Dictionary
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a b c d e f g h i j k l m n o p q r s t u v w x y z
A
Accrued Interest
Interest that is earned but not paid out.
Active Management
An approach to asset management, which relies on a fund manager’s ability to select and actively trade stocks so that, over time, they will outperform a particular market index or benchmark.
Actuarial Valuation
Investigation by an actuary into the ability of a defined benefit pension plan to pay out its benefits. The actuary assesses whether the assets of a plan are sufficient to meet its ccrued benefits and recommends a contribution rate that should enable it to meet future liabilities.
ACT – Advance Corporation Tax
Tax paid by companies on dividend payments distributed to shareholders.
Actuary
An individual whose function within a Life Company is to calculate premium rates based upon mortality and morbidity statistics. The actuary is also very much involved in product design. All Life Companies must have an “Appointed Actuary” who carries out certain statutory functions such as financial reporting.
ADR – American Depository Receipt
A security issued in the US to represent shares of a non-US company. For example, Bank of Ireland is listed on the New York Stock Exchange (NYSE) as an ADR (IRE-ADR).
AIMR – Association for Investment Management & Research
Since 2004, AIMR is now known as the CFA Institute. The CFA Institute is the global, non-profit professional association that administers the Chartered Financial Analyst® curriculum and examination program worldwide and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. (See GIPS).
Allocation Rate
The percentage of the premium paid that is invested
and purchases units.
Alpha
A. A statistical measure of investment manager skill. A measure of the incremental return added by an investment manager through timing and stock selection.
B. When applied to shares, an indication that the price is too high or too low, for example, a share with an alpha value greater than zero would be underpriced relative to other shares that are considered to have the same level of risk.
Alternative Investments
Investments which do not fit into the mainstream areas of equities, bonds, cash, currency and property. Alternative investments normally form a small proportion of portfolios. Alternative investments are really just derivatives or extensions of these main investment areas. Examples include venture capital, hedge funds, natural resources and commodities.
AMEX
American Stock and Options Exchange.
Amortisation
Repayment by a series of installments and transfers over a period of time.
Analyst
A person with expertise in companies, markets and economies. (See Investment Analyst).
Annualise
To take a cumulative return over a certain period and restate it on an annual basis.
Annuity
An annuity is a sum of money payable to a person at egularly specified intervals. Pensions from retirement annuitycontracts and personal pension plans are usually paid as annuities. An annuity can also be a form of nvestment. You can pay a lump sum to a financial institution to buy an annuity, which then pays you a regular income, usually for the rest of your life. The income payments are generally fixed at the outset.
Appreciate
To increase in value over a period of time.
Arbitrage
Trading which seeks to exploit pricing discrepancies in the market.
Asset
Any item which has a monetary value.
Asset Class
A category of assets, for example equities, bonds, property and cash/currency.
Asset Allocation
The process of dividing investments among different kinds of asset classes such as equity, bonds, property and cash, to optimise the risk/reward trade off based on an individual’s specific situation.
Asset/Liability Modelling
The name given to various modelling techniques developed by actuaries over the last 10 years or so in order to estimate the degree of investment and other risks faced by institutional investors.
Asset Manager
A professional person who manages a portfolio of assets in a particular category or sector.
Attribution
(See Performance Attribution).
B
Back Office
Administrative activity related to investmentmanagement, for example, settlement, processing,pricing and accounting. Now more usually referred toas operations.
Balanced Management
Where an investment manager is given broad discretion in relation to the management of all the main asset classes for example equity, bonds, property and cash.
Basis Point
One basis point represents one-hundredth of a percentage point or 0.01%.
Bear
Person who believes the stock markets will decline or stagnate.
Bear Market
A period of sustained stock market loss.
Beauty Parade
Competitive review of investment managers usually involving written submissions and personal presentations to pension fund trustees.
Benchmark
Measure against which a portfolio’s performance is assessed, for example, an Irish equity fund would be measured against the ISEQ index, which is the official price index of the Irish Stock Exchange.
Benchmark Fund
Theoretical portfolio of assets against which the performance of an actual actively managed portfolio is monitored. Typically the theoretical portfolio is distributed across a range of asset classes/markets and then within each market, notionally invested in a representative market index.
Beta
A statistical measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile. The beta of the market is 1.
Bid Price
Price at which a security or a unit in a pooled fund can be sold.
Bid/Offer Spread
Difference between the buying (Offer) and selling (Bid) price of a pooled fund unit or a security.
Black Monday
The name ascribed to Monday, October 19th, 1987. On that day, the Dow Jones Industrial Average fell 22.6%, the largest one-day decline in recorded stock market history.
Blue Chip Company
Large, well-known company with a long history of sound management, strong branding, consistent earnings and profit growth.
Bond
A certificate of debt that is issued requiring the issuer to repay to the lender/investor the amount borrowed plus interest over a specified period of time. (See Gilts, Fixed Interest, Index Linked Gilt).
Book Value
Value at which an asset is recorded on a balance sheet, usually the cost of buying it. If securities have been acquired at different times and different periods, the book value will reflect the average buying cost.
Bottom Quartile
Quartile ranking of 4, that is, in the bottom 25% of returns. (See Quartile).
Bottom Up
Approach to investment management, which gives priority to the identification and selection of quality companies to build up an optimum investment portfolio. This is opposite of a top-down approach.
Bourse
French term for stock exchange. More generally, any European stock exchange.
Boutique
Firm, generally relatively small in scale of operations, which has as its sole purpose the management of investments for third parties for a fee and which does not participate in other activities such as banking or life assurance.
Buffett, Warren
The Chairman of Berkshire Hathaway, and arguably the greatest stock market investor of all time. His forte is in identifying undervalued companies, and he is well-known for taking very long term positions in companies he identifies as being good investment prospects.
Bull
A person who believes that the stock markets will rise in value.
Bull Market
Period of sustained stock market growth.
Buy and Hold Analysis
Technique of investment performance measurement which compares a portfolio and its related characteristics (return, income, yield, volatility) at the end of a period with the portfolio as it would have been had no transactions occurred during the period. This separates the effects of market movements and manager decisions.
C
Call Option
An option which gives the holder the right, but not the obligation, to purchase an asset at a specified price on or before a given date. (See Put Option).
Capital Acquisitions Tax
This is the tax payable by the recipient on receipt of a gift or inheritance. There are several reliefs and thresholds, which have a bearing on the tax due. Frequently referred to as inheritance tax or gift tax.
Capital Gain
The amount by which an assets selling price exceeds its initial purchase price
Capital Growth Option (With Profits Plans)
This is an option for all policyholders with a With Profits savings plan. At maturity, once the reversionary bonuses and terminal bonus have been added to the plan, the policyholder can choose to leave their lump sum in a fund that will continue to attract reversionary bonuses. This allows the policyholder the freedom to decide when they want the money and yet their plan continues to grow.
Capital Market
A financial market where securities are traded.
Capitalisation
Total market value of securities issued by a company, industry or sector. It is calculated by multiplying the market price per share by the number of shares issued.
Cash Flow Risk
Risk that a scheme is forced to sell assets to meet liabilities at times when market prices are depressed. This can occur when the level of cash flow required to meet benefit payments exceeds the contribution and investment income.
CD – Certificate of Deposit
A certificate from a bank stating that the named party has a specified sum on deposit, usually for a given period of time at a fixed rate of interest.
CGT – Capital Gains Tax
CGT is a tax charged on capital gains that arise as the result of the sale or disposal of assets (such as investment property and shares). Pension funds in Ireland are exempt from CGT.
Chartist
A person who studies charts of movements in financial and economic indicators with the aim of interpreting market action, predicting trends and forecasting price movements of individual stocks.
Chinese Walls
The process of separating activities in a financial institution to prevent confidential and price sensitive information from passing from one area to another and to ensure no conflict of interest. For example, it is common practice to separate corporate finance, stockbroking and fund management within an institution.
Churning
Excessive trading of a client’s portfolio. Sometimes used to unethically generate extra commissions.
Clean Price
The price of a bond excluding accrued interest.
Clearing House
A facility for settling the transfer of funds between
banks.
Collateral
Assets pledged by a borrower to secure a loan or other credit.
Commercial Paper
Unsecured debt issued by companies to finance its short term needs.
Commingled Fund
(See Pooled Fund).
Commission
Fee paid to a stockbroker or agent for buying or selling
a security. Often expressed as a percentage of the
cost. Commissions vary across markets and between
brokers.
Commodity
A raw material, for example oil.
Common Stock
US term for ordinary shares.
Compound Interest
Reinvestment of interest payments so as to earn more interest.
Compound Rate of Return
Total return calculated by multiplying returns for different periods.
Concentrated Portfolio
Concentrated Portfolio Portfolio having a high weighting in a small number of shares or a single industry. This is normally considered to be a risky strategy. If a significant portion of the assets of a pension scheme is placed in any single investment or investment category, it is subject to disclosure under the Pensions Act. (See Stock Specific Risk).
Consensus Fund
Form of passive management that aims to match closely the average return achieved by a specified group of actively managed portfolios. These funds usually operate by continually adjusting their assets to bring them into line with the average asset mix of the specified portfolios and then by investing, within each area, in securities that represents the market index. (See Index Fund).
Consideration
In the context of share trading, the value of a share transaction before dealing costs is paid. (See Commission).
Constraint
A limit or restriction imposed on a manager in relation to particular shares, sectors or markets for various reasons, for example, risk reduction or ethical considerations.
Consumer Price Index (CPI)
A measurement of prices for goods and services used to determine the rate of inflation.
Contract Note
Written details of an agreement to buy or sell securities.
Contrarian
Investor who takes a position in the market contrary to the views of the majority.
Convertible Bond
Bond that, under certain conditions, the owner can exchange/convert into another security, such as an ordinary share.
Cooling Off Period
This gives the policyholder 30 days in which they can change their mind and opt to cancel the policy and receive back a refund of all premiums paid in to the policy (Protection & Savings Plans). With regard to Single Premium Investment plans, the policyholder will receive back an amount equal to the lump sum premium originally invested, less any losses incurred by the insurer, as a result of fluctuations in the financial markets during the period from inception of the policy to the date the company receive written notification of cancellation.
Core Holding
A substantial long term holding in a portfolio or fund. A core holding is bought with the express purpose of being held for a very long time, and is often a high-quality security with a history of fairly steady performance.
Core/Satellite Investment
Generally the partitioning of a fund between a core portfolio of lower risk holdings which may be managed passively and a more actively managed (satellite) portfolio.
Correlation Coefficient
A statistical measure of the closeness of a relationship between two or more variables, for example, the returns recorded by two stock markets.
Country Allocation
Part of the asset allocation process, which selects desired weightings for particular geographic regions.
Coupon
Nominal interest rate payable on a fixed interest stock.
Covenant
Commonly used term in property investment to refer to the quality of a tenant. A tenant with a good covenant is of high quality and unlikely to break terms of the agreement, for example, the Government or a Government agency.
Credit Rating
An independent evaluation of the ability of a bond issuer to meet debt obligations i.e. make timely interest payments and to pay off the principal at maturity.
Cum Dividend
Where the purchaser of a security is entitled to receive the next coupon or dividend. The opposite of ex-dividend.
Currency Hedging
Reduction or elimination of exchange rates risk by buying forward, using financial futures or borrowing in the exposed currency.
Custodian
A company whose responsibility is the safe keeping of assets.
Cycle/Cyclical Markets
Historic analysis of markets and economies
demonstrate that they generally move in cycles.
A typical cycle would start with a period of low
economic activity and low confidence causing inflation
and interest rates to fall. These low interest rates
stimulate economic activity. As the economy improves,
company earnings rise, giving an impetus to share
prices. This rising economy puts upward pressure
on inflation and interest rates. Bond prices fall and,
as inflation rises further, company earnings are hit
and share prices slump, leading back to the start of
another cycle.
Cyclical Stock
Security that tends to be sensitive to movements in the business cycle, for example, financial stocks, which generally are interest rate sensitive and capital goods. (See Defensive Stocks).
D
Datastream
Commercial service which provides access to a broad range of investment information.
DCF - Discounted Cash Flow
A way of estimating the value of an investment in today's money by adjusting future returns to get their present value.
DCM - Developing Companies Market
Market operated by the Irish Stock Exchange for small and developing companies. The requirements and costs of listings are less onerous than on the main exchange.
Debenture
Loan made out to a company usually secured against assets of the company and paying a fixed rate of interest.
Debt/Equity Ratio
A measure of a company's leverage, calculated by dividing a company's borrowings by its issued share capital. A high ratio could act as a depressing factor on the share price as the company is more likely to have to seek additional funds from shareholders.
Decile
Relative ranking (in tenths) of a particular portfolio (or manager) in a league table of returns. So, for example, a decile ranking of 4 indicates that 30% of portfolios performed better and 60% achieved a lower return.
Default
Failure to make a payment on schedule.
Buy and Hold Analysis
Defensive Stock Stock which is expected to be less volatile than the overall market. (See Beta).
Deferred Annuity
Annuity which commences on a future date.
Defined Benefit
Pension plan where the benefits payable to members are clearly specified, usually as a percentage of salary at or near retirement. The contributions that are required to ensure that this commitment can be met may vary depending on the scheme's experience.
Defined Contribution
Pension plan where the rate of contribution given by the employer and/or the employee is defined and where the benefits are dependant on the contributions paid into the scheme on behalf of the member and the investment return earned on those contributions.
Depreciate
To decrease in value.
Derivative
Investment whose value derives from the performance of an underlying asset, for example, stock market indices, currencies or commodities.
Devaluation
Formal reduction in the value of a currency relative to other currencies.
Dirty Price
Bond price including accrued interest.
Discount Broker
Stockbroker who charges low commission rates, but typically provides fewer services for example research and advice.
Discount Rate
The percentage rate required to calculate the present value of a future cash flow. (See Present Value).
Diversification
Spreading investments across a range of assets in order to reduce risk. Studies have shown that, for a given level of return, diversified portfolios can reduce risk relative to undiversified portfolios.
Dividends
A taxable regular payment declared by a company's board of directors and given to its shareholders out of the company's profits.
Dividend Cover
Company's total earnings divided by the total amount it has paid in dividends for a particular period. This is an indication of a company's ability to maintain its dividend rate.
Dividend Yield
Company's dividend per share divided by its current share price.
Double Tax Agreements
Agreements between countries to offset tax liabilities in one country against those in another, so that the same or similar taxes will not be paid twice.
Dow Jones Index
The Dow Jones Industrial Average Index is the most frequently quoted measure of the performances of industrial stocks on the New York Stock Exchange. It covers a relatively small number of leading shares (30) but nonetheless its movements can have a profound effect on other stock markets and on the US economy.
Dow Jones Euro Stoxx 50 Index
Dow Jones Euro Stoxx 50 is an index representing the largest 50 Eurozone companies across all 18 Dow Jones Euro sectors. Dow Jones defines Eurozone as the 12 countries who joined the euro: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
Duration
The change in value of a fixed income security that will result from a 1% change in interest rates. Duration is stated in years. The longer the duration, the more volatile the price of the stock.
E
Earnings
Net profits of a company available for distribution to it's shareholders.
Earnings Per Share (EPS)
Company's annual earnings divided by the average number of shares issued.
Earnings Yield
Company's earnings per share divided by its current share price. This is the inverse of the price/earnings (P/E) ratio.
ECB - European Central Bank
Independent central bank responsible for setting monetary and exchange rate policy for the members of the European Monetary Union (EMU).
Economic Cycle
(See Cycle).
Economic Indicator
Statistic which gives an indication of the cyclical position of an economy. Commonly used indicators are price inflation, interest rates and retail sales.
Economist
Person who analyses trends in economic indicators and attempts to forecast economic growth, likely trends in interest rates and inflation and the impact of such factors on financial markets.
Efficient Frontier
Series of portfolios that at different levels of risk produce the highest expected returns.
Efficient Portfolio
A combination of assets that offers the lowest risk for a given expected return. Alternatively the highest expected return for a given level of risk.
Emerging Market
Stock market in a developing or newly industrialising country. Such markets can deliver high returns due to the rapid pace of industrialisation, but can be risky due to low liquidity and political instability.
Encashment
Cashing in part (part encashment) or all (full encashment) of the value of an investment.
Equities
Another term for company shares or stock.
Equity Risk Premium
The extra return expected from investing in equities rather than bonds to compensate for the additional risk associated with equities.
Euribor
Euro Interbank Offer Rate, the benchmark rate at which euro interbank term deposits within the eurozone are offered by one prime bank to another prime bank.
Eurotop Indices
Indices covering the top stocks in Europe. The variations are Eurotop 100 (top 100 stocks) and Eurotop 300. No Irish company qualifies for inclusion in the Eurotop 100 and only 3 qualify for the Eurotop 300 Index.
Ex-Dividend
A security where the buyer is not entitled to the next dividend payment. The opposite of cum dividend.
Exercise Price
Price at which a call option or put option may be exercised. (See Option).
Exit Tax
This is the tax payable on the growth in the value of a fund in excess of the total premiums paid. This tax is payable when the policy is surrendered. Currently, this is the standard rate of tax +3%.
Expected Return
Estimation of the value of an investment including the change in price and any payments or dividends calculated by using the average of possible returns weighted by their probabilities.
F
Financial Regulator
The regulator of all financial services firms in Ireland.
Federal Funds Rate
Interest rate at which the Federal Reserve (the US central bank) will lend funds to the banking system. It is the principal instrument for managing monetary policy in the US.
Fiscal Policy
Government policy regarding spending and taxation.
Fixed Interest
(See Bond).
Flotation
First issue of shares by a company on a stock exchange.
Forex
Foreign exchange.
Forward Contract
A contract to buy or sell an asset at an agreed price in the future.
Forward Exchange Rate
The exchange rate set today for a foreign currency transaction with payment or delivery at some future date.
FRA - Forward Rate Agreement
Agreement to borrow or lend at a specified future date at an interest rate that is fixed today.
FRN - Floating Rate Note
Bond or loan variable interest rate, which varies in line with short term interest rates.
Front Office
Dealing, research and marketing activity of an investment management company. (See Back Office).
FRS17
An international accountancy standard which requires that if a company's pension assets do not cover liabilities the deficit must be recognised as an employer liability in the year end accounts. FRS17 covers short term benefits (salary, bonus, cars), post employment benefits (pension plans, medical plans), redundancy benefits and share plans.
FT Indices
Family of indices promoted by the Financial Times covering most major stock markets and regions worldwide.
Fundamental Analysis
Analysis of a company's share value and potential for future profit and dividends, based on accounting information and economic analysis. (See Technical Analysis).
Funding Risk
Possibility that a defined benefit scheme fails to accrue sufficient assets to meet the liabilities as and when they fall due.
Future (Contract)
Future (Contract) A contract to buy or sell a security on a future date at an agreed price that is fixed today.
G
GAAP
Generally Accepted Accounting Principals - A common set of accounting principles.
Gearing
A. From an accounting point of view, the amount of a company's total borrowings divided by it's share capital. High gearing means a proportionally large amount of debt, which may be considered more risky.
B. In investment analysis, a highly geared company is one where small changes in underlying conditions produce big swings in profits. Gearing can be financial, or operational if, for example, a company has large fixed overheads.
Gift Tax
This is a tax due on a gift from a person who is still alive. The relationship between the person taking the gift (donee) and the person making the gift (donor) has an impact on the tax calculations. (See Capital Acquisitions Tax).
Gilts
Fixed interest securities issued by the Government in Ireland. Often referred to as Sovereigns elsewhere. (See Bonds, Fixed Interest, Treasury Bonds).
GIPS (Global Investment Performance Standards)
Set of minimum performance presentation standards for investment managers, sponsored by the CFA Institute and intended for global use.
Gross Roll Up
Under regulations effective from 1st January 2001, growth in the value of a fund in excess of the total value of premiums paid will be taxed at the maturity of the contract or on certain other occasions. This exit tax is payable currently at the standard rate of tax +3%. Payments made on foot of a death benefit claim are not subject to an exit tax. Gross Roll Up applies to policies taken out after 1st January 2001. It also applies to policies taken out before this date where the policyholder has opted to switch to Gross Roll Up. Policies effected before this date, which have not been switched to Gross Roll Up will continue to be taxed as before.
Growth Investor
Investor who seeks growth stocks/shares.
Growth Stock
Stock of a company which is growing earnings and/or revenue faster than its industry or the overall market. Growth stocks normally have a P/E ratio relative to the market as a whole.
H
Hedge Fund
A private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. The most famous hedge fund is George Soros' Quantum Fund. (See Soros, George).
Hedging
Action taken to protect the value of a portfolio against a change in market prices. It is usually used to reduce or eliminate risk although can also be used to speculate in the market. (See Hedge Fund).
High Yield Stocks
Shares which have a higher rate of return on dividends than the average dividend yield or those where a relatively high proportion of the total return derives from dividend income. Typical examples of high yield stocks are banks and utilities.
High Yield Bond
(See Junk Bond).
Horizontal Merger
Merger between two companies which market similar products or services.
Hurdle Rate
The minimum acceptable rate of return on a project/ investment.
I
IAIM - Irish Association of Investment Managers
Founded in 1986, the representative body for the investment management community in Ireland.
IAPF - Irish Association of Pension Funds
Established in 1973, the representative body for Irish pension scheme members, trustees and sponsoring employers.
Immunisation
The matching of assets and liabilities so that each is affected equally by changes in the external environment. For example, a pension fund may be at least partly protected from any change in the cost of buying an annuity by purchasing a long dated bond. Because while a fall in interest rates will increase the price of an annuity this will be offset by a corresponding increase in the value of the bond.
Income Stock
(See High Yield Stock)
.Indenture
The legal document relating to and defining all of the legal aspects of a bond issue.
Index
A. A statistical measure updated regularly that gives a representation of the movement in value of a particular market.
B. List of prices or other characteristics representing a particular group of goods or services which gives an indication of movements over time, for example, the consumer price index, the average earnings interest and the retail sales index.
Indexation
A. Adjustment of payments or values in line with movements in a particular index of prices or earnings.
B. The use of index funds.
Index Fund
A mutual fund that matches its portfolio to that of a specific financial market index, with the objective of duplicating the general performance of the market in which it invests. The fund may hold all the shares in the particular index or use a mathematical model to select a sample, which will perform as closely as possible to the index. (See Passive Management).
Index Linked Gilt
Government stock on which the interest payments and the final redemption proceeds are linked to the Consumer Price Index. Such stocks provide protection against inflation whereas conventional gilts do not.
Industry Sector
Companies listed on stock exchanges are usually categorised according to their category of business activity, for example, banks, building materials, electronics, food producers, health care, leisure, oil, pharmaceuticals and retailers.
Inflation
The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index. (See Index).
Inheritance Tax
This is a tax due on receipt of an inheritance from a deceased person. The relationship of the person receiving the inheritance with the deceased person (disponer) has an impact on the taxation calculations. (See Capital Acquisitions Tax).
I Insider Dealing
Illegal trading whereby an individual in possession of unpublished price sensitive information (i.e. not in the public domain) and/or knowingly connected with a company attempts to, or actually deals in its shares.
Institutional Funds
Assets managed for an organisation rather than an individual. Institutional funds can include the likes of pension, corporate and charity funds.
Insolvency
Having insufficient assets to meet debt obligations and/or liabilities.
Investment Analyst
Individual who specialises in the analysis of companies and their performance. An analyst normally gathers information by studying the information contained in company annual reports, researching the product markets in which a particular company operates, visiting manufacturing sites and meeting with key personnel.
Investment Bank
A bank which works as a financial intermediary, offering such services as takeover and merger assistance, and the placing of new share and bond issues.
Investment Constraints
(See Constraints)
Investment Consultant
An organisation or individual that advises on investment matters, such as appointment of investment managers, performance measurement and asset allocation strategy but is not involved on trading of securities. For example Mercer, Watson Wyatt and Hewitt.
Investment Intermediary
A third party individual who acts as an agent between clients and companies who offer investment management services. Investment intermediaries include insurance brokers, financial consultants, stockbrokers, benefit consultants and investment consultants.
Investment Intermediaries Act
The Investment Intermediaries Act 1995 regulates the activities of intermediaries in Ireland. Those wishing to act as intermediaries must be authorised and bonded under the Act which is regulated by the Financial Regulator.
Investment Management Agreement
Important legal document that defines the relationship between an investor and its investment manager. It usually incorporates a statement of investment policy and objectives.
Investment Manager
Organisation that invests assets for third parties for a fee.
Investment Performance
Total return earned on a portfolio of assets over a particular period
Investment Performance Measurement
Calculation and analysis of investment performance usually including a review of sector strategy and stock selection. Returns may be compared with a benchmark fund or index or the actual returns achieved by other managers or portfolios.
Investment Risk
A. Chance that a permanent loss will be sustained on an investment through company failure, default on loans, fraud or other factors.
B. The volatility of movements in the value of a security or market usually measured as the standard deviation of returns over a given period.
Investment Team
Group of individuals in an investment management organisation who are responsible for the construction of portfolios and the performance of funds under management. The team may include some or all of the following: a strategy specialist, economists, investment analysts, equity and bond dealers, currency specialists, derivatives specialists, property specialists and money dealers.
Investment Trust
A company which manages share portfolios and whose own shares are quoted on the Stock Exchange.
IPO - Initial Public Offering
The first sale of stock by a company to the public.
ISEQ - Irish Stock Exchange Quotation
Index operated by the Irish Stock Exchange covering all company shares listed on the Dublin Exchange.
J
Junk Bond
A high-risk company bond, which has been given a low rating by credit rating agencies. Junk bonds offer higher returns to compensate for the higher risk.
L
League Table
Ranking of the competitive performance of investment managers in, for example, a pooled fund performance survey.
Lease
A legal agreement stating the long term rental of a property.
Leverage
The use of borrowed funds at a fixed rate of interest to increase the overall size of an investment in order to increase the potential for higher returns. Leveraged funds carry a higher risk than non-leveraged funds. (See Gearing).
Liabilities
A financial obligation, debt, claim, etc due to be made, for example, future pension payments. (See Asset/ Liability Modelling).
Liquid Asset
Asset that can be readily and cheaply turned into cash.
Liquidity
A. Extent to which an asset is easily marketable or turned into cash quickly. There can be large variations in the liquidity of different equity markets and different stocks. The most liquid are the larger international markets, for example large blue chip companies quoted on the New York and London markets. The Irish equity market would be considered to have poor liquidity, particularly among the smaller companies on the market.
B. Liquidity is also used to denote the proportion of liquid assets such as cash and short term instruments in a portfolio.
Long
A market position where the client has bought a currency or security he previously did not hold. Normally expressed in base currency terms.
Long Bond
Bond that has more than 10 years to run to maturity.
Loyalty Bonus
Bonus payable on certain types of contracts only. Increases the number of units in the policyholders account (and therefore the surrender value) and is payable on predetermined policy anniversaries as per policy conditions. The objective is to encourage the policyholder to maintain the contract for the full term.
Lump Sum Premium
Payment made on a once-off basis only. Payment is usually into an investment portfolio or pension contract.
M
Management Charges
A. Fund Management Charge - Fees levied by investment managers usually in the form of a percentage of assets under management.
B. Plan Management Charge - Charges can be fixed or on a sliding scale that decreases with fund size. In addition in the case of some pooled funds a charge may be made on new contributions. (See Bid/Offer Spread).
Mandate
Description of the type of service that an investor requires of a manager, for example, balanced management. (See Statement of Investment Policy and Objectives).
Marketability
(See Liquidity).
Market Capitalisation
(See Capitalisation).
Market Cycle
(See Cycle).
Market Maker
A brokerage or bank which deals in securities. Market makers quote buying and selling prices for the shares in which they wish to deal.
Market Risk
That element of return variability from an asset which cannot be eliminated through diversification. It is measured by beta. (See Beta)
Marked to Market
When profits and losses are posted to accounts for all futures and option positions. This is done at the end of each day.
Maturity
Date when settlement of payment is made under a fixed interest stock or bond.
MBI - Management Buy In
The purchase of a controlling interest of a company by an external investor who leaves management unchanged.
MBO - Management Buy Out
Company acquisition which is led by the firm's own management.
Mean
Average amount or value.
Median
The mid-point of a distribution, with half of the samples less than or equal to the median, and half of the samples greater than or equal to the median, for example, a median performance among a universe of 13 managers would be the 7th ranked manager.
Momentum
The acceleration of price or volume in a security. Momentum occurs in a stock when it starts to rise or fall, and interest is attracted, thereby helping to further the rise or fall of the stock in the same direction.
Monetary Policy
Government policy concerning money supply and interest rates.
Money Market
Financial market for lending and borrowing on a short term basis.
Money Weighted Rate of Return
Actual return achieved over a period that does not allow for the timing of cash flows. It is, therefore, not suitable for comparative analysis. (See Time Weighted Rate of Return).
Moving Average
An analysis term used to indicate market trends. Obtained by averaging prices/indices over a specified period of time, for example, the last 30 or 90 days.
MSCI - Morgan Stanley
Capital International Indices Family of indices that coves most main stock markets and regions worldwide.
Mutual Fund
US name for a pooled fund.
N
NASDAQ - National Association of Securities Dealers Automated Quotations
US stock exchange which lists smaller and developing companies, in particular, technology companies.
NAV - Net Asset Value
The value of a company or a corporate asset according to accounting records, which is determined by subtracting the company liabilities from the company assets. Also known as shareholder funds.
NIKKEI
The Japanese Stock Exchange.
Nominee
A person or company that is registered as the owner of a security in order that the true owners identity is kept secret, or to make dealing easier. The assets of segregated pension funds are usually held in nominee accounts which, for convenience, are registered in the name of the investment management company. However, the pension fund remains the beneficial owner of the securities.
NPV - Net Present Value
The present value of an investment's future net cash flows minus the initial investment.
NYSE
The New York Stock Exchange.
O
Offer Price
Price at which a security or a unit in a pooled fund can be purchased. (See Bid Price).
Open Ended
Refers to a contract which is not of a fixed term. The policyholder decides how long he wishes to maintain the contract by paying the relevant premium or, if it is a single premium case, when it is surrendered.
Option
The right, but not the obligation, to buy or sell a security at a specified price within an agreed period of time. (See Call Option, Put Option).
Ordinary Share
Share in the ownership of a company, which gives the holder the right to receive distributed profits and to vote at general meetings of the company. If the company is wound up, an ordinary shareholder ranks behind all other creditors/investors (See Equity, Stock).OTC - Over the Counter
Securities that are not listed and traded through a recognised stock exchange.
Overweight
Exposure to a specific asset (or asset class) which is higher than the proportion it represents in the market index or benchmark against which the portfolio is measured. Investment managers may take overweight positions in shares or sectors they expect to outperform in order to add value to the portfolio.
P
Pan-European Fund
Vehicle for the consolidation of the pension fund assets of all operations of a multinational company across Europe. Currently, such funds are difficult to establish because of national differences in taxation and the regulation of pension fund investment. However, the European Commission is in favour of facilitating such funds and of harmonising investment legislation across the EU. The Euro may hasten the development of pan-European funds.
Passive Management
Where an investment manager establishes a portfolio, which seeks to match a particular market index or benchmark fund and does not attempt to actively manage the portfolio.
Par Value
The face value of a bond - the amount that a bond issuer agrees to repay the bondholder at the maturity date of the bond.
Pensions Board
The statutory body charged with the regulation of pension scheme activity in Ireland and advising the Government on national pensions policy.
Pension Fund
A fund set up for a group of employees that invest the contributions made by or for the employees. The fund makes regular payments to the employees upon retirement.
Pensions Ombudsman
The legally independent Ombudsman who has the authority to investigate and determine complaints and disputes in relation to occupational pension schemes and personal retirement savings accounts (PRSAs).
P/E Ratio - Price Earnings Ratio
The most common used measure to indicate the value of a stock. It is calculated as a company's current share price divided by its earnings per share. The earnings used may be historic (actually achieved in the recent past) or prospective (based on market expectations). A high P/E ratio may be justified because a company is expected to increase its earnings per share or it may indicate simply that the company is over-valued.
Percentile
Relative ranking (in hundredths) of a particular portfolio (or manager) in a league table of returns, for example, a percentile ranking of 25 indicates that 24% of portfolios performed better and 75% achieved a lower return. Such a portfolio would be referred to as a top quartile portfolio (top 25 percentile = top quartile)
Performance Attribution
Process which attempts to assign over or under performance to the different steps taken in the investment management process, such as asset allocation, stock selection, currency management, etc.
Performance Related Fee
Management fee determined by the degree of over or under performance relative to an agreed benchmark
Perpetuity
It is an annuity that provides a continuous stream of payments to its holder at the end of each year. Often thought of as an annuity with an infinite life.
Pooled Fund
Vehicle in which a number of investments (institutions and private) can pool their assets so that they can be managed on a collective basis. This usually suits small to medium pensions wishing to invest in a broad spread of investments or larger funds wishing to gain exposure to a specialised sector, such as, property. Shares in a pooled fund are denominated in units that are repriced regularly to reflect changes in the underlying assets. This allows investors to value their holdings and provides a basis upon which transaction units can take place. (See Bid Price, Offer Price).
Portfolio
A collection of assets.
Portfolio Manager
An individual who controls the assets of a pooled fund. The portfolio manager chooses and monitors appropriate investments and allocates funds according to agreed mandates and is kept in line with the asset mix specified by the investment team.
Preference Share
A type of share which gives the holder a fixed rate of dividend and, if the company is wound up, a preference shareholder ranks the holder ahead of ordinary shareholders as a creditor.
Present Value
The current value of a future payment, allowing for the time value of the money
Price Earnings Ratio
(See P/E Ratio).
Programme Trading
Computerised trading used primarily by institutional investors typically for large volume trades. Orders from the traders computer are entered directly into the markets computer system and executed automatically.
Property Unit Trust
Pension funds and charities appoint a unit trust to invest in commercial property on their behalf.
Prospectus
A legal document usually offering securities or managed funds for sale. It explains the offer and normally includes the terms, issuer, objectives (if a managed fund) or planned use of the money (if securities), historical financial statements, and other information that could help an individual decide whether the investment is appropriate for them.
Put Option
Gives the holder the right to sell an asset at a specified price up to a specified date. (See Call Option).
Q
Quantitative Analysis
The process of determining measurable characteristics such as revenues, earnings, margin and market share. Commonly referred to as 'Quant'. (See Chartism, Fundamental Analysis)
Quartile
A statistical term describing a division of observations into four defined intervals based upon the values of the data and how they compare in the entire set of observations.
R
Random Walk
An investment theory which claims that market prices follow a random path up and down, without any influence by past price movements, making it impossible to predict with any accuracy which direction the market will move at any point.
Real Assets
Assets which are expected to appreciate by at least the rate of inflation. They are normally investments whose performance is linked to the level of economic growth. Equities, property, and unit linked bonds are real assets; cash and fixed interest assets are not. Real Interest Rate/Real Rate of Return The current interest rate minus the current inflation rate.
Redemption Date.
(See Maturity Date).
Redemption Yield
Combined capital and interest return that an investor will earn on a bond. Investors would calculate this yield in order to compare the value available on bonds with other assets such as equities or cash.
Registrar
The organisation, usually a bank or a trust company, which maintains a registry of the shareowners and number of shares, held for a mutual fund, bond or stock.
Regular Premium
Contribution into a life or pension policy which are made on an on-going basis i.e. weekly, monthly, yearly, etc.
REPO - Repurchase Agreement
A contract in which the seller of securities, usually bonds, agrees to buy them back at a specified time an price.
Retained Earnings
Earnings not paid out as dividends but instead are reinvested in the core business.
Return on Equity
It is used as a general indication of company efficiency and it is calculated by dividing the company earnings by shareholder's funds.
Reuters
Reuters supplies the global financial markets with the widest range of information including real time financial data.
Rights Issue
A privilege allowing existing shareholders to buy shares of an issue of common stock shortly before it is offered to the public, at a specified and usually discounted price, and usually in proportion to the number of shares already owned.
Risk
(See Cash Flow Risk, Funding Risk, Investment Risk, Market Risk, Solvency Risk).
Risk Free Rate of Return
A theoretical interest rate that would be returned on an investment which was completely free of risk. An average 3-month interest rate is a close approximation, since it is virtually risk-free.
Risk Premium
The reward for holding a risky investment rather than a risk-free one.
Risk Tolerance
An investor's ability to handle volatility and possible declines in the value of his/her portfolio.
Running Yield
Annual income on an investment divided by its current market value, for example the dividend yield on equities.
S
Sale and Lease Back
Arrangement in which one party sells a property to a buyer and the buyer immediately leases the property back to the seller. This arrangement allows the initial buyer to make full use of the asset while not having capital tied up in the asset. Sale of an asset to a financial institution that then leases it back to the seller. It is used by companies to raise capital.
Satellite
(See Core/Satellite).
Scrip Dividend
Payment of dividends in the form of additional shares in lieu of cash.
Scrip Issue
Distribution of free shares to existing shareholders in proportion to their holdings.
Sector Strategy
Decision by a manager to over or underweight a sector relative to the benchmark against which the portfolio is measured.
Security
A generic term used to describe fixed interest stocks or ordinary shares.
Segregated Portfolio
Investment portfolio which is managed on behalf of a single client and has separately identifiable assets. Large pension funds tend to have segregated portfolios, as their size makes it possible to achieve a sufficiently wide spread of investments.
Sensitivity Analysis
Analysis into how projected performance varies along with changes in the key assumptions on which the projections are based.
Settlement
When security sales or purchases are finalised by the delivery of cash or securities. Settlement usually takes place some time after the deal and price are agreed.
Shares
(See Equities).
Sharpe Ratio
A measure of the risk-adjusted return of an investment. It was derived by Prof. William Sharpe and tells us whether the returns of a portfolio are because of investment decisions or a result of excess risk. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
Short
Selling a borrowed security (a security the seller does not actually own), with the expectation that the price will fall, at which time the security would be bought back in order to make a profit.
Single Premium
A once-off contribution into a savings or pensions contract i.e. not a regular premium.
Small Cap Stock
A relatively small company.
Solvency Risk
The possibility that a company would have the financial ability to pay debts when they became due.
Soros, George
Famous hedge-fund manager whose speculative raids have been blamed with destabilising many markets and Governments. Soros is a strong believer in the inefficiency of markets and holds that markets become inherently unstable when fundamentals and perceptions get out of line. Investors like Soros can make spectacular gains (and losses!).
S&P 500 Index
Standard and Poors index of the top 500 US quoted stocks.
Specialist Management
Where an investment manager's mandate is restricted to a specific asset class or sector, for example, Irish equities. Internationally there is a strong trend towards specialist management (away from a balanced approach).
Spin Off
An independent company created from an existing part of another company through the distribution of new shares.
Spot Exchange Rate
Current exchange rate
Spot Interest Rate
Interest rate quoted on a day for loans made that day.
Spot Market
A market in which commodities such as grain, gold or crude oil, are bought and sold for cash and delivered immediately. It can also be referred to as a cash market.
SSIA
Special Savings Incentive Account.
Stamp Duty
Tax paid by the buyer on the transfer of assets for example, equities and property.
Standard Deviation
A statistical measure of variance of returns. Statement of Investment Policy and Objectives Formal statement frequently given by trustees to an investment manager specifying their objectives, the nature of the investment mandate, permissible trading ranges for the main asset classes, constraints, return expectations and reporting arrangements.
Stocks
(See Equities).
Stock Exchange
An exchange where stocks can be bought or sold.
Stock Lending
Lending of stock from one investor to another which entitles the lender to continue to receive income generated by the stock plus an additional payment by the borrower. It is used as a means of increasing returns from fixed interest assets but adds to risk as the lender may be exposed if the borrower defaults.
Stock Selection
Selection by investment managers of a portfolio of stocks in a particular market or sector, usually based on technical or fundamental analysis and designed to achieve a return when compared to the overall market or sector.
Stock Specific Risk
This arises in concentrated portfolios where there may be a large exposure to an individual company, which can have an undue influence on the overall performance of the portfolio. The Irish equity market is considered to have a high element of stock specific risk because over 80% of its capitalisation is concentrated in the largest 10 stocks. For this reason, many pension funds constrain their managers to maximum holdings (usually 5%) in any individual stock. (See Constraints, Concentrated Portfolios).Strategic Asset Allocation
By diversifying an individual's asset base, one hopes to create a favorable risk/reward ratio for a portfolio over the long term.
Strip
A bond that does not pay any income.
Surrender value
A valuation of a policy (generally a total valuation) at a given time.
Swap
An exchange whereby two companies lend to each other on different terms e.g. in different currencies, or one at a fixed rate and the other at a floating rate.
Systematic Risk
Risk which is common to an entire class of assets.
T
Tactical Asset Allocation
A method of evaluating share price movements on the basis of assumptions about market data.
Technical Analysis
Attempt to predict share price movements on the basis of past patterns. (See Chartist).
Time Weighted Rate of Return
Rate of return on an asset or portfolio, which adjusts for the effect of cash flows. The time weighted return can be used to compare portfolio performances against each other and against market indices. (See Money Weighted Rate of Return).
Top - Down
An investment strategy which first finds the best sectors or industries to invest in, and then searches for the best companies within those sectors or industries. This investing strategy begins with a look at the overall economic picture and then narrows it down to sectors, industries and companies that are expected to perform well.
Top Quartile
In the top 25% of returns. (See Quartile).
Total Return
The return on an investment, including income from dividends and interest, as well as appreciation or depreciation in the price of the share, over a given time period.
Tracker Bond
This is an investment, which tracks a fund, basket of funds, commodities or a market index e.g. the ISEQ or FTSE 100. As the market rises and falls, the value of the investment rises and falls. It is possible to guarantee the capital sum invested in some circumstances.
Tracking Error
Measure of the consistency of relative performance. It is calculated as the standard deviation of the monthly or quarterly relative performances.
Transaction Costs
Costs incurred when buying or selling shares, such as commissions and the spread.
Treasury Bond
US Government issued Bond.
Trustee
A trustee is a person who holds property for the benefit of another person for the purposes specified by the person who has set up the trust.
Turnover
Measure of the level of trading in a market or portfolio. Costs of dealing would need to be taken into account in judging whether turnover adds value to portfolio returns.
U
Underweight
In the case of a portfolio, containing too little exposure to a given company, sector or country, relative to a benchmark against which the portfolio is measured.
Underwriting
A guarantee to a company issuing new shares or bonds by an investor that it will buy any remaining shares bonds that are not bought by other investors. The risk is that the issue will be a failure and the underwriter is left with the holding of under-performing stock. Regarding insurance, it is the process of issuing insurance policies.
Unit Linked Fund
A pooled fund managed by an insurance company.
V
Valuation
The current worth of an asset, including any accrued income. (See Actuarial Valuation).
Value Investment
Approach to investment which places emphasis on identifying shares which are currently underpriced and have the ability to perform well in the future. (See Buffett, Warren)
Venture Capital
Money provided by investors to startup businesses with perceived, long-term growth potential.
Vertical Merger
Merger between a vendor and a customer.
Vesting
The entitlement of employees to their benefits from a pension fund within a certain period of time, even if they no longer work for their employer.
Volatility
A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.
W
Warrant
A certificate entitling the holder to purchase shares at a specified price at a specified time in the future.
White Knight
A potential bidder for a company who is sought out to take over the company, in an effort to avoid a hostile takeover by an undesirable bidder.
Widow and Orphan Stock
Relatively low-risk stocks from well-known firms that pay high dividends.
Withholding Tax
A tax levied on income (interest and dividends) from securities owned by a non-resident.
Y
Yield
The annual rate of return on an investment, expressed as a percentage.
Yield Curve
A curve that shows the relationship between yields plotted by maturity date.
Yield Gap
The difference between the redemption yield on long dated bonds and the average equity dividend yield.
Z
Zero Coupon Bond
A fixed interest paper or bond which pays no interest. Such bonds are attractive to investors who seek to limit income tax and may be exempt from or have a lower liability to capital gains tax.
