GLOSSARY

We make every effort to communicate in clear, jargon-free language. This isn’t always easy when writing about the world of investing.

However hard we may try to simplify jargon, some financial concepts will inevitably need a little more explanation. We have prepared a guide to our funds for private investors, as well as a glossary of some of the more technical terms that are commonly used when talking about investments.

If you are unsure about the suitability of an investment for your needs, or you do not understand a technical explanation, we always recommend that you speak to a financial adviser.

Absolute Return

Describes the return (or objective) of an investment in absolute terms rather than relative to, say, inflation, a benchmark index or another type of investment. For example, if a fund investing in UK equities returns 10% over a year, that is its absolute return. If the UK equity market as a whole – perhaps represented by the FTSE All-Share Index – returned 7% in the same year, the relative return of the fund would be 3%.

Acceleration

A ranking assigned to stocks that is based on the relative rate of change in stock prices over a 12-month period.

Active asset allocation

Strategy where the manager makes specific investments away from the benchmark with the goal of outperforming an investment benchmark index.

Alpha

Alpha measures the relationship between a portfolio’s overall performance and the proportion of that performance achieved by virtue of market movements alone. In other words, it is a measure of the portfolio manager’s added value.

Alternative investing

Investments such as hedge funds and commodities. These are less evident in traditional portfolios, which focus on equities, bonds and cash.

Behavioural finance

The study of the influence of psychology on the behaviour of investors and the subsequent effect on financial markets.

Benchmark

A standard against which the performance of a security or fund can be measured.  The benchmark could be an index or the average for all similar funds, also known as the sector average.

Bottom-up analysis

The search for outstanding performance of individual stocks before considering the impact of economic trends. The companies may be identified from research reports, stock screens etc.

Cash flow

The amount of cash a company generates and uses during a given period.  Cash flow can be used as a measure of a company’s financial strength.

Core portfolio

A portfolio comprising (generally) the bulk of a fund’s assets, which is invested in a highly controlled fashion in an attempt to secure the fund’s liabilities with a reasonable degree of confidence. The balance may then be invested in one or more satellite portfolios, which may be invested more aggressively.

Default

The failure of a bond issuer to pay interest or capital when due.

Defensive Investment

An investment that provides stable earnings and/or reliable distributions regardless of the state of the market as a whole.

Derivative

A derivative is a contract between two or more parties whose value is derived from a related asset.

Distribution

The income received from an investment, usually in the form of dividends in the case of share-based investments, or interest in the case of cash or bonds.

Dividends

Payments made to shareholders, based on the companies underlying earnings.

Duration

The remaining term (or ‘life’) of a bond in years, adjusted for the timing of future cash flows.  In general, the shorter the duration, the lower is the bond’s volatility.

Euroland

A geographic and economic region consisting of all the countries in the European Union that have fully incorporated the Euro as their national currency.

Eurozone

A geographic and economic region consisting of all the countries in the European Union that have fully incorporated the Euro as their national currency.

Focus process

A way of managing money where the portfolio manager holds a small number of stocks in which they have a very high conviction rather than spreading their risk across a larger number of companies.

Fundamentals

Information relating to the economic well-being of a company such as revenue, earnings, assets, liabilities and growth. These factors are used to determine the worth of an investment in fundamental analysis.

Growth investing

A strategy in which an investor seeks out stocks deemed to have good growth potential. In most cases, a growth stock is defined as a company whose earnings are expected to grow at an above average rate compared with its industry or the overall market.

Hedge funds

Hedge funds seek to make money irrespective of the movement in stock markets. Hedge funds are aimed at experienced investors and as such are allowed to pursue aggressive strategies, often using financial instruments unavailable to authorised funds.

High yield

The generic name for bonds rated as below investment grade by the major credit rating agencies.  High yield bonds offer higher interest payments to compensate for the perceived greater default risk.

Index

An imaginary portfolio of securities representing a particular market or portion of it, often used as a benchmark.  An index is usually expressed in terms of change from an arbitrary base value, so the percentage change is generally more useful than the numeric value.

Indices

An imaginary portfolio of securities representing a particular market or portion of it, often used as a benchmark.  An index is usually expressed in terms of change from an arbitrary base value, so the percentage change is generally more useful than the numeric value.

Inter-dealer broker

Acts as an intermediary between brokers and market makers who wish to buy or sell large quantities without revealing their identities.

Investment grade

A bond rated BBB (Standard & Poor’s) or Baa (Moody’s) or higher and traditionally regarded as being of sufficient quality for long term investment.

Liquidity

The degree to which an asset or security can be converted quickly to cash, or bought or sold in the market without affecting its price.

Long position

The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

Long-dated

Generally refers to Bonds which will mature in 15 years or more.

Macro (economics)

The field of economics that studies the behaviour of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

Mandate

This is simply a written agreement between Skandia Investment Group and the fund manager on how we want our investment to be managed on our behalf.  This allows us to control the investment boundaries including the types of investment and the level of risk we want the manager to take.

Market maker

A dealer whose purpose is to “make” the market for a particular stock and therefore maintaining market liquidity.

Momentum

Investment based on a rising trend in a company’s earnings or price movements.  A momentum manager will seek to ride out the trend and sell the stock once it has peaked.

Overweight

Refers to an investment position that is larger than the generally accepted benchmark.

Peer group

A representative group of competitors that may be used to analyse a company’s performance. In the context of investment management, the performance of a particular fund manager is often compared with the peer group as well as the relevant index or benchmark.

Position

A stock or sector weight which is at variance to the market average, also known as a ‘bias’.

Price/Earnings ratio (P/E)

The ratio of a company’s current share price to its earnings per share.  In general, a high P/E means high projected future earnings.

Qualitative analysis

Analysis that uses subjective judgment in evaluating securities based on non-financial information such as management expertise, strength of research and development and employee relations.

Quartile

A statistical term which in this context describes the performance of an investment fund relative to other investment funds in a group or sector. Each quartile contains 25% of the funds based upon the performance of each fund and how it compares to other funds in the group. The funds are ordered by performance with the top performing 25% of funds making up the 1st quartile and the worst performing 25% of funds making up the 4th quartile.

Relative return

The return that a fund achieves over a period of time compared to a benchmark. The relative return is the difference between the absolute return achieved by the fund and the return achieved by the benchmark.

Relative returns are most often used when reviewing the performance of a mutual fund manager. Because holders of mutual funds are charged management fees, they expect a manager to achieve returns higher than the benchmark index. For example, if the fund you are holding achieves an absolute return of 12% over the past year while the benchmark index provides a return of 15%, then the fund has achieved a relative return of -3% for the year.

Rights issue

When a company offers new shares pro rata to its own shareholders, usually at a discount.

Sentiment

A general term used to describe indicators that gauge investor attitudes toward the market.

Short position

The purchase of a contract against a security, commodity or currency, with the expectation that the asset will fall in value.

Stop loss mentality

A ‘stop loss’ mentality is one in which a manager avoids becoming too attached to a stock and holding on to it for too long in the anticipation that it will recover.

Style

The investment approach a manager takes to achieve his or her objectives.  There are many different kinds of style, but the two most common are value and growth.

Subordinated

Debt which ranks after other debts should a company fall into receivership or be closed.

Thematic

A fund manager may construct a portfolio by weighting it towards particular industries or sectors expected to benefit from demographic, social or other changes.  This is known as thematic investing.

Top down

An investment approach where an investor looks at a country’s economy before considering an industry to invest in. Next, they determine what industries or sectors will return well because of the economic conditions and, finally, they then buy stocks that are attractive within that industry.

Total return

When measuring performance, the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time.

Tracking error

The degree of proximity with which an actual portfolio follows a representative market index. Technically the tracking error is represented by the standard deviation of the differences in return between the portfolio and theindexTracking error measures the likelihood (based on historical data) of actual returns differing from index returns.

Underweight

Refers to an investment position that is smaller than the generally accepted benchmark.

Unrated bond

A bond which has not been given a rating by any of the major credit rating agencies.

Value investing

A value investor is one who seeks to buy shares when they are under priced and to take profits when they appear over valued. The P/E (Price/Earnings Ratio) is a key measure for the value investor. Deep value refers to stocks with particularly strong value characteristics.

Volatility

Volatility is a statistical method that measures how much a series of values has moved up and down around its average.  The higher the volatility number, the less consistent the historical performance has been.

Yield

The annual rate of income generated from a share-based investment in the form of dividends, or from a fixed interest investment in the form of interest, expressed as a percentage of the market price.

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