Glossary

Active investment

The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund’s portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. They continuously monitor a stock’s price movements several times a day to take advantage of profitable conditions. The opposite of active management is called ‘passive management’ or ‘indexing’.

Assets

The underlying investments of a fund. These will vary by portfolio but may typically include Cash, Bonds, Property, Equities and alternative assets such as Commodities.

Asset allocation (also referred to as Diversification)

The process of splitting the funds available for investment across the various asset classes on a targeted basis (for example, Cash, Bonds, Property, Equities and alternative assets such as Commodities), in order to spread risk and avoid overreliance on any one asset for delivering positive returns. Each class of asset offers unique risk and return characteristics and will perform differently in any given set of market conditions. The investment manager aims to construct a portfolio of assets capable of delivering positive returns in a variety of market conditions and to balance the overall risk and return of the portfolio by apportioning the assets according to your investment objectives, risk tolerance, capacity for loss and timeframe.

Asset class(es)

The different types of investments investment managers can buy – for example, Cash, Bonds, Property, Equities and alternative assets such as Commodities. Different asset classes have different risk and return characteristics.

Capacity for loss

Your ability to withstand financial loss within your investment should the portfolio in which you are invested fall in value.

Capital markets

Markets for buying and selling equity and debts, involving channeling savings and investments between suppliers of capital, e.g. retail and institutional investors, and users of capital, e.g. businesses, government and individuals.

Discretionary investment service

A type of investment service whereby a professional manager takes responsibility for the day-to-day decisions over the type and quantity of assets held within an investor’s portfolio. All decisions and portfolio changes are made at the discretion of the investment manager based on their assessment of the investment markets and the wider economic outlook influencing the likely returns of each asset class – creating and maintaining a portfolio that is specifically tailored towards helping you achieve your investment objectives within a pre-determined risk profile.

Conversely, traditional financial advisers create ‘advisory portfolios’ for their clients and must seek their permission when they want to make changes to the make-up of the funds.

Diversification (also referred to as Asset allocation)

The process of splitting the funds available for investment across the various asset classes on a targeted basis (for example, Cash, Bonds, Property, Equities and alternative assets such as Commodities), in order to spread risk and avoid overreliance on any one asset for delivering positive returns. Each class of asset offers unique risk and return characteristics and will perform differently in any given set of market conditions. The investment manager aims to construct a portfolio of assets capable of delivering positive returns in a variety of market conditions and to balance the overall risk and return of the portfolio by apportioning the assets according to your investment objectives, risk tolerance, capacity for loss and timeframe.

Efficient Frontier

A concept of Modern Portfolio Theory. A portfolio is called ‘efficient’ if it has the best possible expected return for its level of risk. By combining assets in different proportions, starting at the left with the most conservative (100% Cash) and moving to the most aggressive (100% Equity), it is possible to tailor portfolios that provide the best opportunity of achieving desired returns at the lowest possible risk.

Execution only

A service or transaction undertaken upon the expressed instruction of a customer, whereby no financial advice has been requested, offered or provided in support of that service or transaction and all decisions regarding the suitability of that service or transaction have been made of the customer’s own volition.

Financial Conduct Authority (FCA)

The UK regulator of financial services created by the Financial Services and Markets Act 2000, responsible for promoting effective competition and ensuring firms operate with integrity and put their customers’ needs at the centre of their business. Regulates authorised investment funds, firms that manage authorised investment funds and that act as trustees, or depositaries or custodians to such funds. (Replaced the Financial Services Authority on 1 April 2013.)

Financial Ombudsman Service (FOS)

A free service established by the government to consider and resolve complaints in circumstances where a resolution cannot be agreed between a UK regulated financial service firm and a qualifying complainant.

Financial Services Compensation Scheme (FSCS)

A scheme designed to protect private individuals against losses from the failure of an authorised (i.e. regulated) business.

General Investment Account (GIA)

A General Investment Account (GIA) is an account used for housing various investments in one place, including Cash, Unit Trusts and Open Ended Investment Companies (OEICs). GIAs are often used as a ‘feeder’ account to fund an ISA up to the annual allowance and to also accept investment sums in excess of the annual ISA allowance. Unlike an ISA, a GIA does not attract favourable tax treatment.

Historical performance data

Extrapolation from historic databases reveals the past performance and volatility of different asset types. This information can be used to project the likely range of returns of an asset in the future. This approach can be used to aid decision-making but past performance should never be taken as a future prediction or a guarantee of investment performance. The actual return you receive will vary depending on the performance of each individual investment within the portfolio, investment term, amount invested and risk grade chosen.

Index

An indicator of the value of a sector of shares in a market, for example the UK’s FTSE 100 Index is an indicator of the performance of the top 100 UK companies’ shares (by market capitalisation).

Individual Savings Account (ISA)

A yearly tax-free allowance given by the government. There are two main sorts of ISA — a Cash ISA and a Stocks and Shares ISA. You can only contribute money to one Stocks and Shares ISA and one Cash ISA in each tax year. If the investments held within your ISA make a profit, you are exempt from capital gains tax. You also receive preferential tax treatment on dividends and interest. You must be over 18 to open a Stocks and Shares ISA.

Investment

The act of purchasing monetary assets (for example, Cash, Bonds, Property, Equities and alternative assets such as Commodities) in the hope that they will generate income or appreciate in value to generate wealth.

Investment portfolio

A collection of investments held in an investment fund.

Investment return

The financial reward you hope to receive in terms of increased capital value for accepting a degree of investment risk. The higher the return you desire, the greater the risk of loss you will need to accept.

Investment risk

A measure? of how much uncertainty there is about the return an investment may deliver. The more risk you take, the wider the range of potential outcomes. Taking additional risk can therefore lead to higher or lower actual returns than you would otherwise have achieved. Understanding the risk associated with your investments is crucial. If you are not comfortable with – or do not understand – the risk you’re taking, you should not invest.

Investment universe

The range of asset classes available to meet an investor’s investment objectives.

Modern Portfolio Theory

An approach to finding the right balance of risk for investments – developed by Harry Warkowitz, who won a Nobel Prize in 1990. Markowitz identified that investments in different asset classes don’t always go up and down in sync. For example, compared to Bonds, Equities have fluctuated more in value over time. Spreading your investments across a variety of assets can help ‘even out the bumps in the road’. Using this theory, investment managers can design a whole range of suitable risk graded portfolios.

Projections

An indication of future outcomes based on assumed levels of investment performance.

Rebalancing

The process of periodically buying or selling assets within a portfolio to maintain a consistent asset allocation and ensure a portfolio remains true to its targeted risk profile.

Restricted advice

When financial services providers make personal recommendations based on a customer’s particular requirements, but have a narrower range of products and services to offer to meet those requirements. Restricted advice, like full advice, is covered by the Financial Ombudsman Service (FOS) and by the Financial Services Compensation Scheme (FSCS) provided the customer is eligible under their rules.

Risk grade

A method of rating the effect of different asset weightings on a portfolio’s level of investment risk. The weightings in each asset group can be calculated to produce a variety of different risk and return structures, based on actual historic returns of the asset types. So based on standard market indices, a risk grade 1 portfolio would have had a much lower return than a risk grade 10, but with much less risk.

Risk profile

An evaluation of the degree of investment risk (i.e. risk that your investments will not deliver the desired return) you are willing and financially able to accept.

Risk profile questionnaire

A questionnaire designed to establish the level of risk you are willing to accept. With this information a portfolio can be selected with a suitable mix of assets to give the best chance of achieving the investment outcome you are looking for.

Risk tolerance

The measure of your personal sensitivity to the value of your investments moving up or down in value.

Risk capacity

The economic measure of your ability to sustain investment losses.

Saving

Putting money aside without risk and usually with the chance to earn interest – typically through savings accounts and cash ISAs. Saving usually has the objective of meeting short-term needs.

Investing, in contrast, involves a greater level of risk and longer-term commitment but is intended to provide income or capital growth over the medium to long term.

Simplified advice

A low cost focused advice process designed to meet one or more specific advice needs of a consumer that does not involve analysis of the consumer’s circumstances that are not directly relevant to those needs.

Strategic asset allocation

The process of defining and fixing portfolio asset allocations (which might include Cash, Bonds, Property, Equities and alternative assets such as Commodities) from the outset, geared to deliver investment returns and price volatility within a target range based on historical performance data.

Volatility

The measure for variation of price of a financial instrument over time.