Glossary of Key Investment Terms

Accredited investor - An individual who has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Active investment / management - An investment strategy where the portfolio manager makes investments with the goal of delivering a certain objective or outperforming a particular benchmark.

Alternative investment strategy - A strategy that offers investment opportunities not generally available through traditional long-only stock, bond, or cash positions.

Alternative investments - Investments that sit outside the mainstream asset classes of stocks, bonds and cash.

Asset allocation - The process of balancing risk and return in a portfolio by investing across different asset classes.

Asset class - A category of investments with similar performance characteristics and risk/return profiles and that are subject to similar regulations or laws.

Average Purchase Yield - The average purchase yield of a portfolio is the weighted average yield to maturity of the securities in the portfolio at the time of investment.

Base rate - The rate at which a country’s central bank lends to other banks.

Bear markets - Market conditions whereby securities prices are falling, which results in further sell-offs in the market. Generally, a downturn of 20% or more from a market peak over a two-month period is considered the start of a bear market.

Benchmark - Often a market index, a benchmark typically provides a starting point for a portfolio manager to construct a portfolio and directs how that portfolio should be managed on an ongoing basis from the perspectives of both risk and return.

Bond issuer - The entity that is borrowing money through the selling of bonds.

Bondholder - The investor who purchases the bond.

Bonds - The means for one entity to raise money by borrowing from another.

Broker - Investment brokers who arrange for the buying and selling of securities, including bonds and shares.

Business cycle - The business cycle describes movements and fluctuations in the economy over time. Often, it is viewed as the pattern of expansion and contraction with peaks and troughs in between.

Buy-and-hold strategy - An investment strategy where the investor buys the bonds with the intention of holding them until they mature.

Buy-and-hold strategy - An investment strategy where the investor buys the bonds with the intention of holding them until they mature.

Call features - The terms and conditions in which the bond can be called or “retired” early by the issuer.

Capital appreciation - An increase in the price or value of assets.

Capital preservation - An investment strategy where the primary goal is to preserve capital.

Capital structure - How a company finances its business activities using a combination of debt and equity.

Cash - A physical form of payment for goods and services; in investing, liquid assets that can easily and quickly converted into physical cash.

Central bank - A national bank that not only provides financial and banking services for its country's government and commercial banking system, but also implements the government's monetary policy and issues currency.

Closed-end fund - A fund with a fixed number of shares which, after the initial share offering, are traded among investors on an exchange at market prices.

Compound interest - Interest earned on top of interest already earned at an earlier point in time.

Consumer price index or CPI - A measure of inflation which reflects the retail prices of goods and services including housing, transportation and healthcare.

Core inflation - A measure of inflation that excludes volatile parts of the economy such as food and energy as they can cause unwanted distortion to the headline inflation figure.

Corporate bond - A bond issued by a company.

Correlation - Describes the degree to which the returns on investments move in relation to each other; positively correlated investments move in the same direction; negatively correlated investments move in different directions.

Correlation coefficient - A number that reveals how likely two or more investments are to move in the same direction.

Cost-push inflation - When the price of goods and services increases because producers are able to pass along rising costs to consumers. The increased production costs may be due to wage growth or more expensive raw materials.

Coupon - The periodic interest paid to the bondholder.

Covered bonds - Debt securities issued by banks that are secured against a pool of assets (generally mortgages), which are held on the bank’s balance sheet.

Credit market - The market whereby companies and governments can raise funds by allowing investors to purchase their debt securities.

Credit quality - The investment quality of a bond based on the risk of default.

Credit ratings - An indicator of the relative risk of investing in a bond.

Credit risk - The risk that the bond issuer cannot make a coupon payment or repay the principal value of the bond at maturity.

Currency options - A financial instrument or contract that gives the owner the right – but not the obligation – to buy or sell currency on or before a set date in the future for a predetermined price.

Cyclical outlook - A six- to 12-month forecast focused on short-term factors likely to drive the performance of the global economy and financial markets.

Debt restructuring - When companies or governments reduce and renegotiate their debt in order to address financial difficulty and cash flow problems.

Default - When the bond issuer cannot make a coupon payment or repay the principal value of the bond at maturity.

Default risk - The risk that the bond issuer cannot make a coupon payment or repay the principal value of the bond at maturity.

Deferred annuity - A type of annuity where the payments are delayed until the investor decides to access them.

Defined benefit scheme - A type of super fund that pays the member a retirement benefit according to a set formula. This formula is often based on years of service, salary at retirement and contributions over time.

Demand-pull inflation - A form of inflation that comes about when total demand in an economy rises too quickly without a corresponding increase in the production of goods and service.

De minimis rule - The de minimis rule states that if a discount is less than 0.25% of the face value for each full year from the date of purchase to maturity, then it is too small (that is, de minimis) to be considered a market discount for tax purposes. Instead, the accretion should be treated as a capital gain.

Depression - A long-term downturn in the economy that lasts for several years.

Derivatives - Investment contracts based on an underlying asset, an index or interest rate. The price of the derivative fluctuates in accordance with the underlying asset.

Discount or Discount to par - When a bond’s price is trading below its par value.

Distressed debt - Debt of companies that have either defaulted, are under bankruptcy protection or are under distress and heading toward bankruptcy.

Diversification - A strategy that seeks to manage risk by spreading a portfolio across a number of different asset classes and investments.

Diversify / Diversification - A risk management strategy that mixes a wide variety of investments within a portfolio to help yield higher returns and/or lower overall risk.

Dividend - Money paid to shareholders from a company’s profits.

Duration - Expressed as a number of years, duration is a measure of how sensitive a bond is to changes in interest rate risk.

Effective duration - The approximate percentage change in a bond’s value in response to a percentage point change in yield.

Emerging local government bonds - Bonds issued in emerging markets in the local currency.

Equity puts - A financial instrument or contract that gives the owner the right – but not the obligation – to sell an equity holding on or before a set date in the future for a predetermined price.

Exchange traded fund (ETF) - An exchange-traded investment that tracks a chosen index or range of different investments, such as bonds, shares or commodities.

Expense ratio - The total expenses involved in running a managed fund, expressed as a percentage.

Face value - The amount of money the investor is paid when a bond matures (also called the principal).

Fiscal policy - The process by which a government stimulates or slows the economy, typically through government spending and tax policy.

Fixed Income - Securities with a fixed payment schedule.

Fixed rate - Where the coupon rate is fixed at a set amount.

Flight to safety - A period of time in markets when investors move their money from assets perceived to be of high-risk into lower-risk assets, such as cash in response to market conditions.

Floating rate - Where the coupon rate fluctuates in line with a market indicator.

Foreign exchange risk - The risk that a change in exchange rates may adversely affect a security’s value.

Futures - An investment contract between two parties where one of the parties is obligated to buy or sell a particular asset to the other party on a set date in the future for a set price.

GDP - Gross Domestic Product is a measure of the value of the products and services produced by a country during a specific period of time.

Government bond - A bond issued by a government.

Hedge fund - A managed pool of money (typically a limited partnership) that utilizes alternative investment strategies to generate returns.

Hedging - A strategy designed to offset risk.

Hybrids - Securities that combine elements of debt securities and equity securities.

Illiquidity - Illiquidity refers to the degree to which a fund or a security may not be quickly bought or sold on the market. Securities and funds that are illiquid cannot be easily or readily sold without having a potentially significant impact on the price.

Illiquidity premium - A premium return sought by investors to compensate for an investment’s low-liquidity and the associated risks.

Income - The money received through investments.

Index tracker strategy - A passive investment strategy that attempts to match the performance of a chosen index.

Inflation - Increase in the prices of goods and services.

Inflation-linked bonds - Bonds where the principal value of the bond is linked to inflation.

Interest rate options - A financial instrument or contract giving the owner the option to buy or sell an interest rate investment on or before a set date in the future for a predetermined rate.

Interest rate risk - The risk that the price of a bond will fall when interest rates rise.

Investing for total return - An investment strategy that captures both income and capital appreciation.

Investment grade - Highly rated bonds that are likely to meet their payment obligations.

Issuer - The entity that is borrowing money through the selling of bonds.

J Curve - A graphical representation of the performance of a private equity investment where an initial loss is followed by a significant gain.

Leveraging - The practice of borrowing to fund an asset purchase, which increases potential returns, but also potential losses.

Listed equity - Equity investment vehicles, such as preferred equities, that are listed on the stock exchange.

Lock-up - A time period during which investors are prohibited from redeeming their capital from a private fund.

Long position - Buying an asset or security. Long positions profit from an increase in price.

Longevity risk - The risk of investors outliving their retirement savings.

Macroeconomics - Economics focused on the performance and behavior of the economy as a whole.

Managed futures - Pooled investment funds that use professional money managers called “commodity trading advisors” or CTAs to trade futures contracts, both long and short, across asset classes.

Maturity - The date at which the bond expires and principal is repaid.

Mezzanine debt - The middle layer of capital that falls between senior secured debt and equity. Mezzanine (subordinated) debt usually is not secured by assets and based purely on a company’s ability to repay the debt from free cash flow. It is predominately used as a way for growing companies to ‘bridge the gap’ between debt raised via traditional means and debt required to execute a specific project.

Monetary policy - The process by which the central banking authority controls inflation and the value of money through interest rates and money supply.

Money market fund - A managed investment that seeks to preserve the investor’s capital and generate yield by investing in short-term low-duration money market instruments.

Money market instruments - Short-term, liquid cash management investments that seek to maintain a stable value.

Nominal rate - The interest rate on a bond without any adjustments for inflation.

Open-end fund - A fund with a typically unlimited number of shares that can be bought and sold from the fund at any time, at a price that reflects the net asset value of the shares.

Options - An investment that gives the owner of the option the right – but not the obligation – to buy or sell an asset on or before a set date in the future for a predetermined price.

Over-the-counter (OTC) market - An investment market where securities are bought and sold between the participants in the market (usually brokers) without use of a centralised or public exchange.

Par - The face value of a bond.

Par Bonds - Bonds currently trading at face value.

Par Value - The nominal value of a bond.

Passive investment / management - An investment strategy that either tracks the performance of an index or which adopts a buy-and-hold approach that is not influenced by short-term fluctuations in the market.

Political risk - The risk political decisions, changes or disruptions will affect the performance of a company or government.

Premium to par - When a bond’s price is trading above its par value.

Prevailing interest rate - The average current interest rate in the economy.

Primary market - The market where bonds are first issued for sale to investors.

Principal - The amount of money the investor is paid when a bond matures (also called face value).

Private equity - Capital that is sourced privately to be invested in assets that are not publicly traded.

Public equity - Capital invested in a company through traditional public markets, such as stock exchanges.

Purchasing power - The amount of goods and services one unit of money (e.g. $1) can buy. Over time, inflation reduces the amount of goods and services that could be bought.

Qualified client - An individual or entity that immediately after entering into the contract has at least $1,000,000 under the management of the investment adviser; or the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either: (i) has a net worth (for an individual, together with assets held jointly with a spouse) of more than $2,000,000 or (ii) is a qualified purchaser as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 at the time the contract is entered into.

Real interest rate - The nominal interest rate for a bond minus the rate of inflation.

Real return - The return from an investment adjusted for inflation.

Recession - A general downturn in the economy which may be reflected in data such as GDP, employment, manufacturing and retail sales. Many countries define a recession as occurring when there is negative GDP growth for two consecutive quarters.

Reinvestment risk - The risk of having to reinvest in bonds offering lower yields than those previously held.

Relative value - Positions based on price differences between similar or related assets.

Retirement risk zone - The risk of markets dropping significantly just prior to a person’s retirement date or in the early years of retirement.

Risk exposure - The level of perceived risk and loss potential associated with the investment.

Risk factors - The underlying risk exposures that drive the return of an asset class.

Risk premia - Risk premia is the amount by which a risky asset is expected to outperform the known return of a “risk-free” asset.

Secondary market - The market where bonds are bought and sold after they are first issued.

Secular outlook - A longer-term view of the future performance of the global economy and financial markets.

Securities exchange - A market where investors can buy and sell a range of securities such as shares and bonds.

Securitization - A process in which the cash flows from various types of loans (for example mortgage payments, car payments, credit card payments) are bundled together and resold to investors as bonds. The largest securitization sectors are mortgage-backed securities and asset-backed securities.

Sequencing risk - The order and timing of an investor’s returns and how these affect overall portfolio outcomes.

Short position - Selling an asset or security that has been borrowed with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, the potential loss of an uncovered short is unlimited.

Sovereign debt - Money borrowed by the government of a country to fund its activities.

S&P 500 Total Return Index - Tracks the 500 largest companies (by market capitalization) listed on the New York Stock Exchange or NASDAQ.

S&P China BMI Total Return Index - Tracks the universe of firms with predominantly Chinese operations whose shares are available to foreign investors.

Safe Haven - A “safe haven” is an investment that is perceived to be able to retain or increase in value during times of market volatility. Investors seek safe havens to limit their exposure to losses in the event of market turbulence. All investments contain risk and may lose value.

Specialty finance - Investment in niche, highly-specialized industries or asset types such as non-performing loans.

Speculative grade - Non-investment-grade bonds that pay a higher yield in return for higher risk.

Standard deviation - The amount of variability around an average. It is also a measure of volatility.

Stock - A unit of ownership in a company.

Stock price - The price a stock can be bought and sold at on the market.

Strategic asset allocation - Asset allocation based on investment goals, risk tolerance and time horizon and periodically rebalanced.

Super guarantee - Refers to the compulsory contributions employers in Australia must make to the super funds of their employees.

Tactical asset allocation - Active asset allocation to take advantage of short-term changes in market conditions.

Tails - The end portions of distribution curves, reflecting the least likely, most extreme outcomes; in investing, this includes lowest returns on the left and highest returns on the right.

Target date fund / glide path - An actively managed fund rebalanced progressively over time, using a process known as a glide path, with a goal of providing an age-appropriate asset allocation.

Tender Offer - An offer to purchase some or all of shareholders' shares in a corporation or fund. The price offered may be at a premium to the market price.

Term structure - The difference in yield from one bond to another based on each bond’s maturity. “Term structure” is another term for “yield curve”.

Time to maturity - The time left until the bond reaches its maturity date.

Total return investing - A type of active investment management using a variety of strategies in an attempt to maximize capital or price appreciation.

Traditional investments - Long investments within core asset classes, including stocks, bonds and cash.

Traditional lenders - Institutions such as banks or loan companies that are traditionally associated with providing lending solutions.

Treasury Inflation-Protected Securities (TIPS) - TIPS are bonds that offer protection against U.S. inflation, or rising consumer prices.

Trend following - The practice of using quantitative signals of momentum to determine when to enter or exit a market.

Unlisted assets and investments - Unlisted assets refer to any investments that are not listed on a stock exchange.

Volatility - A measure of risk based on the price movements of an asset.

Weighted average credit rating - The average of all of the credit ratings attached to securities held in a bond fund.

Yield - Yield refers to the annual return of an investment. For bonds, the yield is based on the purchase price of the bond, along with its coupon payments.

Yield curve - A chart that shows the relationship between yield to maturity and time to maturity for a given number of bonds.

Yield to maturity - Used by bond investors, yield to maturity is a measure of yield which reflects the total return an investor receives if they hold the bond until maturity.