text: Glossary of terms - Investment Management | Flying Colours Life
  Jargon can get in the way of making good decisions. We hope this page helps clear any confusion. You might want to familiarise yourself with some terms that many investment companies will probably be using.
  Bust the jargon
  Active Management (Alpha)
  The way funds are run in the UK. A manager picks investments to try and perform better than the average. Where the manager is successful the additional performance is called alpha. Active management is normally much more expensive than passive (see below) and over time will reduce your investment value unless the manager performs well.
  Investments outside the mainstream stock and bond markets, generally offered because they are expected to perform better or produce less risk. However, most alternatives are just as exposed to the economy as traditional investments, with the added disadvantage that they can be hard to buy and sell when you need to.
  The return over a period simplified to show what the average return each year would have been.
  The kind of investments you hold. This can be the stock market of bonds but may also include cash.
  The total value of all the investments looked after by a fund manager.
  Benchmark or index
  The best yardstick by which to judge a manager. This is usually the average performance of the market (such as the FSTE 100) but can be the average for all competing managers. At Flying Colours we manage against the ARC benchmark, which tracks the average discretionary manager across the UK, including many household names.
  Bond or fixed interest investment
  An investment that pays a fixed interest payment every year and a repayment of capital at the end of its life. This can be issued by the government, such as gilts, or by a large company in the case of corporate bonds. Government bonds are generally considered to be risk-free because the government controls currency and can always print money to honour their commitments. The risk here is inflation. Corporate bonds carry the risk of non-payment and generally offer higher interest payments to compensate. Currently, bond yields are at historically low levels but are still important in portfolios because of the risk control they offer – handy to have in the next economic downturn.
  BPS (Basis Points)
  Basis points are used as a convenient unit of measurement in contexts where percentage differences of less than 1% are discussed. The most common example is interest rates, where differences in interest rates of less than 1% per year are usually meaningful to talk about. For example, a difference of 0.10 percentage points is equivalent to a change of 10 basis points (e.g., a 4.67% rate increases by 10 basis points to 4.77%). In other words, an increase of 100 basis points means a rise by 1 percentage point. A per ten thousand sign or basis point (often denoted as bp, often pronounced as "bip" or "beep"[1]) is (a difference of) one hundredth of a percent or equivalently one ten thousandth.[2][3] The related concept of a permyriad is one part per ten thousand. Figures are commonly quoted in basis points in finance, especially in fixed income markets (reference: https://en.wikipedia.org/wiki/Basis_point).
  Discretionary investment is a form of professional investment management that invests on behalf of clients through a variety of financial investements. The term discretionary refers to the fact investment decisions are made at the investment managers judgement.
  The effect of holding a range of different investment types (stock market, bonds, cash etc) in a wide range of countries (investments outside the UK) and across a range of large and small companies. We are very keen on diversification for our clients. Generally, a wide range of investments allows you to target any level of return with less risk and, therefore, to cope better with the economic cycle and investing in retirement.
  Areas of the world that are less developed than the established economic powers – Western Europe, US & Canada and Japan – and have higher long-term economic growth prospects. Over the long term you should expect investments in these areas to perform better than in developed countries but the risk is much higher. The additional risks include financial shocks, poor governance and corruption. Be careful about having too much exposure to this area.
  Equities or the Stock market
  An investment in the ownership of large companies. These 'shares' entitle you to a share of all profits and dividends and over time are expected to grow and produce a high overall return. During periods of recession, profit and share prices can be expected to fall. Overall, they offer high returns but you may be in for a bumpy ride. The higher your risk profile the higher your exposure to shares and the stock market.
  The gradual (in normal economic circumstances) erosion of pricing power in any currency caused by continual growth in new currency from central banks as part of a deliberate attempt to manage the economy. Inflation can be used to your advantage in your portfolio but is also a major source of risk, particularly if you are retired.
  The ability to sell your investment when you need to. Illiquid or hard-to-sell investments tend to fall much further during recessions as people who are forced to sell take lower prices. This type of investment is therefore risky and, in our opinion, unsuitable for most investors. ON occasion a fund manager will stop withdrawals completely from the fund, this is known as gating.
  A way to invest that doesn't require a fund manager picking shares or bonds. Passive indicates the fund will buy all the relevant investments in the market it operates in. In this way the investment will track the average performance of the market. Passive investments are generally cheap to run, which also makes them affordable. They also avoid the risk of performance chasing as illustrated by the recent Woodford debacle.
  The overall investments held on your behalf. See also Diversification.
  A little word that covers a vast area. At Flying Colours Life risk is a measure of the bumpiness of the ride and how much you can expect the value of your portfolio to rise and fall during growth and recession. This implies that over time the portfolio should increase in value, which is normally true, but there is another type of risk that indicates permanent loss of capital – where a manager speculates and loses (as per Woodford) or if a company goes bust. We aim to avoid this kind of risk.
  The income you can expect from an investment, either as dividends or interest payments on bonds, written as a percentage of the investment value. A yield of 5% indicates that you are getting income equal to 5% of the overall portfolio value.