Glossary of terms

• Alternative investments

  Moving beyond bonds and shares, alternative investments can include hedge funds, structured products, infrastructure funds, commercial property funds and commodity funds.

  Alternative investments are generally added to portfolios to provide diversification away from more traditional types of investment such as equities and bonds. They can incorporate more complicated underlying strategies and can be expensive.

• Bonds/fixed interest stock

  Bonds, or fixed interest stock, are investments bought for their steady (or fixed) income stream – usually in the form of interest. Issued by companies (or governments) as a form of borrowing, bonds are given ratings based on the risk of the borrower defaulting, or failing to repay the debt. Bond prices are typically expected to move by less than equity prices.

• Collective investment schemes

  Known in the US as mutual funds, collective investment schemes let investors combine their resources to buy pooled investments together. It is achieved through the medium of unit trusts, open-ended investment companies (OEICs) or investment trusts.

  Because limited resources are spread across a wider pool of investments, investors benefit from better diversification. They also benefit from the expertise of the fund manager running the scheme.

• Equity

  Equity investment generally refers to the buying and holding of company shares listed on a stock market. Investors buy shares in anticipation of income from dividends and capital gain as the value of the stock rises.

• Gilts

  Equity investment generally refers to the buying and holding of company shares listed on a stock market. Investors buy shares in anticipation of income from dividends and capital gain as the value of the stock rises.

• Hedge funds

  Hedge funds are investment funds where the managers use riskier trading techniques like short selling to achieve a higher or more predictable return. Because of the higher risks and high minimum investment involved, hedge fund investing is generally confined to wealthy individuals and companies.

• Infrastructure fund

  Infrastructure vehicles share some similarities to commercial property trusts. The infrastructure asset class covers a wide range of commercial assets, such as:

  • Hospitals
  • Schools
  • Police facilities

  For all infrastructure assets, the Government is effectively buying assets on a long-term hire purchase contract with an annual return to investors of around 8.5%.

  These funds have a high initial yield, good visibility of future income from top-quality sources, and some prospect of income growth over time.

• Investment trust

  A type of collective investment scheme, an investment trust is a public limited company that issues shares to raise funds and then invests the funds in specified securities.

  When investors wish to realise their investment, they have to sell the shares to other investors in the secondary market or wait for the investment trust to be wound up. This feature makes the investment trust ‘closed-ended’.

  Once the share issue has taken place, the size of the investment trust in terms of number of shares will not be changed. This is in contrast to unit trusts, which are ‘open-ended’.

• OEIC (Open-ended investment company)

  Designed to incorporate favourable aspects of both investment trusts and unit trusts, open-ended investment companies (OEICs) are collective investment scheme.

  Legally speaking, it’s a company that issues shares, like an investment trust. However, while an investor in an investment trust who wants to realise their investment has to sell their shares in the secondary market, investors in an OEIC can sell the shares back to the company, just as if it were a unit trust.

• REIT (Real estate investment trust)

  A real estate investment trust (REIT) is a tax-efficient property vehicle. UK property companies were allowed to convert into REITs in January 2007, which should allow them to pay out higher dividends to investors.

• Structured products

  Structured products are synthetic investment instruments specially created to meet the needs that cannot be met from the traditional financial instruments available in the markets.

  Structured products can be used:

  • As an alternative to a direct investment
  • As part of the asset allocation process to reduce risk exposure of a portfolio
  • To capitalise on a current market trend

  They can protect capital in a falling market, but conversely often don’t pay any income.

• Unit trusts

  Unit trusts are a type of collective investment scheme. Investors buy units in a unit trust, which then uses the money raised to invest in a range of specified investment areas. Investors can redeem their units by selling them back to the manager of the unit trust.

  This means the unit trust has to sell some investments to generate the cash needed to buy back the units. Unit trusts are therefore ‘open-ended’ with the changing size of the unit trust determined by the level of new units purchased relative to units redeemed.

Investment terms

• Benchmark

  A benchmark is a standard against which the performance of a security, index or investor can be measured. Portfolios can have ‘customised’ benchmarks comprising fixed percentages in a basket of indices.

• Capital return

  Capital return is the return on capital invested excluding dividend and interest income generated. In other words, it shows how much the capital has moved adjusting for money added or withdrawn.

• Discounts and premiums

  Investment trust prices are ultimately determined by supply and demand from investors. This means they can trade at a different value to that of the underlying assets. If the price is below the asset value, the investment trust is said to be trading at a discount.

• p/e ratio

  The price-to-earnings (p/e) ratio is worked out by dividing the share price (p) by the company's earnings per share (e). The higher the p/e ratio, the higher the value of the shares.

• Redemption/maturity

  Bonds/gilts have set dates at which the borrower will repay the money, known as the redemption date. The lender (investor) will usually get back £100 for every 100 units of stock. The maturity of a bond or gilt shows the length of time until it is redeemed.

• Strategy and tactics

  Strategy describes the way in which the long-term objectives of the client are met. A fund manager agrees a blend of assets with the client, which is often also used to form the benchmark for performance measurement purposes.

  Tactics describe short-term positions that the fund manager may take from time to time to invest above or below the agreed long-term strategic positions with the aim of producing higher returns over time.

• Total return

  Total return is the return on capital invested including dividend and interest income.

• Volatility

  Volatility is the relative rate at which the price of a security moves up and down. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility. Volatility also measures the size of the price move.

• WM

  WM is a company that provides performance comparisons between charity portfolios with similar investment criteria. WM’s quarterly performance numbers are generally accepted as an industry standard.

• Yield

  The percentage return paid on a bond or share in the form of interest or dividends relative to the price of that bond or share. The yield of something will change if the income payment changes or the price changes. This means that a falling yield does not always show falling income; it could also show a rise in the price of the asset.