Uncovering the jargon

Getting to grips with the language of investment

Accumulation units/shares
With this type of unit/share any income earned on your investment remains accumulated within the price of your units/shares, increasing the value of your holding.

Active managed funds
Funds which aim to outperform a benchmark index, such as the FTSE 100. The aim is for the fund manager to invest the fund’s assets in such a way that the fund will generate better returns than its benchmark.

Authorised Corporate Director (ACD)
The term used to describe the manager of an OEIC fund. An ACD has the same role and responsibilities as their unit trust equivalents, known as a fund manager.

Annual management charge (AMC)
A fee paid to the fund manager once a year which covers the cost of investment management and administration. It is normally 0.75per cent - 1.5 per cent p.a. and is charged to the fund. The AMC forms part of the total expense ratio (TER) of a fund.

Annual Report
Includes details of the fund’s investments and how it has performed with more general financial information relating to the fund. It is available from your fund manager at the end of each financial year.

Assets
The “building blocks” in which a fund invests, for example stocks and shares, cash, fixed interest securities and property funds.

Asset allocation
A term to describe how your money is invested. In most cases, the fund manager will spread money across a range of different assets and companies in order to diversify your holdings and help to spread risk.

Authorised investment fund
A unit trust or OEIC that is regulated by the Financial Services Authority (FSA) for promotion to the general public in the UK. All unit trusts and OEICs which are on sale to a retail investor in the UK are authorised by the FSA.

Balanced Funds
A type of fund which restricts its investment in equities, to a maximum of 85 per cent of the fund’s holdings. The remainder can then be invested in other types of investments such as bonds. This type of fund aims to benefit from the performance of its other investments when equities are not performing well and vice versa.

Benchmark index
A stock market index, such as the FTSE 100, which is used by fund managers as a standard to measure the overall performance of their funds. Fund managers try to outperform any gains made by their fund’s benchmark index.

Bid price
Unit trusts and OEICs can have separate prices for buying and selling units/shares. Such funds are known as dual-priced. The bid price is the price at which units/shares are sold and are lower than the offer or buying price.

Bid/Offer spread
For dual-priced funds this is the difference between the buying and selling prices of your units/shares. The buying or offer price is normally higher than the selling or bid price as it will include an initial charge to be paid to the fund manager for setting up and administering your units/shares.

Blue chip
Large well established companies which are generally considered to be stable. In the UK, such British companies are usually listed on the FTSE 100 index.

Bonds
Also known as fixed interest securities, bonds are investments which pay a fixed rate of interest and have a fixed term. Governments or companies may issue them. Those issued by governments are known as gilts. Not to be confused with investment bonds issued for individual investors usually by insurance companies.

Cancellation price
For dual-priced funds this is the lowest possible price at which an investor can sell units/shares back to the manager under FSA regulations. It excludes exit charges. The cancellation price represents the proceeds the fund would receive if the fund’s assets were sold.

Capital
The amount of money you initially put into your savings or investments before it receives any interest or capital growth. In a fund “capital” can also refer to the assets held by the fund excluding any income the fund may receive.

Capital gains tax
Tax paid to HM Revenue and Customs on any increase in the value of your savings or investments. The tax is payable on the profits you make when you sell your units/shares. There is an annual exemption limit; for the current 2008/09 tax year, this is £9,600.

Capital growth
The increase in the value of your investment, excluding any income.

Cash
In saving and investment terms “cash” refers to a bank or building society deposit account in which your capital is secure. It can also refer to money market funds.

Cash funds
Alternative name for money market funds.

Cautious Managed Funds
Funds which restrict their investment in equities to a maximum of 60 per cent of the fund’s holdings. The remainder is then invested in other types of assets such as cash and bonds. This type of fund is considered to be more ‘cautious’ than funds which invest more in equities, as their portfolios are diversified across less risky investments.

Child Trust Fund (CTF)
A government initiative to provide children who receive child benefit with a long-term savings account. Eligible children will receive a voucher worth at least £250 to invest in a CTF. In addition, up to £1,200 a year extra can be invested in each account and the money cannot be withdrawn until the child reaches 18 years of age. Accounts can invest in a whole range of assets.

Closed ended funds
Unlike unit trusts and OEICs, which are open-ended, these are funds which only have a fixed number of units/shares in issue at any time. The price of units/shares in such funds, which include Investment Trusts, will fluctuate according to investor demand rather than as a result of changes in the value of their underlying assets.

Collective investment schemes
Funds which pool investors’ money and invest on their behalf. This term refers to unit trusts and OEICs.

Compounding
The process by which your investment grows in value over time with reinvested interest or dividends.

Corporate bonds
Fixed interest securities issued by public companies.

Creation price
For dual-priced funds this is the highest possible price at which an investor can buy units/shares from the manager under FSA regulations. The initial charge is not included. The creation price represents the cost of buying the fund’s assets.

Credit ratings
Ratings provided by specialist credit agencies which assess the likelihood of companies being able to meet their financial obligations. Ratings range from AAA (the most secure) to D (the least secure); the greater the credit risk the lower the rating.

Credit Risk
Usually used when referring to investment in bonds, credit ratings agencies estimate the likelihood that the issuer of the bond will not be able to keep up your interest payments or repay your capital at the end of the holding period. ‘Triple A’ or ‘investment grade rated’ are considered to be the lowest credit risk while non-investment grade also known as junk bonds and are rated triple B-D are the highest credit risk.

Currency risk
When the manager buys investments in currencies other than Sterling there is a risk that the value of those investments will change due to changes in currency exchange rates.

Custodian
Usually a major banking group, the custodian is appointed by the fund’s trustee or depositary to safeguard the fund’s assets.

Default risk
The risk that a company may not be able to pay you back the money you have invested.

Deposit Account
A bank or building society account which earns a steady rate of interest and in which your original capital is secure. The interest rates paid vary depending on the length of time you are prepared to lock your money away for.

Depositary
Responsible for overseeing the fund manager’s activities in relation to an OEIC. Usually a large bank, the depositary must be independent of the fund manager where the fund is authorised by the Financial Services Authority. It acts in the interests of the investors, owning the investments in the fund on their behalf. It also ensures that the fund is invested according to its investment objectives and that the manager complies with the regulations. The unit trust equivalent is known as the trustee.

Derivatives
A general term for futures and options.

Discount broker
A service provided by an intermediary where no advice is taken. Also known as an “execution only” service, the broker will buy a product on behalf of an investor after the investor has chosen which product they would like to purchase. Discount brokers usually waive or discount the initial charge, as no advice has been provided. This service is often available by post and rather than pay commission you are charged a one off transaction charge.

Distributions
Income paid out from a unit trust or OEIC in the form of interest or dividends.

Diversification
A term used to describe the spreading of risk by investing in a number of different companies and assets. Doing so will mean that you won’t have all of your eggs in one basket.

Dividends
Income paid on shares out of company profits.

Dividend distributions
Income paid out by unit trusts and OEICs that invest mainly in equities.

Dual pricing
Both unit trusts and OEICs can be dual-priced, such funds have an offer price at which you buy, and a lower bid price, at which you sell. The difference between the two prices is known as the bid/offer spread. The buying price is normally higher than the selling price as this includes the initial charge to be paid to the fund manager.

Effective Yield
Method for calculating bond income which takes account of all expected cash flows from a bond over its lifetime.

Equities
Shares in a company (see also stocks and shares).

Equity exposure
Usually expressed in percentage form. This illustrates the proportion of a fund which is invested in stocks and shares (equities).

Ethical funds
Also known as Socially Responsible Investments (SRIs). These funds aim to avoid investing in activities which may be harmful to society, such as tobacco production or child labour. Some funds also aim to actively invest in companies which promote ethical policies such as recycling.

Ex-dividend (xd)
For funds, the period between its accounting date and when it pays out its income. If you buy a unit trust or OEIC in this period, you do not get the income, but if you sell, you do.

Exempt funds
Refers to funds that are only open to institutional investors which are exempt from paying capital gains tax, such as pension funds and charities.

Exit charge
Also known as a redemption charge. A charge taken by some fund managers when you sell your units/shares. In many cases, the charge will only be applied if you sell within, say, five years. Exit charges are usually applied instead of, rather than in addition to, an initial charge.

Expected income yield
An estimate of the income that you might earn in the coming year if you bought units/shares at the current price.

Expenses charged to capital
Expenses incurred by the fund can either be taken out of the income received by the fund or from the fund’s capital. Charging expenses to capital will increase the amount that can be paid out to investors as distributions but will reduce the capital value of the fund.

Fair value pricing
This is the manager’s best estimate of the value of one or more securities at the valuation point of the fund, with the intention of producing a “fairer” dealing price, where there is doubt over the validity of those prices.

Fettered funds
See “Funds of funds.”

Financial Ombudsman Service (FOS)
Customers with a complaint against a financial services firm can make a complaint to the FOS who will investigate on their behalf. If the company no longer exists or has become insolvent complaints should be referred to the Financial Services Compensation Scheme (FSCS).

Financial Services Authority (FSA)
The UK regulator for the financial services industry, which includes investment management companies, banks, building societies and insurers. The FSA has four statutory objectives; to maintain confidence in the UK financial system; to promote public understanding of the financial system; to secure the right degree of protection for consumers and to help reduce financial crime.

Financial Services and Markets Act 2000
The Act of Parliament which gave the Financial Services Authority its regulatory powers from 2001. These powers include supervision of regulated activities, the control of financial promotion, and the authority to regulate, investigate and discipline the financial services industry.

Financial Services Compensation Scheme
This scheme exists for claims against an authorised financial services company when it is unable to pay claims against it as it is insolvent or no longer trading. For companies still in business claims must be referred to the Financial Ombudsman Service.

Fixed interest securities
Assets which provide regular, fixed, interest payments and are issued by companies and governments. They include gilts and bonds.

Forward pricing
This is the most common method of pricing for authorised investment funds. Once the manager has received your instruction to buy or sell units/shares, the price of those units/shares will be determined at the next valuation point of the fund.

Free Standing Additional Voluntary Contribution (FSAVC) Schemes
Funds which permit people who are part of a company pension scheme to make additional contributions to a separate stand-alone scheme that can continue when you change employer.

FTSE 100 Index
British index on the London Stock Exchange which comprises the leading 100 UK Companies.

FTSE 250 Index
British index on the London Stock Exchange of the largest 250 companies by market capitalisation after those listed on the FTSE 100.

FTSE All Share Index
British index on the London Stock Exchange of all UK listed companies. Incorporates companies from the FTSE 100, FTSE 250 and FTSE Small Cap indices.

FTSE Small Cap Index
British index of the smallest companies by market capitalisation.

Fund manager
Manages the unit trust in accordance with the fund’s objectives and decides which assets to hold in order to meet those objectives. In an OEIC the manager is referred to as the Authorised Corporate Director (ACD).

Funds of Funds
Fund of funds are designed to increase diversification by investing in other funds.

Futures
Agreement to buy or sell a fixed amount of a particular asset at a fixed future date and a fixed price.

Gilts
Bonds issued by the UK government. Also known as gilt-edged securities. Along with bonds can be referred to as fixed interest securities.

Gearing
The amount a fund can “gear” is the amount it can borrow in order to invest. In unit trusts and OEICs borrowing is limited to 10 per cent of the fund’s value and is usually for the purpose of managing cash flow, rather than to increase the fund’s investment exposure.

Gross income
Dividends and interest paid out to you before income tax has been deducted.

Gross redemption yield
Usually used in bond investments. This yield seeks to indicate the total return you might receive from both income and capital growth (or loss) if you hold your investment over a ten-year period.

Guaranteed funds
Funds in which the manager promises to provide a specific minimum return, backed by a legally enforceable arrangement with a third party to guarantee that promise.

Half-yearly report
Also known as the “interim report.” It will include details of the fund’s investments and how it has performed with more general financial information relating to the fund (see also Annual Report). Your fund manager will send it to you during the financial year for the fund(s) that you hold.

Hedge funds
A fund, which uses an assortment of trading techniques and instruments to meet an objective of providing positive investment returns irrespective of the performance of stock markets.

Historic pricing
Where the price at which you buy or sell your units/shares is calculated at the last valuation point i.e. the fund manager uses the price set before they received your instructions.

ICVC
Investment Company with Variable Capital. Another term used to describe an OEIC. This term is used rarely but you may come across it in formal documents relating to an OEIC.

Income
The return on your investment that arises from dividends and interest earned by the fund.

Income tax
A tax payable to HM Revenue and Customs on any income you receive whether it is wages or income from investments and savings. Different rates of income tax apply; the one you pay depends on how much money you have coming in.

Income units/shares
This type of unit/share pays out to you on set dates each year any interest or dividends your investment makes.

Index/indices
A grouping of shares or fixed interest securities on the stock market which are often similar in size or represent similar industries. For example, the FTSE 100 index represents the largest 100 UK companies by market capitalisation.

Index tracking funds
Funds which aim to mirror the progress of a stock market index, e.g. the FTSE 100, by buying and selling shares in the same proportions as represented on the index. These are also sometimes called tracker, index or passive managed funds.

Individual Savings Account (ISA)
A tax efficient means of saving that replaced PEPs and TESSAs in April 1999. See “Tax Wrapper” for more information.

Inflation
A general rise in the level of prices on the high street. This is measured by the retail price index.

Inflation risk
The risk to your savings caused by rising inflation. If inflation rises but interest on your savings doesn’t keep up it can reduce the spending power of your money. A £1 coin will always be worth £1, but what you can buy with that coin will reduce with increased inflation.

Initial charge
A charge that is paid to the fund manager when you invest to cover their expenses, such as commission, advertising, administration and dealing costs.

Institutional investor
Institutions which invest, such as company pension schemes, as opposed to private individuals.

Instrument of Incorporation
This document forms the legal constitution for an OEIC fund and dictates much of how the fund will operate. The unit trust equivalent is known as the Trust Deed.

Interest
An amount, in percentage form, which a bank or building society will credit to you if you save with it in a deposit account or savings account. The amount paid to you will be a percentage of whatever capital you have in your account. Gilts and bonds also pay income in the form of interest.

Interest distributions
Income paid out by unit trusts and OEICs that invest predominantly in gilts and bonds.

Investment funds
A general term for unit trusts and OEICs.

Investment grade bonds
These bonds have a low risk of the company that issued them being unable to repay them. The most secure forms are known as “triple A” rated bonds. See “Credit Ratings.”

Investment trusts
Similar to unit trusts and OEICs in that they provide a means of pooling your investment but with a different structure and governed by different regulations. They are closed-ended funds and public listed companies whose shares are traded on the London Stock Exchange.

Junk Bonds
These bonds have a high risk of the company that issued the bonds being unable to repay them. They are lower rated, with a poor credit rating often as low as D. They are also referred to as “Non-investment grade bonds.”

Key Features Document
A document which must be offered to investors in Non-UCITS Retail Schemes (NURS) before or at the point of purchase. It summarises key information about the fund and provides details on risk and an illustration of the effects of charges both to the investor and the fund.

Life Insurance Products
Products which guarantee that a sum of money will be paid out to you after a set term or upon death.

Limited redemption funds
Funds which restrict when you can cash in your investment, usually by only having set redemption dates.

Manager
See “Fund Manager.”

Manager’s report
See “Annual Report” and “Half-Yearly Report.”

Market capitalisation
The value of a company obtained by multiplying the number of its issued shares by their market price.

Market risk
Investing in the stock market means that you can benefit from its growth potential. However, there is also a risk (market risk) that you could lose your money if the stock market in which you have invested falls in value.

Money market funds
Funds which invest in cash investments, such as bank deposits. Often referred to as “cash funds,” they offer higher returns than a building society account but still have the same level of security.

Multi-manager funds
Multi-manager funds are designed to increase diversification by outsourcing a pool of money for investment to a number of appointed managers.

National Savings and Investment (NS&I) Products
This range of products was created to provide a secure means of saving backed by the government, whilst providing the Exchequer with a source of funding. Products available through NS&I include premium bonds and cash ISAs.

Net income
Dividends and interest paid out to you after income tax has been deducted.

Non-investment grade bonds
These bonds have a high risk of the company that issued the bonds being unable to repay them. They are lower rated, with a poor credit rating often as low as D. They are sometimes referred to as ‘junk bonds.’

Non-UCITS Retail Schemes (NURS)
Unit trusts and OEICs which are based in the UK and sold only to UK investors. Such funds differ from UCITS funds in that they cannot be sold into Europe and they have different investment restrictions. The fund documentation also differs and at the point of purchase you may be given either a Key Features Document or a Simplified Prospectus.

OEICs
Open-ended investment companies. These are very similar to unit trusts, but are constituted as companies rather than trusts. They are the established structure in many other European countries and can be single or dual-priced.

Offer price
Some unit trusts and OEICs have separate prices for buying and selling units/shares. The offer, or buying, price is usually higher than the bid, or selling, price as it includes an initial charge.

Open-ended fund
Funds such as unit trusts and OEICs which expand and contract by issuing or cancelling units/shares depending upon demand.

Options
Provide the opportunity (a ‘right’ rather than an obligation) for the buyer to purchase or sell a certain number of shares, at a future date and a known price.

Overseas funds
Unit trusts and OEICs which are based outside of the UK (but within Europe) and which are authorised by the Financial Services Authority and sold into the UK via distributor status.

Personal Equity Plans (PEPs)
Tax efficient savings and investment plans which were replaced by ISAs in April 1999. As of April 2008 all PEPs were reclassified as ISAs.

Portfolio
Refers to investment holdings. It can either refer to the holdings within a particular fund or the range of investments held by an individual investor.

Pound cost averaging
Investing on a regular basis can iron out stock market fluctuations and can help you to avoid investing all of your money when the market is at its peak. Saving regularly enables you to buy more shares when the market and prices are low and less when the market and prices are high. Over time the cost of your units will even out and it is likely that you will end up paying below average prices for your units. This is known as pound cost averaging.

Preference shares
These are similar to bonds in that they usually pay a fixed rate of income. However, they pay it as a dividend rather than interest and are subject to the issuing company making sufficient profits.

Protected funds
Funds other than money market (cash) funds which aim to provide a return of a minimum amount of capital back to the investor, with the potential for some growth. Unlike guaranteed funds, they do not back their promise with a guarantee.

Provider
A financial company, in the case of unit trusts and OEICs, a fund management company, which provides financial products to members of the public.

Redemption charge
See “Exit Charge.”

Redemption date
Usually associated with gilts or bonds, the redemption date is the date set in advance when the gilt or bond will be repaid by the issuing government or company and you will receive your capital back.

Redemption yield
See “Gross Redemption Yield.”

Regulator
See “Financial Services Authority.”

Repurchase
The sale of units/shares back to the fund manager to realise/cash in the investment. It is also referred to as a redemption, although not to be confused with the redemption of a gilt or bond.

Retail investor
Term referring to members of the general investing public.

Return
The amount of income, capital growth or both that is generated by your investment.

Risk profile
This relates to how much risk you are prepared to take with your money. Generally the more risk you take, the higher the potential gain, but the more likely it is that you could lose some or all of your capital. Your risk profile may depend on your financial circumstances, as some people are able to take more risk than others.

Risk rating
See “Credit Rating.”

Running yield
Also known as income yield. The amount of income generated by a bond or gilt fund at the current time.

Sectors
Unit trusts and OEICs are divided into a variety of categories, known as sectors, to keep together funds of a similar type so that investors can compare funds with similar objectives and investment strategies. Categories include ‘Money market’ funds, ‘European’ funds, ‘North American’ funds etc.

Securities
Another name for investments such as stocks, shares and bonds.

Shares
The name given to a part of a company owned by an investor – the investor buys shares in the company. Is also used to describe the OEIC equivalent of a unit.

Short Report
Consumer friendly version of the long form annual report and accounts which focus on the fund’s activities over a given period. A version of the short report is sent out by the fund manager to all investors in a fund, with the longer version available on request.

Simplified Prospectus
Offered to all investors in UCITS funds (and in some cases NURS funds) before the point of purchasing units/shares. This document formally sets out details of the fund including its investment policy, charges and distribution dates. See also “Key Features Documents.”

Single pricing
Some OEICs and unit trusts have a single price at which investors both buy and sell. The initial charge is shown separately and is charged in addition to the unit/share price.

Socially responsible investment funds
See “Ethical Funds.”

Stakeholder
A government initiative which allows investors to access some investment products, including pensions, in a controlled risk, low cost way.

Stocks and shares
Also known as equities, this is the name given to a part of a company owned by an investor.

Tax wrapper
An extra layer which surrounds an investment product, sheltering it from paying certain taxes. Such wrappers include pensions, ISAs, PEPs and TESSAs.

TESSA
A type of cash account set up by the UK government in 1991. Interest earned on savings in a TESSA were exempt from paying income tax providing you held the account for at least five years. TESSAs were closed to new business in 1999 and were replaced by cash ISAs.

Total Expense Ratio
A calculation of costs expressed as a percentage. TERs provide investors with a clearer picture of the total annual costs for running a unit trust or OEIC. It consists principally of the “manager’s” annual charge, but also includes the costs for other services paid for by the fund, such as the fees paid to the trustee/depositary, custodian, auditors and registrar.

Tracker funds
See “Index Tracking Funds.”

Trust deed
This document establishes the legal constitution, structure and organisation of a unit trust. The OEIC equivalent is known as an instrument of incorporation.

Trustee
Responsible for overseeing the fund manager’s activities in relation to a unit trust. Usually a large bank, the trustee must be independent of the fund manager where the fund is authorised by the Financial Services Authority. It acts in the interests of the investors, owning the investments in the fund on their behalf. It also ensures the fund is invested according to its investment objectives and that the manager complies.

UCITS
A fund that can be marketed in all countries in the European Union. UCITS stands for ‘Undertakings for Collective Investments in Transferable Securities’ and is a European Directive which has been adopted in the UK. UK based UCITS funds are OEICs, with unit trusts abiding by the non-UCITS Retail Schemes (NURS) rules due to trust law being unrecognisable by other European Member States.

Unfettered funds
See “Multi-Manager Funds.”

Units
Unit trusts are divided into “units” of equal value, therefore an investor buys units in the unit trust. The OEIC equivalent is known as a share.

Unit linked policies
These are insurance products where you pay a premium which is then invested in a fund holding a range of assets, usually including equities and fixed interest securities. Part of the premium paid pays for life assurance. Unit-linked policies are similar to with-profits products but do not invest in as many assets.

Unit Trust
Private individuals pool their contributions with others, which combine to form a large fund. The fund invests in a spread of different assets to minimise the risk of loss. Also known as collective/pooled investments or investment funds. Unit trusts can be both single and dual-priced.

Valuation point
The name given to the time of day that unit trusts or OEICs are valued and then priced.

Warrants
A security that offers the owner the right to purchase the shares of a company at a fixed date, usually at a fixed price.

With profits
A with-profits fund is a pooled insurance product. With-profits funds pool together premiums paid by a number of investors, which the insurance company then invests in a very wide range of assets. (See “Unit-Linked Policies”).

Yield
The amount of income generated by a fund’s investments in relation to the price. Equity funds will quote net (after tax and charges). Fixed interest securities will quote gross.