Absolute return

Absolute return investment managers look to make positive returns whether the overall market is up or down. Organisations attracted to an absolute return approach usually accept that they will miss out on some of the positive returns associated with rising stock markets, in the hope that they will suffer less than other investors during periods when markets are falling.


That part of investment returns that can be attributed to the manager's skill in selecting particular investments rather than just picking up the returns from investing in the underlying market. (See also ‘beta’.)

Annual Equivalent Rate (AER)

AER illustrates what the interest rate would be if interest was paid and compounded on an annual basis. 

Annual Equivalent Yield (AEY)

AEY illustrates what the interest rate would be if the periodic interest was paid and compounded on an annual basis. 

Arithmetic returns

Arithmetic reflects the additive relationship of returns. A simple calculation to find the difference between two numbers (e.g., 10% + 10% = 20%).

Asset allocation

The decision about how to allocate a portfolio among categories of assets such as company shares, government and corporate bonds, property and cash. Asset allocation is a major factor in determining returns.



A measure of how closely a portfolio's returns move in relation to those of the market as a whole. A beta of 1 indicates that portfolio moves in step with the market index. A beta value of 1.2 indicates a 1.20% movement for a 1% move in the index, up or down. A ‘passive’ or tracker fund would be expected to have a beta very close to 1. 

Bottom-up investing

An approach to investing which builds a portfolio by selecting individual investments rather than by considering the impact of economic trends or by predetermined allocations to sectors or countries.


Capital gain/loss

Increase/decrease in the market value of an asset in an investor’s portfolio. The gain/loss is ‘realised’ or ‘crystalised’ only if the asset is sold; while it remains in the portfolio any capital gains or losses are ‘unrealised’.


A measure of the relative movement between two variables, such as the price of two companies' shares in relation to each other. The degree of correlation between two variables is measured on a scale of –1 to +1. If two variables move up or down together, they are positively correlated. If they tend to move in opposite directions, they are negatively correlated.

Cyclical stock

The shares of a company which is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. Examples include house builders and car manufacturers. Opposite of defensive stock.



Defaqto is an independent financial information and ratings business that supports financial institutions, intermediaries and consumers. Defaqto assess funds on their ESG credentials, risk profile and overall fund, combining both qualitative and quantitative analysis.

Defensive stock

A stock that tends to remain relatively insulated from difficult economic conditions. Defensive stocks include food, tobacco, oil, and utilities. These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because they lack the recovery potential other sectors may have.


Duration is a measure of how long it takes, in years, for an investor to be repaid a bond’s price by the bond’s total cash flows (i.e., the interest payments received). Duration also measures the sensitivity of a bond’s or a bond fund’s portfolio price to changes in interest rates. For example, if rates were to rise 1%, a bond or bond fund with a five-year average duration would likely lose approximately 5% of its value. In general, the shorter the duration the less volatile the fund is likely to be.



Or ‘ordinary shares’: ownership positions in companies that can be traded in public markets. Usually pay investors an income by means of regular dividends. In the event of the company going bankrupt equity holders’ claims are subordinate to the claims of creditors such as bond holders.


Short for enterprise value/earnings before interest and taxes. A valuation measure that compares the full enterprise value of a business with the earnings before deductions for interest costs, investment and due taxation.

Exchange-traded funds

An investment vehicle traded on the stock market which aims to replicate the returns of a particular asset, sector or index, for example the UK equity market. ETFs tend to be index tracking and to have low annual management charges. Investors in ETFs must understand what strategies the fund employs to meet its objectives as these can involve a degree of risk.


FTSE 100

The Financial Times Stock Exchange 100 stock index, a market capitalisation weighted index of the largest stocks traded on the London Stock Exchange. Similar to the S&P 500 in the United States.

Fund of funds

An investment vehicle that invests in more than one fund. Portfolios will typically diversify across a variety of investment managers, investment strategies and sub-categories. They tend to have a higher annual cost because of the effects of fees from the manager of the fund of funds and the underlying vehicles.

Funds under management

Total amount of funds managed by an entity, excluding leverage.


Geometric returns

Geometric reflects multiplicative or compounding relationship of returns. For example ((1 + 10%) x (1 + 10%) – 1 = 21%), if you start with £100 and have two months of 10% return then you have £110 after month one and £121 after month two for a total return of 21%. This methodology gives a more accurate estimate of the return than using an arithmetic return approach as it includes the income gained on the capital return.

Gilt-edged securities (gilts)

Bonds issued and guaranteed by the UK government. A relatively low risk investment, most gilts pay a fixed interest rate and are redeemable on a specified date.

Growth stock

Shares of a company which is growing earnings and/or revenue faster than its industry or the overall market. Such companies usually pay little or no dividends, preferring to use the income instead to finance further expansion.

Gross redemption yield (GRY)

The total return expressed as an annual percentage that is paid by a bond (see above) up to its redemption, comprising the interest paid over its life and any difference between the purchase price and the capital to be repaid on maturity. It should be remembered that if a bond is bought for more than will be paid back at its maturity, the GRY will be something less than the running yield (see below).



Headwinds are factors or events that slow down growth or have the potential to cause negative effects on profits and revenue (as opposed to tailwinds).


Any transaction with the objective of limiting exposure to risk such as changes in exchange rates or prices.



The extent by which prices and costs have gone up. The government’s preferred measure – the Consumer Price Index (CPI) describes the percentage increase of a fixed selection of goods and services over the last twelve months. The Retail Price Index (RPI) is another recognised measure of the pace of price change. Inflation can erode the real value of capital and the spending power of income. It is a serious challenge for endowments and other long-term investors. 

Infrastructure investment

Investment in large-scale, long-term projects typically via a fund with a consortium of investors.  There is a wide range of potential investments in the UK and overseas including roads, bridges, dock facilities and PFI type contracts for hospitals etc.  

Investment grade

Something classified as investment grade is, by implication, medium to high quality. In the case of fixed income investment, this is usually taken to mean a bond with a rating of BBB or higher.


ISIN stands for International Securities Identification Number (ISIN). It is a code that uniquely identifies a security globally.



The use by an investor of borrowing to increase the amount they have invested in a particular position. Leverage increases both the risk and the potential return of the portfolio. The amount of leverage used is commonly expressed as a percentage of the fund. For example, if the fund has £1 million and borrows another £2 million to bring the total invested to £3 million, then the fund is leveraged 200%.


1) The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterised by a high level of trading activity.
2) The ability to convert an asset to cash quickly.
Investing in illiquid assets is riskier because there might not be a way for you to get your money out of the investment. Examples of assets with high liquidity include blue chip shares and gilts. Commercial property and smaller companies are examples of assets that can be illiquid.

Listed security

Share or bond that has been accepted for trading by an organised and registered securities exchange such as the London Stock Exchange. The attractions of listed securities are an orderly market place, more liquidity, fair price determination, accurate and continuous reporting on sales and quotations, information on listed companies and strict regulations for the protection of securities holders.



The field of economics that studies the behaviour of the economy as a whole. Macroeconomics looks at economy-wide phenomena such as changes in unemployment, national income, rate of growth, and price levels. Expectations for 'macro' developments play an important role in many investment strategies.

Market risk

Risk from changes in market prices.

Market value

The value at which an asset trades, or would trade in the market.

Monetary Policy Committee (MPC)

A committee of the Bank of England charged with setting interest rates so as to achieve a pre-set level of inflation. The committee has nine members of whom four are independent. The committee is chaired by the governor of the Bank of England.

Money market funds

Pooled funds that invest in cash and other short term highly liquid money market instruments. These funds are used when preservation of capital is paramount.


Near cash

Near-cash assets are financial instruments that are highly liquid and easily converted into cash. Examples include deposit accounts (if money can be withdrawn immediately or without a penalty exceeding 7 days’ interest), certificates of deposit (CDs) if immediately redeemable, and government debt (if redeemable at option of the holder or bound to be redeemed within two years).  


Nominal is the unadjusted rate or current price, without taking inflation or other factors into account.

Nominal interest rate

Nominal interest rate is the interest rate before taking inflation into account.



Refers to an investment position that is larger than the generally accepted benchmark. For example, if an index has a weighting to a company of 5% and an investor has a portfolio weighting of 7%, the portfolio would have an overweight position in that company.


Performance attribution

This is the source of the investment returns achieved by the fund manager relative to the returns of the benchmark. The main headings are the choice of assets or ‘asset allocation’, the individual securities held or ‘stock selection’ and when investments are made or ‘market timing’.

Portfolio turnover

The number of times an average portfolio security is replaced during an accounting period, usually a year.


Quantitative easing

An economic policy intended to stimulate activity by introducing large sums of liquidity into the economy.


A term used to refer to companies which have characteristics such as a strong and consistent performance history and robust financial condition. Typically the alternative to ‘quality’ is from cyclical companies.


Real interest rate

The real interest rate is the rate of interest an investor or lender receives after allowing for inflation. It is the difference between the nominal interest rate and the inflation rate.


An easy word to use but trustees might usefully check that their understanding is the same as their investment manager’s. Risk describes uncertainty: of the value of an investment rising and falling unpredictably – or even falling permanently. The real value of interest being eroded by inflation might also be described as risk. Given that all investments carry some sort of risk, trustees will find it useful to work out what risks might or might not compromise their organisation’s work.

Risk-adjusted return

The risk-adjusted return is the return on an investment that takes into account the risk taken in generating that return. 

Risk-free rate

The quoted rate on an asset that has virtually no risk.  The rate quoted for gilts is widely used as the risk-free rate in the UK.

Running yield

The annual percentage return represented by the interest paid by a bond. It should be remembered that because one might pay more or less to buy a bond than its face (‘nominal’) value, then the running yield will in all probability be more or less than its quoted interest rate (‘coupon’).


Say on Climate

The ‘Say on Climate’ initiative was launched in 2020 to promote board-sponsored resolutions aligned with supporting the transition to net zero. The initiative sought improved climate transition disclosures and associated action plans from companies, to be voted on at annual general meetings. The initiative was launched by Chris Hohn, the hedge fund activist, through the Children’s Investment Fund Foundation.


General name for stocks and shares of all types. A securitised investment is one which can be bought and sold between third parties, without reference to the original issuing entity.


Sedol stands for Stock Exchange Daily Official List. It is a seven character identification code assigned to a security that trades on the London Stock Exchange.  


The difference between the buying price and setting price of investments.  For individual securities the spread will be the bid price and the offer price on the stock market. For investment funds the spread will be based on the bid and offer prices but will also include factors such as commission, third-party charges, any taxes or duties (such as stamp duty in the UK – but not for charity investors) and costs such as ‘market impact’ – the recognition that dealing in illiquid investments can affect the price.

Standard deviation

A statistical measure of how much the return on a portfolio is deviating from the expected average returns.

Systematic risk

The risk inherent to the entire market or entire market segment. Also known as market risk. Interest rates, recession and wars all represent sources of systematic risk because they will affect the entire market and cannot be avoided through diversification. 

Systematic risk can be mitigated only by being hedged.

Systemic risk

Risk that threatens an entire financial system.



Tailwinds are factors or events that can contribute to growth or have the potential to positively impact profits and revenues (as opposed to Headwinds).

Top-down investing

An investment strategy which attempts to identify the best geographical areas, sectors or industries to invest in, and then searches for the best companies within those sectors or industries. This investing strategy begins with a look at the overall economic picture and then narrows it down to sectors, industries and companies that are expected to perform well. Analysis of the fundamentals of a given security is the final step.

Total return

The percentage returns that an investment has provided over a specified period (a year for example). It is usually made up of two elements: the income that the investment has paid and any change in the value of the investment itself. It is quite possible for this latter element to be negative – for the value of the investment to fall over a period. In choosing investments it is worth considering the relative importance of these two elements.



A situation where a portfolio holds less of a given asset or investment than the accepted benchmark of the portfolio’s asset allocation strategy. For example, if a particular company’s shares represent 5% of the benchmark index but only 3% of the manager’s portfolio, the position would be considered underweight.




Price volatility is the relative rate at which the price of a security, fund or index moves up and down. Volatility is found by calculating the annualised standard deviation of daily change in price. If the price of a given share moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.

Volatility is also used to measure the extent to which the total investment returns from a portfolio vary over short periods around the long-term average. A portfolio with returns of 5%, 4% and 6% in successive years has much lower volatility than one with returns of 5%, -2% and 12%, even though they have similar average returns.



The annual rate of income return on an investment, expressed as a percentage.

For bonds, income yield is the coupon rate divided by the market price. For securities, the yield is the annual dividends divided by the purchase price. Also called dividend yield or current yield. 

Yield is not an accurate measure of total return, since it does not factor-in capital gains.

Yield curve

A curve that shows the relationship between yields and maturity dates for a set of similar bonds, for example, gilts. Investors analyse yield curves for signals on possible future changes in the direction of interest rates and inflation. Some investors also seek to profit by trading bonds which they believe, on the basis of yield curve analysis, are underpriced or overpriced relative to the market.