Glossary of Investment Terms

Consumer Staples: Essential products such as food, beverage, household goods, and feminine hygiene products, but the category also includes such items as alcohol and tobacco. These goods are those products that people are unable – or unwilling – to cut out of their budgets regardless of their financial situation.

Consumer discretionary: The term given to goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Consumer discretionary goods include durable goods, apparel, entertainment and leisure, and automobiles. The purchase of consumer discretionary goods is also influenced by the state of the economy, which can affect consumer confidence.

Alpha: A term used in investing to describe a Fund’s or strategy’s ability to beat the market, or it’s “edge.” Alpha is therefore also often referred to as “excess return” or “abnormal rate of return”. Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over a specific period.

Beta is a measure of the volatility, or systematic risk, of an individual stock or portfolio in comparison to the risk of the entire market. In statistical terms, beta represents the slope of the line through a regression of data points from an individual stock’s / portfolio’s returns against those of the market. A beta score of 1 therefore means that the stock’s / portfolio’s value tends to move inline with the market, whilst a beta score greater than 1 means the stock / portfolio is more volatile than the market and conversely that a beta of less than 1 means the stock / portfolio tends to be less volatile than the market.

Standard Deviation is a statistical measurement in finance that, when applied to the annual rate of return of an investment, sheds light on the historical volatility of that investment. The greater the standard deviation of securities, the greater the variance between each price and the mean, which shows a larger price range. For example, a volatile stock has a high standard deviation, while the deviation of a stable stock is usually lower

Sharpe Ratio is used to explain the return on an investment compared to the risk taken to generate said return. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

Information Ratio (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry. The IR is often used as a measure of a portfolio manager’s level of skill and ability to generate excess returns relative to a benchmark, but it also attempts to identify the consistency of the performance by incorporating a tracking error, or standard deviation component into the calculation. Higher information ratios indicate a desired level of consistency, whereas low information ratios indicate the opposite.

Long exposure reflects investments in equity / fixed income instruments.

Gross exposure refers to the absolute level of a fund’s investments. It takes into account the value of both a fund’s long positions and short positions. Gross exposure is a measure that indicates total exposure to financial markets, thus providing an insight into the amount at risk that investors are taking on. The higher the gross exposure, the bigger the potential loss (or gain).

Net exposure is the difference between a fund’s long positions and its short / hedge positions. Expressed as a percentage, this number is a measure of the extent to which a fund’s portfolio is exposed to market fluctuations.

Long Exposure (“long” or “long position”) is the buying of a stock, commodity, or currency with the expectation that it will rise in value.

Hedge / Hedge Exposure: Represents an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security. Hedging is analogous to taking out an insurance policy.

Active share: A measure of how much a mutual fund’s holding differs from its benchmark. The greater the difference between the asset composition of the fund and its benchmark, the greater the active share.

Profit (high) margins: Gross / operating and net profit margins are three measures that are used to analyse the income statement activities of a firm. Comprehensively the three margins taken together can provide insight into a firm’s operational strengths and weaknesses (SWOT). Margins are also useful in making competitor comparisons and identifying growth and loss trends against past periods.

High water mark: A high-water mark is the highest peak in value a fund has reached. This term is often used in the context of fund manager compensation, which is performance-based. The high-water mark ensures the manager does not get paid large sums for poor performance. If the manager loses money (absolute or relative) over a period, he must get the fund above the high-water mark before receiving a performance bonus from the assets under management (AUM).

Capital Intensive: The term “capital intensive” refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment (PP&E). Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fixed costs to variable costs. As a result, capital-intensive industries need a high volume of production to provide an adequate return on investment. This also means that small changes in sales can lead to big changes in profits and return on invested capital.

Over/under weight refers to an excess or under allocation of assets within a fund or investment portfolio. In a fund, it refers to a situation in which an investment portfolio holds a greater or lesser percentage of a particular security, compared to the security’s weighting in the underlying benchmark index.