A glossary of key investment terms
Active strategy: an investment approach where the investment manager uses skill and judgement to improve returns.
Actuary: a professional that uses their mathematical skills to measure the probability and risk of future events and to predict their financial impact on a business and their clients.
Annuity: a guaranteed income for life, which can be bought by an individual when they retire. Annuities are provided by insurance companies.
Benchmark: the performance measure that an active investment manager is trying to beat. This is usually an index but could also be cash or inflation.
Benchmark relative fund: an active fund that seeks to beat a specific index.
Behavioural finance: the study of how investors’ biases affect their decision-making.
Bond (government): a type of loan to a government.
Bond (corporate): a type of loan to a company.
Buy and hold: an investment strategy that buys bonds and holds them until maturity.
Catastrophe bond: a bond that makes repayments that depend on whether a specific natural disaster has occurred. Owning a catastrophe bond is like providing insurance against the natural disaster in return for a premium.
Call option: a financial contract that gives the owner the right, but not the obligation to buy an asset at a specified price on a specified date.
Coupon: interest payments from a bond.
Commodities: natural resources, gold etc.
Correlation: in investing, this is the extent to which the returns of two assets move together.
Covenant: the ability and willingness of the sponsor to fund the institution.
Credit rating: a way of scoring the creditworthiness of a borrower.
Default: when the issuer of a bond fails to repay the bond in full.
Defined Benefit (DB) pension fund: a pension fund where the pensions paid to the fund’s members are determined by the rules of the fund.
Defined Contribution (DC) pension fund: a pension fund where individuals and companies contribute to a pot owned by the member, which the individual then uses to provide an income in retirement.
Discount rate: the interest rate that has been assumed in a present value calculation.
Drawdown: when an individual takes cash from their pension pot as and when they need it in retirement.
Duration: the weighted average time to payment of a stream of cash flows. Also, a measure of how sensitive the value of the cash flows is to rising or falling interest rates.
Equities: investments in company shares.
Exchange Traded Fund (ETF): A type of pooled fund that is traded on an exchange like individual shares.
ESG strategy: considers Environmental, Social and Governance factors when making investment decisions.
Emerging markets: countries with developing economies.
Fiduciaries: the people responsible for ensuring the objectives of an institution are achieved.
Fiduciary duty: the duty to act in the best financial interests of the beneficiaries of an institution.
Future: a derivate where the owner commits to buying an underlying asset on a specified date in the future for a specified price.
Gilt: a bond issued by the UK government.
Governance: how an organisation is run.
High yield bond: a bond issued by companies with one of the lower credit ratings.
Index: a basket of shares or bonds that it designed to represent a particular investment market or sub-sector of an investment market.
Investment consultant: a firm that advises institutional investors on investment matters.
Investment grade: a type of bond issued by companies or governments with one of the higher credit ratings.
Leveraged investment: an investment whose performance is some multiple (2 times, 3 times etc.) of an underlying asset.
Liability: the promises made by the institution to its beneficiaries.
Liability Driven Investing (LDI): an investment strategy used by institutions to help manage interest rate and inflation risks. LDI makes the assets of the institution behave more like the liabilities.
Liquidity (sometimes known as marketability): how easy / cheap it is to sell an asset.
Maturity: the date a bondholder is due to be fully repaid.
Multi-asset fund: a fund that contains several different types of assets.
Optimisation: a modelling exercise that seeks to find the lowest risk portfolio for a given target return, or the highest returning portfolio for a given level of risk.
Passive strategy: an investment approach that tries to replicate the returns of an index as closely as possible.
Present value: how much we need to invest today to pay for a promise in the future, allowing for the investment returns / interest we expect to earn between now and when the promise is due.
Pooled fund: an investment vehicle that is owned by lots of investors. Investors buy parts of the pooled fund called units.
Private assets: assets that are not traded in public markets. Examples include private equity and private debt.
Put option: a financial contract that gives the owner the right, but not the obligation to sell an asset at a specified price on a specified date.
Real estate: for institutional investors, this usually means offices, shops and industrial buildings.
Risk premium: the return we earn for taking on a particular risk.
Sponsor: the entity(ies) responsible for funding the institution.
Spread: difference between the yield of a corporate bond and the yield of a government bond with the same repayment profile.
Term (of a bond): how long until the bond is repaid.
Tail risk: the risk of infrequent but severe losses.
Unconstrained fund: an active fund that aims to generate returns independent of any index.
Volatility: a measure of how much the return of an asset rises and falls over time.
Yield (on a bond): the interest rate earned on a bond if the investor holds the bond until it matures and the bond issuer doesn’t default.