Glossary Archives - Chelsea Financial Services

These funds aim to deliver positive returns in all market conditions with low volatility. The funds often uses derivatives (see derivatives) to protect against falling markets.

Any income generated by the fund is automatically reinvested instead of being paid out, which increases the value of your units.

Where a professional fund manager chooses the companies and amounts in which to invest, instead of simply buying the same companies in the same amount as a market index, such as the FTSE 100. The opposite of active management is passive management (see Passive Management).

Active share measures how much an equity portfolio’s holdings differ from the benchmark index. A tracker fund which matches the index perfectly will have an active share of zero. Most actively managed funds will have an active share of between 50-90%. Research has shown that funds with an active share consistently below 60%, typically struggle to beat their benchmark index over a long period.

This is the “earnings-related” part of the state pension. The amount received depends on your earnings, and the national insurance contributions that have been paid, during the whole of your working life.

If your threshold income (see threshold income) is above £260,000 you will need to refer to your adjusted income, and your annual allowance could be reduced to £10,000 per year. For every £2 of income over £260,000 you earn, your annual allowance will fall by £1. So, if you earn £360,000 your annual allowance will be £10,000.

To work our your threshold income add:

taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
benefits built up in a defined benefit scheme
any contributions you may have to an
occupational/trust based pension scheme.

Alpha is a word commonly used to describe a fund manager’s skill. Alpha is the excess risk- adjusted return of a fund relative to the return of a benchmark index (see Benchmark Index). The higher a fund managers Alpha, the better their performance is.

This is the amount that you can invest into a product in any given year.

Products that have an annual allowance:

The annual charge paid to a fund management company for managing the fund (see Fund). It is calculated as a percentage of the value of the fund. The annual management charge is less than the Total Expense Ratio (TER) (see Total Expense Ration (TER)) and Ongoing Charge Figure (OCF) (see Ongoing Charges Figures (OCF)).

This is a type of retirement income which provides you with a regular payment, usually for life. Chelsea does not currently offer annuities.

The government introduced law which is designed to help people save more money for their retirement. It means that most employers have to enrol their workers into a workplace pension, if they are not already part of one.

The pension available through Chelsea is not an automatic enrolment scheme.

This is the first part of the state pension, payable at the state pension age. The amount is dependent on the National Insurance contributions that member has made over their lifetime. To qualify for the basic state pension, at least one of the following:

you worked and paid National Insurance contributions
you received certain benefits, for example, unemployment, or sickness benefits
you were a parent, or carer, and claimed certain benefits
you have a spouse or civil partner, whose National Insurance contributions cover you
you pay voluntary National Insurance contributions

Some people also get additional State Pension. Whether you get it and how much you get depends on your National Insurance record and what you earn while you are working.

A word used to describe the measure of a fund’s volatility (see Volatility) in comparison to the market as a whole. A beta score above 1 means the fund is more volatile than the overall market, while a beta score below 1 means it is less volatile.

A standard against which the performance of a fund can be measured. The FTSE 100 is an example of a benchmark index.

People who may benefit from a payment from a pension, or investment, upon death of the member.

The price paid by the fund manager to buy back your units when you choose to sell some or all of your holding in a fund. The current value of your holdings in a fund is based on the current bid price.

These are loans issued by companies or governments in order to raise money, in return for regular interest payments and the promise that the initial investment will be repaid on a specified date in the future. All bonds are essentially IOUs.

The total value of the company’s assets that shareholders would theoretically receive if a company were liquidated and all creditors were paid.

A management style where the manager prioritises individual stock selection over industry, sector or wider economic factors.

An agreement that gives an investor the right, but not the obligation, to buy a company, bond, commodity, or other instrument at a specified price, within a specific time period.In return for this right the seller, or option ‘writer’, receives a payment from the buyer. The value of a call rises when the underlying asset increases in price.

A bond, which can be bought back by the issuer prior to its maturity date. The issuer will usually ‘call’ the bond if interest rates fall and they can re-issue the bond at a cheaper rate. The call feature is an advantage for the issuer and consequently investors will demand a higher yield as compensation to hold these bonds.

You can read more about the Carry Forward rule here.

The amount offered to a member of a defined benefits scheme who wants to transfer to another pension scheme.

Where the only annual cost that comes out of a fund automatically is that charged by the fund manager for managing the assets. In the past, shares class costs also included those of the intermediary and platform. These charges are now made separately.

An investment style which goes against prevailing opinion. Contrarian investors often invest in out of favour sectors or companies, which have recently performed poorly.

A bond, issued by a company, that may be converted into shares in that company for a pre-stated price.

When a company wants to borrow some money it can issue a bond to do so. This bond is called a corporate bond. People buying the bond lend money to the company in return for regular interest payments and the promise that the capital will be repaid on a specified later date.

A coupon is a periodic payment an investor receives for holding a bond – in other words, the interest. The coupon ‘rate’ is the total coupons paid per year, divided by the face value of the bond. A bond with a high coupon rate, also known as high yield (see High Yield), will be less sensitive to changes in interest rates.

A strategy which involves buying shares in a company and simultaneously selling a call option for those shares. Selling the call option (see Call Option) generates an income but means the fund will potentially miss out on some of the gains should the company’s shares increase in value.

The lowest price at which units can be bought from the fund manager; it is simply the cost of creating a unit.

An assessment of the credit worthiness – or ability to pay interest on loans – of a borrower. Assessment is undertaken by a credit ratings agency such as Standard and Poor’s, Fitch or Moody’s.

This term is usually used when taking about taking benefits from a pension, for example buying an annuity, death, taking drawdown and a test against the lifetime allowance is carried out.

The aggregate performance of a fund or company. For example, company X had a cumulative return of 20% over the past three years.

A word to describe an industry or company that is sensitive to the business cycle. Revenues are generally higher during times of economic prosperity, but lower during times of contraction or recession. The airline industry is one example of a cyclical industry.

The opposite of cyclical is defensive (see Defensive).

A word to describe an industry or company that can outperform in difficult economic conditions. They will typically under-perform cyclical stocks during periods of economic expansion. The utility industry is an example of a defensive sector. Defensive stocks typically have a Beta (see Beta) of less than 1.

These include “final salary” or “career average” earnings-related pension schemes. The amount you get at retirement is based on a number of variables. These could include how long you have been a member of the scheme, your earnings, etc. In most cases, when you retire, you can take some of your pension as a tax-free cash lump sum. The rest you will receive as a regular income, on which you may have to pay tax. If you are unsure, you may wish to seek financial advice.

Your pension pot is placed into different types of investments, for example shares, or investment funds. The amount in your pension pot when you retire is based on how much has been paid in and how well the investments have done. In most cases, when you retire, you can take some of your pension as a tax-free cash lump sum. The rest you can be used to purchase an income, on which you may have to pay tax.

This government department is responsible for most pension schemes, through The Pensions Service, and the administration of the state pension. As pensions opened through Chelsea are personal pensions the DWP is not responsible for this pension scheme.

People who depend financially on the member of a scheme and may receive benefits upon the member’s death. This normally includes spouses, civil partners and children.

A derivative is a contract between two or more parties, the value of which is determined by fluctuations in the underlying asset. The most common forms of derivatives are futures contracts and options (see Options), amongst others. Underlying assets may include company shares, bonds and currencies, to name a few.

An additional charge to investors, levied by fund managers, buying or selling units in a fund, in order to counter any potential effect on the value of the fund such sales or purchases may have. This additional charge is used as a means to protect existing investors in a fund and is usually only applied if there are large numbers of sales or purchases at one time.

The returns of a fund or company over several separate periods of time. For example company X returned 15% in 2013, 12% in 2012 and 5% in 2011.

Click here for more details on your Dividend Allowance.

Calculated by expressing a company’s declared dividends per share as a percentage of the current share price.

The amount of profit attributable to each share, calculated by dividing net profit of a company by the number of ordinary shares in issue.

Also known as shares or stocks, equities represent a stake in the ownership of a company.

An investment vehicle, the units of which are traded on a stock exchange. An ETF can hold a range of assets such as stocks or bonds. Most ETFs track an index, such as the FTSE All share or the S&P 500, so they are typically passive investments (see Passive Investments).

A notification by a scheme member to their pension scheme to show to whom they would like any lump sum or pension benefits to be paid upon death.

These are more commonly known as “bonds” and are loans issued by companies or governments in order to raise money, in return for regular interest payments and the promise that the initial investment will be repaid on a specified date in the future. All bonds are essentially IOUs.

Flexi-access drawdown is a drawdown contract where withdrawals are unlimited, and has been available since 6th April 2015. If you were in “flexible drawdown” before this time, you will have been automatically converted to flexi-access on 6th April 2015.

With flexi-access drawdown there is no limit on the amount you can draw from your pension in any year. Whilst you will receive the first 25% of your pot tax free, you will be taxed income tax on the remainder. You can:

leave it all in the scheme
take the whole pension pot in one go
take just part of it

By taking income your annual allowance will reduce from £40,000 per year to £10,000 and you will be unable to use the carry forward option.

Before going into flexi-access drawdown we would strongly suggest seeking independent financial advice or guidance.

Beware of tax! By withdrawing your money you could be pushed over to higher rate tax, or you could be subject to emergency tax. If we have no notification of a tax code then you will be put on the emergency tax code 1060L on a Month 1 basis until further notification from HMRC is received.

Please contact us if you are thinking about going into drawdown.

A financial portfolio which pools money from many individuals to buy a broad range of assets. Funds are designed to grow an investor’s money, and in some cases, to provide them with a regular income.

A bond issued by the British government. The US equivalent are called Treasuries.

Bonds issued by governments. Typically these are considered safer than corporate bonds issued by companies in the same country e.g. gilts are issued by the UK government.

Growth stocks are characterised by fast growing revenues. These stocks typically have high P/E ratios (see Price to Earnings Ration (P/E)) and high price to book ratios (see Price to Book Ratio).

Hedging is used to reduce risks to a fund from adverse movements in interest rates, markets, currencies or share prices. Similar to hedging your bets.

A bond (see Bond) issued by a company or government which carries a lower credit rating (see Credit Rating). These bonds pay a higher yield than other bonds, reflecting the higher risk of default.

A type of retirement income which may pay you a higher regular retirement income if your life expectancy could be shortened because of your lifestyle or your state of health (for example, if you smoke).

Some defined contribution pension schemes allow you to take an income directly from your pension fund rather than using it to buy a regular retirement income. Your pension fund stays invested, so its value can go up and down. The income is taxable.

Pays out all of the fund’s net income to the investor in cash. Income can be paid out biannually, quarterly, monthly or even triannually.

Note: Income can still be reinvested to buy more units in the fund. Typically this is done where there is no accumulation share class (see Accumulation Share Class) available.

A passive fund (see Passive Fund) aiming to mirror the performance of a benchmark index (see Benchmark Index).

Bonds which are linked to an inflation index. For example, UK government index-linked bonds are linked to the UK Retail Price Index(RPI). These bonds are typically used to protect investors from high inflation. Government and corporate bonds can both be index linked.

The first time a company sells shares to the public.

A measurement (or ratio) of risk-adjusted returns. The information ratio is a special version of the Sharpe ratio (see Sharpe Ratio) in that the benchmark doesn’t have to be the risk-free rate.The information ratio also attempts to measure the consistency of the fund manager’s performance. A manager with a higher information ratio, is deemed to have consistently better performance.

Corporate bonds (see Corporate Bonds) carry a relatively low risk of default and have a high credit rating. As they are lower risk than high yield (see High Yield) bonds they tend to have a lower yield.

As you get nearer to retirement, the money you invested into your pension pot is moved gradually to investments that are less risky, and are less likely to lose value in the short term.

The degree to which a security can be bought or sold without affecting its price. Liquidity is often low in emerging markets and for smaller companies.

The market value of a company, determined by multiplying the number of shares by their current share price.

Forms of cash and near cash, such as bank deposits, certificates of deposit, fixed interest securities or floating rate notes, with a maturity date of under a year.

HMRC introduced the money purchase annual allowance (MPAA) to ensure that there are no potential recycling issues with individuals claiming tax relief on any new contributions made, having just taken their benefits.

The money purchase annual allowance is £10,000 and is triggered once you take income from your pension.

Total assets of a fund or company minus all liabilities and prior charges. Net asset value per share is calculated by dividing this figure by the number of ordinary shares/units in issue.

The majority of funds now refer to the OCF instead of the total expense ratio (TER) (See Total Expense Ratio (TER)), it includes the annual management charge (see Annual Management Charge) and is very similar to the TER, but it does not include any performance fees or transaction costs.

The price at which the unit trusts are bought by investors. The offer price tends to be higher than the bid price (see Bid Price), which is the price at which investors sell their units.

OEICs, unlike unit trusts (see Unit Trusts), are single priced so buyers and sellers of the fund pay the same price, although they may both have to pay a dilution levy (see Dilution Levy). A dilution levy is only charged where a fund provider incurs additional costs and it is intended to protect existing investors in the fund.

Legal agreements giving the holder the right, although not the obligation, to buy or sell the underlying asset at a specified expiration date, and at a price determined at the time of dealing. The price the seller receives for selling the option is called the ‘option premium’. The option premium is more expensive the longer the contract lasts and the more volatile the underlying security. See call (see Call Option) and put options (see Put Option).

This term refers to when the holding of an individual stock, industrial sector, or country in a fund is greater than the proportionate share of its relevant benchmark index (see Benchmark Index).

As opposed to active management (see Active Management), a passively managed fund will invest in a basket of securities and try to replicate a pre-determined benchmark index (see Benchmark Index). Tracker funds (see Tracker Funds) are an example of a passively-managed fund.

Tax-free cash lump sum that a member can take when they take retirement benefits from their pension pot

This gives an ex-spouse or ex-civil partner a share of a scheme member’s pension rights on divorce. The share is paid when the member takes the benefits.

The Pension Tracing Service is a service operated by the government, which helps scheme members find previous pension schemes. You may have collected a number of pensions over your lifetime, and you may now wish to consolidate them.

Click here for more details on your Personal Savings Allowance

How much of a fund’s performance can be attributed to specific factors such as stock selection or asset allocation.

A pension that is set up by the individual directly with a pension provider. You pay monthly amounts or a lump sum to a pension provider, who will invest it on your behalf.

This ratio is calculated by dividing the current share price by the company’s book value (see Book Value) per share. The price to book ratio is used as a measure of how expensive a company’s share price is. A company with a price to book value of exactly 1 would theoretically be worth exactly the same as its share price if it was liquidated immediately (assuming its balance sheet was accurate).

This is a valuation measure calculated by dividing the current share price by the last published earnings per share (net profit divided by the number of ordinary shares). The ‘P/E ratio’ gives investors a quick and easy way of seeing how a company is priced relative to its peers (with a higher P/E being more expensive), although it should not be relied upon by itself.

Property Authorised Investment Funds (PAIFs) are a hybrid between an OEIC a REIT. They have improved tax advantages for ISA investors (no withholding tax is charged) and are able to invest in a wider range of property investments than other types of property fund.

An agreement that gives the buyer of the put, the option to sell a security for a specified price within a specified time. The opposite of a call option (see Call Option). A holder of a put benefits when the value of a security declines.

A fund’s performance relative to its peers is often referred to in terms of quartiles. For example, a first quartile fund is one which its performance ranks it within the top 25% of all funds in that sector. First quintile (top 20%) and first decile (top 10%) are also used.

A statistical measure between 0-100 that represents the percentage of a fund or company’s movements that can be explained by movements in a benchmark index (see Benchmark Index). A fund with an R squared of 100 can be completely explained by movements in the index. You would expect index funds (see Index Funds) to have an R squared very close to 100. A low R squared (usually less than 70) means the fund doesn’t act much like the index and you should ignore its beta (see Beta).

A real estate investment trust (REIT) is a listed company whose primary activity is property investment. REITs own many types of commercial real estate, for example, offices, warehouses, hotels, hospitals and shopping centres. Some REITs also engage in financing real estate. They can be very tax efficient as no corporation or capital gains tax is paid on the company profits made from property investments. However, dividends are treated as income and are taxed accordingly and withholding tax is charged on distributions, unless held within a tax-efficient investment, such as an ISA.

A secondary offering occurs when a public company sells shares to investors at any time other than for the first time (see IPO).

Another word for stock, bond or company.Another word for stock, bond or company.

A type of personal pension, which gives the members more choice over how their pots are invested.

A ratio to measure risk-adjusted performance. The higher a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been. The Sharpe ratio is calculated by subtracting the risk-free rate of return (usually based on a 10-year government bond (see Government Bond)), from the rate of return for a fund and dividing the result by the standard deviation (see Standard Deviation) (volatility) of the portfolio returns. The Sharpe ratio helps to tell us whether a fund’s returns are due to smart investment decisions or a result of excess risk.

Short sellers employ this tactic when they believe a security’s price will decline. The seller borrows the security from another investor and then sells it in the open market. To close the position the short seller buys the security back in the open market at a later date before returning it to the original lender. They make money if the security has fallen in value and lose money if it has become more expensive.

A modification of the Sharpe ratio (see Sharpe Ratio) which only takes account of downside volatility as opposed to all volatility. A large Sortino ratio indicates a lower probability of a large loss.

This is applicable to dual priced funds and is the difference between the price at which investors buy units (see Offer Price) and the price at which they can be sold (see Bid Price). The spread includes any initial charge on the fund as well as the costs of trading in underlying securities.

Measures the volatility (see Volatility) of a fund’s returns. Funds with high standard deviation exhibit relatively more volatility than those with low standard deviation.

A regular payment from the government you can receive when you reach state pension age. The amount varies and is based on National Insurance contributions.

The current state pension age is 65, for men born before 6th December 1953, and between 60 and 65, for women born after 5th April 1950 and before 6th December 1953.

A new law has been introduced for men and women who will reach state pension age on or after 6th April 2016. Women’s state pension age will increase gradually to 65 between April 2016 and November 2018. From December 2018, the state pension age for both men and women will start to increase to reach 66 by October 2020. This is proposed to increase to 68 between 2044 and 2046, although this is subject to review.

Strategic bonds funds can invest into any category of fixed interest bond e.g. high yield (see High Yield), corporate bonds (see Corporate Bonds), gilts (see Gilts) etc. Strategic bond funds are therefore flexible and many utilise derivatives to protect against falling bond prices (often seen when interest rates rise).

Tax relief is what the government contributes to your pension, following a contribution, and is based on 20%.

Personal contributions into a pension plan receive tax relief at your highest rate of income tax. Basic-rate tax relief is added on to what you pay into your plan, and the pension provider will add this 6-11 weeks after a personal contribution is made. Higher and additional-rate tax relief can be claimed in addition to basic-rate tax relief through your tax return, if applicable. Find out more here.

To work out your threshold income add:

taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
rental income from property
dividends
interest on savings
self-employed earnings

A management style whereby the manager takes into account the greater market and wider economic picture to enable them to allocate assets to sectors and regions, before selecting stocks.

The total annual cost of managing a fund, which is charged to an investor. The cost includes the annual management charge (AMC) (see Annual Management Charge) and other fees such as legal costs, trading fees and operational expenses. In order to arrive at the TER, the total costs of the fund are divided by the fund’s total assets producing a percentage amount which represents the TER. Unlike the OCF (see Ongoing Charges Figure), the TER does include transaction costs and performance fees.

The investment return consisting of both the capital appreciation and reinvested income.

The expected and actual maximum deviation of a fund’s returns from those of a relevant index or benchmark.

A passive fund (see Passive Fund) aiming to mirror the performance of a benchmark index (see Benchmark Index).

A measure of trading activity within a fund, indicating how active a manager has been in buying and selling the stocks held within the portfolio. Neither high nor low turnover is necessarily good or bad and the number will generally just reflect the individual manager’s investment style. For example, 100% turnover indicates that on average each stock is held for one year.

Undertakings for Collective Investments in Transferable Securities (UCITS) are investment funds that have been established in accordance with European Law. A fund authorised in one EU Member State can be freely marketed in any other Member State.

UCITS are subject to rules as to what they can invest in, how much they can borrow and how much of the fund can be exposed to any one counterparty.

This term refers to when the holding of either an individual company, industrial sector or country in a fund is lower than that of its relevant benchmark index (see Benchmark Index).

A trust which allows investors to pool their assets together and invest in a broad number of securities. Unit trusts are dual priced and have both a buy (see Offer Price) and sell (see Bid Price) price as opposed to OEICs (see OIECs).

These stocks often have low P/E ratios (see Price to Earnings Ratio (P/E)) and above-average dividend yields. They typically have slower earnings growth and low price to book ratios (see Price to Book Ratio). Value investing is essentially buying stocks which are cheap.

How fast, and by how much, the price of a security, sector or market changes over a period of time. A price that often moves significantly will be considered to have a high level of volatility.

The yield curve is a graph which plots interest rates for similar bonds which have different contract dates and mature on different dates. Typically bonds which mature sooner will have lower yields because investors’ money is tied up for a shorter amount of time. However, this is not always the case and yields can vary for a variety of reasons.

Resources

Glossary

Keep up to date

Sign up to our mailing list