Resources

FAQs

What is an investment company?

Investment companies are quoted companies listed on the London Stock Exchange. They are subject to the listing rules of the UK Listing Authority under the Financial Services and Markets Act. An investment company invests in shares and securities of other companies that trade on stock markets.

What is the role of the portfolio manager?

The portfolio manager has responsibility for the daily operations of the Company and its portfolio. They are the decision-makers regarding where to invest capital held by the Company, and when to sell. The portfolio manager drives the strategy for enabling the Company to reach its investment objectives.

What is the role of the Board?

An independent Board of Non-Executive Directors is responsible for oversight of the Company. The Board is also responsible to shareholders and oversees the relationship with the portfolio manager to ensure that the Company’s objectives are met.

What is the net asset value (NAV)?

The NAV is the value per share of all the assets owned by an investment company. Net asset value is calculated as the value of the company’s holdings, plus cash and income, less any borrowings and charges. If the company’s ’s assets increase in value, the NAV will grow, and likewise if the assets decrease in value, the NAV will decrease.

What are premiums and discounts?

Often the company’s share price will differ from the NAV. If the share price is above the NAV, the company is described as trading at a premium. When the share price is below the NAV, the company is trading at a discount.

What is the mid price?

The mid price is the average of the closing buy and sell prices. An investment company’s underlying investments are valued at the mid prices of the previous day’s closing.

What is the dividend policy?

A company’s dividend policy dictates the amount of dividends paid out by the company to its shareholders and the frequency with which the dividends are paid.

The Board and the Portfolio Manager are very focused on the sustainability of the Company’s dividend policy and regularly monitor and review the position.

Will the Company use gearing?

SMIF will not employ gearing or derivatives for investment purposes, but is expected to employ gearing and/or derivatives in order to manage key investment risks, including the management of Interest Rate Duration.

The Company may, from time to time, also use borrowing for short-term liquidity purposes, which could be achieved through a loan facility or other types of collateralised borrowing instruments including repurchase transactions or stock lending.

The Company is permitted to provide security to lenders in order to borrow money, which may be by way of mortgages, charges or other security interests or by way of outright transfer of title to the Company’s assets. The Articles restrict aggregate borrowing to an amount not exceeding 10 per cent. of the Company’s Net Asset Value at the time of drawdown. Derivatives may be used for currency hedging purposes as set out below and for efficient portfolio management. At the date of this Prospectus, the Company has not incurred any borrowings or indebtedness

What is a Quarterly Tender?

A quarterly tender is an opportunity for shareholders to sell their shares back to the Company once a quarter during any 12-month period. It acts as a discount control mechanism to help minimise the risk of the Ordinary Shares trading at a significant discount to NAV.

How many shares can I sell?

Each individual can choose how many shares they want to sell. However, no more than 20% of the total number of Ordinary Shares in issue may be tendered during a quarter and no more than 50% during a 12-month period. Should the 50% limit be exceeded, the Board would convene a General Meeting in accordance with the Continuation Vote requirements, as set out in note 16 of the Financial Statements. The execution and acceptance of the quarterly tender is at the sole discretion of the Board.

How can I invest?

SMIF’s shares are traded on the London Stock Exchange. They can be bought by placing an order with a stockbroker or by asking a professional adviser to do so.

If you are not sure whether an investment company is the right investment for you, it is recommended that you speak to a financial adviser.

Risks

For a full suite of applicable risks, please refer to the latest financial statements and/or latest prospectus, both available here.

How can I find the latest share prices and NAVs?

The share prices and NAV for SMIF are available via the London Stock Exchange website, or the fund’s own website here.

Who is the registrar for TwentyFour Select Monthly Income Fund?

Computershare Investor Services (Guernsey) Limited has been appointed as Registrar to the Company.

Who should I contact for general enquiries?

The Company Secretary will be able to direct your queries:

Useful links

www.theaic.co.uk

Glossary

A

ABS – asset-backed security
An investment (usually a bond) that derives its value from a pool of assets, such as loans or mortgages. In the latter case, the ABS is specifically a mortgage-backed security.

Active management
An approach to investing whereby capital is allocated according to the judgment of the investor or fund manager(s). An active investor aims to beat the returns from a specified index/sector, rather than match them.

AFME – Association for Financial Markets in Europe
An industry body representing participants in Europe’s wholesale financial markets, including participants in the fixed income and securitisation markets.

AIC – Association of Investment Companies
The UK trade association representing investment companies. The AIC provides industry guidance, information and representation and publishes the AIC Code of Corporate Governance for investment companies.

AIFM – alternative investment fund manager
The entity responsible for managing an alternative investment fund in accordance with applicable regulatory requirements. Its responsibilities may include portfolio management, risk management and oversight of activities delegated to other service providers.

AIFMD – Alternative Investment Fund Managers Directive
A European regulatory framework that governs managers of alternative investment funds, including requirements relating to areas such as authorisation, risk management, transparency, delegation and depositary arrangements.

Alpha
A measure of an investment portfolio’s outperformance of its benchmark: the excess return that the portfolio generates. An alpha of 0 means that the portfolio performed in line with its benchmark. An alpha of 1 means that the portfolio outperformed by one percentage point (for example, a return of 7% against a benchmark return of 6%). Alpha can be positive or negative: if a portfolio returns -6.5% and the benchmark returns -4%, then the alpha is -2.5.

Amortisation
The gradual repayment of the principal of a loan or security over time. Many of the loans underlying asset-backed securities (such as mortgages) amortise as borrowers make regular principal repayments.

Annual financial statements
The financial statements prepared by a company for each financial year. These typically include statements showing the company’s financial position, income and expenses, changes in shareholders’ equity and cash flows, together with accompanying notes and the independent auditor’s report.

APM – alternative performance measure
A financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.

Asset
Anything having commercial or exchange value that is owned by a business, institution or individual.

Asset allocation
Apportioning a portfolio’s assets according to risk tolerance and investment goals.

Asset class
A category of assets, such as cash, company shares and fixed income securities and their sub-categories, as well as tangible assets such as real estate.

AT1 – Additional Tier 1 capital
A category of regulatory capital issued by banks, typically in the form of deeply subordinated securities. AT1 securities are designed to absorb losses if a bank comes under financial stress and therefore carry greater risk than more senior bank debt. Most AT1 securities are CoCos (contingent convertible bonds).

Auditor
An independent firm appointed to examine a company’s annual financial statements and provide an opinion on whether they have been prepared, in all material respects, in accordance with the applicable financial reporting framework.

Average rating
The weighted average rating of a fund’s assets excluding cash..

B

Balance sheet
A statement that summarises a company’s financial status. The balance sheet shows the company’s assets, equity and liabilities. If a company is said to have a “strong balance sheet”, it is being described as financially sound.

Basis point
One hundredth of a percentage point. Basis points are used to measure the difference between two percentages. So, if a bond yield falls from 3.75% to 3.65%, it has fallen by 10 basis points. Often abbreviated to bp, i.e. the yield has fallen by 10bp.

Bank capital
The difference between a bank’s assets (including the loans it has made to customers) and its liabilities (including customer deposits, on which the bank pays interest).

Bear market
A market in which the prices of securities are generally falling, and widespread pessimism often causes the negative sentiment to be self-sustaining.

Benchmark
An index, interest rate or other measure used as a reference against which the performance, risk or other characteristics of an investment or portfolio may be compared. A benchmark may be used for comparison purposes without necessarily representing a performance target for the investment manager.

Beta
A measure of an investment or an investment portfolio’s volatility relative to the market. An investment with a beta of 1.0 will move in line with the market, whereas a lower beta investment will be less volatile than the broader market and a high beta investment more volatile.

BoE
Bank of England

Bond
A debt security through which an issuer, such as a company or government, borrows money from investors. Bonds normally provide interest payments, which may be fixed or variable, and repayment of principal in accordance with their terms. The value of a bond can rise or fall before it matures.

Bond issue
A set of fixed income securities offered for sale to the public by a company or government. If the bonds are sold for the first time, it is called a “new issue”.

Book value
A measure of a company’s worth, calculated by deducting its liabilities from its assets.

Bottom-up selection
Choosing assets for a portfolio based on the attractiveness of the issuing entities.

BTL RMBS – buy-to-let residential mortgage-backed securities
Securities backed by loans secured on residential properties that have been purchased by borrowers for rental purposes.

BoP
Bank of Portugal

BoJ
Bank of Japan

Bull market
A market in which the prices of securities are generally rising, often characterised by investor optimism and confidence in continuing strong returns.

Bund
A bond issued by the German government.

Buyback (share buyback)
The repurchase of shares by the company that issued them. A company may do this to return cash to its shareholders, to boost its share price or to demonstrate confidence in the outlook for its business.

Buy-and-hold strategy
An investment approach that seeks to deliver returns by investing in assets for the long term, regardless of the short-term ups and downs of the markets.

C

CAGR – compound annual growth rate
The average yearly growth rate of an asset over a given period, assuming that all returns are reinvested.

Callable bond
A type of bond that can be called by the issuer at some point before maturity, at which point the principal will be repaid to the investor. This can allow the issuer to borrow again on more attractive terms (when, for example, central banks have cut interest rates); the investor usually receives a more attractive coupon than that from an equivalent conventional bond.

Capex – capital expenditure
A company’s spending on physical assets, such as buildings, machinery and computer systems.

Capital
The financial assets or resources that a company has to fund its business operations.

Capital at risk
The risk an investor faces of losing all or part of the money invested.

Capital growth
A positive change in the value of an investment.

Capital return
The gain or loss derived from an investment over a particular period. Capital return includes capital gain or loss only and excludes income (in the form of interest or dividend payments).

Capital structure
The composition of a company’s liabilities: the way the company finances its assets through a combination of equity (funds raised by selling shares) and debt. When capital structure is discussed, the focus is often on the company’s debt-to-equity ratio, which is an indicator of how risky the company is.

Carry
The income or return generated from holding an investment over time, before taking account of changes in its market price. In fixed income, carry is generally derived from interest or coupon income, adjusted where relevant for financing or other holding costs.

Cash equivalents
Deposits or investments with similar characteristics to cash.

CET1 – Common Equity Tier 1 capital.
The highest quality form of regulatory capital held by a bank, consisting principally of ordinary shares and retained earnings. CET1 is intended to absorb losses while a bank remains a going concern and is an important measure of a bank’s financial strength.

CLO – collateralised loan obligation
A type of securitisation backed primarily by a diversified portfolio of corporate loans, typically leveraged loans. A CLO issues different tranches of securities with different priorities for receiving payments and absorbing losses, and is generally managed by a specialist CLO manager.

Closed-ended fund
An investment fund that issues a fixed number of shares, which are then traded on the stock market. The portfolio manager uses the money raised from the sale of shares to make investments in different assets. A closed-ended fund will often trade at a discount or premium to its net asset value. Compare with open-ended fund.

CMBS – commercial mortgage-backed security
A type of asset-backed security. A mortgage-backed security backed by commercial mortgages rather than residential mortgages.

CoCo – contingent convertible bond
A type of bond that converts into equity or suffers a principal write-down when a specified event occurs. CoCos are issued by banks and are triggered if the bank’s capital falls below a certain level. This means that the bank no longer has to pay the bond’s coupon, which protects the bank if it is under financial stress. Because of this risk, CoCos usually offer high yields. Most AT1 securities are CoCos.

Collateral
Assets that support or secure a financial obligation. In a securitisation, the term is commonly used to describe the pool of loans, mortgages or other assets whose cash flows support payments to investors.

Concentration risk
The risk of a portfolio being excessively exposed to a particular issuer, borrower, sector, geographic area, asset type or other common characteristic. Diversification across different exposures can help to reduce concentration risk.

Consumer receivables
A large variety of consumer debt types that have been securitised, including auto loans, credit card receivables and unsecured personal loans.

Convertible bond
A type of bond that can be exchanged for a predetermined amount of company shares at certain times during its life.

Corporate bond
A fixed income security issued by a company. Corporate bonds can offer higher interest payments than bonds issued by governments as they are typically considered riskier.

Corporate broker
A stockbroker appointed by a listed company to advise on matters relating to its shares and the stock market. This may include providing market intelligence, liaising with investors and advising on share issuance, buybacks and other capital management activities.

Correlation
The tendency of asset prices to move in similar ways in response to events. If all the assets in a portfolio are highly correlated, then the portfolio will not have sufficient diversification should those assets fall in price. Appropriate diversification can be achieved by holding investments with low correlations to each other.

Coupon
The interest paid by a government or company that has raised funds by selling bonds to investors.

CPI – Consumer Prices Index
An index used to measure inflation, based on the rate of change in prices for a basket of goods and services. The contents of the basket are meant to be representative of the products and services a typically consumer purchases.

Credit
Debt investments in which an investor lends money, directly or indirectly, to a company, financial institution, consumer or other borrower. Credit investments can include corporate bonds, loans and asset-backed securities.

Credit duration
A measure of the sensitivity of a bond or portfolio to changes in credit spreads. A higher credit duration generally means that the value of the investment will be more sensitive to a given change in credit spreads. It is also commonly referred to as spread duration.

CDS – credit default swap
A type of derivative: financial instruments whose value and price are dependent on one or more underlying assets. A CDS is an insurance-like contract that allows investors to transfer the risk of a fixed income security defaulting to another investor.

Credit enhancement
Features designed to reduce the credit risk of a securitisation and provide protection for more senior tranches against losses in the underlying assets. Credit enhancement may include subordination, excess spread, overcollateralisation or other forms of protection.

Credit rating
An independent assessment of a borrower’s ability to repay its debts. A high rating indicates that the credit rating agency considers the issuer to be at low risk of default; conversely, a low rating indicates a higher risk of default. Standard & Poor’s, Fitch and Moody’s are the three most prominent credit rating agencies.

Credit rating agency
A company that analyses the financial strength of issuers of fixed income securities and attaches a rating to their debt. Examples include Standard & Poor’s and Moody’s.

Credit research
The process of evaluating a fixed income security, also called a bond, to ascertain the ability of the borrower to meet its debt obligations. This research seeks to identify the appropriate level of default risk associated with investing in that particular bond.

Credit risk
The risk that a financial obligation will not be paid and a loss will result for the lender.

Credit spread
The additional yield that investors require for holding a credit investment rather than a comparable lower risk reference security or rate, often a reference government bond. Credit spreads compensate investors for risks including the possibility of default and changes in liquidity or market conditions. Spreads are commonly expressed in basis points.

Currency hedge
The use of financial instruments, typically foreign exchange forward contracts or other derivatives, to reduce the effect of movements in exchange rates on an investment or portfolio.

Custodian
A financial institution responsible for the safekeeping of a company or fund’s financial assets and, depending on its appointment, for carrying out associated settlement and asset servicing activities.

D

Default
A situation in which a borrower fails to maintain interest payments or repay the amount borrowed when due.

Default risk
The risk that a debtholder will not receive interest and full repayment of the loan when due.

Deflation
A decline in the prices of goods over a given period; the opposite of inflation. Compare with disinflation.

Delinquency
A payment on a loan or other debt that has not been made by its contractual due date. In asset-backed securities, delinquency levels are one measure used to assess the performance and credit quality of the underlying pool of assets.

Depositary
An independent entity appointed to perform certain safekeeping, cash flow monitoring and oversight responsibilities in relation to an investment fund, as required by the applicable regulatory framework.

Derivative
A financial instrument whose value and price are dependent on one or more underlying assets. Derivatives can be used to gain exposure to, or to help protect against, expected changes in the value of the underlying investments. Derivatives may be traded on a regulated exchange or “over the counter” directly between counterparties.

Developed economy or market
A well-established economy with a high degree of industrialisation, standard of living and security. Investments in developed markets are generally considered less risky than investments in emerging markets.

Discount/premium
The difference between an investment company’s share price and its net asset value (NAV) per share. If the share price is below the NAV per share, the shares are said to trade at a discount. If the share price is above the NAV per share, they are said to trade at a premium. The discount or premium is normally expressed as a percentage of NAV per share.

Disinflation
A slowing of the rate of inflation, so that prices continue to rise but by less than before. Compare with deflation.

Dividend
A payment made by a company to its shareholders, usually from income or distributable reserves. For an income-focused investment company, dividends are an important component of shareholder returns and may be paid at regular intervals in accordance with the company’s dividend policy. The amount of any dividend can vary and is not guaranteed.

Dividend cover
A measure comparing the income or earnings available to support dividends with the amount of dividends paid or declared. Dividend cover can indicate the extent to which dividends are supported by current period earnings, though an investment company may also be permitted to pay dividends from other distributable reserves.

Dividend policy
A company’s stated approach to determining and paying dividends to shareholders. The policy may set out matters such as the intended frequency of payments and the basis on which the level of dividends is determined. Dividends are not guaranteed.

Dividend declared
The dividend that is announced in respect of a particular period.

Dividend yield
Dividend yield is a company’s annual dividends per share divided by the current share price, expressed as a percentage.

Downside protection
The ability to avoid the worst of a downturn in a market or asset class. This might be achieved through diversification, hedging or other active risk management.

Downside risk
The risk that an investment will fall in value, whether because of a change in direction in the overall market or because of something specific to the individual investment.

Diversification
A risk management technique that involves investing in a variety of assets, industries or geographies. In a well-diversified portfolio, losses from a particular holding or market can be offset by gains in other holdings, thereby lessening the impact on overall returns.

DoJ
Department of Justice

Drawdown
A fall from the highest point to the lowest, often used in reference to valuations in a market or for a fund. Sometimes used informally to mean simply a decline (for example of a share price).

Duration
A measure of the sensitivity of a bond or portfolio to changes in underlying interest rates. Higher duration generally means that the value of an investment will be more sensitive to a given change in interest rates.

Duration risk
The risk that arises from a bond or a bond portfolio’s sensitivity to changes in interest rates. The longer a bond or portfolio’s duration, the more sensitive and therefore at risk it is to changes in interest rates.

E

EBITDA – earnings before interest, taxes, depreciation and amortisation
A measure of a company’s operational profitability (that is, without considering any debts or costs that the company may have).

ECB
European Central Bank

Economic cycle
The rise and fall of economic activity, from expansion to contraction. This typically occurs over a period of years.

Emerging economy or market
An economy in the process of rapid growth and increasing industrialisation. Investments in emerging markets are generally considered to be riskier than those in developed markets.

Engagement and voting
Activities undertaken by an investment manager when engaging with issuers and exercising voting rights associated with investments. Engagement may include discussions with issuers on financial, strategic, governance, environmental or social matters.

Equity (shareholders’)
The total of a company’s assets minus its liabilities. Equities and stocks are alternative terms for shares.

Equity (ABS)
The most junior part of the capital structure of an asset-backed security. The equity tranche generally absorbs losses before more senior tranches and may receive residual cash flows after amounts due to senior tranches and other costs have been paid. It therefore typically carries greater risk and potentially higher returns than more senior tranches.

ESG – environmental, social and governance
ESG factors may be considered when assessing an investment. These can include a company’s environmental impact, treatment of employees and other stakeholders, and the quality of its governance and business practices. Such factors can affect the risks, opportunities or long-term financial performance of an investment.

ETF – exchange-traded fund
An open-ended investment fund that trades on a stock exchange. Unlike the shares of an investment company, shares in an ETF do not typically trade at a discount or premium to their underlying assets. Most ETFs are passive strategies that track an index, although active ETFs also exist.

Ex-dividend date
The date from which a company’s shares trade without entitlement to a particular declared dividend. An investor who buys the shares on or after the ex-dividend date will not normally receive that dividend.

Excess spread
The difference between the income generated by the assets underlying a securitisation and the interest and other costs payable by the securitisation. Excess spread may provide a form of credit enhancement by absorbing some losses before they affect investors in the securitisation.

Exposure
The proportion of a fund invested in a particular share, bond, sector, region or asset class, usually expressed as a percentage of the overall portfolio.

F

Face value
Nominal/par amount of a bond repayable at maturity.

Fair value
The expected price that would be received in selling an asset, or paid in transferring a liability, in an orderly transaction between market participants at the measurement date.

Fair value hierarchy (Levels 1, 2 and 3)
A framework used under IFRS Accounting Standards to classify investments measured at fair value according to the inputs used to determine their valuation.
Level 1 valuations use quoted prices in active markets for identical assets.
Level 2 valuations use observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets or other market-observable information.
Level 3 valuations use significant inputs that are not based on observable market data and may therefore require greater use of valuation techniques, assumptions and judgment.
The classification relates to the observability of the valuation inputs and does not itself represent a measure of the credit quality or investment risk of the asset.

Flattening yield curve
When the yields on longer dated bonds rise less (or fall further) than the yields on shorter dated bonds, the yield curve is said to flatten. Longer dated bonds typically have higher yields than shorter dated ones, so the yield curve – the difference between short and long end yields – is usually somewhat steep, but this can change, especially when investors expect economic conditions to worsen. See also steepening yield curve and inverted yield curve.

Fiscal policy
Government measures related to taxation, spending and borrowing.

Fixed income security
A bond: a loan in the form of a security, usually issued by a government or company, which normally pays a rate of interest over a given time period, at the end of which the initial amount borrowed (the principal) is repaid.

FOMC – Federal Open Market Committee
The branch of the Federal Reserve (the US central bank) that determines the direction of US monetary policy. The FOMC comprises a seven-member board of governors plus five Reserve Bank presidents.

Forward contract
A contract between two parties to buy or sell a particular commodity or financial instrument at a pre-determined price at a future date. Examples include forward currency contracts.

FRN – floating rate note
A security whose interest payment is periodically adjusted depending on the change in a reference interest rate.

Full payout model
An approach under which substantially all of the income available for distribution is intended to be paid to shareholders as dividends, subject to applicable expenses, reserves, legal requirements and the company’s dividend policy.

Fund administrator
A service provider responsible for the day-to-day administration and accounting of a fund or investment company. Its responsibilities may include maintaining accounting records, calculating net asset value and supporting financial and regulatory reporting.

Fundamentals (company)
An umbrella term for a range of factors typically used to assess a company’s financial health, such as its business model, earnings, balance sheet and debt.

Fundamentals (economic)
An umbrella term for a range of factors typically used to assess the current performance or outlook for an economy or group of economies, such as inflation, unemployment and GDP growth.

Future
A contract between two parties to buy or sell a particular commodity or financial instrument at a pre-determined price at a future date. Futures are traded on a regulated exchange.

FX – foreign exchange
The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around the clock.

G

GDP – gross domestic product
A measure of a country’s economic activity, typically used in the context of its rate of expansion (GDP growth) or contraction.

Gearing
The use of borrowing or other forms of leverage by an investment company to increase its investment exposure. Gearing can increase potential returns when investments perform well but can also increase losses when they perform poorly.

GFSC Code
The corporate governance framework issued by the Guernsey Financial Services Commission for regulated entities within its scope. It establishes principles relating to the effective governance and oversight of regulated businesses.

Gilt
A bond issued by the UK government.

Government bond
A fixed income security issued by a government, which normally pays a fixed rate of interest over a given time period, at the end of which the initial investment (the principal) is repaid.

Green bonds
A bond issued to raise money for an environmental project or to support more general environmental objectives.

Gross purchase yield
The return a bond earns on the price at which it was purchased if held to maturity.

Gross redemption yield
The gross redemption yield is calculated using the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond and takes into account any capital gain or loss over the full period and assumes that all interest payments are reinvested.

Gross yield
The yield on an investment before the deduction of taxes and expenses. It is calculated as the annual return on an investment prior to taxes and expenses divided by the current price of the investment.

H

Hedging
A method of reducing unnecessary or unintended risk.

High yield bond
A fixed income security issued by a company with a lower credit rating from a recognised credit rating agency (companies rated BBB-/Baa3 or higher are dubbed “investment grade”). High yield bonds generally carry greater risk of default than higher rated bonds, but with the potential for higher returns.

Historic yield
The distributions declared over the past 12 months as a percentage of the share price, as at the date shown.

I

IFRS Accounting Standards
International financial reporting and accounting standards issued by the International Accounting Standards Board (IASB), which provide requirements for the recognition, measurement, presentation and disclosure of financial information.

Illiquidity
The condition of an asset being difficult to buy or sell. See liquidity.

Income investing
An investment approach that seeks to generate a significant proportion of investment returns from income produced by the underlying investments. In fixed income portfolios, this income is principally generated through interest and coupon payments.

Income yield
The income received from an investment, usually expressed annually as a percentage based on the investment’s cost, its current market value or face value.

Index
A representation of a particular market or a portion of it, serving as a performance indicator for that market.

Index-linked bond
An inflation-linked bond. A fixed income security where both the value of the loan and the interest payments are adjusted in line with inflation over the life of the security.

Inflation
The rate of increase in the cost of goods and services in an economy. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.

Inflation risk
The risk that inflation will reduce the return of an investment in real terms.

IPO – initial public offering
The first sale of shares by a private company to the public.

Interest rate swap
An agreement between two parties to swap a fixed-interest payment with a variable-interest payment over a specified period of time.

Internal controls
The policies, processes and procedures established by a company to help manage risk, safeguard assets, maintain reliable financial reporting and support compliance with applicable requirements. Under investment company governance arrangements, the Board is responsible for monitoring the effectiveness of the company’s risk management and internal control framework.

Inverted yield curve
A situation in which shorter dated bonds offer higher yields than longer dated bonds.

Investment company
A company whose purpose is to invest a pool of capital in a portfolio of assets on behalf of its shareholders. A closed-ended investment company has a defined number of shares in issue, subject to subsequent issuance and buybacks, and its shares are traded on a stock exchange. The market price of its shares may therefore trade at a discount or premium to its net asset value per share.

Investment grade bond
A fixed income security issued by a company with a credit rating BBB-/Baa3 and above from a recognised credit rating agency. Investment grade bonds generally carry lower default risk than those issued by companies with lower credit ratings (sub-investment grade or “high yield” bonds).

Issuance
The act of selling securities such as shares or bonds to investors.

Issuer
An institution that sells securities, such as bonds and shares.

iTraxx
A family of credit derivative indices referencing baskets of credit default swaps on corporate or other entities. The indices are widely used to measure, trade or hedge credit market exposure.

iTraxx Crossover (Xover)
A credit derivative index referencing a basket of sub-investment grade (high yield) European corporate entities. It is widely used as an indicator of conditions in the European high yield bond market and as a means of gaining or hedging credit exposure

L

Leverage
The level of a company’s debt in relation to its assets. A company with significantly more debt than capital is said to be leveraged. Leverage can also describe a fund’s use of borrowed money or derivatives to magnify an investment position.

Liability
A financial obligation, such as a debt.

Liquidity
The ease with which an asset can be bought or sold on the market. A liquid asset can be bought or sold easily; a less liquid one may take a long time to sell.

Listing Rules
The rules governing companies and securities admitted to listing on a stock exchange. They establish requirements relating to matters such as eligibility, disclosure, governance, transactions and a listed company’s continuing obligations.

Long -dated bond
A bond with a maturity date far in the future (generally 10 years or more). Compare with short -dated bond.

Long position
Ownership of a security held in the expectation that it will rise in value or generate attractive income. Compare with short position.

M

Macroeconomic
The performance and behaviour of an economy at the regional or national level. Macroeconomic factors such as economic output, unemployment, inflation and investment are key indicators of economic performance. Sometimes abbreviated to “macro”.

Market capitalisation
The total market value of a company’s outstanding shares. Calculated by multiplying a company’s current share price by its total number of shares available.

Market value
The price that can currently be obtained for an asset, as opposed to its nominal or face value.

Maturity
The length of time until the initial investment amount of a fixed income security is due to be repaid to the holder of the security.

MBS – mortgage-backed security
A tradable asset that derives its value from a pool of mortgage loans; a type of asset-backed security. See also RMBS and CMBS.

Mezzanine tranche
A tranche of a securitisation that ranks between senior and junior tranches. It generally absorbs losses after junior or equity tranches but before senior tranches and therefore typically carries more credit risk than senior debt and less than junior debt.

Monetary easing
A process whereby central banks lower interest rates or buy securities on the open market to increase the money in circulation.

Monetary policy
A central bank’s regulation of interest rates and the money in circulation.

Monetary tightening
A process whereby central banks raise interest rates or sell securities on the open market to decrease the money in circulation.

Money market instrument
A security that is readily traded and used for short-term lending and borrowing. Money market instruments typically have very high liquidity.

Morningstar™
A provider of independent investment research, including performance statistics and independent fund ratings.

MTM yield – mark-to-market yield
A measure of the yield on a bond using its current market value rather than its original purchase price. It reflects the return implied by the bond’s current market price and expected future cash flows, subject to the assumptions used in the calculation.

Multiple
An informal market term for one of several financial ratios used to assess the value of a company’s shares, such as the price/earnings ratio. A stock that trades on a price/earnings ratio of 5 is trading on 5 times the company’s current earnings, hence “multiple”.

Mutual fund
A fund that pools investors’ capital to invest in securities. The term is commonly used in the US for the equivalent of OEICs or UCITS funds in the UK and Europe.

N

NAV – net asset value
The current value of a fund’s assets after subtracting its liabilities. Often expressed relative to a fund’s total number of shares in issue, as NAV per ordinary share.

NC RMBS – non-conforming residential mortgage-backed security
An asset-backed security that derives its value from mortgages that do not meet conventional lending standards.

Net debt to equity
A ratio that shows how indebted a company is.

Non-rated investment
An investment that has not been assigned a credit rating by a recognised external credit rating agency. The absence of an external rating does not necessarily mean that an investment is of lower credit quality; an investment manager may undertake its own credit assessment of a non-rated investment.

NPL – non-performing loan
A loan where the borrower has stopped making repayments, commonly used when referring to bank lending.

O

Ongoing charges
A figure representing a fund or company’s management fee and all other operating expenses, excluding finance costs, share issue or buyback costs and non-recurring legal and professional fees, expressed as a percentage of the average of net assets during the year.

Open-ended fund
An investment fund that issues new shares to new investors on demand. The value of each share is determined by calculating the fund’s net asset value, which is normally done each day, and dividing it by the number of existing shares. Compare with closed-ended fund.

Originator
The entity that originally creates, or in certain circumstances acquires, the loans, mortgages or other assets that are subsequently included in a securitisation.

OTC – over the counter
Whereby financial assets are traded directly between two parties. This is as opposed to exchange trading, which is carried out through exchanges set up specifically for the purpose of trading. Also known as off-exchange trading.

Overcollateralisation
A form of credit enhancement where the value or principal amount of the assets supporting a securitisation is greater than the amount of securities issued against them. The additional collateral can provide protection against losses in the underlying portfolio.

Overweight
If a fund is “overweight” in an asset or asset class, it holds a larger proportion of it than the comparable index or sector

P

Passive management
An approach to investing whereby capital is allocated according to the weightings of an index, with the goal being to match the performance of a given market rather than attempting to beat it (see active management). Passive management is also referred to as “indexing” or “tracking”.

Payment date
The date on which distributions or dividends will be paid by the fund to investors.

PD – probability of default
An estimate of the likelihood that a borrower or group of borrowers will default over a specified period.

Performance fee
An additional fee that a fund manager may take if the fund’s performance reaches a certain agreed level.

Physical asset
An item of value that has tangible existence, for example, cash, equipment, inventory or real estate. This is as opposed to financial assets, such as bonds and shares.

P&L – profit & loss
A financial statement that summarises a company’s revenues, costs and expenses during a specific time period.

Portfolio
A pool of assets held as investments.

Portfolio transaction cost
The cost of trading, such as brokerage, clearing, exchange fees and bid/offer spread, as well as taxes such as stamp duty.

Portfolio manager
The investment professional or firm responsible for making investment decisions for a portfolio in accordance with its investment objective and policy.

Prepayment risk
The risk that borrowers repay loans earlier than expected. In a securitisation, faster or slower prepayments can change the timing and amount of cash flows received by investors and may affect investment returns.

Primary market
The initial sale of securities such as bonds or stocks to investors by the issuing company. The issued securities can then be traded between investors on the secondary market.

Prime RMBS
A residential mortgage-backed security that derives its value from an underlying pool of high quality mortgages.

Price/earnings ratio
A measure that compares a company’s current share price to its earnings per share. It provides a guide to the market’s opinion about the company’s future earnings prospects. Calculated by dividing the market value per share by the earnings per share.

Principal
The face value of a fixed income security: the amount due to be paid back to the investor by the borrower when the security reaches the end of its life.

Private company
A company that is not traded on the stock market. Private companies may be owned by a single owner or by various individuals or investors, but their shares are not traded publicly on the stock exchange. Compare with public company.

Private credit
Investment in the debt of companies that is not carried out through the public bond markets.

Private placement
The sale of securities to a relatively small number of investors selected by a company, generally investment banks, mutual funds, insurance companies or pension funds.

Public company
A company that is traded on the stock market. Shares in public companies can be freely bought and sold on the stock exchange. Compare with private company.

PMI – purchasing managers’ index
A survey of supply chain managers in the private sector, used as an indicator of business confidence.

R

Real return
The return on an investment, adjusted for inflation.

Realisation opportunity
An arrangement that provides shareholders with an opportunity to realise some or all of their investment in a company, usually at specified times and subject to defined terms and conditions.

Receiving agent
A service provider appointed to receive and process applications, payments or other instructions from investors in connection with a corporate action, share issue, tender or other transaction.

Recovery rate
The proportion of an outstanding debt that is recovered following a default. The amount that is not recovered represents the loss suffered as a result of the default.

Registrar
A service provider responsible for maintaining a company’s register of shareholders and processing changes to shareholder records.

REIT – real estate investment trust
An investment trust that invests in property assets.

Related party
A person or entity that has a relationship with a company that could enable one party to control, significantly influence or otherwise affect the other. Related parties may include directors, the investment manager and entities under common control or significant influence. Transactions with related parties can be subject to specific governance, disclosure and regulatory requirements.

Repo – repurchase agreement
An arrangement under which one party sells securities to another and agrees to repurchase them at a specified future date and price. Repos are commonly used by large banks as a form of short term secured financing.

Risk-adjusted returns
Investment returns considered in relation to the amount of risk taken to achieve them. Risk-adjusted measures can help compare investments or strategies with different levels or types of risk.

Risk retention
A regulatory requirement under which certain parties involved in a securitisation are required to retain a material economic interest in the transaction. It is intended to help align the interests of those creating or sponsoring securitisations with those investing in them.

Revenue
The money that a company makes before its costs are taken into account.

Rights issue
An offer of new shares in a company made to existing shareholders of that company.

Risk
The chance that an investment’s return will be different to what is expected. Risk includes the possibility of losing some or all of the original investment.

“Risk-free” asset
An asset that theoretically carries no risk of non-payment by the borrower, such as high quality government bonds or cash.

Risk management
The activities a fund manager undertakes to limit the risk of a loss in a fund.

Risk premium
The difference between the return from a risk-free asset, such as a high quality government bond or cash, and the return from an investment in any other asset. The risk premium can be considered the “price” or “pay-off” for taking on increased risk. A higher risk premium implies higher risk.

Risk/reward ratio
A ratio comparing the expected returns of an investment with the amount of risk undertaken.

RMBS – residential mortgage-backed security
A type of asset-backed security that derives its value from pools of home loans created by banks and other financial institutions. These securities represent the largest component of the European ABS market.

RPI – Retail Prices Index
A UK inflation index that measures the rate of change of prices for a basket of goods and services in the UK, including mortgage payments and council tax.

S

“Safe haven” asset
An asset that investors perceive to be relatively safe from suffering a loss in times of market turmoil.

Secondary market
The buying and selling of securities such as bonds or shares that are already held by investors.

Securitisation
The process of pooling financial assets, such as mortgages, loans or other receivables, and using the cash flows generated by those assets to support the issuance of tradable securities. These securities are often divided into different tranches, which have different priorities for receiving interest and principal payments and for absorbing losses. Securitisation allows investors to gain exposure to the income and credit risk associated with the underlying pool of assets.

Securitisation regulation
The regulatory framework governing securitisations, including requirements relating to areas such as investor due diligence, transparency, risk retention and, where applicable, simple, transparent and standardised (STS) securitisations.

Security
An asset such as a share in a company or a fixed income security also known as a bond.

Senior tranche
A tranche of a securitisation that has priority over more junior tranches for payments of interest and principal and is protected by those junior tranches absorbing losses first. Senior tranches therefore generally carry lower credit risk than junior tranches within the same securitisation.

Servicer
The entity responsible for administering the loans or other assets underlying a securitisation. Its responsibilities may include collecting payments from borrowers, maintaining records and managing arrears, delinquencies and defaults.

Share
A portion of a company, ownership of which often confers rights to dividends if the company distributes them. The shares of public companies can be freely bought and sold on the stock exchange.

Share buyback
The purchase by a company of its own shares in the market. An investment company may buy back shares as part of its approach to managing its share capital and the discount at which its shares trade relative to net asset value.

Short -dated bond
A bond with a maturity date in the near future (usually less than five years). Compare with long-dated bond.

Short position
A way for a fund manager to express a view that an asset might fall in value. A short position is established through short selling.

Short selling
The practice whereby an investor sells an asset they do not own with the aim of making a profit. The investor borrows the asset from an institution that owns it and pays a fee. The investor must eventually return the borrowed asset by buying it in the open market.

Sovereign debt
Debt of a government: government bonds.

Spread
The difference between two rates, such as bond yields or interest rates. For example, the spread between corporate bond yields and government bond yields is often used to describe the premium typically offered by corporate bonds. Spreads are typically expressed in basis points.

Spread tightening
A reduction in the difference between the yields of two securities or markets. In credit markets, “spread tightening” refers to a reduction in credit spreads and, all else being equal, is associated with an increase in the market value of the relevant credit securities. The opposite is spread widening.

SRT – significant risk transfer
A transaction through which a bank transfers a significant proportion of the credit risk associated with a portfolio of exposures to third parties. Subject to applicable regulatory requirements, an SRT transaction may allow a bank to reduce the regulatory capital it is required to hold against those exposures.

STS – simple, transparent and standardised
A regulatory designation for securitisations that meet specified requirements under the applicable securitisation regulatory framework. STS status relates to compliance with specified structural and disclosure criteria and does not mean that a securitisation is risk-free.

Subordination
A form of credit enhancement created by establishing different levels of priority within a securitisation. Junior tranches absorb losses before more senior tranches, thereby providing protection to investors in those senior tranches.

Stagflation
A combination of weak or zero growth (economic stagnation) and high inflation.

Standard deviation
A statistical measure of dispersion of a set of data from its mean. Can be used to express the relative volatility of certain asset classes, or the consistency of a fund’s returns over a period of time.

Steepening yield curve
When the yields on longer dated bonds rise further (or fall less) than the yields on shorter dated bonds, the yield curve is said to steepen. Longer dated bonds typically have higher yields than shorter dated ones, so the yield curve – the difference between short and long end yields – is usually somewhat steep. See also flattening yield curve and inverted yield curve.

Stock
An alternative term for a share in a company.

Stock exchange
A marketplace in which securities such as stocks and bonds can be bought and sold.

T

Tap
The issuance of additional shares by a listed company under an existing issuance authority, generally in response to investor demand. An investment company may use tap issuance to increase the number of shares in circulation, subject to applicable authorities and requirements.

TFS – Term Funding Scheme
A Bank of England funding scheme designed to provide participating banks and building societies with term funding, with the aim of supporting the transmission of monetary policy to the wider economy. References to the TFS, now closed, may relate to the effect of such funding schemes on bank funding and credit markets.

Tranche
A class of securities issued as part of a securitisation. Different tranches have different priorities for receiving interest and principal and absorbing losses, resulting in different levels of credit risk and potential return.

Top-down investing
An investment approach that analyses high level economic factors before selecting which companies to invest in. The top-down investor will consider macroeconomic trends and the outlook for different industries and asset classes before selecting their preferred individual securities from the “bottom-up”.

Total return
The gain or loss derived from an investment over a particular period. Total return includes income (in the form of interest or dividend payments) and capital gains.

Tracking error
The degree to which an investment portfolio’s returns vary from that of its benchmark. A passively managed fund would be expected to have a tracking error of close to zero. An actively managed fund should have a higher tracking error.

Transaction cost
The cost of trading, such as brokerage, clearing and exchange fees, as well as taxes such as Stamp Duty.

Triple A or AAA rated
The highest possible rating that a fixed income security can be assigned by credit rating agencies. Bonds that are rated AAA are perceived to have the lowest risk of default.

U

UK Corporate Governance Code
A UK framework setting out principles of good corporate governance for companies within its scope. It covers areas including Board leadership, division of responsibilities, composition and succession, audit, risk and internal control, and remuneration.

Unconstrained
An investment strategy where the investment manager has the freedom to invest according to their own judgment, not being obliged to allocate capital according to the weightings of any index, for example.

Underlying value
The fundamental value of a company, reflecting both tangible and intangible assets, rather than the current market value.

Underweight
If a portfolio is “underweight” an asset or asset class, it holds a smaller proportion of it than the comparable index or sector.

Unit/share type
Type of units or shares held by investors in a trust or fund (unit/share types differ by features such as whether income is to be paid out as cash or reinvested on the payment date).

UST – US Treasury
A bond issued by the US government

V

Volatility measures the fluctuation of a fund’s performance over a certain period. It is most commonly expressed using the annualized standard deviation. The higher the volatility, the riskier a fund tends to be.

Volatile – when the value of a particular share, market or sector swings up and down fairly frequently and/or significantly, it is considered volatile.

W

WAC – weighted average coupon
The average interest rate payable on a pool of loans or other interest-bearing assets, weighted according to the outstanding balance of each asset.

WAL – weighted average life
The average length of time that each unit of unpaid principal on an amortising bond remains outstanding.

WAM – weighted average maturity
The average time remaining until the contractual maturity of the assets or securities in a portfolio, weighted according to their respective values or outstanding balances.

Waterfall
The rules that determine the order in which cash generated by the assets underlying a securitisation is used to make payments. Typically, fees and amounts due to more senior tranches are paid before amounts become available to more junior tranches.

Write-down
A reduction in the book value of an asset (such as a company’s vehicles or equipment).

Y

Yield curve

The shape created by plotting the yield for the full range of bond maturities on a graph. Usually, longer dated bonds offer higher yields than shorter dated bonds, creating an upwards curve from left to right when plotted on a graph. This curve can steepen or flatten as the outlook for inflation and interest rates change. Sometimes, economic conditions can lead to an inverted yield curve.

Yield to maturity

The total annual return on a bond if held for its full lifetime, including coupon payments and the return of the principal. When people discuss bond yields, they usually mean yield to maturity.

Yield to worst

Yield to worst is used for callable bonds such as CoCos, and describes the lowest return an investor can receive from a bond assuming the issuer calls the bond and returns the principal at the earliest date allowed.

YTD

Year-to-date