Active management

This is when investment managers actively position their portfolios to differ from their benchmarks in areas they expect to outperform the benchmark, with the aim of earning an active return above the benchmark. The investment managers take deliberate or active ‘bets’ to earn investment returns that are higher than the benchmark. Typically, these bets apply to specific share selection, investment style, industry over- or underweightings, market timing or asset allocation.

Active positions

The difference between a portfolio weighting and the benchmark weighting.

Active return

The return above a benchmark’s return, also known as alpha.

AEX Index

Weighted index of 25 leading Dutch stocks traded on the Amsterdam Stock Exchange.

AFFSI

The Adjusted Free Float Share Index is a hybrid of the FTSE/JSE ALSI and the FTSE/JSE Financial & Industrial Index (FINDI).

Aggressive portfolio

A portfolio that invests mostly in more volatile asset classes such as shares, and has a small amount invested in conservative asset classes such as cash. The investment manager tries to maximise short-term opportunities by switching between investments.

AIMR

The Association of Investment Management and Research is based in the US. It provides the code of ethics and reporting standards for the global investment-management industry.

Alpha

The investment return earned above the benchmark, also known as active return.

ALBI

Bond Exchange Association of South Africa All Bond Index (Total Return Index).

ALSI

The All Share Index is the FTSE/JSE All Share Index and reflects the movement of the South African share market.

American Stock Exchange (AMEX)

The second-largest stock exchange in the US after the New York Stock Exchange (NYSE). Stocks and bonds traded on the AMEX tend to be those of smaller companies than on the NYSE.

Annuitant

An annuitant or pensioner is a person who has paid a sum of money to a retirement fund and who gets an income in the form of an annuity (pension).

Annuity

A monthly pension that you buy from an insurance company. It is a fixed amount paid to an annuitant at specified intervals (monthly or annually) over a period of time (the annuitant’s life or the lives of his beneficiaries) in return for a premium paid.

Arbitrage

An investor activity of buying and selling an asset to profit from a difference in the price. The process takes advantage of mispricing between two assets. Arbitrage returns are characterised by low volatility and are neutral against market movements (not risk-free). Examples of arbitrage strategies are the exploitation of distortions between:
• The theoretical index futures price and its actual price.
• The shares of a company due to be taken over and the shares of the purchasing company.
• The price of a stock and the price of the matching warrant.
• A convertible bond and its underlying stock.

Asset

Any possession that has value when exchanged (bought or sold). Assets include:
• Shares
• Bonds
• Property
• Cash.

Asset allocation

Asset classes have different levels of risk and return. Investment managers use this strategy to spread a portfolio’s assets across the asset classes in different proportions to maximise return and minimise risk according to the portfolio’s goals.

Asset classes

• Shares
• Bonds
• Listed property
• Cash
• Global investments.
Asset classes have different characteristics and risk/return profiles so they behave differently in the same market conditions. Balanced investment portfolios normally invest in more than one asset class to reduce the risk of a portfolio.

Asset/liability modelling

A model that projects an investment portfolio into the future. Usually, assets are projected using a stochastic (random) investment model, and liabilities using a cash-flow model. The combination of assets and liabilities shows the expected funding position in the future. This model gives investment managers the opportunity to calculate an optimal investment strategy.

Asset manager or investment manager

An organisation or individual registered in terms of the required legislation to manage investments on behalf of members of the public, retirement funds and other financial institutions.

Asset swap

An example of an asset swap is the arrangement put in place by the South African Reserve Bank (SARB) to allow local institutions to invest globally. The local institution was required to find an international partner willing to invest the same amount in South Africa. There were also limits on the proportion of assets the local institution could invest internationally. In theory, if the international partner wished to sell its South African holdings, the local institution had to sell its international holdings. With this particular arrangement, there was no capital outflow from South Africa and the transaction had no influence on the exchange rate. This asset-swap arrangement was replaced by more recent legislation governing foreign investments.

Association of Collective Investments

An association that represents South African unit trust management companies and unit-holders.

Attribution analysis

Analysis to discover the source of investment returns.

Average rate of tax

The ratio of income tax paid to income. For example, an individual with an income of R50 000 who pays R12 832 in income tax has an average tax rate of 25.7% (R12 832 divided by R50 000).