Absolute return vehicles/strategies

Types of investment strategies targeting a positive return in absolute terms rather than relative to an index or other benchmark

Accrual bond

See collateralised mortgage obligation

Accrued benefits

Pension benefits earned by an employee based on the terms of the pension plan

Accrued interest

The interest earned since the last coupon payment. When you buy a bond you pay the seller for the accrued interest as you will receive the full coupon when it is next paid

Active manager

An investment manager who seeks to outperform an investment benchmark through, amongst other things, asset allocation, market timing, duration selection or security (company or bond) selection

Active return

The return of a portfolio relative to its investment benchmark

Active risk

The standard deviation (risk) of active return. This is also sometimes called the tracking error

A-day (legislation)

Referring to the 6th of April 2006, the precise date that the simplification of the pension tax regime came into force

Additional voluntary contributions (AVCs)

These are pension contributions over and above normal scheme contributions that a member chooses to pay into an the occupational scheme to get extra benefits

Alpha

A measure of the return of a portfolio relative to an investment benchmark. Alpha adjusts for the level of risk being run in the portfolio compared with the benchmark (as measured by the portfolio"s beta against the benchmark)

Alternative assets

Alternative investments include real estate, hedge funds, private equity and commodities. They are bought in order to enhance expected return and diversify a portfolio. Alternative assets are usually unquoted and therefore less liquid than equities and bonds.

American depository receipts (ADRs)

Certificates issued by a US bank stating that a specific number of a non-US company"s shares have been deposited with it. These certificates are denominated in US$ and traded on US exchanges as if they were US securities. See also Global depository receipt

Annual allowance

The maximum annual amount members can pay into a pension scheme without incurring tax

Annual management charge (AMC)

The annual administration charge payable to the provider of an occupational pension scheme. The percentage amount being deducted from your fund value for investment and administration services

Annual percentage rate (APR)

The cost of debt that is paid by borrowers expressed as an annualised figure

Annualised return

The average return over a given period scaled up or down to an annual figure. For example, if a fund has produced a return of 33.1% over three years, on average the fund would have produced a return of 10% a year (1.10*1.10*1.10=1.331)

Annuity

The name given to an annual pension bought from an insurance company or other financial institution. A defined-contribution scheme builds up a fund that is normally used at retirement to buy an annuity.

Annuity Rate

The rate at which a pension fund is converted into regular pension payments. For example, a £6,000 annuity from a pension fund of £100,000 has a 6% annuity rate.

Arbitrage

Profiting from differences between the prices of very similar assets

Arithmetic average

The result found by adding a group of values together and dividing by the number of values in the group. Also known as mean

Ask price

The price at which a dealer will sell a security to an investor. Also known as offer price

Asset Allocation

A funds allocation to different asset classes

Asset class

The main types of investment available: bonds, equities, real estate, commodities etc

Asset-backed security (ABS)

Securities backed by the income stream of income producing financial assets

Asset-liability modelling

A technique that projects possible future states of a fund's assets and liabilities under a range of investment policies inorder to assess the policies' suitability.

Assets

The holdings of a fund, which may include stocks, shares, fixed-interest securities or cash.

Attribution analysis

Decomposing the return achieved by a fund manager into its constituent parts (e.g. asset allocation and stock selection) to show where value was added

Authorised share capital

The nominal amount of share capital a company is authorised to issue. This does not provide any indication of the worth of the company.

Authorised unit trust

A unit trust that is subject to certain FSA regulations so that it can be marketed to the general public

Backwardation

A term relating to the commodity futures markets. A commodity is in 'backwardation' when later-maturing futures contracts are priced lower than those maturing sooner. For example, this happens when producers sell the commodity in the futures market as a protection against falling prices. See also: Contango

Balanced fund

A fund invested in a range of asset classes, particularly equities and bonds

Barbell strategy

An investment technique, typically related to a bond portfolio, under which a manager holds a combination of both shorter-dated and longer dated bonds relative to the benchmark, but where overall duration is broadly in line with the benchmark

Basis point

1/100th of 1 per cent (0.01%)

Bear

Someone who thinks the market, or a particular share, will decline. A bear market is one in which most prices are falling. Also used adjectivally, as in 'bearish', 'bear market' and so on

Benchmark

A standard asset allocation against which an investment strategy is measured

Benchmark porfolio

Theoretical portfolio of benchmark assets against which the performance of an actual portfolio is measured

Beta

The sensitivity of an asset"s or portfolio"s return to fluctuations in the return of the market or benchmark. If beta is greater than 1.0 the asset or portfolio will move more than the market or benchmark, while if it is less than 1.0 it will move less

Bid price

The price at which a dealer will buy a security from an investor

Bid-ask/bid-offer spread

The difference between the bid and ask prices

Bond

A form of loan. Typically, the investor should receive a regular coupon and the return of the principal originally lent when the bond matures. Note: Not all bonds are interest bearing (see zero coupon bonds), and not all bonds are fixed rate (see index linked, floating rate and stepped rate bonds)

Bonus issue

When a company issues extra shares, free of charge to existing shareholders on a pro rata basis.

Book value

The value at which something ( e.g. a security) is recorded in a company"s balance sheet (often the cost of buying it). If securities have been acquired at different times, the book value will reflect the average buying cost

Bottom-up

An approach to active investment management that gives priority to the selection of companies (with less emphasis on sector and country selection) to build up an investment portfolio. This is the opposite of a top-down approach

Broker/Dealer

An individual or firm that acts as an intermediary between buyers and sellers usually for payment of a commission. He/she may also buy securities to sell for a profit while fulfilling his/her role as dealer

Bull

Someone who thinks the stock market or a particular share will go up. Also used adjectivally, as in "bullish", "bull market" and so on

Bullet portfolio

An investment strategy under which a manager holds a bond portfolio with maturities that are highly concentrated at one point of the yield curve

Buyout

Private equity investment in which equity capital is used to buy an existing business so that the business is subsequently privately held

Call

Specifically a payment on a specified date on a partly paid stock, to be paid by the holder of the allotment letter. More generally, a requirement for an investor to make additional payments in order for an investment to be fully paid up

Call option

An option that gives the buyer the right (but not the obligation) to buy an asset on (and sometimes before) a given date at a price agreed today. The seller (writer) of the option has the obligation to sell the underlying asset at that price if the option is exercised

Cap (as in "market cap", "small cap" etc)

Abbreviation of "market capitalisation". Capital appreciation (or gain) An increase in an asset"s price

Capital asset pricing model (CAPM)

A theoretical model of asset allocation and expected returns.The model states 1) that all investors should hold a combination of cash and a market weighted portfolio of other assets and 2) that the expected excess return on an asset above cash is equal to the expected excess return on the market multiplied by the asset"s beta

Capital gains tax (CGT)

Tax that may be due on the capital component of an asset following its sale at a profit. UK pension funds are exempt from CGT

Capitalisation Issue

See bonus issue

CAPS

Combined Actuarial Performance Services (provided by Russell/Mellon CAPS). One of the largest performance measurement and benchmarking services. Often used by trustees of pension funds to measure performance

Cash equivalent transfer value (CETV)

The equivalent cash value of a member"s occupational scheme benefits in the event of a transfer to another scheme

Cash fund

Money held on deposit to which interest is added - like a building society account

CDO

See collateralised debt obligation

Certificate of deposit

Certificates of deposit (CDs) are short-term, non-interest bearing bonds issued by banks and building societies. CDs have a secondary market, the holder of a CD is often able to sell it to a third party in order to realise cash before the maturity date of the CD

CFA

Chartered Financial Analyst. An industry qualification awarded by The CFA Institute. Requires three comprehensive exams and three years of industry experience

Chartism

The study of historical market data to determine trends and to try to predict future movements

Chinese walls

Controls over communications put in place in financial institutions that offer a wide range of services which could lead to conflicts of interest

Clean fees

Fund management fees that are all inclusive, to which there will be no extra charges added (e.g. custody, overseas transactions, administration, etc)

Closed-end fund

A collective investment vehicle that issues a fixed amount of equity capital to investors. Purchases of the fund"s stock must be balanced by sales by other investors. Shares in closed-end funds are often dealt on a stock exchange. Investment Trusts are examples of closed-end funds

CMO

See collateralised mortgage obligation

Collar hedge

An investment strategy obtained through a combination of put and call options. This option-based strategy results in stabilising portfolio returns by obtaining protection against a major decline in portfolio value in exchange for sacrificing part of the portfolio"s appreciation in a major rally

Collateral

Assets put up as security to protect a lender in case the borrower defaults

Collateralised debt obligation (CDO)

A generic term for securities that are backed by the revenue from debt instruments such as loans or mortgages. See also collateralised mortgage obligation

Collateralised mortgage obligation (CMO)

A security backed by the revenue from mortgages. The total revenue from a given pool of mortgages is shared between a collection of CMOs with differing cash flow and other characteristics. In most CMOs, coupon payments are not made on the final tranche until the other tranches have been redeemed. Interest is added to increase the principal value. This tranche is called an accretion bond, an accrual bond or a Z bond

Collective investment scheme

A vehicle in which a number of investors pool their assets so that they can be managed collectively. This usually suits small to medium sized investors wishing to invest in a broad spread of investments or larger investors wishing to gain exposure to a specialised sector. Shares in a pooled fund are denominated in units that are repriced regularly to reflect changes in the underlying assets. This allows investors to value their holdings and provides a basis upon which transactions in units can take place. Unit trusts are examples of pooled funds

Commercial paper

Short-term corporate debt

Commodities

Raw materials such as crude oil, metals and agricultural products

Common investment fund (CIF)

An arrangement whereby the assets of two or more entities, normally with common control and / or objectives, are pooled for investment

Common stock

The US name for ordinary shares. Securities which represent an ownership interest in a company. (If the company has also issued preferred stock, both have ownership rights.)

Compound interest

A method of accumulating interest, where interest is paid on both the initial investment and the interest received during the period

Compound rate of return

A total return figure calculated by multiplying returns for different periods

Concentrated portfolio

A portfolio that holds fewer stocks than the benchmark, with the aim of achieving a higher performance target but with a commensurate increase in risk

Consolidation

Where a company increases the nominal value of its shares and reduces the number of shares in issue by consolidating holdings. For example, five 5p shares might be consolidated into one 25p share

Constant proportion portfolio insurance

Constant proportion portfolio insurance (CPPI) is an investment strategy which aims to provide downside protection and upside potential by varying the allocation to cash and volatile assets as the value of the portfolio changes

Consumer prices index (CPI)

The main measure of domestic UK inflation. It is used by the Bank of England in its monetary policy. The other widely used index is the retail prices index

Contango

A term relating to the commodity futures markets. A commodity is in 'contango' when later-maturing contracts are priced higher than those maturing sooner. This may occur when consumers buy futures contracts to protect themselves against price increases

Contingent assets

Assets explicitly set aside by the sponsor on which a pension scheme would have a claim in the event of an employer becoming insolvent

Contract note

Written confirmation of the purchase or sale of an investment

Contract-based scheme

The opposite of a trustee-based scheme, whereby members establish a personal contract with the pension provider that has been selected by the employer. Stakeholder schemes and Group Personal Pension Plans are both contract-based schemes

Contracting out

The ability to opt out of the Second State Pension (SP2) and instead make additional contributions to a private/occupational pension arrangement

Contra-cyclical manager

A fund manager who goes against the general trend in investment cycles, or against the "herd", by buying stocks that are out of favour in the belief that they will recover. Also known as a contrarian manager

Contrarian

An investor who takes a position in the market contrary to the majority

Conventional asset

Quoted equities, investment grade bonds and cash

Conventional bond

A bond where the coupon and principal are fixed (as opposed to an inflation-linked bond)

Convertible

A security, usually a bond, which the holder has the option of exchanging for other securities such as a company"s ordinary shares

Convexity

A measure of how a bond"s duration changes as yields vary. For a bond that has positive convexity a small increase in yield causes its price to decline by less than the amount a small reduction in yields would cause its price to increase

Core portfolio

A portfolio generally representing the bulk of a fund"s assets. The core portfolio will normally be invested in a controlled manner to provide stable returns. The remainder of the fund"s assets (often called the satellite portfolio) can then be managed in a more aggressive way, in search of higher returns. This arrangement is called a core/satellite approach

Corporate bond

A bond issued by a company. Often used as a generic term used for all bonds except government bonds (also known as credit). The issuer might be a company, a financial institution or a supranational (such as the World Bank)

Corporate governance

Corporate governance is the system by which companies are directed and controlled. It deals primarily with the relationships between the constituent parts of the company: the directors, the board and shareholders. Corporate governance aims to ensure transparency and accountability. In the UK, corporate governance is enshrined in a number of laws and regulations as well as in the Financial Reporting Council' Combined Code on Corporate Governance, which sets out standards of good practice in relation to issues such as board composition and development, remuneration, accountability and audit and relations with shareholders. Best practice specific to institutional investors is set out in the Institutional Shareholders' Committee's "Statement of Investment Principles". Good governance is also becoming increasingly important in the context of running pension and charity trustee boards. See governance

Correlation

The extent to which two assets" values rise and fall together

Counterparty

The other party to a transaction

Coupon

The regular interest payments on a bond

Covenant (Bond)

Provisions within a borrowing agreement describing the obligations of a bond issuer to protect the interests of the bond holders. Affirmative covenants require the borrower to take certain actions (eg. retain a certain debt to equity ratio). Negative covenants prohibit the borrower from certain actions (e.g. pay out too high dividends). The breach of a covenant might cause the default of the bond

Covenant (Pension scheme)

The ability and willingness of the sponsor to make good any shortfall in a scheme"s funding. A strong covenant reflects a financially strong sponsoring company, who can be relied upon to rectify funding shortfalls in the pension fund should they emerge. This imparts a degree of investment flexibility and freedom lacking from a pension fund with a weaker covenant from their plan sponsor

Credit

See corporate bond

Credit rating

A rating of how much investment risk is associated with a debt issue. Ratings are provided by agencies such as Fitch, Moody"s and Standard & Poor"s

Credit risk

The risk that a bond issuer will default on their obligations. A function of the credit quality of the issuer. Government bonds of developed countries are assumed to have no credit risk. Credit risk is usually associated with corporate bonds

Cum dividend

Cum is the Latin prefix meaning with. A share quoted cum dividend carries the right to a recently declared dividend. Cum scrip and cum rights have similar meanings. See also ex dividend

Currency hedging

The elimination or reduction of the impact of exchange rate movements on foreign currency holdings, typically by the use of forward currency contracts

Currency risk

The risk of incurring losses in the value of overseas investments as a result of movements in international exchange rates. Can also refer to the additional volatility caused by exposure to assets in foreign currencies

Cyclical stock

A security that is sensitive to movements in the economic cycle, i.e. it performs well in periods of falling interest rates, or strong growth; but poorly during an economic downturn

Dealer

An individual or firm that acts as an intermediary between buyers and sellers. The dealer might also buy securities to sell for a profit

Debenture

In the UK this is a bond secured by a prior claim on the assets of the issuer or, in some circumstances, by specific assets of the issuer. A debenture holder is entitled to appoint a receiver if necessary

Debt/Equity ratio

A company"s borrowings divided by the market value of its equity. It is a measure of the amount of gearing of a company, and an indicator of financial strength

Default

Can be a) the failure to pay interest or principal promptly when due, or b) the failure to meet payments on a futures contract as required by an exchange

Default risk

The risk that an issuer will not be able to make future interest (coupon) or capital (principal) payments. Bonds issued by the governments of most developed countries are generally regarded as having an extremely low default risk (AAA)

Defensive

An investment strategy is "defensive" if it is designed to have a low level of risk (and probably will therefore also have a low expected return)

Defensive stock

A stock which is expected to be relatively insensitive to market or economic downturn, for example a food manufacturer

Deflation

Negative inflation, i.e. falling prices

Depression

A period of strongly negative economic growth and falling prices

Derivative

A financial instrument such as a future or option whose payoffs (and ultimately value) are derived from the value of another (underlying) asset

Devaluation

The formal reduction in the value of a currency against other currencies. This is opposed to depreciation, which is the reduction in the value of a currency through market movements

Dilution

A reduction in earnings per share and book value per share due to an increase in the number of shares issued. This can occur if convertible securities are converted or warrants or employee stock options are exercised

Dirty fees

Fund management fees to which "extras" (often not explicit) are added, e.g. for custody, overseas transactions etc

Discount rate

The rate of interest used to find the present value of a future cash flow

Discounted cash flow (DCF)

The process by which future cash flows (for example, dividends or interest payments) are adjusted to allow for the time value of money to arrive at a value in today"s terms

Discretionary client

A client who gives an investment manager total authority to manage the assets against a specified benchmark. The manager has the authority to make decisions as if he was the beneficial owner

Disinflation

A reduction in the rate of inflation

Diversification

Holding a range of assets to reduce risk

Dividend

The portion of company net profits paid out to equity investors

Dividend discount model

A model used to estimate a security"s value by adding all discounted future dividends of a company

Dividend yield

The annual dividend on a share divided by the share price

Downgrade

When a bond"s credit rating is lowered. This might be caused by an event such as a negative trading statement by the issuer, which in turn increases the risk that the issuer might be unable to meet its future payment obligations. If the downgrade reduces an issuer"s credit rating to high yield status – funds which only invest in investment grade bonds may need to sell the bond

Drawdown

Known also as income drawdown/ withdrawal or unsecured pension, it allows members below 75 to continue investing in their funds, whilst drawing a limited proportion as income

Due diligence

A detailed examination of information not all publicly available prior to a transaction e.g. an acquisition of one company by another

Duration

The (Macaulay) duration is a measure of the average time until a bond"s cash flows occur, and of the sensitivity of its price to interest rate changes Technically speaking, the Macaulay Duration is the sum of the time weighted discounted payments (coupons and principal) of a bond. Another way to think about duration is the average time period over which you will receive your payments. Hence, if two bonds have the same maturity, the bond with the higher coupon will have a shorter duration (the average time of repayment is less heavily weighted to the repayment of capital (principal) at maturity)

Earnings

For a company, the net profits available for distribution to shareholders

Earnings per share (EPS)

A common way of expressing company profits - dividing the profits after tax by the number of shares in issue. Earnings per share is the basis for the calculation of the P/E ratio

Earnings yield

The earnings per share divided by the current share price. This is the inverse of the price/earnings (P/E) ratio

Efficient frontier

A curve showing the highest average reward obtainable at each level of risk

Efficient market

A market where the prices of assets fairly reflect all available information about those assets

Emerging markets

The investment markets of developing economies

Enhanced indexing

An investment strategy by which managers aim to add incremental performance to an index return. Techniques range from trading strategies, whereby managers seek to add performance in managing index constituent changes, to arbitrage between similar stocks and low risk active fund management based upon fundamental analysis

Equalisation

As income from a unit trust accrues between dividend distributions, it is added to the unit price. An investor purchasing units will thus be paying for some of the next dividend payment in the unit price; effectively turning capital into income (which is taxable). Unit trust managers state an equalisation factor with each distribution to indicate the proportion of the total distribution that is not subject to income tax

Equity

The shares in a company. Investors in equities are a company"s owners and are entitled to its profits after other claims on the company have been met

Equity risk premium

The additional expected return from equities above that available from cash or bonds to compensate for their higher risk. The equity risk premium (ERP) is a forward looking estimate of the degree to which equities are expected to outperform bonds

ERISA

The Employee Retirement Income Security Act (1974). US pension legislation, now sometimes used as a generic term to cover the whole US pension market

ESG

See Responsible Investing

Ethical investment

A term given to an investment philosophy focusing on investing in companies according to some non-economic criteria such as ethical or religious beliefs. See also Responsible Investing

EURIBOR

The euro zone inter-bank offer rate for the euro. The rate at which banks offer to lend euros to other banks

European Central Bank

The European Central Bank (ECB) is responsible for setting monetary policy (interest rates) within the euro zone. It was established in June 1998 as an essential part of the adoption of a single European currency

EV/EBITDA

A method of valuing companies calculated by dividing a company"s enterprise value (market value of equity plus net debt of the company) by its earnings before interest, tax, depreciation and amortisation. This measure relates short- term cash flow generation to market valuation

Ex ante

Ex ante is Latin for "beforehand." When there is uncertainty about the value of a variable before a process has taken place, the estimate of this variable is called "ex-ante". When the process is finished and the variable known, the formerly uncertain variable is called ex post (= "after the fact")

Ex dividend

To clarify who receives the dividend on a share that is sold around the time the dividend is due, a date is fixed when a share goes ex-dividend. Anyone buying after this date will not receive the dividend. A share price will normally fall by the amount of the dividend on the day that it goes ex-dividend. Compare with cum dividend

Ex post

See ex ante

Exchange traded fund

A vehicle that is traded on a stock exchange and whose performance is designed to track a given market index. Exchange traded funds (ETFs) represent a low cost, highly liquid "form" of index investing

Exercise price

The price at which an option holder has the right to buy or sell the underlying asset. Also known as the strike price

Expected return

The anticipated average future return. The actual return will generally differ

Fiduciary

A person, or entity, who acts for the benefit and on behalf of another person or group of persons. A fiduciary holds a legally enforceable position of trust

Financial Services Authority (FSA)

The body which regulates the financial industry in the UK

Fiscal policy

The management of the economy by use of government spending and taxation

Fixed income

Bonds and related investments

Fixed interest

See fixed income

Fixed interest/Fixed income securities

An interest-paying security, where the interest is calculated as a constant specified percentage of the principal amount and paid at the end of specified interest periods, usually annually or semi-annually until maturity

Floating rate note (FRN)

A bond whose coupon varies with (short-term) interest rates. Floating rate bonds are generally issued by banks or companies whose earnings are closely tied to interest rate fluctuations as a way of more closely matching interest payments to earnings

Flotation

The first issue of shares to the public in a company new to the stock market. Also known as an Initial Public Offering (IPO)

Forward (agreement)

An agreement to buy or sell an asset at a future date at a price agreed today. Forwards are similar to futures. However, forwards are not exchange-traded

Fund specific benchmark

An investment benchmark set with reference to a fund"s particular objectives

Fundamental analysis

An assessment of a company"s share value and potential for future cashflows and profits based on accounting, economic, and business information (hence fundamental factors)

Futures contract

An agreement, traded on a financial exchange, to sell or buy a specific amount of a commodity or security at a specific price and time. Unless the contract is sold to another party before settlement date, participants in the contract are obliged to buy or sell the underlying asset. Distinguished from options, in which the options buyer chooses whether or not to exercise the option at the exercise date

Futures margin

When a future is purchased, a deposit ("the initial margin") is paid to the future exchange. This normally represents a few percent of the value of the contract and helps in protecting the exchange against defaults. As the value of the contract changes additional payments may be requested ("the variation margin")

GAAP

Generally Accepted Accounting Principles

GARP

Growth at a reasonable price: a description of the approach some fund managers use to identify potential share purchases. A mixture of "growth" and "value" style

Gearing

From an accounting point of view, the amount of a company"s total borrowings divided by its share capital. High gearing means a proportionately large amount of debt, which may be considered more risky for equity holders. However, gearing also entails tax advantages. In investment analysis, a highly geared company is one where small changes in sales produce big swings in profits. Gearing consists of financial and operational gearing. Leverage is the corresponding US term

Gilt

A bond issued by the UK government

Gilt (-edged)

Name sometimes given to government bonds issued by the Irish, South-African and UK governments

Gilt repos

The practise of selling gilts and simultaneously entering into an agreement to repurchase them at a fixed time and price. A technique used to fund temporary cash shortfalls, to fund long gilt positions, or to gear portfolios by borrowing against gilts. Buying gilts with a resale agreement is called a reverse and is a means of lending cash on a collateralised basis

Gilt strips

Investors can buy separately either individual coupons or the ultimate principal repayment due on a specific gilt. These separate elements are referred to as principal or coupon strips and are identified by the payment date. The separation process is achieved by "stripping" the gilt. A key benefit is that the duration of a strip is equal to its term, thus making it easier for pension funds to find securities to match fixed liabilities. See also strips

Global depository receipt (GDR)

Securities relating to ownership of a foreign company"s shares. The securities are issued in markets (other than the company"s home market) by a bank that holds shares in the company, and traded as though they were securities local to those markets

Global tactical asset allocation (GTAA)

A multi-asset class strategy that makes high-frequency allocation shifts between asset classes and regions using only a fraction of the total portfolio

Governance

The organisational structure and approach to exercising control over an occupational pensions scheme by its trustee board. See also corporate governance

Government bond

A bond issued by a government

Gross

Before deductions of, e.g. tax or investment fees

Gross redemption yield

See yield

Group personal pension plan (GPP)

A scheme whereby the employer selects the pension provider and the investment options, but the actual pension contracts are solely between the provider and the employee

Growth stock

A stock that is expected to achieve above average earnings growth. Growth stocks normally have a high P/E ratio relative to the market as a whole, as investors are willing to pay a premium for future higher earnings

Growth style/investment

A portfolio focusing on growth stocks

Hedge

To protect against risk

Hedge fund

A fund that seeks to generate investment returns by using non-traditional investment strategies, utilising mechanisms such as short selling, gearing, programme trading, arbitrage, and tools such as options, futures, swaps, and forwards (derivatives in general)

Hedging

An operation to secure an investor against a potential loss or to minimise a potential risk by offsetting the exposure to a specific risk by entering a position in an investment with the exact opposite pay-off pattern. The term is often applied to the currency markets (currency hedging)

High yield bond

A bond whose issuer has a credit rating of BB+ or lower with S&P, or Ba1 or lower with Moody"s. They are also known as junk bonds or sub-investment grade bonds

Hurdle rate

The minimum rate of return required before a prerequisite profit is made or a performance fee is paid

Hybrid scheme

A scheme that combines features from both defined benefit and defined contribution schemes

Implementation Shortfall

See T-Standard

Income constrained

A charity"s asset allocation is income-constrained if the need to generate a particular level of income from its investments influences its asset allocation

Income stock

Shares which have a higher than average dividend yield or those where a relatively high proportion of the total return is derived from dividend income. Typical examples of income stocks are utilities

Indenture

A written agreement between the issuer of a bond and bondholders that specifies maturity date, interest rate, convertibility, and any other options

Index

A market containing all the stocks of a particular asset. For example, the FTSE All Share Index contains all the public limited companies listed on the UK equity market issuing shares

Index fund

A passively managed fund

Indexation (passive management)

A passive management approach designed to mimic the investment performance of a specific market index. A portfolio may be indexed either by buying every security in the index in the same proportion as the index (known as replication), or by selecting a smaller number of securities that together reflect as accurately as possible the characteristics of the index (known as sampling)

Index-linked gilt

A bond issued by the UK Government (gilt) whose interest (coupon) and capital (principal) payments are linked to the UK retail prices index (RPI)

Note: Many pension fund liabilities are wage inflation linked. Earnings have historically grown faster than prices, so this asset is not a perfect match for such liabilities

Industry average benchmark

See peer group benchmark

Inflation

A measure of the rate of increase in general prices, e.g. the movement over time in the Consumer Prices Index (CPI)

Inflation-linked government bonds

Government bonds whose payments are linked to inflation

Information ratio

A measure of investment manager skill. The ratio of an investment manager"s average active return to active risk. (Variations on this definition also occur.)

Initial margin

The returnable collateral deposited by a futures market participant when opening a position. It is also required of the writers of options

Initial public offering (IPO)

The first public sale of a company"s equity resulting in a quoted stock price on a securities exchange

Insider trading

Trading in shares when in possession of price sensitive information that is not known to the market. This is illegal in most countries

In-specie transfer

A direct transfer of a basket of stocks from one manager"s portfolio to another without disinvesting and reinvesting

Institutional investor

An investor such as a pension fund, insurance company or charity

Inter-bank rates

The rates at which banks bid for or offer funds to each other in a particular market

Interest

The return earned on funds which have been loaned or invested (i.e. the amount a borrower pays to a lender for the use of his/her money)

Interest rate swap

A swap in which typically a fixed set of cash flows are exchanged for a set of cash flows linked to short-term interest rates

Internal rate of return (IRR)

The average return on an investment over its life based on its current price and its future cash flows

In-the-money

A term usually used when referring to traded options. If current market prices make it beneficial to exercise an option, the option has value and is therefore "in the money". With call options it is where the exercise price is below the current price of the underlying security. With put options it is the reverse

Investment consultant

An adviser on investment strategy and/or the selection of investment managers

Investment grade bond

A bond with a credit rating of at least BBB- (Fitch), Baa3 (Moody"s) or BBB- (S&P)

Investment only

Refers to the provision of DC pension services where the investment manager only offers investment management services as opposed to bundled, where the investment manager also manages the administration and member communication aspects

Investment style

A portfolio"s exposure to (or an investment manager"s preference for) large or small cap stocks, and to value or growth stocks

Investment trust

A closed-end, incorporated fund established to produce income through investing in other companies. They have a fixed number of shares, trade like stocks on exchanges and are regulated by the UK Investment Company Act of 1940

ISIN

International Securities Identification Numbering system advocated by the G30. The ISIN code is a unique 12 digit code given to a security and is used worldwide

ISMA

International Securities Markets Association

Issued share capital

The portion of a company’s authorised capital that has been issued by the company

Issuing house

This is the name given to financial institutions, often merchant banks, that act as intermediaries between companies seeking capital and the investors prepared to supply it

J-curve effect

The return pattern from a successful private equity fund as it matures. This return pattern occurs because there is no market in which to benchmark the value of private equity investments and they are often be held at cost until it is possible to provide an objective valuation

Junk bond

See high yield bond

K - There are no entries for this letter

Large cap stock

A stock with a market capitalisation that is among the largest within a market e.g. the capitalisation of one of the top 100 companies in the UK as represented by the FTSE 100 index

Leverage

1. When an investor has more than a 100% exposure to a market, or part of a market, typically resulting from the use of debt or derivatives (futures and options)

2. Leverage; The US term for gearing

Liabilities

An investor"s liabilities are the obligations that must be met, e.g. future pension payments for a pension fund, or claims on insurance policies for an insurer

Liability-driven investing

Liability-driven investing (LDI) is an investment philosophy which aims to help defined benefit pension schemes establish a risk framework from which they can measure investment risk and set investment strategy

LIBID

London Inter-Bank Bid Rate, the rate at which major London banks offer to take funds on deposit from other banks

LIBOR

London Inter-bank Offer Rate. The rate at which major London banks offer to lend funds to one another

Life company fund

A pooled fund that is operated by a life company. Such funds are similar to unit trusts except that investors own a life assurance policy rather than units

Lifestyle

A structured approach to investment designed to take account of investment risk over a working life and to remove the need for members to make investment choices

Lifetime allowance

The maximum amount a member can accumulate during his or her lifetime without incurring a tax charge

LIFFE

The London International Financial Futures and Options Exchange Market for trading in derivatives

Limited Price Index (LPI)

A capped version of the retail inflation index used by many pension schemes to calculate their pension increases

Liquidity

The extent to which an asset can be bought and sold quickly and cheaply. Liquidity can be measured by the daily trading volume in a security

Liquidity risk premium (LRP)

In order to overcome investors" desire for liquidity, less liquid assets must offer a higher return ("premium") to compensate for reduced flexibility

Listing

The FSA has taken responsibility for the listing of companies to the "official list". Inclusion in this list represents an endorsement from the FSA that the company has met minimum standards. It remains the responsibility of the London Stock Exchange (LSE) to admit a company"s securities to trading on the exchange. Being "listed on the LSE" is therefore not the same as being "officially listed."

Loan stock

Another name for a bond normally used in connection with those issued by non-government bodies such as companies

Lognormal distribution

A variable is lognormally distributed if the logarithm of the variable has a normal distribution

Long

An investor is "long" when the exposure to a given asset is greater than the level considered neutral. This is usually with a view to selling it at a higher price at a later date

Long/short fund

A hedge fund comprising a mixture of long and short positions in the same asset class or market

Longevity

The fact that people increasingly live longer. While a good thing, it unfortunately also means increased pension liabilities. The potential for further increases in life expectancy present a non-quantifiable risk for pension schemes as the pension is paid until death

Long-term

1. In the Eurobond market, refers to initial maturities longer than seven years

2. Under standard accounting practice, refers to long-term debt with a remaining maturity greater than one year

Lump sum

The percentage of accumulated pension benefits a member can take as a tax-free lump sum upon retirement

Mandate

The agreement between a client and investment manager laying down how the fund is to be managed. May include performance targets by reference to a benchmark

Market capitalisation

The total value of a company or market. For a company, the number of shares multiplied by their market price. For a market, the sum of the market capitalisations of the constituents of that market

Market inefficiency

A condition in which current security prices do not reflect all the publicly available information about a security, such as when some investors do not effectively analyse the available information

Market maker

A dealer or trader who is required to consistently quote both bid and offered prices or yields for an issue of securities and is obliged to trade on those prices

Market neutral

An investment strategy (particularly associated with some hedge funds) that aims to produce returns that are independent of fluctuations in market returns

Market price

The price at which an asset changes hands in an open market

Market risk/Systematic risk

The risk which is common to an entire class of assets or liabilities. It is the level of risk in the market that cannot be eliminated by diversification

Market value

The price at which an asset might reasonably be expected to be sold in an open market

Mark-to-market

The regular adjustment of the recorded price of an asset so that it equals its market price

Maturity

1. For a bond, the time at which the principal of the bond is repayable and it ceases to exist

2. For a pension fund, broadly the average age of the membership and the time until benefits are payable

Mean

See arithmetic average

Median

The result found by arranging the values in order of size and picking the middle-ranking value. In a symmetric distribution, the mean and median are identical

Medium bond or Medium dated bond

A bond with a term to redemption of between 5 and 15 years

Medium Term

1. In the Eurobond market, refers to maturities of two to seven years

2. In the Euro-money markets, refers to maturities in excess of one year

Member-nominated trustee

A trustee chosen by fellow members of the scheme

Mid-cap

Used to describe collectively those companies of medium-sized market capitalisation

Migration risk

The risk that a bond will be downgraded to a lower rating by one of the independent ratings agencies, reflecting its likelihood of default. As a bond migrates its price falls

Minimum Funding Requirement (MFR)

A requirement introduced in the Pensions Act 1995 in an attempt to ensure that pension schemes have sufficient assets to meet their liabilities. It is now being replaced with scheme-specific funding requirements as set out by the Pensions Regulator

Modern portfolio theory

The blanket name for the quantitative analysis of assets based upon their expected return, expected risk (standard deviation) and their correlations. According to MPT, investors should only invest in portfolios (constituting of the previously analysed assets) which generate the highest return at any given level of risk

Modified duration

A measure of bond price sensitivity to changes in yield

Monetary policy

The management of the economy by the use of interest rates and money supply

Money market

The market for short-term fixed income instruments (typically with less than one year to maturity)

Money weighted rate of return

The calculation of the actual return achieved over a period, based partly upon cash in- and outflows of the fund. It is therefore not suitable for comparative analysis of investment managers" performance, since external cash flows are usually beyond the managers" control. See also internal rate of return

Mortgage-backed securities (MBS)

Investments backed by the income stream from a pool of mortgages

Multi-asset management

A single manager is responsible for several asset classes and is measured against a peer group or customised benchmark which specifies a fixed asset allocation. (The manager may or may not have discretion to vary the allocation around this benchmark.)

Mutual fund

The US name for a pooled fund (usually open-ended) operated by an investment manager

Myners Report

In 2001, Paul Myners published a review of issues affecting the pension industry on behalf of the Government. His report and subsequent documents are undergoing consultation before any changes are made to legislation. Issues covered include soft commission, trustee and custodian appointments, and asset allocation amongst others

Negative convexity

A bond is said to exhibit negative convexity when its price rises less for a downward move in yield than its price declines for an equal upward move in yield. See convexity

Net

After allowing for deductions of, e.g. tax or investment fees

Net asset value (NAV)

The company"s assets less all liabilities; also known as shareholder funds. Can be applied in the context of investment trusts or property companies where shares can trade at a premium / discount relative to the NAV

Net information ratio (net IR)

The information ratio after allowing for costs

Net present value (NPV)

A method used in evaluating investments whereby all future cash flows are first discounted at a given discount rate and then added. An investment is acceptable if the NPV is positive

Nil paid

Shares whose nominal value has not been paid up and where there is therefore a call due on the balance. Government stocks are sometimes issued in this way, with one or more calls at specified dates

Noise

We use this term to mean uncertainty about the future not directly related to investment market uncertainty, e.g. an insurance company"s uncertainty about the size of future claims on its policies

Nominal

1. This often means "before allowing for inflation". If inflation is positive the nominal return on an asset is greater than its real return.

2. For a bond, see principal.

Nominal amount/Value

The value stated on the face of a security

Nominal rate of return

A rate of return expressed only in monetary terms, i.e. not adjusted for inflation

Non-contributory scheme

A scheme that does not need contributions from its members

Non-systematic risk

This is the risk attributable to an individual company, as opposed to the sector or broader market. The impact of non-systematic risk factors can be reduced by the diversification of a portfolio

Normal distribution

A bell-shaped curve often used to estimate the chances of different outcomes

OEIC

Open ended investment company. A collective investment scheme structured as a limited company in which investors can buy and sell shares on an ongoing basis

Offer price

See ask price

Open ended funds

Pooled funds in which the number of units varies according to the number of investors wishing to buy or sell units in the fund

Open position

In the context of exchange-traded derivatives this means a position that is exposed to price movements

Optimisation

The creation of a portfolio which will give you the highest expected total return for a given set of forecasts and estimated risks

Optimiser

A computer programme that generates an efficient frontier, given particular input assumptions

Option

The buyer of an option typically acquires the right but not the obligation to buy or sell a particular asset in the future at an agreed price

Option-adjusted spread

A measure of the difference between the yield available on a given bond and that on otherwise comparable risk-free bonds, allowing for any options embedded in the bond

Ordinary shares

Securities which represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. Called common stock in the US

Out-of-the-money

For a call option, when the market price of the underlying asset is below the exercise price. For a put option, when the exercise price is below the market price

Outperformance

The return on a fund in excess of the benchmark return

Over-the-counter (OTC)

A derivatives contract is OTC when it is arranged between two parties privately rather than being traded on an exchange

Overweight

Exposure to a given asset or asset class greater than that implied by its weight within a market index or benchmark Against which the portfolio is measured. Investment managers may take overweight positions in shares or sectors they expect to outperform in order to add value to the portfolio

Par value

See principal

Passive management

Investment management that seeks to closely match the performance of a benchmark

Passive manager

An investment manager who seeks to match closely the return of an investment benchmark

Peer group analysis

A ranking table of the competitive performance of investment managers / funds in, for example, a performance survey such as CAPS or WM

Peer group benchmark

An investment benchmark implicitly defined to be the average asset allocation of an investment manager"s competitors

Pension Protection Fund

A statutory body set up under the Pension Act 2004. It aims to provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the level of compensation to which members are entitled to under the Pension Protection Fund rules. The Pension Protection Fund is funded through compulsory annual levies on all eligible schemes. The amount of the levy is to a large extent based on scheme-specific factors such as liability and funding level as well as the insolvency risk of the sponsoring employer

Performance related fee

An investment management fee the extent of which is determined by the degree of over or under performance relative to an agreed benchmark

Perpetuity

A stream of cash flows that theoretically will last for ever

Personal account

A proposed new National Pensions Savings Scheme, whereby all employees who are as yet able to take part in an occupational scheme will be auto-enrolled in a defined contribution personal account. The scheme is set to come into force in 2012

Personal Pension Plan (PPP)

An individual personal defined contribution contract with a pension provider. An employer might choose one provider for all employees to simplify administration. This is called a Group Personal Pension (GPP)

Placing

The placing of a company"s securities made by a sponsor or stockbroker with their own clients and with the markets

Pooled fund/Pooled vehicle

A fund such as a mutual fund or (UK) unit trust that invests the assets of many different individuals or institutions collectively. See also collective investment vehicle

Portable alpha

An investment technique where the active return of an investment manager relative to one benchmark is combined with the return from a separate benchmark (often in a different market)

Preference shares (UK)

Shares evidencing ownership in a corporation, which pay a fixed percentage dividend but which do not give the holder voting privileges

Preferred security

Typically, a form of equity capital that pays a fixed dividend and has a higher claim on the company"s assets than common stock (ordinary shares), but a lower claim than bonds

Premium

1. For securities selling above par, the difference between the price of a security and par

2. An amount that must sometimes be paid above par in order to call an issue, i.e. a call premium

3. Occasionally used and interchangeable with margin or spread when the latter two refer to a percentage above a given amount or rate

4. The price paid for an asset

5. The additional price an investor is prepared to pay for an asset with attractive characteristics

Preservation

The legal obligation to offer deferred pensions to employees who leave service before retirement if they have two years" or more of scheme membership

Price-to-earnings ratio (PE ratio)

The ratio of a company"s share price to the earnings per share

Primary market

If a transaction occurs in the primary market if relates to a new issue of securities by a company, government or other organisation seeking to raise money

Principal/Face value/Nominal amount

The amount inscribed on the face of a security, exclusive of interest or premium, due to a security holder at maturity and it is the amount used in the computation of interest due on such security

Private equity

Equity-related capital used to finance change in an unquoted (i.e. non-public) company

Prospectus/Offering memorandum

A document, prepared by the lead manager to an issue containing all the pertinent information about a public offering of securities and about the borrower and guarantor, if any. It is made available to the appropriate legal authorities, stock exchanges and prospective investors. A preliminary prospectus is generally dispatched at the beginning of the subscription period and a final prospectus is dispatched immediately after both the final terms have been fixed and the subscription agreement has been signed by the borrower and the managers

Protected rights

The proportion of a member's accumulated pension that originates from contracting out and that must be used to buy a protected rights annuity

Proxy

A written authorisation given by a shareholder to someone else to vote on his behalf at a company"s annual general meeting (AGM) or special meeting (EGM)

Public offering

An offering for sale of a new issue of securities to the general investing public. Securities of such an offering will generally be placed through a syndicate, will have securities issued in small denominations (e.g. £1,000 each), and will be listed on a stock exchange

Put option

A put option gives the buyer the right (but not the obligation) to sell an asset on (and sometimes before) a given date at a price agreed today. The seller (writer) of the option has the obligation to buy the underlying asset at that price if the option is exercised

Qualitative analysis

Assessing the value of an investment by examining mainly non-numeric characteristics such as management, people, process etc

Quantitative fund management ("quant")

Investment management that stresses statistical and other numerical relationships between securities and their returns, and makes extensive use of computer models

Rack rent

The rent that would be received on a property if it were leased on the open market. The current rent may be greater or less than the rack rent depending on the terms of the lease and how the market has moved since the last rent review

Real assets

Assets which should have a natural link to the performance of the economy and the general level of prices (e.g. equities or real estate)

Real estate

Buildings or land

Real estate investment trust (REIT)

A company that owns and usually operates income-generating real estate. REITs are normally quoted on a stock exchange

Real interest rate (or yield or return)

The interest rate (or yield or return) less the rate of inflation

Real return

The return less the rate of inflation

Real value

The value after allowing for inflation. If the value of an asset and the level of consumer prices both double, the asset"s real value is unchanged

Rebalance

To change a fund"s constituents so that they more closely match those of its benchmark

Redemption

When a bond is cancelled by repayment to the bondholders of the capital originally lent to the bond issuer

Redemption yield

Calculation of the return that investors will earn on an bond if they hold it to redemption, taking into account income and any capital gain or loss that will be made at the maturity date. See also yield to maturity

Reporting

This involves providing members with annual or quarterly updates on the performance of their chosen investment funds as well as an obligatory annual forecast on the value in today"s terms of their accumulated benefits today and at retirement

Repurchase agreement (REPO)

An agreement to sell securities, usually bonds, to another party and to buy them, usually after a few days, back at a specified date and price

Responsible Investing

The incorporation of client-specified non-financial corporate or societal behaviours into the investment decision process. These tend to be grouped under environmental, social and corporate governance ('ESG') issues. See also corporate governance

Retail prices index (RPI)

This is an index published by the government that is used to measure the rate of inflation on standard goods and services. Index-linked bonds and pension payments are linked to the RPI. The other main index is the consumer prices index

Retained earnings

Company earnings that are not paid out as dividends

Return

The income on an asset together with its capital appreciation, expressed as a proportion of the asset"s initial price

Return on equity (ROE)

The last fiscal year earnings per share (EPS) divided by the last fiscal year net equity per share of common stock. ROE tells shareholders how effectually their money is being employed

Rights issue

A form of company fund raising where existing shareholders are given rights to purchase newly issued shares in proportion to their existing holding

Risk

In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must promise higher expected returns if investors are to invest in them. Risk is usually measured by the standard deviation of returns. Risk management is an important aspect of portfolio management and may involve the use of complex statistical models

Risk premium

The extra expected return over the risk-free rate demanded by investors to compensate them for the volatility of returns or the possibility of default of risky assets

Risk/Return trade off

The amount of expected return that must be sacrificed in order to reduce risk

Risk-free asset/Rate

An investment with no chance of default, and a known and certain rate of return. (Typically the yield on a government bond or cash.)

Running yield (or current yield)

The current income from an asset divided by its price

Safe harbour

Investment strategy which minimises future uncertainty

Safe haven

See safe harbour

Satellite portfolio

See core portfolio

Scheme administrator

The person/company responsible for the day-to-day running of a pension scheme and maintaining member records

Scrip dividend

Payment of dividends in the form of additional shares rather than cash

Scrip issue

See bonus issue

Secondary market

The purchase and sale of securities which have previously been issued in the primary market

Section 32-a

Refers to the possibility of buying out protected rights via an insurance policy in the event of a wind-up of a defined contribution scheme

Sector

Stock markets are divided into sectors, which comprise of companies from the same industries e.g. telecommunications sector, oil sector, media sector etc

Secured bond

A bond for which the issuer has set aside assets as collateral to ensure principal repayment and encourage timely interest payments

Securities

Assets tradable in standardised units on secondary markets, particularly equities and bonds

Securitisation

The creation of securities from non-tradable assets

Segregated fund

Where the assets of a particular fund are managed independently of those of other funds under the fund manager"s control

Self-invested personal pension (SIPP)

A personal pension plan that gives greater freedom to the individual taking out the plan in terms of investment choice. Employers may offer group or corporate SIPPs

Settlement

The payment or collection of proceeds after trading a security. Settlement usually takes place some time after the deal and price are agreed

Share

A stake in a company which confers ownership rights on the holder. Shares are also known as equities

Share buy-back

Share buy-backs can be a tax-efficient alternative to pay out dividends. When a company buys some of its own shares in the market to reduce its issued share capital, it changes the proportion of debt to equity that it holds on its balance sheet

Sharpe ratio

A measure of risk-adjusted return: the average additional return per unit of risk. Specifically, it is the ratio of the average performance relative to the risk-free asset (usually cash) to the volatility of return relative to the risk-free asset

Short

An investor is "short" when the exposure to a given asset is less than the level considered neutral. If the neutral exposure is zero, the investor"s exposure is negative. Investors go short on a given asset with a view to buying it back at a lower price at a later date

Short

A bond with a term to redemption of less than five years

Short extension investing

A relative return investment approach that provides full exposure to the market by taking both short and long positions. For example, a fund manager can invest 130% of the fund"s value in long positions and 30% in short positions resulting in 100% market exposure but with the potential for more alpha, given the extended opportunity set, than a typical long-only portfolio. The actual percentages may vary but the principal remains the same

Short-selling

Adopting a negative exposure to an asset by agreeing to sell it when it is not currently owned by the investor

Small-cap

Used to describe collectively those companies that have a small market capitalisation

Soft commission

An arrangement whereby a fund manager directs commissions to a broker which are then used to purchase goods and services e.g. research from a third party for the benefit of the fund manager. There are detailed FSA rules on the types of goods and services that may be softed

Sovereign debt

Bonds issued by a central government

Specialist (mandate, portfolio)

A specialist investment mandate or portfolio is usually one involving a single asset class, region or investment style (as opposed to "balanced")

Speculative grade

A credit rating below investment grade

Sponsor covenant

The ability and willingness of the sponsor of a pension scheme to meet the pension promises it has made to its employees

Spot price

The price of an asset when payment of the purchase price and delivery of the asset are essentially immediate (in contrast to the forward price)

Spread

The difference in yield between two different bonds. It is typically used to describe the extra yield offered by corporate bonds over gilts

Spread duration

A measure of the percentage change in a bond"s price for a 100 basis point change in its option adjusted spread. Often used to quantify the sensitivity of a portfolio to changes in spreads. The spread duration of a portfolio is the market weighted average of the spread duration of all of its securities

Stakeholder pension

The latest form of personal pension plan that has to meet certain standards set by the government including low charges and flexible contribution arrangements. Every employer with more than five employees who does not already sponsor a defined benefit or defined contribution scheme has to nominate a stakeholder pension provider and ensure access to the scheme for all qualifying employees

Stamp Duty and Reserve Tax (SDRT)

Stamp duty depends upon there being a document which can be stamped. For this reason SDRT was introduced in the UK in 1986 to cater for paperless transactions in shares. It is the tax paid on the transfer in beneficial ownership of certain types of asset, for example, units in UK unit trusts which invest in UK equities or property

Standard deviation

A measure of risk. The typical spread of outcomes, particularly of investment returns

State Second Pension (formerly SERPS)

From 6 April 2002, the State Second Pension (S2P) replaced the State Earnings Related Pension Scheme (SERPS). This is a more generous additional state pension, for people on low and moderate incomes (particularly those earning less than about £12,500 a year) and for certain carers and people with a long-term illness or disability

Statutory money purchase illustration (SMPI)

A projection of what your defined contribution pension account might provide, expressed in today"s money. See also Reporting

Stock market

A place for dealing in stocks and shares (equities) such as the London Stock Exchange

Stocks

Equities (shares) and (in the UK) bonds (loan stocks)

Strategic asset allocation

The mix of investment regarded as appropriate for an investor over the long run given that investor"s circumstances. This often becomes the investment benchmark

Strike price

See exercise price

Strip

Strips (separately traded registered interest and principal securities) are zero-coupon bonds created from the individual cash flows of a coupon-paying bond

Style

See investment style

Swap

An agreement between investors to exchange future cash flows. Payments can be based on a variety of factors including interest rates, currencies or equity returns

Systematic risk/Market risk

The risk attributable to market or macroeconomic factors which cannot be diversified away by stock selection, for example the impact of war on a domestic economy. See also non-systematic risk

Tactical asset allocation (TAA)

The adoption by an investment manager of an asset allocation different from the benchmark in order to enhance return. Tactical asset allocation is used to reflect the portfolio manager"s short-term market views

Take-over bid

An offer made to shareholders of a company by an individual or organization intending to gain control of that company

Target date

An approach whereby investments are structured in line with a pre-set date whereby risk is gradually eliminated as the target date approaches. Similarly to Lifestyle, Target date aims to cater for members who are unwilling to take investment decisions

Target Driven Investing (TDI)

An investment philosophy which states that DC members should start with establishing a clear pension target and then devise a realistic strategy to achieve that target

Target return

An investment approach whereby the manager aims to achieve a pre-set return over a given period. This differs from the traditional approach whereby the manager aims to mimic (passive management) or outperform (active management) a market or peer index

T-Bill/Treasury bill

A US Government debt security with a maturity of less than one year. They are sold at a discount to par - where the difference between purchase price and redemption value represents the investor"s return

Technical analysis

The analysis of historical price movements and trends to predict future price action

Tender

A method of issuing securities whereby investors are invited to bid, subject to a minimum price. The allocation of the securities is made according to the prices bid

Term (of a bond)

The time remaining until the final payment on the bond

The Pensions Advisory Service (TPAS)

The Pensions Regulator (TPR)

Time-Weighted Rate of Return

The rate of return on an asset or portfolio that adjusts for the effect of cash flows. The time weighted return can be used to compare portfolio performances against each other and against market indices

Top-down

An approach to investment analysis which starts from macro-economic factors (GDP growth, interest rates, inflation etc), and business cycle analysis to identify a portfolio distribution across asset classes, then a country/currency mix, a sector distribution and ultimately a stock selection. Converse of the bottom-up approach

Total return

See return

Total risk

The overall volatility of a portfolio (perhaps relative to the "safe harbour")

Tracking error

A measure of the variability of investment returns relative to a benchmark or index. It is usually expressed as the annualised standard deviation of relative returns. Can be expressed as either ex-post, which is simply the historical tracking error, or ex-ante, which is a forward looking estimate of the future tracking error. See also active risk

Transaction costs

The costs incurred in buying or selling an asset notably brokerage costs and transaction taxes such as stamp duty

Transition manager

A transition manager takes on the burden associated with the restructuring of a portfolio and seeks to minimise the costs and risks to the owner of the portfolio

Treasuries

Central government bonds, often US government bonds

Treasury bill

A type of zero-coupon government debt security, typically with a maturity of less than one year

Trust-based scheme

A scheme that is set up by the employer as an independent trust and run by a trustee board in line with the rules set out in the trust deed. See also Contract-based scheme

Trustees

The people appointed to make sure that a pension scheme is run in line with its trust deed and rules in line with the regulations

T-Standard

Also known as implementation shortfall, the T-Standard is the generally accepted method for assessing the overall success of a transition. It considers financial performance, comparing the value of the portfolio at completion with the value that would have been achieved had the transition been implemented instantaneously and at no cost at the outset

Turnover

A measure of the level of trading in a market or portfolio. Usually expressed as the sum of the total value of purchases and sales in a period as a percentage of the portfolio value

UCITS

Undertakings for Collective Investments in Transferable Securities. The UCITS legislation governs how a fund can be marketed within the European Union and is designed to allow cross border fund sales to investors of different nationalities. To obtain UCITS status a fund must invest within defined but wide parameters

Unauthorised unit trust

A unit trust that is suited to the needs of institutional investors, but cannot be marketed to the general public

Unconstrained/Focus investing

A long-only, 'best ideas' investment approach that completely removes the constraints imposed by the benchmark. This means managers no longer have to hold stock positions simply because of index constraints. The "dead money' that is thus freed up can be invested in the managers" best ideas, thereby increasing the portfolio's return potential. Unconstrained portfolios tend to be more concentrated, but within a risk-controlled environment still offer appropriate diversification

Underlying security

The shares (or other securities) on which a derivative instrument is based

Underweight

Exposure to a given asset or asset class lessthan that implied by its weight within a market index or benchmark

Underwriting

A guarantee by an investor (usually an investment bank) to a company issuing new shares or bonds that it will buy any remaining shares or bonds that are not bought by other investors. For providing this service, the underwriter will receive a fee but bears the risk that investors will not fully take up the issue and the underwriter is left with a large holding of stock

Unit trust

A UK based, open-ended, collective fund where new units are created for new investors and units are cashed in if the investor wants to leave the fund

Unquoted assets

Assets which are not quoted on a stock exchange

Unsecured debt

A debt obligation with no collateral, and backed only by the debtor"s creditworthiness

Valuation

A summary of an investment portfolio showing the holdings and their value as at a certain date

Value at risk (VAR)

A measure of the risk of loss on a portfolio

Value Investment/Style

An approach to investment that places emphasis on identifying shares that are believed to be underpriced (on the basis of indicators such as P/E ratio and dividend yield) by the market

Value stock

A stock that appears cheap when compared with other stocks because the share price is low relative to the book value of the equity (or earnings or dividends)

Variance

The degree to which a given set of numbers/data points vary around the mean. It is the square of the standard deviation

Venture capital

Private equity investment in relatively young companies

Volatility

The fluctuations in an asset"s return. See standard deviation

Voting rights

The entitlement of an ordinary shareholder to participate in the running of a company by voting on resolutions

Warrant

A certificate, attached to a security, which gives the holder the right (but not the obligation) to purchase either a number of shares of the borrower"s common stock or specific bonds at a stipulated price. Warrants are valid for a specified period of time which may lapse either before or, in the case of warrants to purchase common stock, on or after the maturity of the debt security. Warrants are usually detachable and may be traded independently of the debt security. Effectively, warrants are long-term call options

Weighted average return

A rate of return that is weighted to take into account the relative sizes of the various assets or funds which make up the sample

Weighting

Proportion of an index or portfolio made up of an individual or group of items, usually expressed as a percentage e.g. the percentage of a portfolio invested in a region or in any one stock. See also underweight and overweight

Withholding tax

A tax deducted from foreign investment income. The tax can often be claimed back, either at source or via a reclaim process

X - There are no entries for this letter

Yield

A measure of the income return earned on an investment. In the case of a share the yield expresses the annual dividend payment as the percentage of the market price of the share. In the case of a property, it is the rental income as a percentage of the capital value. In the case of a bond the running yield (or flat or current yield) is the annual interest payable as a percentage of the current market price. The redemption yield (or yield to maturity) allows for any gain or loss of capital which will be realised at the maturity date

Yield curve

A curve showing the relationship between the time to maturity of a bond and its redemption yield. The yield curve can take different shapes:

1. Normal, or positive. In this case yields rise as maturities lengthen, since lenders would normally expect to be paid more for the greater uncertainty of lending money for a longer period.

2. Flat, when similar yields are observed for all maturities.

3. Inverted, or negative, when long bonds offer lower yields than short or medium bonds. Yields at the short end are influenced by interest rate expectations. Yields at the longer end are influenced by inflation expectations and the supply/demand balance.

Yield gap

The difference in yield between different assets; the most frequently quoted yield gap is that between gilts and equities

Yield spread

The difference in yields available on different types of bonds, for example government and corporate bonds

Yield to maturity

The annualised return (internal rate of return) that would be earned on a bond if held to maturity. Also see redemption yield

Z bond

See collateralised mortgage obligation

Zero-coupon bond

A bond which does not pay interest (coupon). It is issued at a discount to face value, and is redeemed at face value when held to maturity