D
Debt to Equity
Total debt as a percentage of total common equity.
Decile
1st decile means ranked in the top 10% of similar funds, 2nd decile means ranked in the next 10% of similar funds, and so on.
Default
The failure of a bond issuer to pay promptly interest (coupon) or principal when due.
Depression
A prolonged slump in economic activity, characterised by rising unemployment and serious falls in production and consumption of goods.
Derivatives
A collective name for futures, options and warrants.
Discount
Describes the situation when the share price of an investment trust is less than the Net Asset Value (NAV) of the share. Premium is the reverse.
Dividend
The amount a company pays to shareholders from after-tax earnings.
Dividend Yield
The return on a share calculated by dividing the dividend rate by the market price.
Drawdown
This word has two meanings in the context of pensions and investment:
1. Traders uses it as a synonym for reduction or loss in value.
2. Gray & Associates use this term to describe the annual withdraw of income from an unsecured pension i.e. monthly income from the balance of the fund which remains invested after the tax-free cash of 25% has been taken.
Duration
A measure of the sensitivity of bonds to changing interest rates. Duration takes into account not only the redemption date but also the dates on which interest (coupon payments) are paid and the amount of such interest. Duration is an important measure of the interest rate sensitivity of a fixed interest portfolio and a more sophisticated measure of the maturity of the holdings in that portfolio.
E
Earnings Growth
The average annual growth of earnings over a trailing three years.
Earnings Yield
The annual earnings received per share divided by the share price.
EBITDA
Earnings before Interest, Taxes, Depreciation and Amortisation – an indicator of a company’s financial performance.
Emerging Markets
Financial markets in countries with developing economies, where industrialisation has commenced and the economy has linkages with the global economy. The financial markets in these countries are immature compared to those of the world’s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets can provide very high returns but investors are subject to higher risk and greater volatility.
Equity
See Shares.
Equity Risk Premium
The difference between the rate of return available from risk-free assets (such as government bonds) and the return anticipated from taking on the risk inherent in more volatile investments, such as shares.
Ethical Investment
An investment approach which takes into account considerations other than solely the financial return potential of particular investments. An ethical portfolio might, for example, avoid investing in alcohol or tobacco.
Exchange Rate
The price of one currency in terms of another currency.
Exchange Traded Funds (ETFs)
An ETF is a pool fund invested with a stated investment objective.
For more detailed information, please click here.
Exposure
A word used by fund managers that means they have invested in a particular share, asset class or industry.
F
Fixed Interest
Income from bonds. It remains constant and does not fluctuate, although the price of the bond does.
Floating Rate Notes (FRNs)
Floating rate notes are long-term debt securities for which the interest rates are adjusted periodically in line with a benchmark interest rate. FRNs appeal to investors who might otherwise be reluctant to commit funds to fixed interest investments for lengthy periods in times of fluctuating interest rates. Typical investments for a cash unit trust/OEIC.
Foreign Sales/Total Sales
International sales as a percentage of net sales.
Financial Services Authority (FSA)
The FSA is an independent body that regulates the financial services industry in the UK.
FTSE Index
Abbreviation for Financial Times Stock Exchange Index. The FTSE 100 Index covers the movements of the 100 largest public companies traded on the London Stock Exchange. The FTSE All-Share Index is a broad index based on 98% of all UK listed companies, in terms of market capitalisation.
G
Gearing
(a) Borrowing money to increase returns and increase assets. A method used by investment trusts to generate superior returns.
(b) The ability to increase exposure by investing in futures contracts without making the underlying cash available. For investment trusts, the company has one or more classes of borrowing, or shares, that rank in priority to the ordinary shares as to capital and/or income. These are known as ‘prior charges’. The gearing figure published indicates the extra amount by which shareholders’ funds would rise or fall if the total assets were to rise or fall. A figure of 100 means that the company has no gearing. A figure of 115 means the company would be 15% geared if fully invested. If the total assets were to rise or fall, shareholders’ funds would rise or fall by 15% or more.
Gilts
Bonds issued in the UK by the Government.
Gross Domestic Product (GDP)
A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. GDP is one of the main measures of the health of an economy.
Gross National Product (GNP)
GNP is a measure of an economy’s output of goods and services which includes GDP plus income earned by residents from overseas investments, less income earned within the domestic economy by overseas residents.
Gross Redemption Yield (GRY)
The total return for a share or bond that includes the expected income and the capital returned, which may include capital growth, over its life.
Growth Investing
An approach to investment that concentrates on companies which have, or are expected to, increase their net profits faster than the market as a whole.
Growth Stock
A company that is expected to produce more and more profits and exceed the average returns of the market over time.
H
Headline Inflation
The published overall inflation rate, unadjusted for non-economic factors, as opposed to underlying inflation.
Hedge Fund
A type of investment scheme in which the fund manager can use a number of specialist investment techniques, including the use of derivatives, short selling and borrowing to generate a higher return or make gains despite a falling stock market.
Hedge/Hedging
To offset the risk of one investment activity by carrying out another, usually in a related market place.
Hurdle Rate
The rate of growth of an investment trust’s assets needed to repay any preference shares.
I
Income Shares/Unit
A type of share entitling the income derived by a fund to be distributed to investors.
Income to Sales
The ‘net margin’. Annual Net Income before Dividends (plus Policyholders’ Surplus for insurance companies), divided by Annual Net Sales.
Index Fund (or Tracker Fund)
Its investments are designed to reflect the nature of a specified index, so a fund may be designed to track the FTSE All-Share Index. Three main methods can be used to build up a portfolio and the success is measured by the smallness of the tracking error of the fund.
Individual Savings Account (ISA)
Tax-privileged accounts for savings and investments with two components. For the 2010/11 tax year, a maximum of £10,200 can be invested. For more detailed information, please click here.
Inflation
A situation where an economy shows increasing prices of goods and services. Increases in productivity offset the adverse effects of the rise in prices.
Information Ratio
The Information Ratio is a risk-adjusted return measure of the amount of value added to a portfolio relative to a benchmark by active management. A positive information ratio indicates that the manager’s stock selection and other decisions, adjusted for risk, have had a positive impact on performance relative to the benchmark. A negative information ratio indicates that the manager’s decisions, adjusted for risk, have had a negative impact on performance relative to the benchmark. Mathematically, the information ratio is defined as excess return above benchmark divided by tracking error. The higher the information ratio, the better it is. It is generally considered that a figure of 0.5 reflects a good performance, 0.75 is very good, 1.00 outstanding. This is particularly useful when comparing a group of funds with similar management styles and asset allocation policies. If two funds have near-identical Alphas, the higher information ratio identifies the manager who has been more skilful in betting on stock-picks that deviated from the benchmark or index. As ever, the R-squared correlation between the fund and its benchmark must be strong if any discrete reliance is to be placed upon the information ratio.
Interest Rate Risk
The risk for fixed interest securities, and borrowers with floating rate loans, when interest rates fluctuate. As interest rates rise, the market value of fixed interest securities declines.
Investment Grade
In the case of fixed income, a bond with a credit rating of BBB or higher. Credit ratings are issued by agencies, such as Standard & Poor’s (S & P) and Moody’s and are based on their assessment of the company’s ability to pay the interest and repay the par value of that particular bond.
Investment Trust
A public company which invests in the shares of other companies. They are collective investment vehicles which pool investors’ money, but they have a fixed number of shares (see Closed End Fund). Investment trusts can borrow money to enhance market gains or build that borrowing into their make-up.
J
Jensen’s Alpha Ratio
This is a risk-adjusted measure used to gauge the extent to which a manager has added value to the returns that could have been expected from a benchmark portfolio with the same degree of sensitivity to movements in the market (Beta). It is calculated by subtracting the fund’s Beta from its average return in excess of the notional risk-free rate, then multiplying the result by the benchmark’s average return in excess of the risk-free return.
It is designed to be a test of whether a fund has achieved a better performance than its Beta would suggest; a positive Jensen Alpha indicates an active management style with superior stock-picking ability; a negative figure is produced if returns are less than the fund’s Beta. In effect, the measurement determines how much extra has been generated from active management in comparison with returns that would have been achieved anyway, while carrying the same level of market risk. Finally, since Jensen’s Alpha is calculated by reference to a fund’s Beta, a strong R Squared correlation between the fund and its benchmark is important.
Junk Debt
A bond rated ‘BB’ or lower because of its perceived high default risk. These are also known as ‘high yield’ bonds and tend to pay a higher coupon than an investment-grade security.
