The date when income will be paid by a unit trust. This income is reinvested back into the unit trust, increasing the value of the units, instead of being paid out to the investor.
A traditional investment approach where fund managers actively build and change a portfolio of assets (for example stocks and shares) to take advantage of the best opportunities in the stock market.
A portfolio that is designed to provide above-average returns by taking above-average risk. Typically, such portfolios have a relatively high exposure to equity investments.
Alpha is a coefficient that measures the risk-adjusted performance, or the excess return, considering the risk due to the specific fund and its underlying investments, rather than the overall market. A high alpha indicates that the fund has performed better than would be predicted given its beta (volatility).
An arrangement under which periodic payments are made to a person in return for the investment of a lump sum, usually for the purpose of providing retirement income.
This is the percentage rate used to calculate the amount of income payable, following investment of a lump sum in an annuity.
Taking advantage of countervailing prices in different markets. For example, the purchase of an asset for a low price in one market and its sale for a higher price in another.
The percentage split of an investment portfolio among different asset classes (shares, bonds, property, cash, etc). See also ‘Strategic asset allocation’ and ‘Tactical asset allocation’.
The different types of assets available to investors. For example, equities, cash, fixed interest or property.
Items that are owned by an individual, such as property and investments. Money in a bank or building society account is known as liquid assets.
The transfer of ownership to another party.
An investment portfolio that diversifies its holdings over a range of asset classes, which typically include shares, fixed interest, property and cash.
An investment manager whose expertise includes asset allocation and the supervision of portfolios containing a variety of classes of investment (as distinct from expertise in managing a particular asset class – see ‘Specialist manager’).
A measurement of fluctuation of an investment, equal to 1/100 of one percent.
A market in which prices decline sharply against a background of widespread pessimism.
An index or other market measurement which is used by a fund manager as a yardstick to assess the risk and performance of a portfolio.
This is someone who benefits from a will, a trust, a pension fund or a life insurance policy.
A requirement of the Financial Services Authority that a financial adviser, whether independent or tied to a single product provider, must provide the best advice regarding the most suitable product, having first established a full understanding of the financial background. An additional requirement is that commissions received on products sold should not influence recommendations.
See ‘Bond Exchange for South Africa’.
Beta is a quantitative measure of the volatility of a fund or portfolio, relative to the overall market. A beta above 1 shows that a fund is more volatile than the overall market, while a beta below 1 represents a fund, which is less volatile.
Bid offer spread
This is a form of charging whereby units are bought and sold at different prices. The price of units that an investor can buy is higher than the price at which they can sell the same units.
Financial instrument that promises that the issuer (borrower) will pay the holder (the investor) interest and repay the capital amount over a certain period of time. Bonds represent debt to the issuer.
Bond Exchange for South Africa (BESA)
The market for the listing and trading of long-term (generally longer than a year) securities that are issued by government and the corporate sector.
Activities of financial intermediaries on behalf of other participants in return for commission.
An advancing market (as opposed to ‘Bear market’).
A market in which prices have a tendency to rise easily with a considerable show of strength.
Capital gains tax
You may have to pay capital gains tax on any profits over a set allowance when you sell assets such as shares or property. You are allowed to make gains up to a certain amount each tax year that are exempt from tax.
The amount you receive in addition to the capital you’ve invested when you cash in your investment.
Referring to an investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital.
Funds that are no longer accepting new investments, but where the fund is still invested and managed in the usual manner. Funds are capped by the asset managers who manage them and they can be re-opened at a later date.
A tradeable item that can generally be further processed and sold. For example, metals, wheat, sugar and coal.
Procedures undertaken at regular intervals or on an ongoing basis to ensure internal and external controls and regulations are complied with.
In, for example, a deposit account, this is where interest is added to both capital and the accrued interest from time to time. The longer an investor leaves an investment, the more advantage they can get from compound interest. For example, in year one an investor is paid 10% on his or her R100 investment. At the end of year one this investment is worth R110. In year two, with compound interest taken into account, the investor now earns 10% on R110, giving him or her R121 by the end of year two. In year three they earn 10% on R121, giving a grand total of R133.10.
Compulsory purchase annuity
An annuity that a member of an insured pension scheme must purchase on retirement.
A portfolio comprising (generally) the bulk of a fund’s assets. These assets are invested in a highly controlled fashion in an attempt to secure the fund’s liabilities with a reasonable degree of confidence. The balance may then be invested in one or more satellite portfolios, which may be invested more aggressively.
The interest that the issuer promises to pay to the bondholder during the life of the bond. This is normally expressed as a percentage per year and may be a fixed or variable (floating) interest rate.
A term meaning ‘with dividend’.
The performance of a fund’s price over a given period of time.
Failure to meet the terms of a credit agreement.
A general price decline during which consumer spending is substantially curtailed, bank loans contract and the amount of money in circulation is reduced. It is the opposite of inflation and generally applies to more than just a temporary decline.
A prolonged slump in economic activity, characterised by rising unemployment and serious falls in production and consumption of goods. Also see ‘Recession’.
A financial contract that derives its value from an underlying security, liability or index. Derivatives come in many varieties, including forwards, futures, options, warrants and swaps.
This is a type of trust where the trustees can decide who will benefit from the trust and how much they will get.
When a company pays money (dividends) to its shareholders.
A fund that is invested to provide a distribution payment of income on a regular basis to policyholders.
The spreading of investment funds among classes of securities and localities in order to distribute and control risk. This is a fundamental law of investment meaning simply that you shouldn’t put all your eggs in one basket. In other words, you shouldn’t invest all your resources in one place.
The amount of a company’s after-tax earnings that it pays to shareholders.
A set of indices compiled daily from New York Stock Exchange closing prices. The averages are unweighted arithmetic indices, useful for showing general price movements. The Industrial Average consists of 30 industrial stocks. The Dow Jones is probably the most widely quoted US index.
Efficient frontier modelling
An investment portfolio is said to reside on the efficient frontier if it is expected to produce returns greater than other portfolios (ie with different asset mixes) of the same or lesser risk, where risk is defined as the standard deviation of the returns. In order to calculate an efficient frontier, future investment returns and their standard deviation need to be known. These are, of course, unknown and need to be estimated from past market data. However, there is no guarantee that the past will be a suitable guide to the future and so efficient frontiers cannot be determined with certainty.
Financial markets in countries with developing economies, where industrialisation has started and the economy has linkages with the global economy. The financial markets in these countries are immature compared to those of the world’s major financial centres, but are becoming increasingly sophisticated and integrated into the international markets. These markets provide potentially high returns but are subject to high risk and volatility.
A life assurance policy that pays out a lump sum after a specific period of time or on death of the policyholder. It is important to remember than endowment is a long-term commitment. An investor who surrenders early may not get back the amount of money they have invested.
Financial instrument representing part ownership of a corporate entity OR the value of an asset (for example, a property) less any money owing on it (for example, loans or mortgages).
Equity investment funds
An investment fund that invests in shares in UK or other overseas companies . International equity investment funds invest either within developed economies or within emerging markets.
The price of a currency in terms of another currency.
A term meaning ‘without dividend’. It denotes a share price that is quoted on the basis that the seller, not the buyer, is entitled to the current dividend on the share (as opposed to ‘Cum dividend’).
An individual or company appointed in a will to deal with the wishes of the deceased, in administering their estate.
Financial instrument with non-standard features; could possibly be a derivative
An organisation (for example, an investment management company) engaged to manage and invest funds on behalf of a client.
Individuals who give advice about all aspects of finance. Financial advisers can advise and sell products for a range of insurance companies and investment companies. Generally, the companies pay them commission when they sell a product although they may assign part of that commission to their client. There are also financial advisers who do not take commission but charge their clients a fee instead.
Financial needs analysis
The standard procedure a financial adviser will undertake when formulating an individual’s investment strategy.
Financial Services Board
The financial service industry’s regulator. One of the principal aims of the regulator is to protect the consumer.
Referring to income that remains constant and does not fluctuate, such as income derived from bonds and annuities. Any debt security that has a fixed flow of income is known as a fixed interest security.
Fixed interest rate
An interest rate that does not change during an investment or borrowing period.
See ‘Financial needs analysis’
See ‘Financial Services Board’
FTSE 100 Index
A share index of the stocks of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.
FTSE All-Share Index
An index of the share prices of all companies on the London Stock Exchange.
The professional company responsible for the day-to-day running of a fund.
The value of all the assets held in a fund. Usually based on the bid or selling price of the underlying assets.
Fund supermarkets / Platform / Linked Investment Service Provider (LISP)
Providing access to a number of investment companies through one route, like one website address.
The monetary value of a fund, calculated by adding up the value of its underlying assets. The price of units in a unit trust, for instance, is worked out from the value of all its holdings divided by the number of units issued.
An obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.
A market in which futures contracts are transacted.
The total before deductions have been taken away.
Gross domestic product (GDP)
A measurement of the aggregate goods produced and services provided within an economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of an economy. See also ‘Gross national product’.
The amount of interest you receive without any income tax taken out.
Gross national product
An economic statistic which includes the gross domestic product (GDP) plus any income earned by residents from their overseas investments, minus income earned within the domestic economy by overseas residents. See also ‘Gross domestic product’.
Group of Seven (G7)
The seven major capitalist powers: Canada, France, Germany, Italy, Japan, UK and US.
Hang Seng Index
The principal Hong Kong Share Price Index.
The practice of undertaking one investment activity in order to protect against loss in another, for example, selling short to nullify a previous purchase. While hedges reduce potential losses, they also tend to reduce potential profits.
A type of investment portfolio under which the fund manager is authorised to use a number of higher-risk investment techniques, including using derivatives, short selling and borrowing funds to generate a higher return.
A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.
A portfolio of securities structured in such a way that its value will closely follow a nominated market index. For example, an equity index fund may be designed to track the FT/S&P All Share Index. There are three main methods in use: Replication, Stratified Sampling and Optimised Sampling.
A condition of continuous rise in the average level of prices.
The illegal practice of trading in securities on the basis of ‘inside’ or secret information which is not available to the public at large.
Refers to market activities undertaken by corporate entities and government (as opposed to retail, which are activities undertaken by individuals).
International Monetary Fund (IMF)
An international organisation founded in 1947 to promote maintenance of equilibrium in the balance of payments among the various nations of the world. The functions of the IMF include the levying of quotas on member nations to create a pool of funds available to be loaned to nations facing balance of payments problems.
The cost of borrowing or the price paid for the borrowing of funds. Expressed as a percentage per year.
Without a valid will.
An asset acquired for the purpose of producing income and/or capital gains for its owner.
The general economic, political, legal and market conditions within which an investment is made.
Johannesburg Stock Exchange
The inception (start) date of a fund.
Opposite of assets; in other words, debts. In the case of pension funds, a stream of obligations (pension payments).
See ‘London Interbank Offered Rate’.
The ability of an investment to be easily converted into cash with little or no loss of capital and with minimum delay. An example of a highly liquid asset is a short-term bank bill, while property is a relatively illiquid investment. For many securities, the degree of liquidity depends on the depth of the secondary market for that security. Also refers to the maintenance of cash and reserves by a financial institution to fund withdrawals by depositors, unit holders or investors.
The risk that an investment may not be easily converted into cash with little or no loss of capital and with minimum delay.
A market where selling and buying can be accomplished with ease, due to the presence of a large number of interested buyers and sellers who are willing and able to trade substantial quantities at small price differences.
A company whose shares are traded on the stock exchange and are able to be bought and sold by members of the general public.
London Interbank Offered Rate
The interest rate at which major international banks in London will lend cash to each other, and thus an indicator rate for international lending.
Managed funds are generally made up of a spread of other specialist funds. This is done to spread the risk.
The agreed objectives given by an investor to his or her investment manager. This often includes a benchmark, and guidelines about sector exposures and prohibited investments.
Marginal tax rate
Highest tax band rate applicable to an individual or firm.
The sum of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities.
The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities as well as judgements of underlying value. It is extremely difficult to get market timing right consistently.
The value of an asset to a third party on the open market.
The date on which a loan, bond, mortgage, life policy, or other debt or security is due to be repaid.
Money market instrument
Financial instrument that promises that the issuer (borrower) will pay the holder (the investor) interest and repay the capital amount over a certain period of time. That period of time will be less than one year.
Morgan Stanley Capital International Index
A series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.
See ‘Morgan Stanley Capital International Index’.
An investment product that consists of multiple specialised funds. Each specialised fund may invest across different sectors and markets, or have managers investing in the same asset class but with different investment styles.
The first electronic stock market, which uses computers and telecommunications to trade shares rather than a traditional trading floor. NASDAQ is owned and operated by the National Association of Securities Dealers (NASD). It is the fastest growing major stock market in the world with well over 5 000 companies listed. Market makers compete to buy and sell NASDAQ-listed stocks of US and non-US based companies via a worldwide computer network for large and small investors.
An index of the average value of the shares of 225 Japanese companies which reflects share price movement on the Tokyo Stock Exchange. The index is unweighted, so smaller companies can influence the index as much as the larger ones.
The face value of a financial instrument.
An account in which the named holder holds the assets in it on behalf of another (the beneficiary). In the stock market, the most common use of nominee accounts is where execution-only intermediaries act as nominees for their clients. The shares are registered in the name of the intermediaries, but the client has beneficial ownership of them. The advantage of nominee accounts is that they make settlement quicker and more streamlined. In theory, dealing costs should be lower. There are some disadvantages: because the individual isn’t the registered owner of the shares, he or she doesn’t get sent company reports and accounts, and can’t take advantage of shareholder perks, unless his or her intermediaries provide a special forwarding service.
The cost of not having invested in an alternative manner.
Achievement of a higher investment return than a benchmark or other measure against which that return is being compared. For example, an equity fund would be said to have outperformed the index if the fund achieved a 5% return against a 3% return by the index over the same period (as opposed to ‘under-performance’).
A term used to describe the situation following a decline in share prices generally or of a particular share, in which some investors believe that prices have fallen too far. In other words, shares are undervalued.
A term referring to an offer for sale where applications for shares exceed the number of shares available. When this happens, the allocation of shares will depend on the rules set out in the company’s prospectus, but a common solution is to scale back all applications so that everyone gets a smaller slice of the available new issue than they applied for.
A term used to describe a security that is trading at a higher price than it should be in relation to fundamentals. The opposite of ‘undervalued’.
Having a greater exposure to a particular sector or stock in an investment portfolio compared with a neutral or benchmark position (as opposed to ‘underweight’).
An investment approach that aims to mirror or track the performance of a financial index. This is normally done by either investing in the exact constituents of an index or by taking a representative sample of that index. The managers of the fund have lower expenses than active fund managers, and the charges to investors are therefore lower.
A regular income paid to a person after they have retired. Also used to describe a plan or scheme that is set up to provide a pension or other retirement benefits.
A form of analysis that attempts to compare investment manager performance. It can be critically affected by the time period selected. While some attempts have been made to look at risk-adjusted returns, generally it is very difficult to assess the quality of those returns. Good performance measurement should include: analysis of performance over a business cycle (typically three to five years) and assessment of returns on a quarterly basis, ideally by sectors as well as total returns; ensuring that like is being compared with like – the best way to do this is to look at each manager’s benchmark, or risk profile, and compare performance against the benchmark, preferably on a sector basis; and analysis of the reason for any extreme out- or under-performance in a given period (for example, whether a large overweight position exists in one or a few securities or a sector).
Performance to date
The performance of an investment over a given period of time calculated to the most recent update date.
Performance since launch
The performance of an investment or fund since inception to the given date.
The collection of investment holdings of a particular investor, usually with reference to its composition. The composition is the mix of different classes of securities, such as bonds, property, shares and cash. In a single asset class, the composition is the mix of different sectors and stocks.
The process of identifying which asset classes to invest in, and in what proportions.
A person or organisation engaged to manage investment portfolios and make investment decisions on behalf of others. Also known as an investment manager.
The part of the economy owned or operated by corporations and individuals outside the public sector. Split by economists into households and business.
A portfolio management technique by which an investment manager aims to protect the capital value of a portfolio through risk management techniques, such as dynamic hedging.
A written authorisation given by a shareholder to someone else to vote his or her shares at a shareholder’s meeting. Fund management agreements often delegate the authority to the investment manager to exercise proxy votes on behalf of the client.
An option giving its purchaser the right, without the obligation, to sell an asset at a specified price (the exercise price) at any time between the purchase of the option and its expiry date.
An approach to investment management which seeks to use statistical or numerical methods to create efficient portfolios, with the optimum risk/return trade-off. Quantitative managers generally attempt to add value by exploiting pricing anomalies, or by providing particular levels of risk control, rather than by subjective forecasting of market behaviour.
A brisk rise following a decline in the general price level of the market or an individual share.
The difference between the highest and lowest prices recorded during a given trading session, week, month, year, etc.
Rate of return
The yield earned in relation to a capital amount invested.
Property in land, building or housing, as distinct from personal property (for example, cars). Also known as physical property to distinguish itself from property trusts.
To sell an asset (usually when it appears to have appreciated to the maximum extent that can be reasonably expected).
An inflation-adjusted return.
The return of a proportion of a payment that effectively reduces the total outlay or obligation.
The administratively determined rate of the central bank at which private sector banks acquire accommodation (borrowed reserves). This is undertaken in the form of repurchase agreements.
This is the date that you choose to retire at.
The amount of money in income and capital growth received annually from an investment, usually expressed as a percentage.
In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must provide higher expected yields if investors are to be attracted to them.
The monitoring and controlling of various risk factors in an investment portfolio with the aim of minimising volatility of investment returns.
An offshore investment fund that does not distribute its dividends. An important definition for classification and taxation purposes.
S & P 500
A United States-based stockmarket index, maintained by Standard & Poors.
A grouping of funds with a similar investment objective and makeup.
Sector averages denote the average performance of all funds within a particular sector. Sectors are governed by the Association of British Insurers for Life and Pension funds and by the Investment Management Association (IMA) for MultISA and MultiFUND investments.
A term used to describe stocks and shares.
In relation to financial markets, the paper right to a (generally tradeable) asset. In this context the term includes Bills of Exchange, bonds, share certificates or any other interest-bearing paper traded on financial markets; an asset pledged to ensure the repayment of a financial obligation (for example, a loan), and forfeited in the event of a default on that obligation.
A piece of paper representing legal evidence of ownership of a stipulated number of shares in a company. Also known as a ‘scrip’.
The owner of issued shares of a company who is normally entitled to: a proportionate share of the issuing company’s undivided assets; dividends when declared by the directors; and the right of proportionate voting power.
An offer by a company, usually to its employees and directors, to buy its shares at a given price, before a specified date.
A statistical measure that attempts to show the performance of a portfolio’s return in risk-adjusted terms. It is calculated by dividing the portfolio’s excess return over the risk-free rate by the risk (ie standard deviation) of portfolio returns. The higher the sharpe ratio, the better the portfolio’s return in risk-adjusted terms. A sharpe ratio higher than one can be considered to be very good, while a ratio below 0.1 shows that the portfolio has been poorly rewarded for the risk undertaken.
An investment product that consists of a specialised fund. Each specialised fund may invest across different sectors and markets, and has one manager investing in the same asset class but with different investment styles.
South African Reserve Bank (SARB)
South Africa’s central bank. It manages the country’s currency, money supply and interest rates.
Method of recouping initial expenses when setting up a unit-linked policy, whereby only a proportion of the investment is allocated to the policy for the first few years.
A generic term for equities (shares) and, less frequently, bonds. See also ‘Securities’.
Strategic asset allocation
The composition of the asset mix within a portfolio, constructed with the objective of meeting the long-term views of relative performance of the various asset classes. Usually a benchmark is derived in this fashion. See also ‘Asset allocation’ and ‘Tactical asset allocation’.
A fee charged for the redemption (ie withdrawal/cashing in) of units in a unit trust. Also known as ‘back-end load’.
Transferring sums of money from one unitised fund to another. This is usually done on a bid-to-bid basis to avoid ‘new money ‘ charges when buying units at the offer price.
Tactical asset allocation
A process by which the asset allocation of a fund is changed on a short-term basis to take advantage of perceived differences in relative values of the various asset classes. A variation of asset allocation around a benchmark. See also ‘Asset allocation’ and ‘Strategic asset allocation’.
A period of time used for tax calculations.
A person who passes away having made a will is described as ‘Testate’
An investment manager who uses macroeconomic research and expertise to develop themes to influence its asset allocation decisions. The aim of thematic managers is to identify those factors in the market that will have an influence on companies’ profitability and on the market’s perception of relative values.
The period of time over which an investment objective is to be realised. Time horizon is a critical factor for all investors in determining the types of investments they should make or, at least, the amount of risk they are prepared to carry. The investments made to provide for future retirement income, for instance, would almost always be different from those for short-term purposes.
The art of deciding upon the exact moment to buy or to sell.
Tokyo Price Index
A Japanese share price index measuring share prices of selected large companies listed on the Tokyo Stock Exchange.
See ‘Tokyo Price Index’.
Total expense ratio (TER)
The total expense ratio (TER) represents the true cost of running a fund. It includes the fund AMC as well as the depository and custodial charges, and audit, registration, and compliance fees.
The aggregate increase or decrease in the value of a portfolio resulting from the net appreciation (or depreciation) of the principal of the fund, plus or minus the net income (or loss) experienced by that fund during the period.
Funds that aim to mirror or ‘track’ the performance of any of a number of worldwide stock market indices, such as the FTSE 100 Index. See ‘Passive management’.
The degree of proximity with which an actual portfolio follows a representative market index. Technically, the tracking error is represented by the standard deviation of the differences in return between the portfolio and the index. Tracking error measures the likelihood (based on historical data) of actual returns differing from index returns.
A persistent and pervasive direction, upwards or downwards, of commodities, prices, earnings, etc over a period of time.
A legal obligation binding a person (the trustee) to deal with property over which he or she has control for the benefit of certain people (the beneficiaries) of whom the trustee may himself or herself be one.
An individual, group of people or independent institution responsible for the management of the trust as defined by the trust deed. The trustees have the power to veto any investment which they feel does not adhere to the trust deed.
This is the legal entity fund or funds that your investment choice is invested in.
Achievement of a lower investment return than a benchmark or other measure (for example, competitor portfolios) against which that return is being compared (as opposed to ‘out-performance’).
Having a lesser exposure to a particular sector in an investment portfolio, compared with a neutral or benchmark position (as opposed to overweight).
An investment or company fund which pools together investors’ money, allowing them to increase the types of shares they can invest in, therefore improving the risk. Many unit trusts have now become open-ended investment companies (OEICs).
One who seeks to buy shares when they are underpriced and to take profits when they appear overvalued. The price/earnings ratio is a key valuation measure.
A measure of dispersion of returns on investments based on deviations from the average or mean value.
Capital that is subject to more than a normal degree of risk, usually associated with a new business or venture and particularly in relation to new technology projects. Also called ‘risk capital’. See also ‘Development capital’.
Volatility (portfolio or fund)
Volatility is a statistical method that measures how much a series of values move up and down around its average. The higher the volatility number, the less consistent the historical performance has been.
The relative proportion of each of a group of securities or asset classes within a single investment portfolio. See also ‘Overweight’ and ‘Underweight’.
Year to date
The period from 1 January to today.
A measure of the income received from an investment compared to the price paid for the investment. Normally expressed as a percentage.
A visual representation of the term structure of interest rates. It shows the relationship between bond yields and maturity lengths. A normal or positive yield curve signifies higher interest rates for long-term investment, while a negative or downward curve indicates higher short-term rates.