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Glossary of terms and definitions - 39 KB

Complex terms defined

We believe a glossary is key for any client trying to navigate through the range of complex terms and jargon in our industry. Our most frequently defined terms are defined below but if there's something you think we should add, please contact us.



Absolute breadth index (ABI)

A market indicator used to determine volatility levels in the market without factoring in price direction. It is calculated by taking the absolute value of the difference between the number of advancing issues and the number of declining issues. Typically, large numbers suggest volatility is increasing which is likely to cause significant changes in stock prices in the coming weeks.

Absolute return

A change in value of an investment measured in absolute, not relative, terms. An absolute return fund looks to make positive returns in all market conditions.

Accrued benefits

Pension benefits earned by an employee based on the terms of his/her employer's pension scheme e.g. the monthly pension received, which could be based on final salary and length of service, if the employee is in a defined benefit scheme.

Accrued interest

Interest that has been earned but not yet paid.

Active management

Approach to investment management which aims to outperform rather than match the return of a particular market index or benchmark. See also index-tracking fund and passive management.

Active return

The portion of returns that result from the active management of an investment portfolio. Also known as residual return.

Active risk

The risk arising from active management in excess of the risk that would be incurred if the portfolio were passively managed.

Actuarial valuation

A valuation which analyses pension scheme membership by type, assesses a scheme’s financial position (i.e. are the fund’s assets sufficient to meet its projected liabilities), sets out the assumptions for future inflation and investment returns and then provides a schedule of the contribution rates for each of the fund’s employing bodies. These rates are set at a level sufficient to secure the ongoing viability of the fund. Scheme members are reminded that their own contribution rates are fixed by statute and that it is the employing bodies who must make good any shortfall in fund assets relative to liabilities.


Adviser on financial issues relating to risk, probabilities and mortality, most frequently in relation to the financing of pension schemes and insurance companies.

Added value

Performance in excess of a stated benchmark or index.

Additional Voluntary Contributions (AVC)

Employee contributions, over and above any compulsory contributions, to a tax-approved occupational pension scheme. An employee may choose to pay AVC in order to secure additional pension benefits in the future.


The additional return generated by manager skill as opposed to general market movements. Historical alpha measures the returns achieved by active management over time.

Alternative investments

Investments that do not fit into traditional categories of equities, bonds and cash, examples are private equity, venture capital, hedge funds, absolute return funds and property.

American Depositary Receipts (ADR)

Certificates that are issued by a US bank stating that a specific number of non-US company’s shares have been deposited with them. These certificates are denominated in dollars and traded on US exchanges as if they were US securities. This enables US investors to trade non-US securities via a simple dollar denominated vehicle

Annual Equivalent Rate (AER)

Interest calculated under the assumption that interest is paid and compounded per year.

Annual Percentage Rate (APR)

Cost of debt that is paid by borrowers, expressed as an annual percentage.

Annualised returns

The average return over a given period scaled up or down to an annual figure.


An annuity converts a lump sum, usually from a retirement fund, into a regular, guaranteed income that will last for the rest of retiree’s life.


Profiting from differences in price when the same security, currency or commodity is traded on two or more markets. By taking advantage of monetary disparities in prices between markets, arbitrageurs perform the economic function of making these markets trade more efficiently.

Asset allocation

The distribution of investments across categories of assets, such as equities, bonds and cash. Asset allocation affects both risk and return and is a central concept in financial planning and investment management. See also strategic asset allocation and tactical asset allocation.

Asset class

Category of assets, for example, equities, bonds, property and cash.

Asset-Backed Security (ABS)

Bonds or notes backed by a pool of assets, such as car loans or credit card receivables

Asset-liability modelling

The comparison of projections of the future assets and liabilities of a particular pension scheme in order to gauge the suitability of various investment policies.

Attribution analysis

Decomposing the return achieved by a portfolio manager into its constituent parts (for example, asset allocation and stock selection) to show where value was added and lost.


Status required by the Financial Services Act 1986 for any firm that want to conduct investment business. It is achieved by direct application to the Financial Services Authority (FSA) or by becoming a member of a Self-Regulating Organisation (SRO).

Authorised share capital

The nominal amount of share capital a company is authorised to issue. This does not provide any indication of the worth of the company.

Authorised unit trust

A unit trust that is subject to certain Financial Services Authority regulations so that it can be marketed to the general public.