in shares (including preference shares, permanent interest-bearing shares and convertibles). A minimum of 50% of the fund must be in sterling-based investments (including fixed interest securities hedged back to sterling).

A deposit is made in a bank and a certificate confirming that deposit is given to the lender. The certificate has a set maturity date and level of interest.

Fund with a fixed number of shares. Changes in demand for these shares are reflected in the share price. For example, investment trusts.

The price of the last transaction at the end of a trading session.

An investment vehicle that allows the average investor to pool their money with other investors. Collective investment schemes include unit trusts, investment trusts and open-ended investment companies (OEICs).

'Paper' issued by corporations or banks promising the holder (lender) a sum of money to be paid in at an agreed date in the future (average maturity 40 days).

Includes shops, retail warehouses, offices and industrial storage and distribution centres.

Includes any raw material, for example, oil, gold and livestock.

Members of occupational pension schemes can contract in to the State Earnings-Related Pension Scheme (SERPS) by paying full National Insurance contributions. At retirement, they can take a state pension as well as their occupational pension.

An investor who takes the opposite position to the majority of the those investing in the market.

If someone contracts out of the State Earnings-Related Pension Scheme (SERPS), they pay less National Insurance contributions. They pay into a private pension scheme instead. Please note that the option to contract out on a money purchase basis will no longer be available from 6 April 2012.

A type of financial security that can be changed into another type of security at a given time.

A bond issued by a company.

Used to describe a general fall in share prices and generally viewed as necessary in bringing prices back to realistic values.

A measure of the relationship between two variables. A correlation of 1 indicates perfect positive correlation, a correlation of -1 indicates perfect negative correlation and a correlation of 0 indicates no correlation. For example, a correlation of 1 between a fund and an index would indicate the fund was perfectly tracking the performance of that index.

An attachment to a bond that may be separated and used as evidence of the holders' entitlement to interest paid on the bond. More commonly used to describe the amount of interest attached to the bond.

Ratings given by credit rating agencies based on their view of the financial strength of an institution.

Shares closely linked to economic conditions which tend to rise when the economy is recovering and fall markedly in an economic downturn.

The failure of a bond issuer to pay the interest of face value when it's due.

A minimum of 85% of the fund must be in sterling-based investments (including fixed interest investments hedged back to sterling). A maximum of 35% of the fund can be invested in equities (including preference shares, permanent interest-bearing shares and convertibles).

Decline in price of goods and services. The opposite of inflation.

Types of financial instruments whose performance is derived from the value of underlying assets such as commodities, equities or bonds. Derivatives are contracts that give the right, and sometimes obligation, to buy or sell a quantity of the underlying asset. Futures, options and warrants are types of derivative.

Prolonged downturn in economic activity, usually characterised by high unemployment and low production of consumer goods.

This is an indication of the actual charges applying to a fund as part of the management process. The charges listed are the 'additional' charges, in other words those charges above the usual charges that apply to all funds.

A way of spreading and potentially reducing risk by investing across a range of different asset classes, sectors and markets.

If a company has profits to share out it can pay a dividend. How much the shareholders get depends on how many shares they own.

A measure of risk, expressed in years, that takes into consideration factors such as the expected regular income, maturity value, current yield and term of a bond. The longer the duration, the greater the risk.

Ethical Investment Research Service.

Financial markets in newly industrialised countries in the early stages of development.

Debts issued by governments and corporations within developing economies.

Equities, or shares, offer part-ownership in a company, unlike bonds, which are loans. Equities are generally considered the most risky type of investment as their value tends to go up and down more than other investment types, in some cases quite dramatically. However, shares are widely considered to offer the greatest potential for returns. Due to the potential for significant gains or losses in value, shares are better suited to investors who are prepared to invest for the medium to long term.

Investment in securities that don't benefit from unethical activities (for example tobacco, pornography, armaments and so on).

Single currency used by member countries of the European Economic and Monetary Union (EMU).

The price of one currency expressed in terms of another.

A fund that tracks an index but can be traded like a stock.

The amount of a portfolio invested in a particular asset class, region or stock.

A way of helping you achieve your long-term financial goals through investments, tax planning, asset allocations and risk management.

Independent regulator of the UK financial services industry.

Fixed interest investments, or bonds, are generally considered a lower-risk investment. Bonds are issued by governments, local authorities or companies to raise capital. They're generally issued for a fixed time period, during which investors are usually paid interest.

A maximum of 100% of the fund can be invested in equities (including preference shares, permanent interest-bearing shares and convertibles). A minimum of 20% of the fund must be in sterling-based investments.

Notes with variable interest rates, usually reviewed every three to six months, which are linked to a money market index like the London Inter Bank Offered Rate (LIBOR). They're used mainly in euro market lending as a medium-term debt instrument and generally have maturities ranging between five and 15 years.

A passive investment approach where the fund manager invests in exactly the same assets in the same proportion as the index or benchmark they're aiming to track.

The name given to the place your money is held while invested. There are many different types of fund and you can choose one or a number to invest your money in.

The person responsible for managing the money in the fund and choosing where to invest it, with the aim of meeting the fund objective.

Funds that invest money in a range of other funds.

See derivatives.

Loan stocks with varying maturity dates issued by the UK government to fund the public sector cash requirement that pay a fixed rate of interest until their repayment date. Gilts are traded in the bond market and their value will be influenced by a number of underlying economic factors such as interest rates and inflation.

Where the emphasis is put on selecting companies whose earnings are expected to grow at an above-average rate.

A type of investment fund in which the fund manager can use a number of specialist investment techniques, including the use of derivatives, short-selling and debt to generate a higher return or make gains even in a falling market.

An attempt to reduce risk by offsetting one investment by carrying out another opposing investment.

These funds invest in regions and asset classes that typically see larger day-to-day changes in return (relative to our full fund range). They can offer excellent growth potential and are particularly useful as part of a balanced portfolio. However, they also have the potential for sudden and severe falls if the market moves against them.

Also known as 'junk bonds'. High yield bonds are generally regarded as higher risk than gilts or investment grade bonds as they're issued by companies with lower credit ratings. They pay a higher level of interest but also carry a higher risk of default.

Opinion formed on a particular issue by an organisation as a whole.

An asset that can't be quickly converted into cash, for example, property.

See drawdown.

An open-ended collective investment vehicle, similar to a unit trust. The only difference is that ICVCs are companies and not trusts.

Investment Management Association.

A type of unit that pays out the income it earns to investors, instead of reinvesting it.

An individual authorised by the Financial Services Authority to give financial advice.

An index tracks the rises and falls in value of a particular market over time. Indices are commonly used as a benchmark for investors to compare the performance of their investments against similar types of investments.

Bonds, issued by the UK government, that provide protection against inflation. The redemption value rises with inflation over the life of the bond.

A type of fund that aims to perform in line with a particular index by investing in the same shares and in the same proportions as those reflected in the index.

A measure of general price increases, calculated monthly from a sample of goods and services in a particular country. High levels of inflation can erode the real value of money. For example, the more prices of goods rise, the less you can buy with the same amount of money over time.

The risk that your investment loses value by providing returns below the rate of inflation.

The risk that movements in the interest rate will have an adverse affect on an investment.

A bank that carries out various financial services, usually excluding high street banking.

A bond with a high credit rating and generally regarded as 'safer' than bonds with a lower credit rating, as it has a low likelihood of default. Investment grade bonds generally pay less than high yield bonds and generally have a rating of BB or above.

The person/company who manages a fund.

Designed to give investors an understanding of the style and aims of the investment management employed by a fund and to outline the regions, sectors and asset classes a fund invests in.

An investor's plan for distributing assets among various investments, taking into account factors such as individual goals, risk tolerance and time horizon.

The approach or philosophy that investors use to frame their expectations and plan how they'll achieve their investment objectives.

A bond with a poor credit rating, below that of an investment grade bond. Considered high risk, but offers higher yields as a result.

Named after John Maynard Keynes and advocates government intervention and spending to manage the economy, promote growth and control prices.

Refers to companies with large market capitalisations.

The use of borrowed capital to over-invest in a portfolio.

Debts that a person or organisation owes.

The rate of interest that banks bid to secure deposits from other banks.

The rate of interest offered on loans to highly rated, low-risk banks in the London inter-bank market.

A type of policy that's a contract between the policyholder and the insurance company. The insurance company will normally pay out a sum of money when the policyholder dies.

An investment fund that invests in various asset types for growth, then gradually switches into safer assets like bonds and cash as the investor approaches retirement.

The extent to which an asset can be bought and sold quickly and easily without loss in value.

The London market in which equities are bought and sold.

A bond that has more than 10 years to maturity

UK government bonds with more than 15 years to maturity date

In investment terms, this refers to a market cycle, typically considered at least five years.

Holding a positive amount of an asset with the expectation that its price will rise in the future.

The underlying investments of these funds will generally see some change in day-to-day value but the movements will typically be small. They try to provide longer-term growth prospects, mostly by investing in a combination of asset types.

The behavioural study of broad economic indicators such as national income, savings, investments, taxation, inflation and so on.

A fund where managers make all the decisions on how, where and when to invest. Managed funds invest across the main asset classes. Some may include other asset types like property. Managed funds give access to bond and stock markets worldwide. The ABI has categorised managed funds, depending on how much they invest in equities, as follows: defensive managed, cautious managed, balanced managed and flexible managed.

The value of a company based on the price of its shares multiplied by the number of shares in issue.

The process of updating the value of an asset on any given day in relation to the market. Mark to market calculations are typically done daily and reflect the price of an asset should it be sold on that particular day.

The time when a financial security, for example a bond, is redeemed and the par/face value is paid to the lender.

Statistically, the median is the mid-point of a series of numbers put in ascending order. For example, in the series of numbers 1, 3, 5, 7 and 11, the median is 5. Note that median is not the same as average.

Shares of companies with a market capitalisation smaller than large-cap companies but larger than small-cap companies. Stock exchanges will usually define the financial size ranges for capitalisation definition.

These funds have underlying investments that see little change in value from day to day. They're designed to provide steady growth but the movements generally won't be large and are particularly suited to short-term investment where security is the main aim. Over the long term, they're unlikely to deliver high levels of return.

Market for short-term loans and debt instruments.

Typically invest in safe, short-term debt instruments such as commercial paper, bank deposits and other short-term financial instruments. They're considered low risk relative to other investible assets and typically provide lower returns than riskier assets such as corporate bonds and shares.

Investment funds that allocate assets to a number of investment managers.

Pools of money from many investors that are invested by professionals or according to indices and which aim to meet clear objectives.

The book value of a company's assets, divided by the number of shares in issue.

The exposure level of a fund to the market. It's calculated by subtracting the short position of the fund from the long position. For example, if a fund is 100% long and 30% short, then the net exposure to the market is 70% long.

A pension scheme organised by an employer to provide pension benefits for employees.

This is the price you can buy units at (the buying price).

Investment outside of UK jurisdiction and financial regulations.

Investments authorised and regulated by the regulator in the investor's home country.

A type of collective investment vehicle that can issue more units if demand increases from investors.

When an employee chooses not to join or leaves an employer's occupational pension scheme.

A contract giving one party the right, but not the obligation, to buy or sell a financial instrument, commodity or underlying asset at a given price, at or before a specified date.

An asset a fund manager perceives to be worth less than its current market price based on specific criteria.

When a fund invests in a particular asset, sector or country to a greater degree than its relevant benchmark index.

Far Eastern markets and markets bordering the Pacific area.

The stated or face value of a share or bond.

The fund manager aims to match the performance of a benchmark index or fund by investing in the same, or highly comparable, assets in the same proportions as the index. See full replication approach and stratified sampling.

How an investment fund or asset has performed in the past. Past performance in no guide to future performance.

The pensions and lump sum an investor receives from their private pension.

The age at which people are entitled to draw their state pension.

Fund(s) set up for a pension plan.

Measurement of a funds historical return on its investments.

Changes in government or government policy that affect asset class returns or volatility.

See mutual fund.

An investment strategy where money is invested at regular intervals rather than as a single lump sum.

A collection of investments, for example funds, shares, bonds, mutual funds, savings accounts or property.

Cost, usually expressed in monetary terms.

Market in which securities are initially issued.

Shares in companies not quoted on any stock market.

A written promise to pay an amount of money to someone at a given time or on demand.

Physical property (bricks and mortar) or securities linked to the value of physical property.

An option giving the holder the right, but not the obligation, to sell a specific quantity of an asset for a fixed price during a specific period.

An approach to investment management based on subjective information such as the quality of a company's employees, business strategies and systems.

An approach to investment management based on statistical or numerical methods to assess potential investments.

Every three months.

A measure of a fund's performance against its relevant sector or universe if the funds within that sector or universe are divided into four.

A small rise in a market that has been generally falling.

Provided by independent rating agencies based on a range of investment criteria. AAA rating is the highest rating available from Standard & Poor's, OBSR and Citywire.

The inflation-adjusted return on an investment.

The repayment of the par/face value of a security at the maturity date.

A business that aims to buy and manage income producing properties or mortgages on income producing properties, and pays a high proportion of that income as a dividend.

Making regular adjustments to a portfolio to offset the fact that assets within it may have performed differently and now comprise different percentages of the intended portfolio split.

The return of an asset over a period of time comparative to a benchmark.

Banking for an individual customer or small firm, generally for small amounts.

A measure of general inflation for the economy as a whole.

Retail warehouses, shops, distribution centres and so on.

An invitation to existing shareholders to buy more shares in a company.

A measure of how much the performance of an investment fluctuates in comparison with a relevant indicator. Generally measured by standard deviation. The higher a fund's risk, the greater the likelihood that its performance will fluctuate.

An investor who would generally seek a less volatile return unless they were compensated for the risk taken.

The market for issued shares. The demand for secondary market shares sets the tone of any new primary release of shares.

Shares are often grouped into different sectors depending upon a company's business. Grouping them in this way can make it easier to compare their performance.

The ranking of a fund's performance relative to its peer group, with the best performer at the top.

A financial asset, for example a share or a bond.

Stock Exchange Daily Official List.

Managed on behalf of a single client and with separately identifiable assets.

Similar to an ordinary personal pension scheme except that the investor can select the range of assets that the fund invests in.

The completion of a transaction where there's a transfer of ownership from one party to another for a cash amount.

Shares, or equities, offer part-ownership in a company, unlike bonds, which are loans. Shares are generally considered the most risky type of investment as their value tends to go up and down more than other investment types, in some cases quite dramatically. However, shares are widely considered to offer the greatest potential for returns. Due to the potential for significant gains or losses in value, shares are better suited to investors who are prepared to invest for the medium to long term.

The money invested directly in the company by its investors.

The sale of a borrowed commodity, currency or security in anticipation that the value will fall in the future.

The same price applies for buying, selling and valuing units.

Shares of companies with a market capitalisation smaller than large-cap and mid-cap companies.

Ethical investing in companies which are seen to contribute to the well-being of society.

See bid-offer spread.

A person or group with an interest in an organisation, for example an employee, a customer or the local community.

Similar to a standard personal pension, except the management charges are capped at 1.5%, reducing to 1% after 10 years, and the minimum contribution is 20. It must also offer a default investment fund, and investors can move easily to another provider.

An organisation that rates companies based on their financial strength.

A statistical measure of the volatility of a portfolio or asset based on its historical performance. The larger the standard deviation, the greater the likelihood that the portfolio or asset has fluctuated over time.

The basic state pension that the government pays to everyone who has paid the minimum National Insurance contribution.

The unit of currency used in the United Kingdom.

Another word for equities or shares. See shares.

A stock exchange is a market for stocks and shares. Organisations can raise capital by selling securities through a stock exchange.

Method used in active investment management that selects stocks on the perceived value relative to the current market.

An approach used in passive fund management where the manager invests in a broad sample, rather than the whole, of the market that is considered comparable in terms of performance and risk. It is considered a more cost effective approach to passive fund management while a fund is still small in terms of capital value.

Moving money from one fund to another, either within a fund family or between fund groups.

The costs incurred by performing a switch.

The bonus paid on a with-profits plan at the end of its life. Also known as final bonus.

The concept that a set sum of money received in the future will be worth less than the same amount received today because of future inflation.

An investment approach that looks to identify trends in the overall economy and then selects investments that could potentially benefit from those trends.

The 10 largest holdings within a portfolio expressed as a percentage of the overall portfolio.

The sum of all gains and losses of an investment over a period of time.

The period of trading activity from the time a market opens until it closes.

See index tracker.

The extent to which a tracker fund's return differs from the benchmark fund or index it's aiming to track.

A financial agreement in which assets are held by named people for someone else.

Individual or organisation responsible for the management and administration of a trust, for example, a pension plan, on behalf of the beneficiaries of that trust.

The assets within a portfolio that make up the entire fund.

Value of a pooled fund unit. May be expressed as the 'bid', 'mid', or 'offer' price.

An open-ended pooled fund which creates new units as demand from investors increases.

Term used by investment professionals to describe the total number of assets available from which a portfolio can be constructed.

An investment style that aims to buy assets that are felt to be undervalued in relation to the market and take the profits when they appear overvalued.

The extent to which an investment fluctuates in value. Usually measured by standard deviation.

Insurance policy that shares in the surpluses of the insurance company's life insurance and pensions business.

The income from an investment given as a percentage of its price.

Graphical representation of the relationship between the length of time to maturity for a bond and the interest rate on the bond.

A bond that doesn't pay regular interest but is instead issued at a discount below its par/face value. However, it is redeemable at par/face value, giving a capital gain.