Below we outline some common terms regarding investments and investment styles which are used throughout our website.

 Absolute return fund

A fund which invests without regard to market benchmarks or peer groups.  Whereas traditional investment funds typically measure their success in terms of whether they track or outperform a key market benchmark or index, absolute return funds aim to achieve outright positive returns irrespective of whether asset prices or key market indices rise or fall.

 Active management investment style

A style of investment management that relies on the fund manager making investment decisions based on extensive research and analysis.  The aim is usually to outperform a particular market or sector index rather than to replicate it.

 Alternative assets

Alternative assets are assets that neither have a high likelihood that the original capital invested is returned at the end of the investment period, nor where the underlying capital of the investment is employed to produce a return.  Examples of alternative assets include fine wine, vintage cars and gold.  Investments in trading based strategies that invest in growth assets are also generally regarded as alternative assets from an investor’s perspective.  This is because the underlying capital employed is generally not held at risk over a medium to long term time horizon.

 Arbitrage oppurtunity

This simply means making a riskless profit i.e. the simultaneous purchase and sale of the ‘same’ asset in a different market to take advantage of price discrepancies.  Arbitrage is often incorrectly used in the funds management industry.  This is the case when the strategy is not completely riskless.

 Bear market

Bear markets are markets associated with investor pessimism and an extended period of general price decline in an individual security, an asset, or a market.

 Black-box trading 

Black-box trading is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.  Black-box trading can be used in any investment strategy ranging from fundamental investing to technical trading.

 Bond

A bond is a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the issuer is required to pay a fixed sum annually (the coupon) until maturity and then a fixed sum to repay the principal.  

 Bottom up selection approach

A bottom-up approach focuses on a specific company rather than on the industry in which that company operates - or on the economy as a whole.

 Buy write (covered call) strategy

A covered call strategy is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument such as shares or other securities.  It is a conservative strategy that provides the investor downside protection at the expense of some potential upside.

 Bull market

Bull market are markets associated with investor optimism and a prolonged increase in overall stock prices usually occurring over a period of months or even years.

 Convergence trading

Convergence trading is form of arbitrage trading that consists of taking two positions: buying one asset and selling another asset that have a direct pricing relationship with each other, in the expectation that in time any pricing distortions will become tighter (will have converged), and thus the investor profits by the amount of convergence.

 Covered bonds

A debt instrument issued by banks that is secured by an interest in a pool of high-quality mortgages.  Interestingly the value of the mortgage pool secured can be greater than amount of monies issued.  Issuers can also provide other guarantees to safeguard the investor.

 Defensive assets

Defensive assets are typically less risky and generally produce lower returns than growth assets over the long term.  They usually provide regular income with a high likelihood that the original capital invested is returned at the end of the investment period.  Examples include term deposits and government bonds.  Some defensive assets, in particular long-dated government bonds, are used to mitigate the impact of falling share markets.

Dynamic asset allocation

Dynamic asset allocation (DAA) employs a macro or top-down approach to active portfolio management. The main objective of DAA is to preserve investment capital by decreasing the exposure to ‘at risk assets’ when the investor believes markets will fall. Dynamic asset allocation primarily reallocates growth assets to defensive assets. It can however make investment decisions across asset classes (e.g. Australian equities to International equities) and within asset categories (e.g. countries, sectors, styles, credit exposure, foreign exchange hedging, duration, market cap, etc.). A DAA has many benefits, for example; it allows portfolios to adapt to new events and trends to be more optimally suited to the market. Furthermore, this allows for better risk-control and potentially higher rates of return (if the investor/ fund manager correctly predicts market trends).

 Face value

The nominal value of a security stated by the issuer.  For bonds, it is the amount paid to the holder at maturity.

 Foreign exchange

The system by which one currency is exchanged for another.  Foreign exchange enables international transactions to take place.

 Frozen fund

The term ‘frozen fund’ refers to a registered managed investment scheme, which was originally marketed on the basis that investors had an ongoing or periodic right to redeem their investment on request, but which has since suspended that right.  A freeze or withdrawal does not necessarily mean an investor will not received their money back, or that distributions will cease.

 Fundamental Investing

A method of valuating a business or a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.  Fundamental analysis attempts to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and company specific factors (like financial condition and management). 

 GARP investing

GARP stands for Growth at a Reasonable Price.  Some argue GARP investing is a hybrid of growth and value investing and others a subset of growth investing.

 Growth investing

Growth investing involves purchasing shares in companies whose earnings are expected to grow at a rate that is above average for its industry or the overall market even if the share prices appears expensive.

 Growth Assets

Growth assets aim to produce a return on investment by employing the underlying capital over the medium to long term, thus exposing it to more risk than defensive assets.  Consequently, growth assets are more likely to produce greater returns than defensive assets over the medium to long term.  Growth assets benefit from inflation whereas defensive assets generally do not.  Examples of growth assets include stocks and property.  Typically from an investor’s perspective, investments intended to be held for a short time horizon should not be considered growth assets.

 Hedge

In finance, a hedge is a position established in an attempt to offset exposure to price fluctuations in another position with the goal of minimising one’s exposure to unwanted risk.

 Hedge Funds

In Australia, a hedge fund is defined as a managed investment scheme that uses leverage, derivatives, short selling or seeks returns with low correlation to equity and bond markets.  These characteristics and other features of hedge funds mean that investors in these funds can be exposed to more complex risks than investors in funds pursuing more ‘vanilla’ investment strategies.  As hedge funds seek to produce returns not correlated with equity or bond markets, investors often incorporate hedge funds into their portfolio for the purpose of downside protection arising from their more traditional holdings (equities or bonds).

 Hybrid bond

A hybrid bond is a type of bond that can be converted into shares in the issuing company.  It is a hybrid security with debt (bond) and equity (shares) like features. 

 Investment grade

A term referring to a top grade, best rated bond.  A "blue-chip" stock might also be referred to as investment grade.  Investment grade usually refers to an assessment of a debt issue by a credit-rating firm that indicates investors are expected to receive principal and interest payments in full and on time.  Many institutional investors (superannuation funds, fund managers) can only invest in securities with an investment grade rating.    

 Liquidity

Liquidity is the characteristic of an asset which measures its ability to be converted into cash.

 Long and short position

A long (short) position is one in which the share holder purchases the shares with the hope that the share price will increase (decrease).

 Managed futures fund

A managed future account is a type of alternative investment.  Unlike most managed funds, a managed futures strategy can take both long and short positions in futures contracts in the global commodity, interest rate, equity, credit  and currency markets.  

 Market capitalisation

Market capitalisation is a measurement of the value of the ownership interest that shareholders hold in a business enterprise.  It is equal to the share price times the number of shares outstanding of a company. 

 Mortgage backed securities

These are debt instruments secured by a discrete pool of loans secured by mortgages that make payments to investors based primarily on the performance of those loans.  Mortgage backed securities are packaged in to a single security by banks and other lending institutions and on sold to the market.

 Pair trading

Is a trading strategy that involves the investor buying (long) one company and selling (short) another company in the same industry.  An example would be long Westpac and short ANZ.  This is done in the hope that the company that you are long outperforms the company you have shorted on a relative basis. 

 Passive management investment style

Passive management is a financial strategy in which a fund manager makes as few investment decisions as possible with a goal minimising transaction costs and operating costs.  Passive management usually involves selecting a benchmark index (e.g. ASX 200) and aims for investment performance to mirror it.  

 Property trust

These are trusts that enable investors to pool their funds together to purchase real estate.  Investors in property trusts gain exposure to the value of the real estate owned by the trust, and receive rental income through distribution the trust pays to investors. 

 Property trust (listed)

Listed Property Trusts are property trusts listed on a security exchange.  As listed property trusts are bought and sold on a security exchange the price of a trust unit will be based on market sentiment.  This means that prices will be based on what the market is prepared to pay and will sometimes be priced at a premium or discount.  Listed property trusts are now known as Real Estate Investment Trusts (REITs).

 Property trust (unlisted)

Unlisted Property Trusts are not listed on a security exchange and as a result can be difficult to convert to cash on demand (liquidity).   Unlisted property trusts prices are based on net assets of the trust and are usually used in long term investment strategies.

 Growth investing

A qualitative investment style uses fundamental and subjective company analysis. 

 Quantitative investing

A quantitative investment style uses quantitative tools or models to determine which shares are likely to outperform.  This approach uses minimal subjective overlay.

 Real estate investment trusts

Listed property trusts are now known as real estate investment trusts (REITs).  Please see listed property trusts for more information.

 Running yield

An estimate of the annual rate of interest paid out by fixed income investments like such as bonds.  It does not take into account any increase or decreases in the capital value of the investment where the purchase price of the bond has been purchased at a premium or discount to the bond’s face value.

 Sequencing Risk

Sequencing risk is the risk of receiving the worst returns in their worst order.  Conventional wisdom assumes that retirees and those relying on investment income are solely effected by sequencing risk.  However, sequencing risk also affects wealth accumulators if they contribute additional capital after the initial investment has been made.  The idea of sequencing risk contrasts with the principle that time in the market heals all wounds.    

 Special situations investing

An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation.  It is generally not a long-term investment nor based on underlying fundamentals of the business or some other investment rationale.

Strategic asset allocation

Strategic asset allocation is a traditional investment approach that determines how much an investor is invested in each asset class by looking at the long term expected returns and risk levels of each asset class. Once an investor’s risk tolerance and investment timeframe are understood, a recommended allocation is devised by creating an allocation of investments that, when combined, should match the long term returns and risk tolerance of the investor. Once an strategic asset allocation is determined, the portfolio is typically rebalanced on a pre-determined basis, annually for example, back to its original allocation. Strategic asset allocation approaches recommend sticking with an original allocation over long periods of time rather than reacting to what is expected to occur in the markets.

 Technical investment style

A technical investment style include not only investment managers trading from chart patterns but those using moving averages or computer rules based on price and volume data.

 Top down selection approach

When making a decision to invest in a company, a top-down approach focuses on the economy and financial world in an attempt to identify which industries are forecasted to outperform the market (not the individual company or companies).

 Value investing

An investment philosophy that places primary emphasis on finding undervalued or inexpensive shares as opposed to selecting shares on forecasted earnings growth. 

 Yield to maturity

Yield to maturity is the rate of return anticipated on a bond if it is held until the maturity date.  It takes into account all investment returns inclusive of any increase or decreases in the capital value of the investment where the purchase price of the bond has been purchased at a premium or discount to the bond’s face value.