Glossary of Investment Terms

tactical asset allocation (TAA):

Tactical asset allocation involves the strategic selection and trading of individual stocks or securities within a specific sector or industry group. This method, often referred to as active stock or security picking, aims to identify and capitalize on the microeconomic factors influencing specific securities. Tactical asset allocation can be understood as the securities within a particular sector or industry that should be acquired or divested to optimize portfolio performance.

strategic asset allocation (SAA):

Strategic asset allocation is the intentional distribution of investments across diverse asset classes, including equities, bonds, alternative investments, and cash. It is guided predominantly by large-scale macroeconomic trends and a long-term perspective on market dynamics. Distinct from tactical asset allocation, which zeroes in on the selection of specific companies or securities, strategic asset allocation focuses on determining investment in broader sectors or industry groups.

assets under management (AUM):

Assets Under Management (AUM) refers to the total market value of the investments that a financial institution or individual manages on behalf of clients. It includes the capital invested by clients and any gains or losses from the investment portfolio. AUM is a key metric used in the financial industry to gauge the size and success of an investment management company.

Benchmarks:

A benchmark, in the context of professional asset management, is a standard or reference point against which the performance of a portfolio or investment manager can be measured. The choice of an appropriate benchmark is crucial as it should closely align with the investment style, asset class, and objectives of the portfolio it is measuring. For example, a global equity fund might use the MSCI World Index as its benchmark.

• BGF Global Allocation A2: The Blackrock global allocation is a 15B$ AUM global multi-asset fund. The Fund invests globally at least 70% of its total assets in equity securities (such as stocks) and fixed income securities (FI) under normal market conditions. Fixed income securities include bonds and money market instruments (i.e., debt securities with short-term maturities). It may also hold deposits and cash.
  
  More information can be found here
• MSCI ACWI: The MSCI ACWI (All Country World Index) is a financial index that serves as a global barometer for stock market performance. It encompasses thousands of stocks from a multitude of countries, including both developed and emerging markets. This index represents a comprehensive overview, offering a broad and diverse glimpse into the overall performance of the world's stock markets. Covering regions from North America to Europe and Asia, the MSCI ACWI is widely utilized by investors and fund managers as a benchmark.
  
  More information can be found here
• S&P 500: The S&P 500, or Standard & Poor's 500, is an American stock market index comprising 500 of the largest companies listed on U.S. stock exchanges. It is a key indicator of the performance of large-cap U.S. stocks and reflects a diverse range of industries, making it a widely used benchmark for the overall U.S. stock market. The inclusion of companies in the S&P 500 is based on criteria such as market capitalization, liquidity, and industry representation. This index is often used by investors to gauge the health of the U.S. stock market and the economy, and is also a benchmark against which the performance of stock portfolios is compared.
  
  More information can be found here
• 60-40 Portfolio: The 60-40 portfolio is a classic investment strategy that refers to a portfolio allocation of 60% in stocks and 40% in bonds. This strategy is favored for its balance between risk and return. Stocks, representing the 60% portion, offer higher potential returns but come with greater volatility and risk. Bonds, making up the 40%, provide stability and steady income, typically with lower returns but also less risk compared to stocks. The idea behind this allocation is to strike a balance where the growth potential of stocks is complemented by the risk mitigation and income generation of bonds. This approach is particularly popular among moderate-risk investors, as it aims to offer a blend of growth, income, and preservation of capital. Over time, investors may need to rebalance their portfolios to maintain this 60-40 split, especially as market values fluctuate.
  
  The 60-40 Portfolio used as a benchmark for our Global Dynamic Allocation Strategy and is composed of 60% MSCI ACWI and 40% Bloomberg Global Aggregate Bond Index, rebalanced annualy.

Beta:

Beta measures the volatility or systematic risk of a security or portfolio in comparison to the broader market. It indicates the extent to which a security's returns respond to market swings. A beta greater than 1 signifies higher volatility than the market, while a beta less than 1 indicates lower volatility. This metric is crucial for assessing risk and designing balanced portfolios.

Alpha:

Alpha is a measure of an investment's performance relative to a benchmark. It represents the excess return of an investment given its risk compared to the return of a benchmark index. A positive alpha indicates outperformance, while a negative alpha denotes underperformance. Alpha is often used to assess the value added by a fund manager's investment decisions.

For example: our global dynamic macro strategy has a beta of 0.82 and an alpha of 5.71% (as of 31/12/2022), this means that for every 1% the benchmark increases in price, our startegy on average increaes in value by 0.82% + 5.71% = 6.53%, outperforming by 5.53%.

Asset Liquidity:

Asset liquidity refers to the ease and speed with which an asset can be converted into cash without significantly impacting its market price. Highly liquid assets, such as stocks in major companies, can be quickly sold in the market at a price close to their true value. Conversely, assets like real estate are considered less liquid due to longer timeframes and potential price reductions required for sale.

Rebalancing Frequency:

Rebalancing Frequency refers to how often a portfolio manager adjusts the asset allocation in a portfolio to maintain its original or desired level of asset allocation. Over time, due to varying performance of different assets, a portfolio's allocation can drift from its intended target. Rebalancing involves buying or selling assets in a portfolio to achieve the desired asset mix. The frequency of rebalancing can vary based on the investor's strategy, risk tolerance, and market conditions. Common rebalancing frequencies include quarterly, semi-annually, annually, or on an as-needed basis triggered by specific allocation drift thresholds. Regular rebalancing helps maintain the portfolio's risk profile and alignment with the investor's investment goals and strategies.

Economic Cycle:

The Economic Cycle, also known as the Business Cycle, is a series of stages an economy goes through, characterized by fluctuating levels of economic activity, typically including periods of expansion and contraction. It's an essential concept in macroeconomics used to understand and analyze the economy's performance over time. The key phases of the economic cycle include:

• Expansion: This phase is marked by increasing economic activity. Indicators such as employment, production, and sales show an upward trend. Businesses expand, consumer spending increases, and GDP grows.
• Peak: The peak represents the height of economic growth in a cycle. During this phase, economic indicators are at their highest levels, signaling the end of expansion and the start of contraction.
• Contraction: In this phase, the economy starts to slow down. Indicators such as employment and production decline. This period may lead to a recession, where there is a significant decrease in economic activity.
• Trough: The trough is the lowest point of the economic cycle, where economic activity is at its weakest. Following the trough, the economy typically enters a recovery phase, leading back to expansion.
• Recovery: During recovery, economic activity begins to pick up again from the low point of the trough. Employment rises, consumer spending increases, and production starts to grow, leading back to the expansion phase.

Market Cycle:

The Market Cycle refers to the trends or patterns that emerge in financial markets over time. These cycles are influenced by a variety of factors including economic indicators, investor sentiment, political events, and global conditions. Market cycles are characterized by periods of rising and falling market prices, typically referring to stock markets, but applicable to other asset classes as well. The key phases of the market cycle include:

• Accumulation Phase: This initial phase is characterized by investor optimism and increasing investment. Prices begin to rise from their lowest points, and early investors start to enter the market, anticipating future gains.
• Markup Phase: In this phase, prices continue to rise steadily. More investors enter the market, attracted by the rising prices and the potential for profit. Market sentiment is generally bullish.
• Distribution Phase: During this phase, prices reach their peak. Savvy investors begin to sell or redistribute their assets, anticipating a market downturn. The market may stagnate or experience increased volatility.
• Decline Phase: This phase sees a downturn in market prices. Investor sentiment becomes bearish, and many participants exit the market, leading to a decrease in prices. This phase can sometimes lead to a market correction or a bear market.
• Bottom (Trough) Phase: Eventually, the market reaches its lowest point, which may be followed by a period of consolidation before the cycle starts anew with the accumulation phase.

Calmar Ratio:

The Calmar Ratio is a performance metric that evaluates the risk-adjusted return of an investment. It is calculated by dividing the annualized return by the maximum drawdown over a specified period. This ratio is particularly relevant for hedge funds and other strategies focusing on minimizing losses during market downturns. A higher Calmar Ratio indicates better performance in terms of gaining higher returns for each unit of risk taken.

Dollar-Cost Averaging (DCA):

Dollar-Cost Averaging (DCA) is an investment strategy where an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals; this strategy removes much of the detailed work of attempting to time the market in order to make purchases of assets at the best prices. DCA is aimed at reducing the risk of investing a large amount in a single investment at the wrong time. By spreading the purchases out, the investor potentially reduces the impact of market volatility. This strategy is particularly popular among investors who are looking to build up their portfolios gradually and are less concerned with short-term fluctuations in market prices.

To find the optimum reinvestment interval click here.

Composite:

In accordance with the Global Investment Performance Standards, a composite represents a grouping of discrete investment portfolios that collectively reflect a specific investment strategy or objective. Composites are used to provide a consistent, standardized performance presentation, allowing for more accurate comparisons and benchmarking in investment management.

Long-Only Investment Strategy:

The Long-Only Investment Strategy is a conventional approach to investing where an investor buys securities with the expectation that they will rise in value over time. In this strategy, the investor holds a 'long' position in assets such as stocks, bonds, or mutual funds, aiming for capital appreciation and/or income generation. Unlike hedging or short-selling strategies, long-only does not involve taking positions that would benefit from a decline in asset prices. This approach is typically associated with a more traditional, buy-and-hold investment philosophy and is often preferred by investors who are looking for steady growth and are less tolerant of high risks associated with short positions and their financial leverage.

Correlation:

Correlation in finance measures the degree to which two securities or portfolios move in relation to each other. It ranges from -1 to +1, where a value close to +1 implies a strong positive relationship (securities moving in the same direction), and a value close to -1 indicates a strong negative relationship (securities moving in opposite directions). A correlation near zero suggests no significant relationship in the movement of the securities.

For example: A portfolio with assets that have a correlation close to 0 will have much lower risk than a portfolio with assets that have a correlation close to 1, while maintaining the same expected return.

Tracking Error:

Tracking Error quantifies the divergence of a portfolio or fund's performance from its benchmark. It is a measure of the consistency with which a manager replicates the benchmark's returns. A lower tracking error suggests a closer alignment with the benchmark, typically indicating a more passive management style, whereas a higher tracking error implies greater deviation from the benchmark, often associated with active management strategies.

Treynor Ratio:

The Treynor Ratio is a risk-adjusted performance metric, similar to the Sharpe Ratio, but it uses beta (systematic risk) instead of standard deviation (total risk) as the risk denominator. It calculates the excess return per unit of risk, with risk defined by the beta. This ratio helps in assessing whether the additional returns of a portfolio compensate adequately for the risk taken, considering the market volatility.

Upside Market Capture:

The Upside Market Capture Ratio evaluates a manager's performance in upward trending markets relative to the overall market. A ratio above 100 indicates outperformance compared to the market in periods of positive returns. This metric helps investors understand a manager's effectiveness in capitalizing on market upswings.

Up/Down Capture Ratio:

The Up/Down Capture Ratio assesses a manager's performance in both rising and falling markets relative to a benchmark. It juxtaposes the manager's ability to capture gains during market upturns against their effectiveness in minimizing losses during downturns. A favorable ratio indicates a balance between capturing upside potential while protecting against significant losses in down markets.

Sharpe Ratio:

The Sharpe Ratio is a measure of risk-adjusted return. It is calculated by subtracting the risk-free rate from the return of the investment and then dividing the result by the investment's standard deviation. This ratio helps investors understand the return of an investment compared to its risk. Higher Sharpe ratios indicate better risk-adjusted performance.

Duration:

Duration measures the sensitivity of a bond's price to changes in interest rates. It is expressed in years and helps investors understand how much a bond's price will fluctuate with interest rate movements. Longer duration implies greater sensitivity to interest rate changes, meaning higher risk and potential volatility.

Yield Curve:

The Yield Curve is a graphical representation of interest rates across different bond maturities, typically ranging from three months to 30 years. The shape of the curve helps investors gauge economic expectations and interest rate risk. A normal upward-sloping curve suggests higher interest rates for longer-term investments, while an inverted curve can indicate economic downturn expectations.

Market Capitalization:

Market Capitalization, or Market Cap, refers to the total market value of a company's outstanding shares of stock. It is calculated by multiplying the current stock price by the total number of outstanding shares. Market cap categories like large-cap, mid-cap, and small-cap provide a quick understanding of a company's size and potential risk and return characteristics.

Price-to-Earnings Ratio (P/E Ratio):

The Price-to-Earnings Ratio (P/E Ratio) is a valuation metric that compares a company's current share price to its per-share earnings. A higher P/E ratio might suggest that a company's stock is overvalued, or investors are expecting high growth rates in the future. It's a crucial metric for comparing the relative value of companies in the same industry.

Dividend Yield:

Dividend Yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is calculated by dividing the annual dividends paid per share by the price per share. This yield is often used by investors seeking regular income from their investments.

Maintenance Margin:

The Maintenance Margin is a key concept in margin trading, representing the minimum amount of equity an investor must maintain in their margin account after a purchase is made. It is typically set as a percentage of the current market value of the securities held in the margin account. If the equity in the account falls below this percentage because of a decline in the value of the securities, the investor will receive a margin call, requiring them to either deposit more funds or securities into the account or sell some of the assets to raise the equity back to the required level. The maintenance margin requirement helps protect brokers from the risk of loss in case the market moves against the investor's positions.

For example: if the maintenance margin is 25%, an investor can purchase an asset worth 100$ with only 25$ in their account. If the asset value were to fall bellow 100$, the investor would receive a margin call and would have to deposit more funds or sell some of the assets to raise the equity.

portfolio diversification:

Diversification is a risk management strategy used in investing that involves allocating investments across various financial instruments, industries, and other categories to reduce the overall risk of the portfolio. The effectiveness of diversification is significantly influenced by the correlation between the assets within the portfolio. Correlation measures the degree to which two securities move in relation to each other. In a diversified portfolio, the aim is to include assets with low or negative correlations. When assets are not perfectly correlated, the ups and downs of different investments can balance each other out, leading to a reduction in the overall volatility and risk of the portfolio. Negative correlation is particularly valuable in diversification, as it implies that when one asset class performs poorly, another may perform well, thus providing a buffer against losses.