Useful investment definitions
Absolute Return Strategies
Investment Strategies targeting an absolute return rather than relative to an index or other benchmark
Accrued Interest
Interest earned but not yet received
Active Management
Aims to outperform a benchmark or index by actively managing asset allocation or asset selection
Alpha
Alpha is the portfolio return in excess of a risk adjusted benchmark. It is considered to be the value added by a manager by their asset allocation/selection activities
Asset Allocation
The combination of assets in a portfolio to different asset classes. For example Stocks, Bonds, Cash, Property. Different common approaches to asset allocation exist, for example, tactical, dynamic or strategic
Asset & Liability Management
The measurement and deliberate management of the liquidity and interest rate re-pricing characteristics of an asset and liability portfolio to maximize returns for a given risk
Balanced Fund
A fund that invests across a wide variety of asset classes. See also Pooled Fund
Basis Point
0.01% or 1/100 of 1%
Benchmark
Measure against which a fund's performance is assessed. It might be an index such as the All Ordinaries or a peer group average
Beta
Statistical measure of risk or volatility of returns indicating the sensitivity of the securities or portfolio’s returns to the market in general as measured by the market index. High beta stocks are expected to perform better in rising markets and visa versa
Bear Market
A declining market or one expected to fall
Bond
Legal evidence of debt issued by a company or government, promising regular payment of interest, on pre-agreed dates often at a pre determined rate and with a set date for the repayment of the capital
Bond Yield
Income of the bond (internal rate of return) expressed as a percentage of the capital invested. Prices of bonds rise when yields (interest rates) fall and visa versa
Bottom-Up
Type of active management that gives priority to the identification and selection of securities (at an individual level) to construct an investment portfolio rather than a macro industry or sector allocation
Boutique Fund Manager
A firm, generally small in scale and owned by senior management, that tends to have a low cost base and focus on niche asset classes
Capital Asset Pricing Model (CAPM)
Economic model for valuing assets based on risk and return using the risk free rate of return and beta to measure reasonable excess returns
Capital Gains Tax
Tax that may be due for the profit derived from the sale of an asset. Superannuation funds in Australia receive favorable capital gains tax rates
Closed End Fund
An investment fund which is not open to new investments or to withdrawals by investors on an ongoing basis. Examples include listed funds where an investor obtains liquidity by selling into the market or private equity funds where investors only receive distributions when underlying assets are sold
Convertible Securities
These obligations include bonds, debentures or preferred stock which may be exchanged by their owners for common stock
Consumer Price Index (CPI)
A measure of price inflation. A basket of representative consumer goods in the market is priced on a regular basis to monitor the rate of inflation
Convexity
A measure of interest rate sensitivity. For example, if two bonds have the same duration, the one with a higher convexity will experience a greater increase in price if yields fall
Corporate Governance
Systems, processes, policies, checks and balances put in place to control and direct companies and funds towards investors best interests
Custodian
Organisation that has the legal responsibility for the safekeeping of assets, income collection and for the settlement of transactions in a portfolio, independent from the asset management function
Debenture
Loan made to a company. Sometimes referred to as a bond. A debenture is governed by specific sections of Australian corporations law
Duration
A measure of the number of years the average dollar (present value terms) is received from coupon and principal repayments. Generally, a bond with a higher duration will be more sensitive to interest rate movements
Dynamic Asset Allocation
An approach (such as portfolio insurance) where investments are hedged to theoretically limit losses beyond a floor level
Fixed Income
Debt instrument or security issued by corporations or governments that has a fixed interest rate, set interest payment dates and set maturity and principal repayment date
Fundamental Analysis
Assessment of a company’s share value and potential for future cashflows, profit and dividends based on accounting, economic and business information
Hedge Fund
A fund that seeks to generate investment returns by using non-traditional investment strategies. They are likely to engage in short selling and use derivatives such as swaps and options
High Yield Debentures
In Australia, they tend to be debentures issued by property development companies or riskier lenders. They are unrated and generally have not been reviewed by an independent research house
Illiquid
Investments that can not be quickly converted into cash at a predictable price (eg: property developments)
Income Fund
Generally a trust structured investment that invests in assets that provide a higher regular income rather than capital gain
Index
Measure that gives a representation of the movement in value of a particular market or group of securities
Index Fund
A fund that aims to match its performance to the returns of a particular market or security index
Institutional Fund
Assets managed for an organisation or entity rather than for an individual
Investment Philosophy
Set of systems and principles used to manage investments
Liquidity
Ease with which a seller can find a willing buyer to convert a security, asset or liability to cash
Management Monitoring
Quantitative and qualitative review of an investment manager’s performance against its benchmark and within specific guidelines
Marketability
Ease with which a security can be bought or sold. Similar to liquidity except that liquidity implies value will be preserved.
Market Inefficiency
Conditions in which current security prices do not reflect all publicly available information about a security and it might therefore be under or over valued
Market Risk
Risk that is common to entire market, asset or liability class. The level of risk in the market that diversification cannot eliminate. Also called systemic risk
Monetary Policy
Actions taken by central banks (eg: Reserve Bank of Australia) to influence the level of interest rates
Mortgage-Backed Security
Collateralised fixed income security in which a pool of mortgages are pooled together and act as collateral for the issuance of securities
Passive Management
Fund that aims to replicate a particular market index or benchmark fund and does not attempt to actively manage the portfolio
Risk
Possibility that an investment will not deliver expected returns or meet its objectives or the chance that a permanent loss will be sustained. Technically, risk is measured as the volatility (standard deviation of returns) over a given period
Risk/Return Tradeoff
The amount of expected return that must be sacrificed in order to reduce risk
Risk Tolerance
Extent to which investors are prepared to accept volatility or risk in a portfolio
Standard Deviation
Measure of the dispersion of a set of numbers around an average. Frequently used as a measure of risk
Tactical Asset Allocation
Short term opportunistic deviation from a strategic asset allocation to exploit short term anticipated movements in markets
Tilt
A weighing towards or away from a particular asset class or security
Top-Down
Approach to investment analysis that starts with macro economic factors and business cycle analysis to determine allocations starting with country, asset class and ultimately individual stocks, assets and securities
Total Return Style
Investment approach that aims to achieve the best possible return for a given risk level without paying regard to a benchmark
Tracking Error
Measure of the standard deviation of a manager’s excess returns over a set priod
Unsystemic Risks
Risk that is idiosyncratic to a stock or security and cannot be explained by general market movements. It can be reduced by using diversification strategies
Unit Trust
Managed Investment Scheme. A pooled fund established under the managed investments act
Value Style
Strategy to invest in stocks, assets or securities that appear to be undervalued relative to the market based on tangible measures
Yield Curve
A graph showing the relationship between yield and maturity for a set of similar securities
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