Glossary


Please see below for a glossary of commonly used financial terms. 

A

 
Absolute return Absolute return is the gain in an asset’s value in absolute terms, rather than in relative terms (i.e. compared with the return of a benchmark index).
Absolute value Absolute value is an asset’s value in absolute terms and a relative value is a company's value when compared with the return of a benchmark index.
Active investing Active investing uses active management techniques, so investments are selected by the portfolio manager of the CIS and passive investing sticks closely to an index in terms of its composition and expected returns.
Agency bonds Fixed income investments issued by a government agency.
American Depositary Receipts A tradeable, negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities. 
American Depository Shares Dollar denominated shares of an overseas company.
Asset-backed securities Investments that aim to reduce risk by using other underlying financial assets as collateral. which can range from loans and mortgages to credit card receivables. Residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) are common types of ABS. 

B

 
Bonds Bonds are defined as fixed-income investments issued as debt by companies and public bodies to raise finance. Investors in bonds receive a previously agreed, non-variable interest payment until the investment matures. Corporate bonds are those issued by companies to raise finance and government bonds are issued by governments.
Breakeven rate  The difference between the yield on a conventional (fixed rate) bond and that of an inflation-linked investment of comparable maturity and credit quality. If you think inflation will be greater than the breakeven rate, you would buy an inflation-linked security and sell a conventional security. If you think inflation will be less than the breakeven rate, you would sell the inflation linked security and buy the conventional security. 

C

 
Callable bonds  Bonds where the issuing entity has the power to ‘call’ (i.e. buy back) the bond, usually on specific dates or within a specified timeframe. The issuer may want to call a bond in order to re-borrow at a lower rate by issuing a new bond (this has been a common tactic in the ongoing environment of low interest rates). Bonds can also be ‘puttable’, which gives the bond holder (investor) the option to ‘put’ the bond back by selling it back to the issuer. Puttable bonds are less common.
Capital Growth Capital growth is the rise over time of an investment’s value.
Cash flow Cash flow is the net amount of money coming in and out of a business. Positive cash flows indicate that a company’s liquid assets are increasing – this means there is more cash to settle debts, reinvest and pay shareholders dividends (regular payments made by a company to its shareholders).
Certificates of deposit (CDs) Negotiable savings certificates for fixed-term deposits, paying a fixed or variable rate of interest until maturity, usually at a higher rate than a savings account. CDs are liquid and offer a high level of capital protection, and are often appropriate instruments for cash funds. 
Closed-ended funds  A type of pooled investment, such as an investment trust, which issues a finite number of shares that are then listed on a stock exchange.
Commercial paper Short-term, unsecured debt issued by a company.
Commercial properties Commercial properties are properties that are used for business purposes, such as offices, shops and industrial units or warehouse facilities. The latter may be used for a number of purposes, including leisure facilities, hotels and residential properties.
Corporate bonds Bonds are defined as fixed-income investments issued as debt by companies and public bodies to raise finance. Investors in bonds receive a previously agreed, non-variable interest payment until the investment matures. Corporate bonds are those issued by companies to raise finance.
Cost & Charges Sheet  A regulatory document that was recently introduced as part of the new MiFID II regulations. The Cost and Charges sheet includes information on the OCFs and Transaction Costs.

All of the Cost and Charges sheets are available at www.rlam.co.uk
Covered bonds  Corporate bonds secured both against the issuer and a collateralised pool of assets, such as mortgages or loans. Covered bonds offer an extra layer of protection compared with corporate bonds, as in the event of default or insolvency investors have a claim on the pool of assets as well as the issuer.
Credit rating Credit-rating agencies rate bonds based on the likelihood of them defaulting and being unable to repay their debt.

D

 
Derivative Investments that derive their value from another closely related underlying investment
Developed markets Developed markets are countries with more advanced economies. Developed markets according to the MSCI classification include the UK, US, Hong Kong and most eurozone countries.
Diversification Diversification is investing in multiple asset classes or sectors in order to reduce risk and/or enhance performance.  
Dividends Dividends are regular payments made by a company to its shareholders.
Duration The sensitivity of a bond’s price to changes in interest rates. If rates increase, a ‘short’ duration portfolio will experience less of a price decline than a ‘long’ duration portfolio. If rates fall, a ‘short’ duration portfolio will experience less of a price increase than a ‘long’ duration portfolio. To put it another way, if rates increase by 1%, the price of a bond with a 10-year duration will lose 10%, but a bond with a 5-year duration will lose only 5%. A bond with -5-year duration will rise in price by 5%.

E

 
Efficient portfolio management Efficient portfolio management is a list of approved investment techniques, including the use of derivatives, used to protect against excessive risk, reduce cost or generate extra income or growth.
Emerging markets Emerging markets are markets in the developing world that are more advanced than frontier markets. Emerging markets, according to MSCI classification, include China, Russia, India and Brazil.
EMT The European MiFID Template. It is a regulatory document which has been introduced as part of the new MiFID II regulations. The document includes information on the OCFs, Transaction Costs and Target Markets.

The EMT is primarily for the use of RLAM’s third party Fund Distributors, such as platform and IFAs.

The full EMT is available at www.rlam.co.uk 
ESG (environmental, social and governance) Environmental, social and governance is a list of predefined criteria that determines how a company operates in terms of sustainability and overall corporate governance.
Exhange traded funds (ETFs) An exchange-traded fund (ETF) is a fund that is tradeable on an index in a similar way to individual shares. ETFs track other indices and provide a lower-cost method of diversifying a portfolio. 

F

 
Floating-rate notes (FRNs) A floating rate note is a fixed-income investment with a flexible interest rate linked to a benchmark rate, such as the federal funds rate.
Forward contracts/transactions Forward contracts/transactions are agreements to buy or sell an investment at a fixed time in the future at a price agreed in the present.
Fund Management Fee (“FMF”)  An 'all-in fee' that RLAM will be introducing into the Funds to replace the current list of expenses which are paid out of the Funds. The FMF will be the only charge in the Funds (excluding Transaction Costs).

The FMFs will be fully disclosed in the Prospectus, replacing the current Management Fee.

G

 
Gilts Bonds issued by the UK Government.

H

 
Hedged Hedging is reducing risk by protecting an investment with another related investment.
High yield bonds Bonds rated below investment grade (BBB- or lower). These bonds offer higher yields to compensate investors for taking additional risk. However, ratings are not the only measure of risk, and some high yield bonds may offer attractive risk/return profiles for active investors who can conduct their own research and analysis.

I

 
Income Income is defined as the payment an investment generates, such as dividends or bond coupons
Index-linked bonds Fixed-income investments that are closely tied to an index of consumer prices/inflation.
Index-linked gilts UK Government bonds whose income payments are closely tied to an index of consumer prices/inflation.
Interest rate derivatives An interest rate derivative is the right to pay or receive a set amount of cash at a pre-specified interest rate on an underlying investment.
Investment-grade bonds Investment-grade bonds are bonds credit-rating agencies have rated as high quality, so rated BBB and higher. These bonds offer lower yields than those of high yield bonds, reflecting their relatively lower risk. However, ratings are not the only measure of risk, and investment grade bonds may not always offer an attractive risk/return profile.

K

 
KIID The Key Investor Information Document, which is a regulatory document in a standardised format. The KIID includes information on the Fund’s objectives, risks, historic performance and the OCF, as well as other required info and disclosures. The KIIDs for all of the Royal London Funds are available at www.rlam.co.uk 

L

 
Large companies (large cap) Large companies (large-cap) are defined as those typically in the top 70% of the market in terms of size, by market capitalisation. Smaller companies (small-cap) are defined as those typically in the bottom 10% of the market in terms of size, by market capitalisation.

M

 
Market capitalisation Market capitalisation is the number of a company’s shares multiplied by their value.
MBS and RMBS ‘Mortgage Backed Securities’ and ‘Residential Mortgage Backed Securities’. These are securities whose cashflows derive from a pool of mortgages. 
Medium-sized companies (mid-cap) Medium-sized companies (mid-cap) are defined as those typically between 10% and 30% of the market in terms of size, by market capitalisation, represented by those in the FTSE 250 Index.
Money market instruments Money market instruments are short-term, more liquid investments issued by public bodies or corporations.

O

 
Ongoing Charges Figure (“OCF”)  Total of the costs borne by the Funds (excl. Transaction Costs), expressed as a percentage. The OCF number is published in the KIIDs, EMT and Cost and Charges sheets, and are used by investors to understand the total costs they will be paying through the Funds. 

P

 
Participatory Notes Instruments used to invest in Indian stocks, without the requirement to register with the local regulator.
Passive strategy A fund that follows a passive strategy aims to stick closely to an index in terms of its composition and expected returns.
Positive absolute return  The gain in an asset’s value in absolute terms, rather than in relative terms.
Preference Shares A share that entitles the holder to a fixed payment in the form of a dividend, gives an investor in a company a higher priority and greater protection than common stock. 
Property Investment Business Property Investment Buisness: Property investment business is defined as property rental business, owning Shares in UK real estate investment trusts (REITs), and shares or units in non-UK REITs.

R

 
Ratings Credit-rating agencies rate bonds based on the likelihood of them defaulting and being unable to repay their debt.
Real estate investment trusts A type of property fund that is listed on a stock exchange and benefits from tax advantages.
Reverse repurchase agreements Agreeing to sell a purchased security at a specified later date.
Rolling 12-month period A rolling 12-month period is any period of 12 months, no matter which day you start on.
Rolling 3-year period A rolling 3-year period is any period of three years, no matter which day you start on.
Rolling 5-year period A rolling 5-year period is any period of five years, no matter which day you start on.
Rolling 7 year period Rolling 7 Year Period: A rolling 7-year period is any period of seven years, no matter which day you start on.

S

 
Sectors Many funds sold in the UK are grouped into sectors by the Investment Association (the trade body that represents UK investment managers), to help investors to compare funds with broadly similar characteristics. Some independent data providers prepare and publish performance data on the funds in this sector and you can use this to assess the Fund’s performance. The data source will be Financial Express.
Securitisation Securitisation is the pooling of various types of contractual debt, that are backed by cash flows from underlying assets (e.g. residential mortgages, loans etc).
Smaller companies (small cap) Smaller companies (small-cap) are defined as those typically in the bottom 10% of the market in terms of size, by market capitalisation
Sterling Ovenight Index Average The average overnight interest rate UK banks pay for unsecured transactions in sterling.
Sub-investment-grade bonds Sub-investment-grade bonds are bonds credit-rating agencies have rated as low quality. Lower-quality bonds tend to pay a higher income, but come with a greater risk of default.
Supranational bonds Supranational bonds are issued by an international union of countries, sometimes for the purpose of developing economic ties.  

T

 
Tactical overlay component The tactical overlay component of the Fund invests in derivatives for the purposes of making investment returns and efficient portfolio management (EPM). Derivatives are defined as investments that derive their value from another closely related underlying investment. EPM is a list of approved investment techniques used to protect against excessive risk, reduce cost or generate extra income or growth, and includes the use of derivatives.
Time deposits A deposit that cannot be withdrawn before a set date.
Total return  A total return is a combination of capital growth and income. Capital growth is defined as the rise in an investment’s value over time and income as the payment an investment generates, such as dividends or bond coupons.
Transaction costs the costs of trading, which the Funds pay when securities are bought and sold. These costs can include broker taxes, bid/offer spreads and “market slippage”, which is the change in the price of the security between when the trade is placed and the trade is actually executed. 
Transferable securities  Securities that can be readily transferred between two investors.
Treasury Bills (T-bills) Zero coupon debt instruments issued by governments, T-bills are offered at a discount to their par (face) value. The investor receives the difference between the purchase price of the security and par value when the bill matures.
Treasury Inflation Protected Securities Index linked bonds issued by the US government. 

U

 
UK government bonds Bonds are fixed-income investments issued as debt by companies and public bodies to raise finance. Bonds pay out a previously agreed, non-variable interest payment until that investment reaches maturity. UK government bonds are those issued by the UK government or other UK public body, not by companies.  
Unrated corporate bonds Bonds which are not rated by any of the ratings agencies. This is not necessarily a reflection of their riskiness – there are many reasons why an issuer may choose not to pay an agency to rate its bonds. Unrated bonds will not appear in bond indices, and may offer attractive, off-benchmark opportunities to active investors who are able to conduct their own research and analysis. 

V

 
Volatility Volatility refers to upward or downward movements in a market index or investment.

W

 
Weighted average life A measure which shows how long (in years) it takes to receive half the amount of the outstanding (unpaid) principal of a fixed income security (or portfolio). WAL is calculated by multiplying the total cashflows for each future year by the number of years until they are paid (i.e. cashflows for the first year ahead are multiplied by 1, those for the second year ahead are  multiplied by 2, etc.). This value is then divided by the simple sum of the future cashflows. 
Weighted average maturity A measure of the maturity of the portfolio, calculated by taking the time to maturity (time outstanding) of each individual asset in the portfolio, multiplied by the weight (percentage holding) of that asset in the portfolio. 

Y

 
Yield curve A graph that plots the yields of bonds from the shortest-maturity to the longest-maturity. It is also known as the ‘term structure of interest rates’. A ‘normal’ yield curve slopes upward as maturities increase, as investors in longer-dated bonds demand a higher yield in return for higher interest rate risk. An ‘inverted’ yield curve occurs when investors believe that economic growth will slow, reflecting the risk of future interest rate cuts.