Investment Terms Explained
This is a guide to some investment terms; not all will not be relevant for every fund. Please contact your financial adviser if you need an explanation of the terms used.
A share class which reinvests all the net investment income and net realised capital gains. This is the opposite of a distribution share class where the income is paid to the investor.
Percentage weighting of a stock held in the fund relative to the stock’s weighting in the benchmark.
A measure of how actively a portfolio is managed, this is the percentage of the portfolio that differs from its benchmark. An active share of 100 indicates no overlap with the benchmark and an active share of zero indicates a portfolio that tracks the benchmark.
The administrator contracted through Polar Capital LLP is partly responsible for matters like fund or investment trust accounting, the calculation of net asset values (NAVs) and other administrative services under the terms of the Investment Management Agreement (“IMA”).
Annual General Meeting – a meeting required to be held in accordance with the Companies Act 2006, within six months of the company’s financial year end. Details of the arrangements will be provided in the separate Notice of AGM and on a company’s website.
The excess return on an investment in the fund compared to the benchmark.
Association of Investment Companies, the industry body for closed-ended investment companies.
Alternative Investment Fund – a collective investment undertaking which raises capital from a number of investors (in the case of closed-ended investment companies, by selling shares in the open market on the London Stock Exchange) with a view to investing the capital in accordance with the investment policy.
Alternative Investment Fund Manager, a body appointed in accordance with the AIFMD (see below). Polar Capital LLP is the appointed AIFM to products including Polar Capital closed-ended investment companies.
Alternative Investment Fund Managers Directive. Issued by the European Parliament in 2012 and 2013. The Directive requires that, while the Board of Directors of an investment trust remains fully responsible for all aspects of the company’s strategy, operations and compliance with regulations, all alternative investment funds (‘AIFs’) in the UK and European Union, must appoint a depositary and an Alternative Investment Fund Manager (‘AIFM’).
A charge made each year to cover the expenses associated with running the fund. Although it is expressed in annual percentage figures it is usually split into 12 monthly amounts and taken from the fund monthly.
The amount the fund has gained or lost over a rolling 12 month period as a percentage. Also see ‘Cum/Cumulative performance’, ‘Discrete performance’, ‘Gross performance’ and ‘Net performance’.
Assets under management.
The currency in which the net asset value of each portfolio is calculated.
An index experiencing a prolonged fall (technically of 20% or more) is said to be in a bear market. A bearish investor may express negative sentiment and expect such a fall.
A comparator against which investment funds measure their performance; usually a recognised index such as the FTSE 100 or S&P 500.
A financial data and news company headquartered in New York. Traders, fund managers and analysts use Bloomberg terminals to extract data, securities’ prices and other financial information.
A familiar name for the largest stocks listed on an exchange. The term comes from poker, where blue betting chips are traditionally of the highest value.
A debt investment where an investor loans money to an entity for a defined period of time at a variable or fixed interest rate.
Bottom-up stock selection/portfolio construction
An investing approach which focuses on the analysis of individual stocks rather than the broader market and economic environment.
An index experiencing a prolonged rise (technically of 20% or more) is said to be in a bull market. A bullish investor may express positive sentiment and expect such a rise.
This describes a fund in which the number of shares is fixed at any given time. These can be bought and sold on the stock market, with no impact on the underlying portfolio. The fund may create more shares through new issues or buy back shares to reduce the number.
These are raw materials, including natural resources such as oil and gold. So-called ‘hard’ commodities include industrial and precious metals, ‘soft’ commodities include agricultural products such as coffee and wheat.
Convertibles are securities that can be converted into common stock on the stock exchange. Convertibles are usually convertible bonds where bond holders can convert their creditor position to an equity holder at an agreed upon price.
This describes the interest paid regularly on a bond, expressed as a percentage of the bond’s par value (the value at which it was bought).
The total amount the fund has gained or lost in the period specified as a percentage. Also see ‘Ann/annualised performance’, ‘Discrete performance’, ‘Gross performance’ and ‘Net performance’.
The custodian is a financial institution responsible for safeguarding, worldwide, the listed securities and certain cash assets of the company, as well as the income arising from them, through provision of custodial, settlement and associated services.
Arranging the sale and purchase of units or shares in a fund/closed-ended investment company.
The specified end of the trading day to accurately define settlement periods with respect to buying and selling trades.
This describes the likelihood that a borrower (individual, country or company) cannot repay a debt. Rating agencies such as Fitch, Moody’s and Standard & Poor’s provide credit ratings on companies and governments.
The inverse of inflation, this is when the prices of goods and services fall. A country is in deflation if its inflation level drops below 0%.
Under AIFMD (see above) rules a company must appoint a depositary whose duties in respect of investments, cash and similar assets include: safekeeping; verification of ownership and valuation; and cash monitoring. Under the AIFMD rules, the depositary has strict liability for the loss of the company’s financial assets in respect of which it has safe-keeping duties. The depositary’s oversight duties will include but are not limited to share buybacks, dividend payments and adherence to investment limits.
A derivative is a contract between two or more parties, the value of which fluctuates in accordance with the value of an underlying security. Examples of derivatives are Put and Call Options, Swap contracts, Futures and Contracts for Difference. The use of derivatives is to protect the capital value of the portfolio or for efficient portfolio management. A derivative can be an asset or a liability and is a form of gearing because it can increase the economic exposure to shareholders.
This describes countries with advanced economies. They often display characteristics such as high household incomes, robust regulatory and legal bodies, openness to foreign ownership and efficient capital market institutions. Examples may include the US, Japan, Germany and the UK.
A discount arises when the share price of an investment company is lower than the underlying value. This is often represented as a percentage figure. The inverse of a discount is a ‘premium’.
Discrete annual performance
Discrete performance is calculated between two fixed specific times and static dates. The aim is to demonstrate how consistently an investment has performed over time. This differs from cumulative performance, which aims to show overall performance between two set dates. Also see ‘Ann/annualised performance’, ‘Cum/Cumulative performance’, ‘Gross performance’ and ‘Net performance’.
Any share class which can declare and distribute dividends. These are sometimes called inc/income share classes.
An income payment made to shareholders of a company or fund, from its profits. These are usually paid quarterly, six-monthly or annually in accordance with a fund or company’s dividend policy.
This is the difference between the highest price and lowest price of an asset over a given period, usually appearing as a percentage. This should not be confused with pension drawdown, which describes the act of accessing and receiving accumulated pension monies.
This measures how sensitive a bond is to any changes in interest rates. Expressed in years, the number shows the time it would take for an investor to recoup the present value of a bond’s cash flows. The shorter a bond's duration, the less volatile it is likely to be. A bond with a duration of one year would lose 1% in value if interest rates were to rise by 1% whereas a bond with a duration of 10 years would lose 10% if rates were to rise by 1%.
Earnings per share (EPS)
A company’s profitability expressed on a per share basis and calculated by dividing the company’s annual earnings after tax by the weighted average number of shares in issue.
Emerging markets are countries progressing toward advanced status, usually shown by some development in financial markets, the existence of some form of stock exchange and a regulatory body.
Also called stocks and shares, these are bought and sold by investors, normally on a stock exchange and represent part ownership of a company.
Environmental, Social and Governance criteria are used by companies and investors alike to rank, compare and evidence how sustainable a business’s practices are. This may form part of an investor’s assessment of a prospective investment.
The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable and promoting healthy competition between financial service providers. See also ‘SEC’.
Any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. A bond is an example of a fixed income security.
Frontier markets are developing countries advancing toward emerging market status.
These are a type of derivative mostly used in commodity, currency and stock markets. They describe a legal agreement to buy or sell an asset at a predetermined price at a given time in the future.
Gearing describes all external borrowings of a company and any subsidiaries. According to its own policy, an investment trust may borrow money to invest. This has the capacity to enhance returns but could also increase losses.
The geographical location in which the holdings of a fund are listed. Exposure represents the relative risk particular to the percentage of investment in that particular geographic location.
This is an investment strategy that aims to generate capital growth by investing in companies growing at above-average rates compared to their industry or the market. Growth investors often find opportunities for such growth in small or young companies with the ability to grow profit potential. Quality growth investors may look for more mature companies with a history of consistently high earnings growth.
The amount the fund has gained or lost over a given period as a percentage, before any fees have been deducted.
A share class which is denominated in a currency other than the base currency of the portfolio. The investment manager employs techniques and instruments to protect against fluctuations between the class and the base currency of the portfolio.
High water mark
A high water mark is the highest peak in value that an investment trust, fund or account has reached in the context of a specified period of time.
International Financial Reporting Standards (IFRS) are accounting standards which are developed by the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB). The IASB sets IFRS Accounting Standards and the ISSB sets IFRS Sustainability Disclosure Standards.
The benchmark the fund has used to track performance. This may be a well-known benchmark such as the FTSE 100 or a niche collection of similar companies, to allow a clear and relevant performance comparison.
A measure of the change in the average price level of a basket of goods and services in a particular economy.
This measures the risk-adjusted returns of an asset or fund relative to a benchmark. Often expressed as a percentage, the higher the ratio, the better risk-adjusted performance has been. See also ‘Sharpe ratio’.
In Section 833 of the Companies Act 2006, an investment company is defined as a company which invests its funds in shares, land or other assets with the aim of spreading investment risk.
This is a type of collective investment vehicle, constituted as a limited company with a fixed capital structure (see ‘Closed-ended’) and incorporated under company law. Investment trusts seek to offer investors a way to diversify their portfolios, spread risk and gain access to professional fund management.
Investment trust tax status
UK Corporation Tax law (Section 1158 of the Corporation Tax Act 2010) allows an investment company (referred to in tax law as an investment trust) to be exempt from tax on its profits realised on investment transactions, provided it complies with certain rules. These are similar to Section 833 above but further require that the company must be listed on a regulated stock exchange and that it cannot retain more than 15% of income received. The directors’ report contains confirmation of the company’s compliance with this law and its consequent exemption from taxation on capital gains.
Initial Public Offering (IPO)
An IPO marks the first time a company’s shares are listed on the stock market.
International Securities Identification Number. A unique international code which identifies a security’s issue. Each country has a national numbering agency which assigns ISIN numbers for securities in that country.
Key Information Documents (KID)
Under the EU PRIIPs Regulation, Key Information Documents are pre-contractual document designed to help clarify important information on investment products and help investors compare them easily. Distinct from a Key Investor Information Document (KIID), KIDs include forward-looking performance scenarios, using historical data as well as four different economic conditions (from bad to good).
Key Investor Information Document (KIID)
Key Investor Information Documents were introduced under the UCITs regulatory framework, designed to replace a fund’s simplified prospectus so that non-expert investors can get the information they need about a product in a short, standardised format. KIIDs show past performance whereas KIDs will also include forward-looking performance scenarios.
The borrowing of money with the intent to grow the value of an investment.
The ease with which a security can be traded on the market, usually defined by turnover of the shares divided by the number of shares in issue.
Buying stocks/shares and other securities with the aim of generating capital gains and income from positive performance of those assets.
This describes the firm and team running an investment strategy on behalf of investors. In this instance, Polar Capital LLP is the investment manager as well as the AIFM (see above). The responsibilities and fees payable to Polar Capital are set out in the Strategic Report.
The amount payable to an investment manager to cover costs associated with research, stock selection, portfolio management and investment expertise.
Market capitalisation/market cap
This represents the total value of a company’s shares. It is calculated by multiplying the current share price by the number of shares in issue. When combined with the value of a company’s debt this gives the ‘Enterprise Value’, or total value, of a company. Market cap exposure refers to the percentage of a fund’s assets that are invested in companies of a particular size e.g. small cap, mid cap and large cap.
Refers to income paid out to investors of a fund on a monthly basis. The regularity of a fund’s income policy is outlined in its prospectus.
Net Asset Value (NAV)
The NAV is the value attributed to the shareholders of the company minus the liabilities, presented either on a per share or total basis. The value of the company’s assets, principally investments made in other companies and cash being held, minus any liabilities. The NAV is also described as ‘Shareholders’ funds’ per share. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the company’s shares can be bought or sold by an investor. The NAV per ordinary share is published daily.
The amount the fund has gained or lost over a given period as a percentage, after any fees have been deducted.
Listed companies are overseen by a board of directors who are appointed by letter rather than a contract of employment. Investment companies rarely have executive directors. Remuneration of the non-executive directors is set out in the Directors’ Remuneration Report while the duties of the board and the various committees are set out in the Corporate Governance Statement.
Ongoing Charges Figure (OCF)
This is a figure representing all annual charges and other payments taken from the fund.
An open-ended fund is a collective investment scheme which does not have restrictions on the amount of shares it can issue. The manager creates and redeems shares in line with investor demand. Unit trusts and open-ended investment companies (OEICs) are examples of open-ended funds.
Where an equity or financial instrument has performed better than the market return.
Where a fund has more of a particular exposure, be it to a specific security, geography or market capitalisation banding, than the respective weight in the underlying benchmark portfolio.
This describes a strategy whereby a fund is created to track the performance of an index such as the FTSE 100. As these so-called passive funds, also known as tracker funds or index trackers, simply mimic a particular market, they often do not have human fund managers.
The difference between the portfolio return and the benchmark return. The top contributors to the fund reflect the portfolio holdings which most contributed to positive performance in the fund. The top detractors indicate which holdings in the portfolio influenced underperformance in the fund against the benchmark. Performance can also be attributed to geographic, sector, subsector and style level.
A fee charged on any returns that the fund achieves above its performance fee benchmark. These fees can be subject to a ‘high water mark’ meaning performance must be exceed a prior peak before the performance fee can be applied. Please refer to a fund’s prospectus for further information.
A grouping of financial assets such as stocks, bonds and cash equivalents, often managed by a financial professional.
A premium arises when the share price of an investment company is higher than the underlying value. This is often represented as a percentage figure. The inverse of a premium is a ‘discount’.
Price/earnings ratio (P/E ratio)
A way to estimate the future earnings potential of a particular company or investment trust. It is calculated by taking the current share price and dividing it by the earnings per share (EPS). The P/E ratio also gives an indication of how quickly the company is expected to grow – a high P/E indicates that a company is expected to see EPS grow quickly in the future.
This measures the performance of an investment, only taking into account capital growth. If the asset pays an income, this is ignored. Price return is commonly expressed as a percentage figure.
Shares held in a company not listed on a public stock exchange.
A fund or investment trust’s prospectus is a document which lays out information such as its management’s objectives, investment strategies, performance, distribution policy and fees.
Quantitative Easing (QE)
This is a type of monetary policy, used by central banks to encourage lending and spending. They increase an economy’s money supply in a bid to avoid deflation. QE often involves a central bank purchasing government bonds. Also see the inverse ‘Quantitative Tightening (QT)’.
Quantitative Tightening (QT)
This is the inverse of QE (above), where a central bank reduces its balance sheet instead of expanding it. It does this by holding the bonds it bought during QE until they mature (passive tightening) or by selling the bonds on the secondary market (active tightening). The goal is to reduce the amount of money in circulation and cool an overheating economy.
This is the person responsible for keeping a register of shareholders in a company or fund and issuing certificates for individual quoted companies. They also have other administration duties including distributing dividends.
This describes how a publicly listed firm can issue new shares to existing shareholders in a bid to raise money to expand its business or avoid financial difficulties. Existing shareholders have the right to buy the shares before anyone else. The issuance of more shares will dilute the value of the shares already in existence.
In investment terms, this describes the likelihood that an investment will deliver a negative return. Given how many factors influence this, both inside and outside a company’s control, investment risk can vary considerably between assets. Investors will often hold a range of securities with different risk profiles to mitigate the effect of any one holding on their portfolio.
A risk asset is any investable asset that carries a degree of risk. This normally refers to assets carrying a significant degree of price volatility such as shares, commodities, high-yield bonds, real estate and currencies.
A ‘risk-on’ mood refers to investors or markets willingness to take on risk when investing.
A ‘risk-off’ mood refers to investors or markets reluctance to invest in higher-risk assets.
The US Securities and Exchange Commission (SEC) is a US government agency created by Congress to regulate the securities markets and protect investors. See also, ‘FCA’.
The percentage of the fund’s assets which are invested in a particular sector, industry or subsector.
A financial instrument such as a stock or bond, often traded on an exchange.
Stock Exchange Daily Official List. A SEDOL number is a unique code used in the UK and Ireland to identify securities.
The European Sustainable Finance Disclosures Regulation (SFDR) requires asset managers to assess and disclose how they incorporate sustainability risks into their investment processes, as well as how they consider investment decisions that might result in negative effects on sustainability factors.
Companies may choose to buy their own shares on the stock market and retire them. The aim here is to increase the value of outstanding shares and may represent faith in the future value creation of the company.
Share class is a designation applied to a share/unit in a fund. Different share classes within the same fund will confer different rights on their owners. These may appear as a letter designation to show different pricing arrangements or to show if fund income is distributed or reinvested (e.g. Y Acc, W Inc).
A measure of risk adjusted performance. The higher the ratio, the better risk-adjusted performance has been. See also ‘Information ratio’.
Borrowing shares to sell in the open market with the goal of buying these shares back at lower prices in the future, and at that time returning the shares to the lender.
A société d'investissement à capital variable (SICAV) is an open-ended investment fund structure offered by European financial companies.
The Statement of Recommended Practice (SORP) for investment trusts is issued by the AIC and provides recommendations on financial reporting that supplement official accounting standards. The financial statements of the company are prepared in accordance with the investment trust SORP.
This is a derivative contract between two parties, who choose to swap the investment returns from two different instruments. The most common markets for swaps are currencies and interest rates.
Top-down stock selection/portfolio construction
When populating portfolios, top-down investors begin by analysing macroeconomic conditions and industry trends before looking at individual companies. This is the opposite to bottom-up stock picking which begins at a company level.
This measures the performance of an investment, taking into account capital growth and the effect of reinvesting income back into the asset. It is commonly expressed as a percentage figure.
Measures how closely the fund’s performance follows the benchmark.
Treasury shares are the company’s own shares that have been bought back from shareholders and not cancelled but held in treasury. Such shares may be reissued into the market at a premium to NAV. Treasury shares do not attract the right to receive dividends or have any other voting rights.
UCITS or ‘undertakings for the collective investment in transferable securities’ describes investment funds which can operate across the European Union if authorised in one member state.
The international accounting standards adopted by the UK Endorsement Board after delegation of adoption powers. This includes International Accounting Standards (IAS), IFRS and related interpretations, subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the IASB.
Where an equity or financial instrument has performed worse than the market return.
Where a fund has less of a particular exposure, be it to a specific security, geography or market capitalisation banding, than the respective weight in the underlying benchmark portfolio.
The worth of an asset company based on its current price.
This is an investment strategy that involves picking stocks which appear to be trading for less than their intrinsic or book value. The aim is to benefit from a near-term positive catalyst such as a management change, new corporate strategy or general renewed market interest, which could lift the value of the shares.
Volatility of returns
Volatility describes the price movement of an investment. High volatility indicates frequent and significant price movement, whereas low volatility investments have less frequent or severe fluctuations in price.
Year-to-date. Refers to the amount the fund/trust has gained or lost since the first day of the calendar year.
Yield describes the income an investor may receive from an asset such as a share, bond or income-oriented fund. It is often expressed as a percentage, relative to the asset price. To calculate the historic yield (dividend return) of a fund, we divide the dividend per share for a particular period of time by the net asset value per share at a particular date and multiply by 100.