Reblog: Jargon Buster
We’ve created our Jargon Buster to explain some of the most commonly-used investment words and terms.
An actively managed investment fund is one where your money is invested in a portfolio of assets selected by a professional fund manager. Each fund manager constantly monitors companies, economic conditions and markets, and decides where it’s best to invest to meet the investment fund’s objectives.
Annual management charge or AMC
Used by other fund providers, this is a charge that covers the fund manager’s management costs and is taken out of the assets as a percentage of the fund’s value.
Is the process of deciding what proportion of an investment portfolio should beinvested in different types of investments (for instance, shares or bonds), in what markets (what regions and countries) and in what sectors.
There are four main categories of asset class for investment funds:
- Cash – The least risky of the four asset classes but the risk is often accompanied by modest returns on investment.
- Shares/Equities – Shares issued by a company normally listed on a stock exchange. Individuals who buy shares hold a share in that company and are entitled to dividend payments and voting rights.
- Corporate bonds or fixed interest investments – Are loans to companies or governments. They usually pay an agreed level of interest each year and aim to pay back the capital at the end of a stated period. There are different types of bonds and each type has a different level of investment risk determined by a credit rating system. A ‘risky’ or ‘sub-investment grade’ bond has a lower rating than an investment grade bond. The lower the rating, the riskier the bond.
- Property – Commercial property such as shops, office blocks, retail parks and warehouses.
This facility gives you the opportunity to switch your unit trust investment to an ISA. Your investment moves to a more tax-efficient position automatically at the start of each new tax year.
Banks’ Automated Clearing Services. A system supported by the major UK clearing banks for automated cash transfers between accounts, eliminating the need for cheque payments.
The spread is the difference between the buying and selling price of units on any day. The spread is made up of two parts:
- An allowance for the difference in the buying and selling price of all the investments held within the fund. This spread includes any stamp duty and stockbroker fees. The size of this part of the spread mainly depends on the type of investments held. The spread tends to be larger for funds investing in smaller companies, emerging markets, commercial property and higher risk corporate bonds.
- Any initial charge on the fund.
The price at which units are ‘sold’ or cashed in by the customer.
Generally viewed as the amount of the original investment.
The difference between the price at which you buy an asset and the price at which you sell, transfer or give it away.
Capital gains tax (CGT)
This is a tax which could be charged on certain capital gains.
You can now invest your full ISA allowance, currently £15,240 in a cash ISA this tax year. Alternatively, you can now invest up to £15,240 in a stocks and shares ISA, or £15,240 in a combination of both.
Consolidated Contract Note (CCN)
The Financial Conduct Authority requires companies like us to send confirmation of customer transactions every six months. With many of our customers’ transactions, for example lump sum investments or withdrawals, they receive a Contract Note and will also be notified of these transactions in their annual statement. However, for some transactions such as regular investments, the customer doesn’t receive a Contract Note every time the regular investment is made. Instead, the confirmation of those transactions is consolidated and provided twice a year.
Corporate bonds are a type of fixed interest security. When you invest into a corporate bond fund, instead of ‘lending’ money to a bank – which is effectively what happens when you place money on deposit – we lend your money to companies who agree to pay an agreed level of interest over a certain period of time.
Some investment funds can use investments known as derivatives. Their name reflects the fact that their price is derived from a change in value of the investment that they’re linked to, such as shares, property or bonds. Experienced managers use derivatives as part of an investment strategy to manage the effect of possible market falls or changes in exchange rates. This reduces the cost of investing in assets and helps to manage cash flow.
For some investment funds, derivatives will be used to seek to enhance overall investment returns, manage risk and to help protect returns from market falls. This includes investing in derivatives whose value rises when the market falls, but whose value falls if the market rises.
If you invest in a unit trust in your name for the benefit of someone else, such as a child or grandchild, then the investment is still yours. You’ll pay whatever taxes you would normally pay on it. It’s possible for you to ‘designate’ the investment in the name of the other person as a way of identifying that the investment has been made for that person.
Shares issued by a company normally listed on a stock exchange. Individuals who buy equities hold a share in that company and are entitled to dividend payments and voting rights.
An investment that conforms to a range of ethical and environmental guidelines.
Where a provider quotes an annual management charge (AMC), they will typically quote extra expenses (or something similar). These are expenses not quoted in the AMC, such as auditors, trustees, custodian, registrar and regulator fees, which are paid out of the fund.
Fixed interest securities
A fixed interest security is a way of ‘lending’ money to a government, or to a company, in return for an agreed level of interest over a set period. This type of investment is intended to provide a regular, reliable income.
Is the Financial Times Stock Exchange, an independent company owned by the London Stock Exchange Group.
Fund management fee or FMF
The Fund Management Fee (FMF) is the yearly charge we’ll make on your investment. It relates to the costs of running the fund. The daily fund price reflects this deduction.
If a fund invests in any funds not run by Legal & General, the FMF does not include charges and expenses for those funds.
A person professionally qualified to manage funds to meet financial goals for the benefit of the investor(s). A fund manager will make the decisions about which assets to invest in and is responsible for the day-to-day management of the fund.
Fund of funds
Allows you to invest in several funds to create a diverse portfolio through a single investment.
Fixed income or index-linked bonds issued by the UK Government to raise public funds, also known as gilt-edged securities. They are usually secure but they are not entirely without risk.
Income before tax is deducted.
Interest before income tax has been deducted.
HM Revenue and Customs. They’re responsible for collecting taxes.
This is where any income earned by the investment fund is paid direct to your bank or building society account, and isn’t reinvested into the investment fund. If you choose to receive an income you’ll receive ‘distribution units’.
This is where any income earned is reinvested back into the fund. This increases the value of the investment fund. For most investment funds, if you choose to reinvest your income, you’ll receive ‘accumulation units’.
Index-tracker or Passive Funds
Index-tracker investment funds invest in most or all of the same shares, and in a similar proportion, as the index they are tracking, for example the FTSE 100 Index. Index-tracker funds aim to produce a return in line with a particular market or sector, for example, Europe or technology. They are also sometimes known as ‘tracker funds’ or ‘passive funds’.
The increase in prices over a period of time. As prices rise, the value of money falls, so your money has less buying power over time.
The initial charge is a percentage you’ll pay each time you make an investment in certain funds or unit classes.
Lets you put your money together with other investors’ to buy a wider range of investments than you would be able to achieve on your own. Funds are managed by professional fund managers.
ISA stands for Individual Savings Account. An ISA is simply a ‘tax-wrapper’ around a product, for example, a unit trust, that makes it tax-efficient. You can invest in a cash ISA and/or a stocks and shares ISA. The tax advantages of ISAs may not be maintained and the value of current tax benefits depends on individual circumstances.
You can transfer from a stocks and shares ISA and a cash ISA between providers without losing their ISA status.
A Junior ISA allows you to save up to £4,080 this tax year for an eligible child, tax efficiently.
Key Investor Information
Provides you with key information about the fund to help you make an informed decision about whether to invest. You can find the most recent version of thedocument here.
Is a Thomson Reuters company and a global leader in supplying fund information, analytical tools, and commentary. Lipper is recognised as one of the industry standard providers of benchmarks and classifications for asset managers, fund companies and financial intermediaries.
Lump sum investment
An investor can choose to make regular monthly contributions into a fund or pay alarger amount as a lump sum. Lump sum payments are often one-off payments, with an initial minimum investment amount of £500 for ISA or unit trust investments.The maximum lump sum investment for a stocks and shares ISA this tax year is currently £15,240. There is no maximum lump sum investment for unit trusts, although you can invest a maximum of £100,000 online.
An investor can choose to make monthly contributions to their chosen investment fund, known as regular investing. The minimum monthly contribution is £50 for ISA or unit trust investments. There is no maximum monthly contribution for unit trusts.
A company which provides information about the investments industry. It has operations in 27 countries and currently provides data on approximately 473,000 investment offerings.
Multi Manager funds
Multi Manager investment funds allow you to invest in several funds at the same time through one simple investment. Professional fund managers select, monitor and change the underlying funds based on set criteria, for example, the investment quality and investment objective of the providers. Each multi manager investment fund holds a mix of funds covering many different types of asset, industry sectorsand markets. The funds may also be sourced from more than one provider. For example, our Multi Manager investment funds may invest in funds managed by well-known and respected companies such as Invesco Perpetual, Schroders, M&G, as well as in our own funds.
Our online account management service. It allows you to manage your investment or pension online. You can change your contributions, switch funds or simply check up on your investment funds whenever it suits you. Register here.
Is a company or person who looks after the ownership of investments on behalf of someone else.
The price at which we ‘sell’ units to customers.
Ongoing charges figure (OCF)
Shows the European Union standard disclosure of annual costs of a unit trust or OEIC, which includes the Fund Management Fee and any additional costs the fund incurs.
Open-ended Investment Companies (OEICs)
OEICS are similar to unit trusts, but are established as companies that issue shares to investors. Often, OEICS are made up of a series of sub-funds. Each sub-fund has its own investment objective. The value of each sub-fund, and each share price, is usually calculated on a daily basis.
Passive funds – see Index-tracker
A holding of investment funds. This could be split across ISA and unit trust investments. A balanced portfolio is made up of a number of different types of assets such as cash, shares, corporate bonds and property.
A legal document provided by businesses to describe the investments/productsthey offer customers. The Prospectus usually provides investors or potential investors with fund information.
All investment funds have risk factors and some have higher overall risk ratings than others. Higher-risk investment funds offer the potential for higher returns but carry with them an increased risk of not getting back all the money you initially invested. The lowest risk type of investment is cash.
Securities or Stocks
Capital of a company raised through the issue and subscription of shares.
The price at which you can purchase shares in a company on the stock market. The share price is determined by the financial market and so can fluctuate on a daily basis.
Legal & General’s share price
Shares are sold by companies to raise money. If the company is a Public Limited Company or Plc, its shares will be available to purchase on the stock exchange. Shareholders are entitled to a share of company profits, usually paid as dividends, and have the right to vote on major decisions. (Also, see Open-Ended Investment Companies (OEICs)).
As the name suggests, a stock exchange is where stocks and shares in companies can be bought and sold. The Financial Times Stock Exchange 100 Index (FTSE 100) lists the 100 largest companies on the London Stock Exchange. These companies are the largest in terms of market capitalisation, the total value of the shares issued by the company. See also FTSE.
Stocks and shares ISA
You can invest your full ISA allowance, currently £15,240 in a stocks and shares ISA each tax year. Alternatively, you can now invest up to £15,240 in a cash ISA, or £15,240 in a combination of both.
Switching is when you change your fund choice. You can make a switch at any time and this service is currently free of charge. You can switch online if you’re registered with My Account. If you decide to switch into a unit class with an initial charge, the initial charge may be taken.
Please see Index-tracker.
Dividend payments are made to shareholders from a company’s profit. The amount of payment is decided by the company directors and cannot be guaranteed. Some unit trusts pay their income in the form of ‘UK dividends’.
A unit trust:
- Lets you put your money together with other investors’ to buy a wider rangeof investments than you would be able to achieve on your own.
- You’ll be able to invest in one or more of a range of assets like equities, fixed interest securities, commercial property or cash which can help reduce risk.
- You can invest an unlimited amount in a unit trust, but you won’t get the tax advantages of an ISA. You can invest up to £100,000 online, today.
Is the point in time on each business day that the unit trust is valued and a price calculated. The valuation point can be found in the ‘Key Investor Information‘ documents.
The degree of unpredictable change over a period of time.
A ‘wrapper’ is designed to go around an investment to make it tax-efficient. For example, an ISA is a wrapper that allows you to invest in a unit trust without having to pay personal income or capital gains tax.
There are three different types of yield
Funds paying a dividend distribution have a Historic Yield.
The Historic Yield reflects distributions declared over the past 12 months. It does not include any initial charge and investors may be subject to tax on their distribution.
Funds paying an interest distribution have a Distribution Yield and an Underlying Yield.
The Distribution Yield reflects the amounts that may be expected to be distributed over the next 12 months. It is based on a snapshot of the portfolio. It does not include any initial charge and investors may be subject to tax on distributions.
The Underlying Yield reflects the annualised income net of expenses of the fund. It is a snapshot of the portfolio. It does not include any initial charge and investors may be subject to tax on distributions.
If the Distribution Yield is higher than the Underlying Yield this is either because the fund distributes coupon income and/or a portion of the fund’s expenses are taken from capital. This has the effect of increasing distributions and constraining the fund’s capital performance.
The original post appears on www.legalandgeneral.com and can be found here.