Glossary

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a


Absolute performance

The return that an asset achieves over a period of time, relative to the investment itself.

Annual management fee

The annual consideration paid to an asset management company for managing clients’ investments.

Attribution analysis

A performance-evaluation tool used to analyse the abilities of portfolio or fund managers. Attribution analysis uncovers the impact of the manager's investment decisions with regard to overall investment policy, asset allocation, security selection and activity.

b


Benchmark

A comparative performance index.

Borrowing

See gearing.

Bottom-up stock selection

An investment approach that concentrates on the analysis of individual companies and considers the company’s history, management and potential as more important than macroeconomic trends.

c


Cash Alternatives

Also known as cash equivalents. A class of investments considered relatively low-risk because of their high liquidity, meaning they can be quickly converted into cash.

Cash Equivalent

See Cash Alternatives.

Closing price

The price of a security at the end of the day's business in a financial market.

Contrarian approach

An investment style that goes against prevailing market trends. In very simple terms the approach is defined by buying assets that are performing poorly and then selling when they perform well.

d


Dealing day

Every official working day of the week, typically the days between Monday to Friday, not including public holidays.

Debenture stocks

A type of stock entitling the bearer to a certain fixed rate of interest at set periods of time.

Depositary/custodian

A Depositary and a Custodian both perform the same function of safekeeping of securities. A Depository also has legal ownership of the securities.

Derivative instruments

An instrument whose value depends on the performance of an underlying security or rate which requires no initial exchange of principal. Options, futures and swaps are all examples of derivatives.

Discount

The share price does not always reflect the underlying value of the share portfolio held by the investment trust. When the share price is lower than the underlying value of the share portfolio, the investment trust is referred to as trading at a discount to NAV (Net Asset Value).

Diversification

Holding a range of assets to reduce risk.

Dividend

The portion of company net profits paid out to shareholders.

Downside

The negative movement in the price of a security, sector or market.

e


Enterprise Value

Also known as EV. The market value of a company if it were (hypothetically) to be taken over. It is calculated by adding its market capitalisation to its debt, minority interest, and preferred equity at market value, then subtracting its cash or cash equivalents.

f


Fixed interest

Fixed interest securities, also known as bonds, are loans usually taken out by a government or company which normally pay a fixed rate of interest over a given time period, at the end of which the loan is repaid.

Free dividend re-investment scheme

Sometimes known as a dividend reinvestment plan (DRIP). An arrangement offered by companies to investors to purchase additional shares by reinvesting their cash dividends.

FTSE 350 Index

A comparative index that tracks the market price of the UKs 350 largest companies, by market value, listed on the London Stock Exchange. The name FTSE is taken from the Financial Times (FT) and London Stock Exchange (SE), who are its joint owners.

FTSE All-Share Index

A comparative index that tracks the market price of the UKs leading companies listed on the London Stock Exchange. Covering around 900 companies, including investment trusts, the name FTSE is taken from the Financial Times (FT) and the London Stock Exchange (SE), who are its joint owners.

Fundamental analysis

The evaluation of a security by examining related economic, financial and other qualitative and quantitative factors.

g


Gearing

At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders’ assets is called ‘gearing’. If the Company’s assets grow, the shareholders’ assets grow proportionately more because the debt remains the same. But if the value of the Company’s assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

Gearing represents borrowings less cash and cash equivalents expressed as a percentage of shareholders’ funds.

Gilts

A bond that is issued by the UK government which is generally considered low risk.

Gold Morningstar Analyst RatingTM

Morningstar, Inc. is a leading provider of independent investment research. The Morningstar Analyst Rating™ for funds is the summary expression of their forward-looking analysis of a fund. Morningstar Analyst Ratings™ are assigned globally on a five-tier scale running from Gold to Negative. Gold funds are Morningstar’s highest-conviction recommendations and stand out as best of breed for their investment mandate. By giving a fund a Gold rating, Morningstar are expressing an expectation that it will outperform its relevant performance benchmark and/or peer group within the context of the level of risk taken over the long term (defined as a full market cycle or at least five years). To earn a Gold rating, a fund must distinguish itself across the five pillars that are the basis for Morningstar’s analysis. That is, a Gold-rated fund should have a seasoned, talented, and successful manager or management team; a sound, thoughtful process that has been executed skillfully and consistently; a portfolio that’s in harmony with the stated process and that’s capable of delivering a reward that compensates investors for the risks it takes; reasonable expenses; and a strong management company that is focused on responsible stewardship of investor assets.

h


Hedging

A technique seeking to offset or minimise the exposure to a specific risk by entering an opposing position.

Holding periods

The length of time during which a security is owned.

i


Index

A measurement of the value of a section of the stock market created using the prices of selected stocks (typically a weighted average). It is a tool used by investors and investment professionals to describe the market, and to compare the return on specific investments.

Intrinsic value

The value of a security, justified by factors such as assets, dividends, earnings, and management quality.

Investment trust

A public limited company that is listed on the London Stock Exchange. It exists to invest in the equity of other companies with the aim of producing a return for its shareholders.

l


Liability

A financial obligation that the investment trust is responsible for (e.g. payment of taxes or depositary fees).

Liquidity

The ease with which an asset can be sold at a reasonable price for cash.

Long-term investment

Holding an asset for an extended period of time. Depending on the security, a long-term asset can be held for as little as one year or for as long as 30 years.

m


Management Company

A formal name for a company that is set up for the purpose of selling and managing a portfolio of securities.

Management fee

A fixed annual fee that a manager charges for its services. (See annual management fee).

Market capitalisation

The total value of a company’s equity, calculated by the number of shares in issue multiplied by their market price.

MSCI ACW Index

An index weighted by market capitalisation designed to provide a broad measure of equity-market performance throughout the world. It is maintained by Morgan Stanley Capital International, and is comprised stocks from both developed and emerging markets.

n


Net Asset Value

Also described as shareholders’ funds, Net Asset Value (NAV) is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue.

Net Asset Value at Fair

Borrowings are valued at an estimate of their market worth.

o


Ongoing charges

Ongoing charges represent the Company’s management fee and all other operating expenses, excluding finance costs. They are expressed as a percentage of the average of the daily net assets during the year and calculated in accordance with guidance issued by the Association of Investment Companies.

p


Performance fee

A fee, which has been stipulated in advance, which is sometimes paid on top of a management fee if a fund out performs its performance comparison index or meets other conditions stipulated in advance.

Portfolio

A grouping of financial assets, such as equities, bonds and cash equivalents. Portfolios are held directly by investors and/or managed by financial professionals.

Portfolio Turnover

A calculation expressed as a percentage describing what portion of securities (stocks, bonds, or both) in a fund's portfolio are bought and sold during the course of a year.

Premium

The share price does not always reflect the underlying value of the share portfolio held by the investment trust. When the share price is higher than the underlying value of the share portfolio, the investment trust is referred to as trading at a premium to NAV (Net Asset Value).

Private placement

The sale of a security directly to a limited number of investors, without a public offering.

r


Relative performance

The return that a portfolio achieves over a period of time, compared to a benchmark.

s


Saving scheme

A personal savings plan, in which the plan contributor automatically deposits a fixed amount of funds at specified intervals into their investment account.

Sector

An industry or market sharing common characteristics which investors use to place stocks and other investments into categories. For example technology, health care, energy, utilities and telecommunications. Each sector has unique characteristics and a different risk profile.

Share buyback

When a company buys some of its own shares in the market, which may lead to a rise in the share price. It changes the company’s debt-to-equity ratio and is a tax-efficient alternative to paying out dividends.

Share price discount/Premium to net asset value (NAV) per share

If the share price of an investment trust is lower than the NAV per share, the Company’s shares are said to be trading at a discount. The discount is shown as a percentage of the NAV per share. The opposite of a discount is a premium. It is more common for an investment trust’s shares to trade at a discount than a premium.

Short-dated gilts

A gilt with typically less than 5 years to run before redemption.

Smaller-medium sized companies

Also known as SMEs. Companies which employ fewer than 250 people and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro, as defined by the European Commission.

Stock lending

Also known as securities lending. The act of loaning a stock, derivative, other security to an investor or firm. It requires the borrower to put up collateral, whether cash, security or a letter of credit. When a security is loaned, the title and the ownership is also transferred to the borrower.

t


Total Assets

Total assets less liabilities, before deduction of all borrowings.

Total Return

The total return is the return to shareholders after reinvesting the net dividend.

Treasury Shares

Ordinary shares of the company that have been repurchased by the Company and not cancelled but held in Treasury. These shares do not pay dividends, have no voting rights and are excluded from the net asset value calculation.

Trailing returns

Past returns of a fund or a company over a given time period.

u


UK securities

Another name for shares of stock, bonds, or any kind of financial asset that can be traded on the UK stock market.

v


Valuation

Determination of the value of a company's stock based on earnings and the market value of assets.

Value investing

Value investing is a strategy where stocks are selected that trade for less than their intrinsic values because it is believed that the market has undervalued them based on certain forms of fundamental analysis.

y


Yield

A measure of the income return earned on an investment. In the case of a share the yield expresses the annual dividend payment as the percentage of the market price of the share. In the case of a property, it is the rental income as a percentage of the capital value. In the case of a bond the running yield (or flat or current yield) is the annual interest payable as a percentage of the current market price. The redemption yield (or yield to maturity) allows for any gain or loss of capital which will be realised at the maturity date.

Yield Target

The stated income return aim of an investment.

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