Fund terms glossary

Absolute return
With an absolute return strategy, the source of return is not connected to traditional investments. The aim is to offer positive returns, whether share or bond markets rise or fall.

Accumulation units
Type of unit in a collective investment scheme where the income is reinvested automatically, thereby increasing the unit price.

Alpha
A positive alpha is a measure of how much a fund has outperformed its benchmark, and a negative alpha is a measure of how much a fund has underperformed its benchmark. As the benchmark is assumed to have a return of zero any returns over this are often seen as a key measure of the ‘added value’ of an active fund manager.

Alternatives
The ‘alternatives’ class covers a range of investments. The main parts are commodities such as oil, infrastructure such as communication and transport, hedge funds and absolute return funds (an absolute return fund aims to make positive returns by using investment management techniques and classes of asset that differ from traditional funds).

Annual management charge (AMC)
A charge taken from the fund. The charge is expressed as a percentage per annum but is normally taken daily from the fund and is calculated based on the value of funds under management. Normally the fund manager reserves the right to review the level of charge.

Annualised volatility
The annualised standard deviation of the monthly returns of a fund over a given period – a measure of risk. Please see Volatility.

Asset allocation
The process of spreading investments among different kinds of asset classes such as equities, bonds, property and money market assets.

Asset backed securities (ABS)
An asset-backed security (ABS) is an investment backed by a loan, lease or mortgage payments. The owner of the ABS receives a share of the interest and principal payments made to the loan holder. Assets held in these vehicles can include payments from credit cards, auto loans, and mortgage loans, to cash flows from aircraft leases, royalty payments and movie revenues.

Asset class
This refers to the different types of investments that funds or individuals may invest in, such as equities, bonds, property or money market assets.

Asset leasing
An asset leasing fund uses its capital to buy goods that are then leased to companies that operate them as part of their core business. Examples include aircraft to airlines or ships to freight companies. In return for providing the asset, the fund receives a predetermined fee over the course of the lease and receives the asset back at the end of the lease, at which point it can be leased again or sold.

Benchmark
A measure against which the performance of a fund is compared. The benchmark could be an index, for example the FTSE 100, or a sector average. The benchmark is disclosed in the fund documentation.

Beta
Beta is a measure of how closely the performance of the fund has mirrored its chosen benchmark. If the Beta is one then it is exactly the same, beta of 1.5 implies that a fund has risen/fallen by 50% more than the market. Passively managed funds aim for a beta of one.

Bid price
The price at which you can sell units of a fund. This term is usually used when a fund has different prices for buying and selling. All AXA IM Select funds are single priced. Please see Offer Price.

Blue chip
A security from a large, well-established reputable company.

Bonds
Also referred to as Fixed Interest Securities. A bond can be issued by either a company or a government and is a way of raising capital. Investors buying a bond are effectively loaning money to the issuer. Most bonds promise to pay a fixed rate of interest for a given period of time, at the end of which the holders are, in most cases, repaid the capital sum. It is important to remember that these securities can be traded in the market, so their value can go down as well as up.

Bottom-up
An investment approach. A bottom-up investment manager will concentrate on stock selection rather than asset allocation or sector selection. Economic issues and asset allocation guidelines are considered, but are not of primary importance in the construction of the portfolio.

Capitalisation
Total market value of a company, calculated by multiplying the number of shares by the price per share. Companies are usually classified as either large cap, medium cap or small cap.

Catastrophe reinsurance
Catastrophe reinsurance is the money provided to cover the insurance claims arising from catastrophic natural disasters. Regulators require insurance companies to ensure they have enough capital to pay-out all policyholders without going bankrupt in this scenario. In exchange for providing this capital, the catastrophe reinsurance company receives an insurance premium, which is the return that the investor receives. The returns are largely uncorrelated with factors that affect financial markets, making them a useful diversifier in an investment portfolio and holds particular appeal in uncertain market conditions.

Collective investment schemes
A generic term for investment funds with more than one investor, for example unit trusts, open-ended fund companies, offshore funds and investment trusts, which are managed by professional managers. By pooling their investments, investors can gain exposure to a wide number of underlying investments (e.g. bonds or equities).

Commodities
A commodities fund invests in a range of commodities including industrial metals, precious metals, energy, livestock and grains.

Convertible bonds
Bonds that can be converted to shares of the same issuing company.

Corporate bond
Corporate bonds are issued by companies to raise money as an alternative to issuing equities. Similar to government bonds but subject to commercial risk, corporate bonds will pay a regular rate of interest and will generally be redeemed at their issue price on a set date.

Coupon
The interest payment made from a bond.

Derivatives
Derivatives are financial contracts, or financial instruments, whose values are based on, or ‘derived’ from, the value of something else, such as a bond, equity or currency. Derivatives offer investors exposure to the performance or risk characteristics of an underlying investment instrument, without actually owning the instrument.

Diversification
Diversification or not “putting all your eggs in one basket”. By spreading out our funds, we aim to spread the investment risk across a range of assets, geographic regions, investment styles and managers such as corporate bonds, US shares and UK property. By doing this, we aim to reduce the risk the portfolio would be exposed to if the assets were all in one area or class of asset. Bringing together funds that tend to behave differently in varying market conditions may help to prepare a portfolio for a range of market conditions.

Dividends
The distribution of part of a company’s earnings to shareholders.

Emerging markets
Countries that are progressing toward becoming advanced, usually shown by some development in financial markets, the existence of some form of stock exchange and a regulatory body.

Environmental, Social, Governance (ESG) integration
The systematic and explicit inclusion of ESG information in investment processes, with the objective of enhancing investment decision-making. ESG integrated investors take into account the effect that ESG issues may have on the performance of individual investments or on whole portfolios.

Equities
Also referred to as shares. An instrument that signifies an ownership position, or equity, in a corporation.

Exchange traded funds (ETF)
Exchange traded funds (ETFs) are open-ended, this means that you can buy or sell in and out of them at any time that the market is open, and they can track almost any stock market index all over the world. Their price directly reflects the underlying value of the investments they hold.

Fixed interest securities
Also referred to as Bonds.

Focus fund
A fund that holds large positions in a small number of stocks. The fund concentrates investments in fewer companies, commonly no more than 20-30, selected for their future growth potential. Such concentration increases the overall risk profile of the fund as the price movement of a single stock in a concentrated portfolio may have a greater positive or negative effect on overall portfolio performance.

Foreign Exchange hedging
Foreign exchange hedging is the act of entering into a financial contract to protect against changes in currency exchange rates. Currency hedging is used by financial investors and businesses to reduce the possible risks around international investment. Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.

Fund of funds
A fund which holds a portfolio of other funds rather than investing directly in shares, bonds or other securities.

Geographic region
It is possible to invest in bonds, property and shares from different countries and regions across the world.

Government bond arbitrage
Government bond arbitrage involves the simultaneous buying of a government bond in one market and selling it in another to capture a disparity in value.

Gross income yield
The annual gross dividends as a percentage of the current share price. It is a way of indicating the level of income an investor will receive.

Ground rents
A ground rent is created when a freehold piece of land or a building is sold on a long lease. The individual leases provide an annual payment, known as ground rent, to the freeholder. These payments represent a very small amount, relative to the lease value, but failure to pay results in the leaseholder losing the property to the freehold owner; therefore there is a strong incentive to pay and a very low default rate. Ground rents have pre-defined payment terms that often include a periodic increase in-line with inflation.

Hedging
Hedging is a way of protecting against unforeseen events and reducing risk. For example if a share or portfolio take an unforeseen turn, holding an alternative option to your position will reduce the risk and help limit losses.

Hedge funds
You will have heard the term ‘hedge your bets’ used in a way of taking one action to counteract the result of another action and there is a similar process in investments. The term “hedge” in investments is an investment position intended to offset potential losses/gains that may be incurred by a companion investment. In simple language, a hedge is used to reduce any substantial losses/gains suffered by an individual or an organisation. A hedge fund is an investment vehicle that uses a number of different ‘hedging’ and ‘leveraging' techniques to manage and grow the value of the fund.

Hybrid
A hybrid fund aims to combine a Fund of Funds investment approach with a Manager of Managers investment approach.

Impact investing
Impact investing, as defined by the Global Impact Investing Network (GIIN), is the process of making investments with the intention of generating a measurable social and environmental impact alongside a financial return. (The GIIN is a non-profit organization dedicated to increasing the scale and effectiveness of impact investing around the world). The United Nations Development Programme (UNDP) has provided three guiding principles which help to define and differentiate impact investments: the expectation of a financial return; the intention to tackle social or environmental challenges and a commitment to measuring and reporting against the intended social or environmental impact.

Income
The dividend payment from equities or interest paid on bonds.

Income units
Type of unit in a collective investment scheme where the income is distributed to the unit holders.