Copy of `Scandia - Glossary of economics`
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Scandia - Glossary of economics
Category: Economy and Finance
Date & country: 20/09/2007, UK
A statistical measure which attempts to show the performance of a portfolio`s return in risk adjusted terms. It is calculated by dividing the portfolio`s excess return over the risk-free rate by the risk (i.e. standard deviation) of portfolio returns. The higher the Sharpe Ratio, the better the portfolio`s return in risk adjusted terms. A Sharpe Ratio higher than one can be considered to be very good, while a ratio below 0.1 shows that the portfolio has been poorly rewarded for the risk undertaken.
An excess of sales over purchases of a relevant commodity, currency or investment instrument (As opposed to Long Position).
The sale of a security that is not yet owned, in the expectation that its price will fall so that it can be bought back at a later date.
Bonds or Gilts that have a redemption date within five years. Some institutions use seven years as the cut-off date.
Single Life Pension
A pension that is paid for the lifetime of the policy holder only.
A one off payment into an insurance policy or pension.
This refers to the range of Skandia pension funds where the pricing does not include an initial charge, and hence buying and selling takes place at the same single price of the fund.
Single pricing means that there is just one price for both buyers and sellers of the units or shares. This contrasts with dual pricing where there is one price for sellers and a higher price for buyers, sometimes known as a bid / offer spread.
Skandia Investment Management (SIM)
Skandia`s process for managing the managers â€` selecting, blending, and deselecting fund managers through a robust, research driven process. SIM funds are available as complete managed investment solutions, identified by typical risk profiles where Skandia are responsible for asset allocation; and as sector solutions [the asset allocator funds] where Skandia provide the manager selection skills, and the advisers are responsible for the asset allocation decisions.
Small Gifts Exemption
An annual Inheritance Tax (IHT) allowance, enabling a donor to give up to £250 per year to any number of separate individuals (donees).
Generally, companies with a market capitalisation of less than US$1 billion or the bottom 25% of the market, although definitions differ.
Payment for research-related services by commissions generated from trading rather than fees.
An investment manager which confines its investment activity to specific asset classes (e.g. equities, fixed interest, property, overseas shares, etc.) instead of (or as well as) balanced funds. See also Balanced Manager.
Uncertainty in the return of a share arising from factors that are specific to the company concerned. It is unrelated, or, at most, distantly related, to events that impact on other comparable firms or the market as a whole. Unlike market risk, specific risk can be diversified away.
In relation to share, bond and currency markets, the difference between the bid price and the ask (offering) price, incorporating both an estimate of demand and potential profit for the seller; In relation to unit trusts, the difference between the allocation of redemption price of units, as a result of transaction costs incurred in buying and selling the underlying securities which make up the value of the trust. In relation to option markets, the holding of a long position and an offsetting short position, usually in contracts with the same underlying security or asset.
An investor in the share market who aims for quick gains by subscribing to new share issues and then selling once the shares commence trading on the exchange.
Stakeholder pensions were introduced from 6 April 2001. The Government has laid down minimum standards to ensure that all Stakeholder pensions meet the same basic criteria for payments, costs and terms. For example:
A tax on the purchase of shares â€` at 0.5% of the value â€` and on the purchase of property. For shares the tax is a flat rate. In the case of property, there is no duty up to £60,000. From £60,001 to £250,000 the duty is 1%, and rises to 3% of the value to £500,000, and 4% above £500,000.
A statistical measure of the dispersion of a set of numbers around a central point. If the standard deviation is small, the frequency of distribution is concentrated within a narrow range of values. For a 'normal' distribution, about two thirds of the observations will fall within one standard deviation of the mean. Standard deviation is a commonly used measure of risk because the higher the standard deviation the higher the uncertainty of the return. As standard deviation measures the volatility of investment returns, it is an important measure of risk. Also known as Standard Error.
State Pension Schemes
Basic State Pension â€`if you have a full National Insurance contribution record you are entitled to the full Basic State Pension.
State Pensionable Age
Fixed retirement ages for men and women, currently 65 and 60 respectively. To be equalised to 65 for men and women, by April 2020 (with ten years â€˜phasing-in from 2010). This is the age at which State benefits may be taken as pension income.
A generic term for equities (shares) and, less frequently, bonds. See also Security.
A professional person who buys and sells securities on behalf of others in return for a commission (or brokerage).
A market where stocks and shares are bought and sold.
A place where Shares or other securities are bought and sold e.g. the London Stock Exchange.
The selection of an individual security within an asset class. For example, stock selection in relation to equity investments is made after analysing the financial standing, future earnings prospects and valuation of the shares of the company concerned. Along with asset allocation, stock selection is a key way in which investment managers add value.
Agents who buy and sell stocks and shares for customers.
Stocks and Shares
A stock generally refers to fixed interest securities, usually issued in denominations of £100.Share is sold by a company to raise money. Shares give the owners an interest in the company and a right to a share in the profits.
Strategic Asset Allocation
The composition of the asset mix within a portfolio, constructed with the objective of meeting the long-term views of relative performance of the various asset classes. Usually a benchmark is derived in this fashion. See also Asset Allocation, Tactical Asset Allocation.
An agreement to purchase a certain offering, e.g. a certain number of shares for a stipulated price. Such an offer is not binding unless accepted by the properly authorised representatives of the issuer. Also used as a term for payments into Skandia MultiFUND products.
A company which is wholly or partly owned by another company but which (unlike a branch office) is still a distinct legal entity responsible for its own tax, regulatory compliance, etc.
The guaranteed amount paid on death or maturity under a life assurance policy.
For non-life insurance it is the maximum amount the insurance company will pay out for a claim. For life assurance it is the amount that is guaranteed to be paid on death to which bonuses may be added.
A means of setting aside funds during working life for use as retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors. See also Pension.
The amount of money that will be paid to a policy holder if they discontinue a policy before it matures. The benefits the customer usually receives are reduced because of the effects of the charges.
An interest rate, currency or equity exchange transaction involving two parties. In the case of an interest rate swap, one party is obliged to pay a fixed interest rate to the other party in return for a floating interest rate. In the case of a currency swap, one party is obliged to make payments in another specified currency.
Abbreviation for Society for Worldwide Interbank Financial Telecommunication. A non-profit Electronic Trade Confirmation System that provides secure messaging services and interface software to financial institutions globally.
Transferring sums of money from one unitised fund to another. This is usually done on a bid-to-bid basis to avoid â€˜new money â€˜ charges when buying units at the offer price.
The ability to transfer units between two funds or components of a unit trust or life policy.
One of the components into which the risk of an asset,as defined by its price volatility, is usually divided - the other is specific risk. The systematic risk is the portion of the risk that relates to the movements in the underlying market of which this asset forms part. Systematic risk is normally measured in terms of beta. It should not be confused with systemic risk.
Risk pertaining to the fundamentals of a system as a whole â€` e.g. in the case of banking, the risk of failure of the Payments System or, in the case of property, a collapse of valuations owing to there being no buyers in the market. Systemic risk should not be confused with systematic risk, which relates to risks associated with individual securities rather than markets as a whole.
Tactical Asset Allocation
A process by which the asset allocation of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark. See also Strategic Asset Allocation.
Tactical Asset Allocation Overlay
A portfolio management technique, managed on an overlay basis, which gains exposure to the same asset classes as the total fund, through derivatives rather than physical securities, with the aim of taking advantage of short-term movements and opportunities in the markets. Use of a tactical asset allocation overlay manager can allow for a fund to take advantage of that manager`s asset allocation skills without them necessarily being responsible for ongoing management of the underlying assets. See also Overlay Manager.
The acquisition of shares by one company in another so as to gain a controlling interest.
Taper relief was introduced into the UK taxation regime with effect from 6 April 1998.Its purpose is similar to indexation, in that it aims to reduce the amount of Capital Gains Tax you have to pay when you sell Shares, to account for the effect of inflation.
The amount an ISA manager can reclaim from the Inland Revenue in respect of share dividends received. This is 10% of the amount received until April 2004, when it will no longer be available.
Referring to income which is not liable for tax in the hands of the recipient. Referring to a fund which does not incur tax on its income, by virtue of its beneficiaries being a specialised class of persons, e.g. a charitable organisation.
Amounts which you can deduct from your annual income to reduce the amount on which you have to pay tax. For instance, if your income before deduction of reliefs is £20,000, and you made pension contributions in the year of £1,000, you could deduct £1,000 from £20,000 to produce a total income for tax purposes of £19,000. That is because pension contributions are payments on which the Inland Revenue allows you to get relief.
A period of time used for tax calculations. It starts on 6 April each year and finishes on 5 April the following year.
An approach to the analysis of stock and futures and their future trends which examines the technical factors of market activity, often represented by charting patterns, as contrasted with fundamental analysis. Technical analysts normally examine patterns of price change, rates of change, and changes in volume of trading and open interest, in the hope of being able to predict and profit from future trends. Some investment professionals are sceptical of the predictive ability of technical analysis, but most managers keep an eye on the charts anyway.
See Total Expense Ratio.
A simple life assurance policy that pays out on death of the customer during the time period specified by the policy.
A deposit with a financial institution for a fixed period and a rate of interest which applies for the duration of the deposit.
A person who dies having made a will is described as â€˜Testate`
An investment manager who utilises macroeconomic research and expertise to develop themes to influence its asset allocation decisions. The aim of thematic managers is to identify those factors in the market which will have an influence on companies` profitability and on the market`s perception of relative values.
A sales person who sells the policies of only one insurance company. Some sales people are tied to several companies â€`this is known as a multi-tie.
A term for those Asian economies characterised by rapid growth and industrialisation since World War II. These countries include Taiwan, Singapore, South Korea and Hong Kong. See also Emerging Markets.
Tillinghast Towers Perrin
The Tillinghast business of Towers Perrin provides global actuarial and management consulting to insurance and financial services companies.
The adoption of a particular view on a sector by over-weighting a portfolio in the direction of that sector, (e.g. a portfolio with a high level of resource shares and low level of industrials would be described as having a resource tilt). Such a technique is commonly employed by index fund managers when clients indicate a desire for above-index returns.
The period of time over which an investment objective is to be realised. Time horizon is a critical factor for all investors in determining the types of investments they should make or, at least, the amount of risk they are prepared to carry. The investments made to provide for future retirement income, for instance, would almost always be different from those for short-term purposes.
The art of deciding upon the exact moment to buy or to sell.
Top Down Analysis
A country`s economy is considered before deciding which industry in which to invest. Economic conditions determine which industries or sectors will return well and then attractive stocks are bought within those industries.
A method of calculating Income Tax liability on a chargeable gain from certain packaged products.
Abbreviation for Tokyo Price Index. A Japanese share price index measuring share prices of selected large companies listed on the Tokyo Stock Exchange.
Total Expense Ratio (TER)
The Total Expense Ratio (TER) represents the true cost of running a fund. It includes the fund AMC as well as the depository and custodial charges, and audit, registration, and compliance fees.
The aggregate increase or decrease in the value of a portfolio resulting from the net appreciation (or depreciation) of the principal of the fund, plus or minus the net income (or loss) experienced by that fund during the period.
Aim to mirror or 'track' the performance of any of a number of worldwide stock market indices, such as the FTSE 100 Index-see passive management.
The degree of proximity with which an actual portfolio follows a representative market index. Technically the tracking error is represented by the standard deviation of the differences in return between the portfolio and the index. Tracking error measures the likelihood (based on historical data) of actual returns differing from index returns.
A person who actively buys and sells securities for his or her own account, usually with relatively short time horizons.
Costs associated with managing a portfolio, notably brokerage costs and stamp duties.
Payment made from a pension scheme to another pension scheme, in lieu of benefits which have accrued to the member, to enable the receiving scheme to provide alternative benefits. The amount transferred is known as the transfer value.
Negotiable debt obligations of the US government. See Treasury Bills, Treasury Bonds, Treasury Notes.
Short term negotiable debt obligations of the US government with maturities of one year or less issued at a discount from face value.
Long term negotiable debt obligations of the US government with maturities of 10 years or longer.
Intermediate term negotiable debt obligations of the US government with maturities of 1 to 10 years.
A persistent and pervasive direction, upwards or downwards, of commodities, prices, earnings, etc. over a period of time.
A legal obligation binding a person (the trustee) to deal with property over which he has control for the benefit of certain people (the beneficiaries) of whom the trustee may himself be one.
An individual, group of people or independent institution responsible for the management of the trust as defined by the trust deed. The trustees have the power to veto any investment which they feel does not adhere to the trust deed.
In relation to investment portfolios, the rate at which securities within a portfolio are exchanged for other securities of the same class;In relation to investment markets, the level of trading that occurs.
The name given to the fund analysis reports provided to Financial Advisers by Skandia UK via their online service U Select Online.
UK Resident (for tax purposes)
If you are physically present in the UK for six months in a tax year then you will be resident in the UK and taxable on your income and capital gains.
Referring to the structuring of a product or service where the individual components involved in the management of that product are split out with separate fees usually applying. For example, an unbundled pension arrangement might involve separation of investment management, trusteeship and insurance arrangements among different parties. (As opposed to Bundled).
Generally refers to the valuation of a Final Salary Occupational Pension Fund where the actuary perceives that there are insufficient funds to support liabilities within the investment review period.
When the maximum sum a company will pay out to cover a claim is less than the value of the loss or damage.
index to be delivered in the event an option is exercised. The term underlying is often used as a noun in its own right, as well as an adjective.
This is the legal entity fund(s) that your investment choice is invested in.
A calculated measure that takes the headline inflation rate and excludes certain volatile items or series that are affected by factors other than general economic conditions (e.g. government taxes, or the effect of weather on fruit and vegetable prices). The resulting rate is based on only those items directly related to the economy.
Achievement of a lower investment return than a benchmark or other measure (e.g. competitor portfolios) against which that return is being compared (As opposed to Outperformance).
Referring to a security or currency which trades below what is perceived to be its proper market value, taking account of statistical or fundamental research or other relevant information.
Having a lesser exposure to a particular sector in an investment portfolio, compared with a neutral or benchmark position. (As opposed to Overweight).
An individual who decides whether or not to accept a risk and calculates the premium to be paid.
There are two definitions:
1. Financial organisation, usually an investment bank, taking up Shares from an Initial Public Offering (IPO), not purchased by the public, for commission.
2. Review and analysis of relevant factors affecting an insurance proposal by an Underwriter.
Income received from sources such as dividends from Shares and Bonds-income, which has not been earned by working.
Where the value of the saver's fund is linked to the value of the units of the Trust or Life Company Fund it is invested in.
An investment or company fund which pools together customers' money allowing them to increase the types of shares they can invest in, therefore improving the risk. Many unit trusts have now become OEIC's, see Open Ended Investment Companies in this glossary.
Unitised With Profits
Contracts where premiums are invested in units, either in the with-profits fund or in the linked funds or a mixture of both.
When investing in a unit-linked contract, the individual's contribution is used to buy units of equal value. These units will fall or rise in line with the underlying investments.
A term sometimes used to describe the total number of operators or competitors in a particular field, or the number of available stocks from which a portfolio is selected. Investment manager performance surveys are also referred to in this way.
Referring to a company and/or shares that are not available for purchase or sale through the stockmarket.
Securities which are not listed on an organised stock exchange.