We have tried to avoid the use of technical jargon on the Seneca IM website, however due to the nature of our business some investment terminology is necessary to describe what we do. We have put together this glossary to explain some of the terms we think might need further clarification. If there is anything within this document or anywhere else on the website that you are not sure of, please get in touch and we will be happy to help.
There are two main types of investment management: active management and passive management. We at Seneca are an active management company. Active management means that investment decisions are based on the judgment of fund managers (as opposed to passive management where decisions are made systematically). ‘Judgment’ means that our fund managers use analytical research, forecasts, and their own experience to make investment decisions with respect to which securities to buy, hold and sell.
Specialist or non-traditional assets are investments other than shares or bonds. They are called ‘specialist’ because they represent an specialist to traditional assets such as shares or bonds. The term can cover anything from property and commodities to infrastructure investments, for example, covering green energy, or leasing businesses which specialise in aeroplanes or plant and machinery. We use specialist assets to help diversify a portfolio, as some of these investments are not expected to move in tandem with more conventional investments for much of the time.
This is how different types of investments are grouped together, such as company shares, bonds, commodities or commercial property.
A benchmark is something against which the performance of our funds can be measured or judged. This ‘something’ could be a stock market index, an index comprised of the performance of competitor funds, or a fixed performance hurdle such as 5% per annum.
Issued by companies or governments, these are a kind of debt and are typically designed to pay interest, which is sometimes fixed and sometimes variable.
The phase of a financial market in which prices are rising over a sustained period, generally more than a few months.
The phase of a financial market in which prices are falling over a sustained period, generally more than a few months.
The return from any investment is comprised of two parts: income and capital growth. In the case of an investment property, rental income would be considered income while the appreciation in the value of the property would be considered capital growth. Capital growth generally refers to the appreciation in value in the underlying investment, whether shares, bonds, or property.
The interest rate paid by a bond.
Diversification refers to the principle of ‘not putting all your eggs in one basket’. In other words, it means investing in a variety of investments and thus not being excessively exposed to the risk of a single investment falling sharply in value. Diversification can be achieved using different assets, funds and geographic regions.
Another name for shares in a company.
General Investment Account (GIA)
A way to hold investments outside of tax wrappers such as pensions or ISAs. They do not offer tax relief, but have few limitations.
An investment theme refers to some sort of broad issue or factor that is influencing markets or certain parts of markets in some way. One example would be ‘demography’, the study of populations, specifically human populations. Growth in populations, aging of populations or movement of people would have ramifications either for particular markets, sectors or individual companies. Understanding how investment themes impact markets and their components helps to improve investment decision making.
This refers to the size of a company in terms of the total value of its shares (other ways of measuring the size of a company might be in terms of total revenue or total assets). To calculate current market cap, one simply multiplies the total number of shares in issue with the current share price.
The term “Mid Cap” is a reference to a medium-sized listed company. Exactly how big a company should be to qualify as a mid-cap varies from market to market. For example, mid-caps might mean companies whose market capitalisation is between £500 million and £1 billion.
A fund that invests in more than one asset class. A simple multi-asset fund would be one that invested just in equities, bonds and cash. A more complicated multi-asset fund might also include specialist assets.
New Individual Savings Account (NISA)
An individual savings account allowing individuals to hold cash, shares, and funds free of tax on dividends, interest, and capital gains. Investors can put in up to a maximum amount in each tax year.
Self-Invested Personal Pension (SIPP)
A pension plan that allows the holder to choose and manage the investments made.
Strategic Asset Allocation
Strategic asset allocation can be thought of as the broad allocation to each asset class that would be expected to achieve the investment performance objective over time. For example, a simple multi-asset fund might have a strategic asset allocation of 60% global equities and 40% global bonds. Given an understanding of how global equities and global bonds would be expected to behave over the longer term, one would have an understanding of how the fund should behave over the longer term as a result of exposure to bonds and equities in the proportions mentioned.
The return from any investment is comprised of a systemic return and an idiosyncratic return. Systemic returns are ones that are common to more than one company while idiosyncratic returns are returns that are unique to one company. For example, the rise in shares of exporters that is the result of depreciation of Sterling would be systematic. While the fall in the shares of company ABC plc due the resignation of the CEO would be idiosyncratic.
Tactical Asset Allocation
Tactical asset allocation is generally used in conjunction with strategic asset allocation. Tactical asset allocation refers to decisions to deviate from time to time from strategic asset allocation. Using the example cited, this might mean a decision to have only 50% in equities rather than the strategic allocation of 60% because one might have a slightly negative view on the outlook for equities.
The term ‘undervalued’ is used to describe an investment that is cheap in relation to some or other measurement. The measurement could be an objectively derived measure of the value of the investment in question such as breakup value (how much cash shareholders would receive if the company was broken up) or related to the sector in which the investment sits (a company might be considered undervalued if it was yielding more than the sector average). There are many ways of valuing assets.
This is a term used to describe the frequency and severity with which the price of an investment goes up and down.
The amount of income you receive in monetary terms will be equivalent to the dividend per share multiplied by the number of shares you own. This is usually expressed annually as a percentage based on the investment’s market value.