The Base Rate

The Base Rate (often called the Bank Rate) is a rate set by the Bank of England's Monetary Policy Committee (MPC), which lenders and bank account providers will refer to when they're deciding how much interest to charge / pay on credit / savings.

This is particularly clear when it comes to mortgages - tracker mortgages in particular, as the rate on one of these mortgages will 'track' the Base Rate, following it as it goes up or down.

Back in 1979, the Base Rate reached 17%, but it hasn't been over 10% since May 1992. In fact, the Bank's MPC started a rapid series of reductions in the Base Rate in response to the onset of the financial crisis: between October 2008 and March 2009, it plummeted from 5% to its all-time low of 0.5%

Since then, this has had a massive effect on both savers and mortgage holders. Savers have lost out on billions in interest on their savings - but people with mortgages have saved billions.

Source: ThinkMoney.com

Similar Fund Terms: Interest Rate, Monetary Policy

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Sovereign Debt Crisis

A sovereign debt crisis occurs when one or more government or sovereign entities become at risk of being unable to pay their obligations. Governments become vulnerable to this through fundamental factors such as the accumulation of excessive debt obligations (particularly external debt or debt issued in a currency in which the government has no control) and persistent deficits; while a downturn in economic growth, and a spike in interest rates can exacerbate the problem in the short term. A 'liquidity crisis' is when the government is unable to borrow money e.g. to replace existing debt that is maturing, while a 'solvency crisis' is where the government fundamentally has too much debt. Sovereign debt crises have the potential to greatly impact on investments through the direct holding of the debt/bonds issued by the sovereign, but also through the associated market disruption that may come. Sovereign debt crises will generally be resolved through a number of options such as: debt restructuring, outright default or repudiation, printing money or hyperinflation, or through fiscal austerity. The manner in which the crisis is resolved will have materially different implications for investors.

Similar Fund Terms: Debt Crisis, Debt restructuring, Credit default, Default, Market crash, Bear Market

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Sovereign Wealth Fund

A Sovereign Wealth Fund (SWF) is an investment institution owned and controlled by a sovereign state (government) for the purposes of investing government controlled funds. Sovereign Wealth Funds are typically funded from trade surpluses, budget surpluses, foreign exchange reserves, and sometimes using income from natural resources or one-off significant asset sales. Sovereign Wealth Funds invest in all manner of instruments including public equity, private equity, bonds, real estate, gold and commodities, currencies, and other financial instruments. Sovereign Wealth Funds may be operated to serve one or more of the following purposes: preserving capital, providing for liquidity needs, growing wealth for future spending, purchasing strategic assets, spreading the proceeds of windfalls/short-term gains/surpluses across a number of years, funding future pension expenses, and as a safety reserve. The total assets under management by sovereign wealth funds is estimated as close to $5 trillion in 2012.

Similar Fund Terms: State Owned Investment Fund, SWF, Investment Authority, Stabilization Fund, Sovereign Investment Fund

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Interest Rate

An interest rate is the rate at which interest is paid/received on a sum that is borrowed/invested. Interest rates are expressed in percentage terms, and may apply to a certain period. Typically investments that pay interest will specify upfront how the interest is paid and calculated, for example a bond may pay a fixed coupon rate twice a year based on the face value (initial value at issue date), or a bank deposit might pay interest monthly based on daily deposit balances. It is important to know the precise details of an interest rate e.g. frequency and basis of payment, in order to know the true return.

Similar Fund Terms: Rate, Yield

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Carry Trade

The so-called "carry trade" is when an investor borrows at a low interest rate and simultaneously invests at a higher interest rate. The most common example of a carry trade is when currency investors go long (buy) a currency with a high interest rate, and short (borrow) a currency with a low interest rate; over time the currency investor will earn money from the positive difference between the interest rates (also known as interest rate differential. However that currency investor will also be exposed to movements in the exchange rate, and may end up taking a loss if the exchange rate moves against them by more than which they expect to gain from the positive carry. Active fixed income fund managers will often take advantage of carry trades.

Similar Fund Terms: Active fund, Interest differential, Active Investment

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Momentum Fund

A momentum fund is a type of investment fund that uses strategies which look to ride momentum in trends such as earnings or price movements. The fund manager will employ a range of research and analytical tools to find price trends and earnings trends, this area can become quite sophisticated, with some employing advanced statistical/quantitative analysis to determine price trend patterns and generation of trading signals. In practice the portfolio manager will look to buy stocks that are trending up, in effort to ride the wave up, and then sell before or after it has peaked. These types of funds are popular during bull markets, due to the success of such strategies in an environment of generally rising prices. These types of funds tend to have higher turnover ratios, due to a higher frequency of trading; especially amongst the heavily quant-driven funds.

Synonyms: Active fund, Market timing, Momo fund

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Asset Allocation Fund

An Asset Allocation Fund is a type of fund which invests in more than one asset class. The types of asset classes that theses funds will invest in include stocks, bonds, cash, commodities, property, currencies, and both domestic and international variations of those. The asset mix may remain fixed or it may vary; there are two key variations to those that vary their asset mix: 1. Target date or "life cycle" funds, which alter their mix to suit the investor's risk profile and financial goals; and 2. Active asset allocators, which employ tactical or dynamic asset allocation to take advantage of market trends and convergence and divergence of valuations. Balanced funds offer investors a short-cut to building a portfolio, given the wider range of assets they tend to include; and potential associated benefits of risk and return optimization.

Synonyms: Asset allocator, Balanced fund

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