Investment fund names are often a baffling mixture of fancy but vague words, which mean little to people who aren’t already clued up on financial jargon.
There are thousands of funds and investment trusts out there to choose from, and investors – particularly newcomers – need to be clear what terms such as alpha, dynamic or special situations actually mean before they start risking their money.
People hoping to boost their savings by buying a fund or trust face a steep learning curve, unless they’re lucky enough to have a friend in the know or are willing to fork out fees to a financial adviser.
We have tried to provide a short cut, by compiling a list of common terms that often pop up in fund names along with simple explanations.
FIND OUR FUND NAME JARGON BUSTER BELOW
Fund jargon: Investors, particularly newcomers, need to know what fancy names mean before risking their money
Why are fund names often so cryptic?
To be fair, many of the terms used in fund names are useful and informative. UK, Japan, North America and so on are perfectly plain. Cautious, ethical and aggressive are also easy to grasp.
Sometimes – sadly not always – the summary of the fund goal will provide enough context to let you have an educated guess at what the fund is up to even if its name is meaningless.
Patrick Connolly, investing expert at Chase de Vere, says descriptive fund names are fine but when they are picked for marketing purposes they can be misleading or difficult for people to understand.
He takes particular issue with ‘absolute return’ funds, which are meant to turn a profit in any market conditions. Connolly argues that their names give the perception of security and protection, but they can make big losses. He believes officially renaming the sector ‘targeted absolute return’ a few years ago hasn’t improved matters much either.
‘Marketing is always on the positive side rather than the realistic side,’ he adds. ‘Rather than call the fund “higher risk fund” they will give them names like focus, dynamic or alpha to make them more exciting, more marketable.
‘I can think of lots of funds that are high risk. I can’t think of any that are called high risk.’
Jason Hollands: Fund names are driven by fashion as well as marketing, he says
Jason Hollands, managing director of Tilney Bestinvest, says fund names are driven by fashion as well as marketing, and that alpha and focus are very popular right now.
Meanwhile, he notes that one fund that used to go by the name ‘global titans’ eventually became simply ‘global’.
What about the abbreviations tacked on the end of fund names?
To make things even more complicated, when investors search out more information about individual funds they typically discover there are several versions of it, each with a baffling string of abbreviations and letters on the end.
Only some of them are common across the industry. The rest are unique to each fund provider, because these firms have never bothered to get their heads together to standardise them.
As a result, the letter ‘C’ on the end of a name might mean one thing on one fund, and quite another on a different fund from a different firm, and it requires further investigation to find out. We decode the most frequently used abbreviations below, and explain more about them here.
What do fund names mean? Here’s our jargon buster
Fund attempts to make a decent return for investors whether wider markets are doing well or badly, although there is no guarantee it will succeed. You should ensure you fully understand the strategies being used, because they are sometimes complicated and risky.
Investments are being actively managed with the goal of outperforming the market. ‘Alpha’ has a somewhat slippery definition, but it’s often taken to mean the return you make from active investing, on top of what you can get by just stashing money in a passive tracker fund that clones market performance. However, in practice many active funds are more costly than trackers but still fail to beat their benchmarks, or end up following them fairly closely anyway. We explain the pros and cons of active and passive investing here.
Invests in stocks, corporate and government bonds and other assets with the split between them remaining fixed or not changing much.
Money is deposited to get a similar or only very slightly better return to what you would make from a savings account. These funds can be used as the no-risk portion of a diversified portfolio.
Invests on behalf of charities. These funds don’t tend to be suitable for personal investors, because you usually can’t put them in a tax-efficient Isa or in a Self-Investment Pension Plan (SIPP) and they might also set a high minimum investment level.
Focuses on mainstream investments, rather than anything too niche.
Query: How do you tell the difference between an opportunities and an opportunistic fund?
Another name for a balanced fund, but one that tracks markets rather than taking an active approach to picking investments.
Invests in stocks that tend to withstand economic shocks with little trouble, but where performance will lag behind in good times. That’s in contrast to cyclical stocks, which take a hit when investor confidence is low, but will have more growth potential when the economy is doing better. Utility, tobacco and household goods firms are defensive stocks, while retailers and airlines are cyclical stocks.
Investments are spread across a lot of different asset classes. This includes the main ones like stocks, corporate and government bonds, property and cash, plus sometimes more niche areas such as private equity. The wide variety of assets should make a fund less volatile and reduce the risk of losses, because no holding is substantial enough to torpedo returns if it does badly. Also, when one asset is performing poorly, this will generally be offset by another that is doing better.
Manager has a lot of scope to switch up investments depending on current or anticipated market conditions. They can be similar to Alpha funds.
Fund invests wholly – or if not, almost entirely – in shares.
Manager will try to boost returns from more mundane income-earning assets such as dividend-paying stocks and corporate or government bonds by selling share ‘options’ to other investors. They earn fees from giving such investors the right to buy some of the fund’s shares at a fixed price in future. If the share price doesn’t rise enough, the other investor won’t bother to exercise their option down the line. However, if it does the other investor gets to buy shares from the fund at what is by then a discount.
Looks at investors’ behavioural biases and tries to make money based on the opportunities these might throw up. M&G Investments, which runs a number of episode funds, says: ‘Episodes are periods in which markets become driven by behavioural rather than fundamental considerations. Investors may become overly focused on one issue, become too concerned about the short term, and fall victim to a whole host of biases which can create opportunities.’ Behavioural investing traps are explained here.
A term sometimes tagged onto Alpha and Long Short fund names, and also referred to as a ‘130/30’ strategy. It means managers are going to pile money into companies they think will do well, but offset the risk of doing this by short selling – betting against – other firms they reckon will do poorly (see Alpha and Long Short).
Puts money into a separate master fund which does the actual investing.
Invests in a relatively small number of stocks, usually just 20 to 30, and/or a specific market sector or region.
Invests all over the world but not in the UK (see Global, Overseas and International).
Invests all over the world, usually in the UK too but not always (see Overseas, International and Foreign).
Loads up on investments that will grow capital fast, a goal that is prioritised over providing a good income. In practice, that means backing companies that stick all their spare cash into growing their business, rather than handing it out in dividends to shareholders.
These are not classic ‘hedge’ funds, which are risky ventures that are typically only open to very wealthy investors. When ‘hedged’ appears in a mainstream fund name, this means it is taking measures to protect against adverse currency movements. We explain how hedge funds work here.
Pursues riskier strategies than a straightforward income fund to generate a stream of earnings for investors (see Income).
Patrick Connolly: ‘I can think of lots of funds that are high risk. I can’t think of any that are called high risk’
Buys the riskier corporate bonds, which means company debt given lower scores by credit rating agencies Standard and Poor’s, Moody’s and Fitch. When a company’s bonds are deemed risky, they have to pay a higher coupon – interest rate – to attract investors. That translates to better returns, providing the company issuing the bond doesn’t go bust. High yield bonds are also known as junk bonds (see Income).
Invests with the aim of generating a good stream of earnings, which is prioritised over growing capital as fast as possible. This strategy often means just buying reliable dividend-paying stocks. However, an income fund might also invest in what are known in industry jargon as fixed-income assets like corporate and government bonds. Those that buy corporate bonds tend to focus on ones that are ‘investment grade’, which means company debt given a good score by the credit rating agencies. The firms use different codes for their scores, but basically anything between AAA and BBB or equivalent is investment grade. Anything BB and below is a riskier junk bond – or high yield bond, which is the politer moniker preferred by the investment industry (see High Yield).
Invests all over the world but not in the UK (see Global, Overseas and Foreign).
Invests in high quality companies, usually the biggest or with the potential to be the biggest in their sector, with strong brands and very little chance that new entrants can challenge their status. The emphasis tends to be on pursuing growth rather than income (see Growth and Income).
This term is sometimes included in bond fund names to indicate that the debt being held has a maturity date some way into the future, when all being well the money investors have lent will be repaid. Bonds with a long maturity date tend to be regarded as riskier than those with a shorter one because there is more time for things to go wrong before you get your money back. However, in times of crisis investors sometimes decide short-dated debt is just as or more risky than long-dated debt. The latter phenomenon is explained here. (See Short-Dated.)
This is a hedge fund strategy where bets are made that some stock prices will fall (going short) while others will rise (going long) with the overall goal of making money in both good and more challenging market conditions. This can be a complicated and risky area, and as with other hedge fund strategies make sure you fully understand it before you invest.
Invests in assets that have high growth potential, but with lot of risk attached.
Invests in unloved assets in hope of a big turnaround, and/or takes large risks in the hope of maximising the eventual rewards.
Indicates the manager has flexibility to switch assets around depending on where they see the best opportunities.
Short for macroeconomics, which involves looking at the economy as a whole, as opposed to microeconomics, which is about the behaviour of an economy’s components like market sectors, companies or individuals. In this context, it means a fund invests to exploit broad economic or political changes in the expectation this will be profitable.
Run by a professional manager. This is also the case with lots of funds that are actively managed to beat the market but some firms choose to emphasise this aspect in their fund names. Managed funds come in a few different varieties, but usually they are invested across many different asset classes in order to spread risk and offer a simple, all-in-one approach. They are generally designed to appeal to people who are inexperienced at investing, nervous of losses, don’t have much money to risk, or have a combination of the above characteristics. ‘Cautious managed’ is a common version of a managed fund (see Diversified and Multi Asset).
Tries to smooth out returns by investing in less risky stocks but still make a profit.
Investments are spread across a lot of different asset classes. Some offer an all-in-one approach, so investors don’t have to invest in lots of funds to get exposure to all markets. However, investing experts don’t tend to advise putting all your money in just one fund, a topic we explore here. (See Diversified and Managed.)
This means a fund invests in very small companies, which offers the opportunity of a big return if they succeed and enjoy massive growth, but is riskier than putting money in larger well-established firms. These funds tend to invest in a lot of companies, so risk is thinly spread and returns aren’t too badly damaged when one of them fails. Another reason to do this is that these funds can’t take too large a stake in any one company, otherwise they become the majority shareholder or outright owner. Cap stands for capitalisation, and market cap is shorthand for the size of a company. You can calculate market cap by multiplying a company’s share price by the number of shares it has outstanding.
Many funds concentrate on either large cap or small cap stocks, with maybe a bit of overlap with mid cap stocks at each end. However, multi cap funds invest across the entire spectrum.
Invests all over the world but not in the UK, providing it’s a fund based in the UK. But it might also indicate that the fund is not based in the UK, so check (see Global, International and Foreign).
Picks unloved stocks or other assets with turnaround potential (see Special Situations and Value).
Invests in companies that adopt ‘ESG’ – environmental, social and governance – policies.
Investments are actively managed to outperform the market. The term also implies a focus on a particular type of holding or a specific fund goal, but it’s so vague you will have to investigate further when it comes to individual funds (see Focus).
This term is sometimes included in bond fund names to indicate that the debt being held has a maturity date only a short time from now, when all being well the money investors have lent will be repaid. Bonds with short maturity dates tend to be regarded as less risky than those with longer ones because there is not as much time for things to go wrong. However, in times of crisis investors sometimes decide short-dated debt is just as or more risky than long-dated debt (see Long-Dated).
Picks stocks where a one-off event – a scandal, a spin-off – can create an opportunity to make money. This will often involve unloved companies with turnaround potential (see Recovery and Value)
This is an indicator that the manager has a lot of scope to switch up investments depending on current and anticipated market conditions and where they can find the best opportunities. Bond funds and multi asset funds will sometimes include this term.
Chooses funds according to a pre-set, computer-driven pattern, an approach used by some hedge funds. Make sure you understand what is involved and the risks before you invest.
Picks unloved stocks or other assets with turnaround potential (see Recovery and Special Situations).