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Here you’ll find a simple explanation of some of the most commonly used investment terms. If there is any other financial jargon you want translated, please call our Customer Service Team free on 0800 597 2525 or email us at firstname.lastname@example.org and they will be pleased to help.
Morningstar divides stocks into 11 sectors according to their primary business, grouped into three larger Super Sectors. The Communication Services, Energy, Industrials and Technology sectors make up the Sensitive Super Sector; Healthcare, Consumer Defensive and Utilities make up the Defensive Super Sector; and Basic Materials, Consumer Cyclical, Financial Services and Real Estate form the Cyclical Super Sector.
Because sectors can differ greatly in their characteristics, comparing a Fund with its sector rather than the market as a whole is generally a better way of putting it in the proper context.
A Sector Fund is one which invests in a specific industry. For example a Global Healthcare Fund invests in healthcare companies around the world.
Instruments traded on the stockmarket. These are usually Shares or government bonds.
Stock Exchange Daily Official List numbers issued for Unit Trusts, OEICs and Shares. SEDOL numbers are unique numbers allocated to UK (and Irish) securities which enable them to be easily identified by stockbrokers and market makers. The numbers are allocated by the UK Stock Exchange. SEDOL numbers (and ISIN numbers) are also quoted in the Financial Times.
An OEIC sub-Fund can have a range of share classes. Each class can have different characteristics such as charging structures, currencies or choice of distributions.
A scheme enabling investors to exchange existing holdings for Shares in an OEIC. These schemes can often be of great benefit as some Shares can be sold without paying dealing expenses.
Either income shares or accumulation shares.
These are stakes in the ownership of companies. Shares traded on the stock market are also known as equities. Dividend income is usually paid to shareholders twice a year, although it is not guaranteed (overseas dividend income may be paid more or less frequently). There is no maturity of redemption date and shareholders not wishing to hold the Shares any longer must sell in the market. Shares have tended to provide greater returns than bonds or deposits over most periods of five years or more.
This is a commonly-used measure which calculates the level of a Fund's return over and above the return of a notional risk-free investment, such as cash or Government Bonds. The difference in returns is then divided by the Fund's standard deviation - it's volatility, or risk measurement. The resulting ratio is an indication of the amount of excess return generated per unit of risk.
Sharpe is useful, when comparing similar portfolios or instruments. There is no absolute definition of a 'good' or 'bad' Sharpe ratio, beyond the thought that a Fund with a negative Sharpe would have been better off investing in risk-free government securities. But clearly the higher the Sharpe ratio the better: as the ratio increases, so does the risk-adjusted performance. In effect, when analysing similar investments, the one with the highest Sharpe has achieved more return while taking on no more risk than its fellows.
Short dated government stock (gilts), i.e. with a life of less than five years.
This is the European (offshore) version of an 'OEIC' – it is an investment company that is 'open-ended’ (i.e. its Shares can be bought or sold on any dealing day).
Instead of having an Authorised Corporate Director (ACD), a SICAV tends to have a board of individual directors, which may or may not appoint an investment manager.
For each OEIC Fund there is one single (mid) price for buying and selling Shares.
A single price is calculated by taking the average of the buying and selling prices of each of the assets held in a Fund (their mid market prices). With the single pricing system, any initial charge the manager may take is charged separately, rather than being included within the difference between the buying and selling prices (the spread) which is the case with dual pricing. An effect of the single pricing system is a possible dilution in the value of a Fund when investors buy and sell Shares.
This group includes any Fund that invests according to noneconomic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views
For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. This group also includes funds that avoid investing in companies involved in promoting alcohol, tobacco, or gambling, or in the defense industry.
A Fund that avoids investing in assets that are seen as harmful to society. See also 'Ethical Funds'.
A ‘soft close’ is a term that is used to cover a variety of actions that an investment group takes to try and stop a Fund becoming too large. Read more
Our research partners Square Mile carry out in-depth interviews with Fund Managers and award ratings (AAA, AA, A, R and P) to less than 10% of the universe of over 3,000 Funds. Their research process focuses on: manager and environment, investment philosophy and objectives, investment process, portfolio construction, management of risk and value for money. The higher the ‘A’ rating the greater the confidence Square Mile have in the Fund consistently meeting its objectives. R is for high quality Funds in uniform sectors, mainly passives. P is for Positive Prospects which have not yet been tested in all environments.
This stands for Synthetic Risk Reward Indicator. It was first proposed by the European SEcurities and Markets Authority (ESMA) and its aim is to provide a simple measure of risk across all Funds. This indicator is typically in the Key Investor Information Document (KIID) from a scale of 1 to 7, with 1 being typically lower risk and 7 being higher.
This indicator is calculated using historical data and so future indications cannot be guaranteed as it may change over time.
An investor who applies for a new issue of Shares with the intention of selling them (at a profit) as soon as the secondary market starts dealing.
A tax payable on purchases of UK equitities. In addition, in certain circumstances an authorised investment Fund may pay a small, additional amount of SDRT calculated on the basis of transactions in the Fund units or shares, and the proportion of taxable assets of the Fund.
The standard deviation measures how much a Fund’s total returns have varied in relation to its historic mean, usually calculated on the most recent 36 monthly returns. It is the most common risk measure used by investors as a gauge for the amount of expected volatility. A volatile Fund will have a high standard deviation while a stable Fund will show a low standard deviation. The standard deviation is expressed in percentage terms, like the returns.
With single pricing, a mid-market price is quoted for all buying and selling and to counteract dilution of the Fund, a dilution levy may be charged in addition.
Morningstar's corporate Stewardship Rating represents an assessment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts assign one of three stewardship ratings: "exemplary", "standard", and "poor". Analysts judge stewardship from an equity holder's perspective. Ratings are determined on an absolute basis. Companies are judged not against peers within their industry, but against ideal stewardship of shareholder capital. Most companies will receive a standard rating, and this should be considered the default rating in the absence of evidence that a management team has made exceptionally strong or poor capital allocation decisions.
A Stock Transfer (also called an In Specie Transfer or Re-Registration of Assets) is when Funds or Shares that you own are transferred to a different intermediary or provider without the need to convert them to cash. There will be a change of nominee account but you remain the beneficial owner of the assets. Read more here
An OEIC can be made up of a single Fund or a series of Funds (sub-Funds) under an umbrella OEIC.
These are corporate bonds issued by companies with lower credit ratings and therefore considered to offer high risk, but with the potential of higher rewards.
A firm which enables you to buy and sell a range of Funds from different providers. They are also called "Fund Platforms".
Swinging single pricing is where a Fund has one price at which investors buy and sell Shares on any given day. Unlike the standard mid-market single pricing system, however, the single price can be swung higher or lower at the discretion of the manager in order to counteract the effect of dilution on the Fund. This ‘swing’ is called a dilution to adjustment.
When you move an investment (or part of it) out of one Fund and into another.
The Synthetic Risk and Reward Indicator (SRRI) is a measure of risk calculated by the Committee of European Securities Regulators (CESR). It divides the annualised volatility of a Fund’s total returns over the past 5 years into 7 categories with 1 representing the lowest volatility (or risk) and 7 the highest.