Equity Factor Investing Glossary
An investment strategy where an asset manager looks to outperform their benchmark by making investment decisions about which assets to buy, sell and hold in their portfolio.
A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a security or a portfolio and compares its risk-adjusted performance to a benchmark index. The excess return, relative to the return of the benchmark index, is the security or portfolio alpha.
Indices that do not adopt or adhere to the standard market cap method of developing an index.
The tendency for investment decisions to be influenced by the judgement or behaviour of the people that are managing the portfolio. This is the ‘human element' that can influence the outcome of an investment strategy that is not completely rules-based.
The market index or return target that the performance of an investment strategy is measured against.
Market beta is essentially the return of an asset class which an investor receives from investing broadly in a given market. A security or a portfolio's beta is a measure of its volatility, or systematic risk, in comparison to the market as a whole.
A beta of one indicates that the security or portfolio price will move in line with the market. A beta of less than one means that the security will be less volatile than the market and a beta of greater than one indicates that the security's price will be more volatile than the market.
A measure of transaction costs which looks at the difference between the quoted prices to buy (bid) and sell (offer) an asset in the market.
Buy and maintain
An investment strategy involving the detailed analysis and careful selection of securities and monitoring those securities over a longer-term horizon, rebalancing portfolios as required. The aim is to minimise transaction and other costs associated with excessive portfolio turnover, and in so doing, maximise the beta generated for investors.
The ongoing interest payment that is received from a bond investment.
The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honour the debt.
Expanding a portfolio across a variety of asset types in order to spread risk and limit potential overall losses.
A negative change in the rating of a security, based on a judgement that the issuer's financial strength has deteriorated.
A measure of the sensitivity of the price (the value of principal) of a fixed income security, to a change in interest rates.
Equally weighted index
A market benchmark that is constructed by allocating across each security or sector in equal proportion.
The risk associated with a changing portfolio value due to large swings in market prices, resulting from unforeseen events.
A set of proprietary criteria to help narrow a respective investment universe and filter out those securities representing the highest unrewarded risk.
High yield credit
A sub-investment grade bond (also known as a speculative grade, or junk bond). These bonds have a higher risk of default or other adverse credit events, but typically pay higher income yields than better quality bonds in order to compensate for this additional risk and make them attractive to investors. Bonds rated BB and below (by bond rating agencies) are considered high yield, while bonds rated BBB and above are considered investment grade.
Risk that is specific to an asset or a small group of assets.
A simple, cheap investment technique that mimics the construction and performance of a particular financial market or asset group.
Investment grade credit
A bond viewed as being of higher credit quality and, as such, having a relatively low risk of default. Bonds rated BBB and above (by bond rating agencies) are considered investment grade while bonds rated BB and below are commonly referred to as high yield or junk bonds.
Erosion of potential performance associated with costs incurred through transaction costs and management fees.
The amount of debt used to finance a company's assets. A firm with significantly more debt than equity is considered to be highly leveraged.
The risk stemming from a lack of ability to buy or sell an asset quickly in order to prevent, or minimise, losses.
Trends or patterns that may exist in a given market environment, allowing some securities or asset classes to outperform others. The securities themselves may exhibit price patterns in their trading.
An investment strategy that replicates a market index, buying, selling and holding securities based on the rules of the index.
An assessment of the value of a security compared to the value of a similar security.
The expected return on an investment that has no risk of financial loss over a given investment period. Typically, this would be the return on highly rated government debt.
The amount an investor can expect to be paid for taking on extra risk
A financial ratio that measures risk-adjusted performance.
An investment strategy aimed at maximising market beta, while minimising potential performance erosion associated with excessive transaction costs and management fees.
Subordinated debt (bond)
A loan that is issued by a company which has lower repayment priority than other more senior (unsubordinated) debt in the event of a company liquidation or bankruptcy.
The (undiversifiable) risk inherent to the entire market or entire market segment.
The risk of collapse of an entire financial system or entire market. It refers to the risks imposed by interdependencies in a market, where the failure of a single entity or group of entities can cause a cascading failure, bringing down the entire market.
A form of portfolio risk that relates to the possibility that an investment will move more than the ‘normal distribution' pattern of returns, i.e. three standard deviations from the mean. The ‘fatter' the tail, the greater the probability that such an extreme move will occur.
Expenses incurred when buying or selling securities.
The level of disclosure or information that can be accessed about a particular investment strategy or underlying portfolio holdings.
The rate at which underlying portfolio holdings are changed (bought or sold) over the investment period.
A risk driver that is embedded in the market that adds additional risk (volatility) without necessarily adding additional returns.
The bespoke enhancement given to a product or service before offering this product or service to the end customer.
A statistical measure of the dispersion of returns for a given security, portfolio or market index. Essentially, volatility refers to the amount of uncertainty or risk relating to the size of changes in a security or portfolio value. Commonly, the higher the volatility, the riskier the security or portfolio.
The income return on an investment. This refers to the interest or dividends received from a security, expressed as a percentage based on the investment's cost, its current market value or its face value.
The extra yield offered on an investment, in compensation for the greater risk associated with that investment. For example, liquidity risk and/or default risk.