In return for buying equities the shareholders become part-owners of the company. Their level of ownership depends on how many shares they purchase. Shareholders have the potential to receive a share of the company’s profits and the right to vote on how that company is run. Their interests at the company are protected by the Board of Directors they elect.

What affects the price of equities?Technically speaking, ‘equity’ is the value of a company’s assets less the value of its liabilities. The value of those assets and liabilities is dictated by market forces, i.e. the stock market. Share prices are constantly changing because people in the stock market make different assessments of the company’s value. If more investors want to buy a company’s equity than sell, the price will normally increase. Similarly, if there are more sellers than buyers, the price will normally fall.

(continued) (BGB 10pt)A SIMPLE GUIDE TO EQUITIES

Equities... shares... stocks – in the financial markets they mean the same thing: slices of company ownership. In this guide we explore their structure, why their prices go up and down, and some of the key benefits and drawbacks of investing in them. By speaking to a financial adviser, you can discuss whether investing in equities may be right for you.

What are equities?A company may choose to raise money for a number of reasons. For example, it may want to expand its operations, invest in research and development, or reduce its level of debt. It may even be starting out and need money to form the initial business. A company can do this by splitting its ownership into ‘shares’ and selling these to ‘shareholders’. It typically offers them on the stock market, where investors can buy and sell them.

More investors predict improved prospects for a company = more buyers than sellers

VALUE INCREASES

More investors predict deteriorating prospects for a company = more sellers than buyers

VALUE DECREASES

For promotional purposes

The main force that drives a company’s value, and therefore its share price is its past and forecast profitability. This can be affected by a number of factors. These include:

Company factors – an earnings update or management change

Sector factors – industry news, competition

Economic factors – exchange rates, interest rates, inflation

External factors – natural disaster, war, terrorism

What are the benefits and drawbacks?

Equities could potentially give you a higher return than other investments, but they are also higher risk. There is no limit to how high the price of a share could rise.

Investors, such as fund managers, buy shares in companies they believe will rise in value. If they are proved right, they have the potential to benefit in two ways: capital growth (the share price rises) and dividend payments. A dividend is a cash payment made by a company to its shareholders. The amount is variable and is paid as a portion of the company’s profits.

As a part-owner of a company an investor shares in its successes - but also its failures. In other words, the

share price and income received can rise as well as fall. This fluctuation in value is known as volatility. There is no limit to how low the share price can fall, and should the company go bankrupt, the shares will likely be worthless.

A SIMPLE GUIDE TO EQUITIES

Capital growth Income Price volatility

Equities High growth potential Depends on dividend and will rise and fall Generally high

Bonds Moderate growth potential Generally higher than equities. Usually stable and regular Generally low

Commercial property Moderate growth potential Generally high and more stable than equities Generally lower than equities

Cash Low growth potential Low. Depends on interest rates Very low

The above table is a generalisation of the asset classes. Individual securities in each asset class may behave differently.

Equities vs. other asset classes

Shareholder return

Capital growth

Dividend payments

NEWS

BANK

How do investors select which equities to buy?

There are many ways of researching the equity market and choosing which companies to invest in. For fund managers, there are four main things to think about:

Industry analysis: What is happening to the industry in which the company operates? How will it perform at certain stages of the economic cycle?

Company analysis: What is the company’s strategy, and how is it adapting to changing conditions?

Financial analysis: Are the company’s profits sustainable and are they being distributed to shareholders?

Valuation: Is the company’s share price expensive, and how does it compare to its peers?

How equity managers perform is typically measured against an index of companies in the region or industry in which they invest. This is known as a ‘benchmark’. For example, a European equities fund may be benchmarked against the MSCI Europe Index, which represents about 450 of the largest companies listed across 15 countries in Europe. The fund manager will aim to outperform the index, as well as seeking to protect investors’ capital when the wider market is falling.

Glossary

Benchmark: A standard against which a fund’s performance can be measured. A benchmark is often called an index.

Bond: A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments, and the eventual return at maturity of the original money invested.

Commercial property: Any property used for commercial purposes. Commercial property has three main sectors: retail, office and industrial, the largest of which is retail. It excludes residential property.

Dividend: A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.

Outperform: To deliver a return greater than that of a fund’s assigned benchmark.

Volatility: The rate and extent at which the price of a fund, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.

At a glance

3 Equities represent part-ownership in a company

3 Investors share in company profits through share price growth and dividends (income)

3 However, this depends on the company’s success as well as economic/external factors

3 Equities are generally higher risk than other asset classes

By speaking to a financial adviser, you can discuss whether such an investment may be right for you.

GlossaryPlease see HGi.co/glossary for a glossary of financial terms used in this document.

Other educational guides in this series include:

Absolute returnPlease see HGi.co/absolutereturn for a simple guide to absolute return fundsThe manager of such a fund is likely to build a portfolio of companies

that diff ers to a greater or lesser extent to the make-up of the index, but the fund will broadly rise and fall in line with that wider index. The drawback of this approach is that if the index is falling, the fund may do better than it on a ‘relative’ basis but still lose an investor money in ‘absolute’ terms.

An absolute return fund seeks to do things diff erently. Instead of being measured against an index, it aims to deliver positive returns regardless of whether equity markets are rising or falling. With this aim in mind, absolute return funds tend to be benchmarked against the return available from holding cash on deposit. See the chart below for an example.

How does absolute return investing diff er from traditional investing?Traditional investment funds buy shares in companies that the fund manager believes will rise in value. Their success (or otherwise) is typically measured against an index of companies in the region where they invest, known as a ‘benchmark’.

For example a UK equities fund may be benchmarked against the FTSE All-Share Index or a European equities fund against the MSCI Europe Index. These funds are said to be managed on a ‘relative return’ basis, which means they aim to deliver returns above those of, or ‘relative to’, their benchmark. See the chart below for an example.

(continued) (BGB 10pt)

A SIMPLE GUIDE TO ABSOLUTE RETURN FUNDS

Absolute return funds aim to deliver a positive (‘absolute’) return to investors regardless of whether the wider market in which they invest rises or falls. Please remember that absolute return funds do not guarantee positive returns. Performance will be impacted by market movements and the investment decisions made by the fund manager.

Absolute return investing can apply to many asset classes and a number of techniques, but this guide focuses on funds invested in company shares (‘equities’) using a ‘long/short’ approach. By speaking to a fi nancial adviser, you can discuss whether investing in absolute return funds may be right for you.

Relative return example

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-5

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Equity benchmark index

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Absolute return example

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Cash benchmark

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Published May 2017

BondsPlease see HGi.co/bonds for a simple guide to bonds

(continued) (BGB 10pt)A SIMPLE GUIDE TO BONDS

Bonds are debt securities issued by companies, governments and the like. For investors, they can provide a stream of returns. In this guide we explore their structure, why their prices go up and down, and some of the key benefits and drawbacks of investing in them. By speaking to a financial adviser, you can discuss whether investing in bonds is right for you.

What are bonds?A bond is an IOU, typically issued by a government or company (an ‘issuer’). When issued by a company, they are referred to as ‘corporate bonds’. By buying a bond you are lending the issuer money. Two things are specified at the outset: the agreed rate of interest that the issuer must pay you at regular intervals (the ‘coupon’), and the date at which the issuer must repay you the original amount loaned (the ‘principal’).

To illustrate this, let’s take a fictional bond issued by Enterprise Inc. Say you buy Enterprise Inc’s €100 five-year 5% coupon bond. This means you lend the company €100 and in exchange Enterprise Inc. will pay you an annual coupon of 5% (i.e. €5), and repay the principal after five years.

Coupon paymentPrincipal

0

20€5

€

€5 €5 €5

€105

40

60

80

100

120

Year 5Year 4Year 3Year 2Year 1

For illustrative purposes only

What affects the price of bonds?Bonds can be bought and sold in the marketplace. Their prices change constantly because people in the market make different assessments on two main factors: the likelihood that the issuer will repay its debts (‘credit risk’), and the effect of interest rates (‘interest rate risk’). We say more about these later.

If more investors want to buy a bond than sell, the price normally increases. Similarly, if there are more sellers than buyers, the price normally goes down. The rising or falling price affects the yield of the bond. Yield is a way of measuring the attractiveness of an individual bond. However, bonds are not always held until the principal is repaid - they can be bought and sold at any time until the principal is repaid - so there are many ways of calculating the yield. The most common is the ‘redemption yield’. This discounts the value of coupons received over time. It also adjusts for any difference in the price paid for the bond and the principal repaid at maturity.

However, one of the simplest is the ‘running yield’. Using the earlier example, imagine that after three years, Enterprise Inc’s five-year 5% coupon bond is worth €95 in the market, and another investor buys the bond from you. The coupon is still €5 – this never changes as it was agreed at the outset. The running yield would therefore be 5 ÷ 95 = 5.26%. Therefore, if bond prices fall, yields rise. If bond prices rise, yields fall.

BONDPRICE RISES

YIELD FALLS

BONDPRICE FALLS

YIELD RISES

BONDPRICE RISES

YIELD FALLS

BONDPRICE FALLS

YIELD RISES

Published May 2017

Risk profilingPlease see HGi.co/riskprofiling for a simple guide to risk profiling

How can my attitude to risk be assessed?

A financial adviser or online tool can assist you in arriving at your ‘attitude to risk’ and then recommend the most appropriate investments to match your circumstances and needs. Typically categories of attitudes to risk can range from (1.) being risk averse to (10.) being highly adventurous (see example below).

Normally your attitude to risk will be assessed via a detailed questionnaire. Don’t forget that taking on more risk can potentially lead to higher rewards but also potentially higher losses.

Risk versus reward

Before devising an investment strategy in order to reach your end investment goal, you must first establish how much risk you are willing to take. This can depend on:

· Your capacity to recover from losses should the markets fall during your investment period

· The length of time you wish to be invested

· Which investment products you should be invested in

· Whether cash is more suitable for you

· What other dependants you have relying on your investment goals i.e. family

Some investment products are more ‘risky’ or volatile but can offer greater returns over time, but the reverse is also true: you could potentially suffer greater losses. For example, shares are usually considered to be more risky compared to bonds. For the most part, the more risk you are prepared to take the greater the potential reward, but you must be aware of that before you or your adviser selects your investments.

(continued) (BGB 10pt)

A SIMPLE GUIDE TO RISK PROFILING

Investors have a huge choice when it comes to deciding where to place their money. They must consider what their attitude to risk is and how they might want to diversify their investments. Risk profiled funds allow investors and advisers to match individual attitudes to risk to investment goals.

1. RISK AVERSE

2. VERY LOW RISK

3. LOW RISK

4. LOWEST MID RISK

5. LOW MID RISK6. HIGH MID RISK

7. HIGHEST MID RISK

8. HIGH GROWTH

9. VERY HIGH RISK

10. HIGHLY ADVENTUROUS

DECREASING RISKS

INC

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A TYPICAL ATTITUDE TO RISK SPECTRUM USED BY A FINANCIAL ADVISERINCREASING RISKS

Published May 2017

VolatilityPlease see HGi.co/volatility for a simple guide to volatility

Can you measure it?

The most common measure of volatility is standard deviation. This measures how much the value of an investment moves away or deviates from its average (mean) value over a set period of time, i.e. how much it rises and falls. The higher the volatility, the greater the standard deviation.

The examples below show shares with lower and higher volatility. Share A has lower standard deviation (volatility) compared to share B which has higher standard deviation.

Forecast volatility attempts to use standard deviation to forecast future variation in returns. The higher a forecast volatility figure, the more an investment could move both up and down over time.

What is volatility?

Volatility is how sharply and how frequently a fund or share price moves up or down over a certain period of time (see example below).

What causes volatility?

Volatility can be triggered by any number of factors. The UK stock market, for example, can fluctuate because of various factors both domestically and overseas; economic data from around the world, as well as key political developments can trigger significant market movements. Periods of losses/downturns can be followed by upswings, also known as rallies, and vice versa. But this is the very nature of the stock market.

(continued) (BGB 10pt)

A SIMPLE GUIDE TO VOLATILITY

Investors have much to think about when choosing and understanding investments; in particular, market volatility and the impact it can have on your investment. Extreme market volatility during the 2007-08 financial crisis demonstrated how markets can swing wildly. Understanding volatility is therefore vital to the overall process of choosing the right investments, whether you decide to make your own investment decision or to consult a financial adviser. If you are unsure, we recommend consulting a financial adviser if you can.

Share A

Pric

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Pric

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Share BLower volatility Higher volatility

Time Time

£1 £1

5 years 5 years0 0

Published May 2017

Source: Janus Henderson, for illustrative purposes only

Fund pricingPlease see HGi.co/fundpricing for a simple guide to fund pricing

A SIMPLE GUIDE TOFUND PRICING

A fund pools the money of lots of investors to buy a portfolio of assets. The price of these assets fluctuates and so does the size of the fund as investors buy and sell shares. So pricing the fund is complex and needs to be fair to both ongoing investors in the fund and those wishing to deal (buy or sell the fund). In this guide we explain what this means in practice.

How is the fund price calculated?The fund price takes into account the value of the fund’s assets, such as the shares, bonds and property it owns. Several factors contribute to the fund price:

· Spreads on underlying assets in the fund: When you buy an individual share or a bond you may notice there is one price for buying (the offer price) and a lower price if you want to sell (the bid price). This difference between the two prices is known as the spread. For widely traded assets the spread may be very small and for some very liquid assets there may be no spread at all, such as on cash. For other assets that are not widely traded, such as smaller-company shares, the spread could be large, say 3%. It’s larger because the broker who buys or sells the shares doesn’t want to sell you them too cheaply or pay you too much when buying them from you. The larger spread compensates the broker for the extra risk of dealing in smaller-company shares.

· Transaction costs: There are often external transaction costs for buying or selling assets, such as commissions, transfer fees and stamp duty. These costs can vary widely depending on the type of asset and where they are. For example, you need to pay 5% stamp duty land tax when buying UK commercial property above £250,000.

· Initial charge: This is applied by the fund manager when you buy into the fund. It covers the cost of setting up the investment, although fund managers often offer a partial or full discount on this charge, particularly if you invest through a cost-efficient platform.

The spread, transaction cost and initial charge mean there is essentially a buying price and a selling price for every fund, although the quoted price for the fund will depend on the pricing method.

Summary: what does the fund price include?

Underlying assets

The fund’s assets, such as the shares, bonds or property it owns

Spreads on underlying assets in the fund

The difference between the buying price (the offer price) and the selling price (the bid price)

Transaction costs

External transaction costs attached to buying/selling assets such as commissions, transfer fees and taxes

Initial charge The cost of setting up the investment applied by the fund manager

For information relating to charges please see our Simple Guide to Charges

ChargesPlease see HGi.co/charges for a simple guide to charges

A SIMPLE GUIDE TO CHARGES

Investment Management can appear a complex business. When you invest in a fund, we work hard behind the scenes to safely pool your money with that of other investors in the fund; we employ investment professionals to build and manage the portfolios, operations teams to administer the funds, and all transaction and regulatory expenses have to be met. All of this costs money, so this guide helps you to understand the charges and expenses incurred by funds.

The main fund charges

Entry charge One-off charge (we take this on the day you invest in the fund)

What is it?It's the maximum charge we can take from the money you use to invest in the fund.

What is it for?It covers the costs of setting up your account.

It may also cover payments to a financial adviser, if this has been agreed as part of the adviser fee.

How much?Typically anything from zero up to 5%.

ExampleIf you put £1,000 in a fund with an entry charge of 5%, the charge will be £50. This means £950 will be invested in the fund.

Ongoing charges figure (OCF) What is it?The OCF is a single figure that represents the charges you'll pay over a year for the length of time you hold your investment. It is usually stated as a percentage of the fund value.

What is it for?The OCF covers aspects of operating the fund each year. It includes fees paid for managing the fund such as the annual management charge and our administration and oversight tasks. See overleaf for more details.

How much?An OCF can typically range from 0.25% to 2.5% each year.

ExampleA fund with a constant value of £1,000 over a year and an OCF of 1.5% would have a charge of £15 in that year. Put another way, if the same fund achieved a return of 10% a year, the OCF would reduce the return to 8.5%. A breakdown of a typical Janus Henderson OCF is shown overleaf.

Conditional charges Portfolio transaction costs

Some funds have conditional charges that are triggered when they meet specific predefined targets. The most common conditional charge is a performance fee – a fee that generally aims to reward good fund performance. So if the fund achieves a certain level of return, we can take part of that return as a fee for good performance. For further information please refer to our guide to absolute return funds at HGi.co/d33

All funds also incur various transaction costs. For example, when a fund buys or sells shares, this incurs broker commissions, transfer taxes and stamp duty, which the fund pays on each transaction. Transaction costs for some Janus Henderson funds are shown at HGi.co/by5r

Exit charge One-off charge (day fund is sold)

What is it?We may take an exit charge when you sell part or all of your holding in the fund although this is extremely rare.

What is it for?It typically covers the costs if you sell your investment early.

Some funds may make a charge to deter excessive short term trading.

How much?If a fund applies a charge, the amount is often discretionary.

ExampleA fund that applies a 5% exit charge when it is sold at a value of £2,000 will make a charge of £100. This means the investor will receive £1,900.

The duration of the investment

Published May 2017

Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. © 2017, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC. H032149/1117

Contact usGeneral enquiries: 0800 832 832Email: support@janushenderson.comWebsite: janushenderson.com