Standard Life Investments

Glossary

Absolute return

Absolute return describes certain types of funds that target a specific level of return rather than a return relative to that of an equity, bond, property or other market index.

Those funds described as 'absolute return' have an explicit performance target, e.g. Cash + 5%, which they strive to deliver on a regular basis, also defined in the objectives. They may also have objectives relating to the amount of risk taken by the fund manager.

Alpha

This is a measure of the extra value generated by a fund manager. Alpha represents the additional investment return of a fund compared to the fund's relevant benchmark index. If the benchmark index, e.g. the FTSE 100 Index, rises 10% but the fund rises 12%, then the 'alpha' can be said to be the difference, which is 2%. Also, if the index falls in value by 10% but the fund only falls by 8%, then the 'alpha' would again be 2%.

Asset classes

Stocks or shares represent a proportion of the ownership of a company an investor has. For this reason, stocks and shares can also be referred to as equities. Shareholders are entitled to a share of the net assets and profits of the company.

Bonds represent a form of borrowing, by companies and governments. In return for investors lending them money, the company or government commits to making regular, fixed payments. Bonds are also frequently referred to as fixed income. Bonds can be categorised as credit (bonds sold by companies), gilts (bonds sold by the UK government), and treasuries (bonds sold by the US government) among others.

Real estate is the ownership of property assets such as offices and retail units.

Cash refers to both money deposited in banks and bond-like investments that can be realised at relatively short notice.

Alternatives describe other types of investments which do not fall easily into other categories.

Each asset class can have very different characteristics meaning they can respond differently to economic events, e.g. when the economy and growth is poor, investors may well prefer the greater certainty and security they get through investments backed by governments, such as gilts and treasuries. As a result, these types of investments may well result in them performing better than equities or credit for example.

Benchmark

This is a standard against which the performance of a fund or investment manager can be measured. Benchmarks typically represent the performance of a particular asset class, market or even market-segment (e.g. retailers or banks). An active fund manager will often be asked to outperform a particular benchmark. This objective will normally be expressed as an amount by which the manager will seek to beat the benchmark over a particular period, e.g. the investment return of their fund to be 2% higher over 12 months compared to the investment return of the UK stock market overall.

Beta

Beta is the sensitivity of the return of an asset or fund to fluctuations in the return of the market or benchmark. By definition, the market has a beta of 1.0.An asset that swings more than the market over time has a beta above 1.0. If an asset moves less than the market, the asset's beta is less than 1.0.

Bonds

Bonds represent a form of borrowing, by companies and governments. In return for investors lending them money, the company or government commits to making regular, fixed payments. Bonds are also frequently referred to as fixed income. Bonds can be categorised as credit (bonds sold by companies), gilts (bonds sold by the UK government), and treasuries (bonds sold by the US government) among others.

Commodities

Commodities refer to natural resources and agricultural products. Investors can invest in these through either buying the physical product directly, or through companies that produce these products. Gold, iron ore, woodchip pulp and corn are examples of commodities.

Credit Rating

The higher the rating (typically awarded by rating agencies such as Moody's, Standard & Poor's, or Fitch) the higher the perceived 'safety' of the bond. Therefore, all things being equal, the lower the rate of interest that the bond pays in order to attract investors.

Default

When a company or government that has sold a bond fails to pay the regular interest payment, or repay the original amount borrowed, then it is said to have 'defaulted'.

Derivatives

Derivatives are financial instruments whose value depends in some way on the value of other, more basic, underlying financial assets or indices. They may commonly relate to the value of particular equities or equity markets more broadly, commodities like oil or grain, but also interest rates, inflation and volatility. There are many types of derivatives, with the most common being swaps, futures and options. Derivatives form the basic tool-kit of many forms of modern fund management and particularly alternative investments.

Diversification

This is the investment equivalent of not putting all your eggs in one basket. Investment diversification means holding a wide variety of very different types of investments, e.g. asset classes, within a portfolio. The reason for this is that such a portfolio is likely to offer a better investment return because the peaks and troughs of each individual investment within the portfolio are unlikely to happen at the same period, therefore compensating for one another. In addition, a diversified portfolio is less likely to be unduly affected by the risk of a very large loss in one particular investment, as the many different assets held within the portfolio are unlikely to sharply fall at the same time.

Dividend yield

The dividend yield is how much a company pays out in dividends to shareholders each year, relative to its share price. In the absence of any change in share price, the dividend yield would be the complete return on investment for a stock. Dividend yield is calculated by dividing the annual dividend per share by the price per share.

Duration

Duration is a measure of the sensitivity to the effect of changes in interest rates on the value of bonds. Individual bonds or bond funds with high duration are more sensitive than those with low duration.

Duration is often used in relation to specific investment strategies that try to make money from changes in interest rates. In this context, a 'long duration' position will make money if interest rates fall whereas a 'short duration' position will make money when rates rise.

Emphasis

When we describe the mix of assets in which a fund invests, 'emphasis' means at least 60% of the value of the fund.

Equity

Equity, stocks or shares (used interchangeably) represent a proportion of the ownership of a company. A particular company's shares may be privately held (not openly available for investors to buy) or they may be listed on a stock exchange anywhere in the world. This listing generally means that buying and selling the shares is relatively easy and quick.

Shareholders are entitled to a share of the net assets and profits of the firm in proportion to their holding. Equity has no fixed life, pays no fixed dividend and its price rises or falls depending on supply and demand, and overall market conditions.

Listed equities are usually clustered into groups, such as by geography, e.g. UK equities or US equities, or by the nature of the underlying business, e.g. industrials, retailers, etc. They may also be classified according to the stock exchange on which the shares are listed/dealt, e.g. New York.

Emerging markets

Emerging markets are countries that are less economically developed. As they are at an earlier stage of development than developed markets, they have the potential to generate higher returns although with higher risk.

Extensively

This means frequently, regularly, or to a large degree.

Foreign exchange

The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock.

Like any other goods, the value of most currencies can rise or fall in response to supply and demand. This is driven by many factors but most obviously by the scale and nature of international trade as well as the relative attractiveness of investments in other countries. The changes in currency values also represent an investment opportunity for those with a view as to their future movement.

Futures

A future is a contract giving the owner exposure to the change in the value of a bond, equity or currency over a specific period into the future without actually owning the assets directly.

Generally

When we describe the mix of assets in which a fund invests, 'generally' means at least 60% of the value of the fund.

Hedging

A hedge is an investment that has the objective of reducing the risk of financial loss because of negative falls in the price of other assets.

Inflation

The change in prices over time.

Investment grade

A rating that indicates that a corporate bond has a relatively low risk of default. Bond rating firms such as Standard & Poor's use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating.

Interest

Regular, fixed (sometimes inflation-linked) payments made by bond issuers or institutions with whom cash is deposited to bondholders or depositors.

Liquidity

Liquidity refers to the ease with which investors are able to buy and sell their assets and convert them into cash. In a so-called liquid market, there are a lot of buyers for a particular asset, whereas in an illiquid market investors may struggle to sell assets.

Macro environment

A macro environment is the condition that exists in the economy as a whole, rather than in a particular sector or region. In general, the macro environment includes trends in gross domestic product (GDP), inflation, employment, spending, and monetary and fiscal policy. The macro environment is closely linked to the general business cycle as opposed to the performance of an individual business sector.

Mainly

When we describe the mix of assets in which a fund invests, 'mainly' means as least 50% of the value of the fund.

Market capitalisation

The total market value of all of a company's outstanding shares. Market capitalisation is calculated by multiplying the number of a company's shares by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.

Net (in the context of performance data)

Performance data calculated after any deductions (i.e. costs, tax etc.).

Option

An option is a contract giving the owner the right, but not the obligation, to buy or sell a specified amount of an underlying security at a specified price within a specified time.

Predominantly

When we describe the mix of assets in which a fund invests, 'predominantly' means at least 80% of the fund.

Primarily

When we describe the mix of assets in which a fund invests, 'primarily' means at least 70% of the fund.

Principally

When we describe the mix of assets in which a fund invests, 'principally' means at least 80% of the fund.

Private equity

Private equity is money invested in companies not publicly traded on a stock exchange. Private equity is a form of alternative investment.

Real estate

Real estate refers to physical property that is used solely for business purposes (as opposed to residential property) and can also be called commercial real estate. This can include investments such as shopping centres, restaurants and office blocks. Owners of commercial real estate receive rent payments, often for a long period, from their tenants.

REITs

Real estate investment trusts (REITs) are a type of company listed on a stock market, which owns and manages property on behalf of its shareholders. They allow investors to experience the risks and rewards of holding commercial property assets without having to buy property directly.

Significantly

When we describe the mix of assets in which a fund invests, 'significantly' means at least 80% of the fund.

Swap

An agreement between two parties to exchange a series of future cash flows.

Tracking error

Tracking error is the divergence between the movement of a fund and the index against which it is benchmarked.

Underweight/Overweight

Underweight refers to a situation where a portfolio holds less of a particular security when compared to the security's weighting in a comparable benchmark portfolio. This often occurs when a portfolio is actively managed and under/overweighting a security may allow the portfolio manager to achieve investment returns which are larger than that of the benchmark.

Volatility

Volatility is a statistical measurement of the extent to which an individual security, market or fund's price fluctuates. Commonly, the higher the volatility, the higher the risk.

Yield

Shares, commercial property and bonds typically pay income (respectively interest, rent or dividends) to investors. The yield of an individual bond, building or share is the value of the payment divided by its price and expressed as a percentage. So a bond valued at 100 paying interest of 5 has a yield of 5%.