Investment markets are large, complex, ever-fluctuating, and often difficult for the average investor to navigate. There are, however, global terms and phrases which all investors should know and understand. In this article, we unpack the A-Z of stock markets and elaborate on key concepts that are vital to the world of investing:
Asset allocation: The variability of returns in the various asset classes, such as cash, equities, bonds, and property, vary from year to year, and asset allocation across these four major asset classes is important to achieve diversification and to spread your investment risk. Each asset class has different levels of risk and return, and each will behave differently under a certain set of circumstances, so asset allocation is an essential component of an investment strategy that aims to balance risk in an investment portfolio.
Bonds: In South Africa, an RSA Retail Savings Bond is an investment in the government that earns a fixed or inflation-linked interest for the period of the investment which can be two-, three-, or five-year terms. Government bonds are considered low risk investments, although their yields are also generally low. However, they can play an important role in diversification as they frequently perform well when other asset classes underperform.
Commodities: Commodities are generally naturally occurring, tangible goods that have economic value. They can take the form of natural resources such as gold, oil and natural gases, or can be harvested or farmed goods such as coffee, wheat, cattle and soya beans. Commodities form the basis of our economy because the raw materials are used to produce food, energy, clothing, and other essential goods.
Diversification: Another way to reduce risk in your investment portfolio is to spread your investments, not only across asset classes. You can do this by spreading your risk geographically, ensuring that not all your investments are based locally and ensuring that you have enough exposure to foreign markets. You can also ensure that your investments are spread amongst the various sectors and industries to create a good mix. Depending on your investment horizon and goals, you may want to ensure that you include both growth and income assets and may also consider incorporating more than one management style. Remember, the goal of investing is not always to simply achieve the best return but to give yourself the best chance of obtaining the return you require to achieve your goals within an acceptable level of risk.
Equities: Equities are essentially shares in a public company listed on the stock exchange which investors can purchase, with the share price being published daily. As an asset class, equities have historically produced the highest returns for investors over the long term, although they can be very volatile in the short-term which is why they are considered high risk assets.
Fund manager: Each investment fund has a specific set of investment goals, and it is the fund manager’s job to implement the fund’s investment strategy and manage the portfolio in line with the mandate. A fund can be managed by one person or a team of people. Their job is to perform market research and analysis, and to allocate capital in line with their findings to ensure that the fund achieves its objectives.
Gold: Many investors consider gold to be a safe-haven investment because, instead of holding their wealth in currency, which is subject to fluctuations, the value of gold remains stable in the long-term. For this reason, many investors turn to gold in times of uncertainty. You can invest in gold by buying physical gold jewellery, Krugerrands, gold coins or bullion, gold shares, gold certificates or even gold ETFs.
Hedge fund: Regarded as an alternative investment, a hedge fund is an investment company that uses a wide range of strategies and tactics to either beat the market or provide a hedge against unpredictable market fluctuations. Hedge fund managers can invest with debt, derivatives, stocks, bonds, options, and commodities to achieve their goals.
Investment horizon: The time period during which your money will remain invested, also known as your investment horizon, is important as this will impact your overall investment strategy. If you are investing for a retirement which is 30 years away, you will be able to take on more investment risk. On the other hand, if you need your money in the short-term, you will need to consider a lower risk investment and more income generating assets.
JSE: The Johannesburg Stock Exchange, now based in Sandton, is the largest stock exchange in Africa although it is relatively small by world standards, ranking 17th in the world in terms of size. There are currently 343 companies listed on the JSE, with companies such as Naspers, BHP Billiton, Richemont, Anglo American and British American Tobacco being in the top 10.
Krugerrand: First produced in 1967 to help market South African gold to international markets and to enable individuals to own gold, the Krugerrand is produced by the Rand Refinery and the South African Mint. Krugerrands are one of the most frequently traded gold coins in the world. The JSE trades Krugerrands though a well-regulated market with prices quoted based on the weight of the coins.
Living annuity: Regulated by the Long-term Insurance Act, a living annuity is a retirement product that is designed to provide a retiree with an annuity income. Annuitants can draw down from a living annuity between 2.5% and 17.5% of the gross value of the investment on an annual basis and have the option of adjusting their draw down levels on the annuity’s anniversary date. Although referred to as a policy, a living annuity is an investment held in the name of the annuitant. The annuitant has full investment flexibility and can structure his underlying investment to align with his goals.
Multi-manager: A key function of a multi-manager is to research and analyse the various funds offered by the different asset managers, and then build a portfolio in line with a specific investment mandate. A multi-manager does not handle invested funds, but rather strategically allocates an investor’s capital to carefully selected funds in line with the agreed mandate. A multi-manager can move between funds as and when markets fluctuate to take advantage of prevailing conditions. This dynamic approach to investing allows decisive and timeous action to be taken in a client’s investment portfolio in line with a given mandate.
Near cash assets: Assets that are highly liquid which can be easily converted to cash are referred to as near cash investments. These include savings account, fixed deposits, notice accounts, money market accounts, bonds that are near their redemption date, and widely traded foreign currencies.
Offshore investing: To gain exposure to offshore markets, investors can choose to externalise their Rands by either investing directly offshore using foreign-domiciled funds or invest indirectly through a local unit trust with a mandate to invest in foreign assets. If you choose to invest directly offshore, you will be limited to a single discretionary allowance (SDA) of R1 million per calendar year, as well as an additional foreign capital investment allowance (FCIA) of R10 million per calendar year, bearing in mind that the latter requires a tax clearance certificate to be obtained from Sars. If investing in-directly offshore, your investment is made in Rands whereafter your local unit trust manager will reinvest your money directly offshore via an asset swap.
Passive fund: Unlike an active fund, a passive fund is an investment vehicle that tracks a market index or market segment. There is no active involvement by the fund manager and, as a result, passive funds tend to have lower investment fees.
Quantitative research: Quantitative trading analysts use a variety of data to develop a trading strategy. They may look at historical and current investment data to build algorithms which will help them to analyse investment opportunities, with the goal being to use quantifiable data on which to make investment decisions.
Regulation 28: Regulation 28 is part of the Pension Funds Act, and its purpose is to protect investors against poorly diversified investment portfolios, and ostensibly aims to ensure that investors’ hard-earned money is invested in a sensible way without too much exposure to risky assets. Regulation 28 applies to pension, provident and retirement annuity funds, and essentially limits asset managers’ allocations of retirements savings to certain assets classes, including equities, property, and foreign assets. As it currently stands, the regulation currently limits equity exposure in retirement funds to 75% whether local or offshore. Further, exposure to local or international property is limited to 25%, while foreign investment exposure is limited to 30%. There are also additional sub limits for alternative investments and the percentage of a portfolio that can be held offshore, among others.
S&P 500: The Standard and Poor’s 500 is a stock market index that tracks 500 large companies listed in the stock exchange in the US and is one of the most commonly followed indices. The S&P 500 represents the stock market’s performance by reporting the risks and returns of the largest listed companies and is often used by investors as a proxy benchmark of the overall market.
Tax-free savings account: Also known as a TFSA, this type of investment vehicle allows one to invest in a tax-efficient way. All proceeds earned from a TFSA – including interest income, capital gains and dividends – are exempt from tax. This means that you get your full investment return without being taxed on the growth you earn. However, you are limited to an annual contribution of R36 000 and a total lifetime contribution of R500 000. Most life insurers, banks, unit trust companies and LISP platforms offer Tax Free Savings Accounts (TFSA) which are easily accessible and attractive to those wanting to reduce their taxable returns.
Unit trusts: Collective investments or unit trusts are transparent, well-regulated, and easy-to-understand investment vehicles, and are well-suited to a wide range of investment objectives. Unit trusts, which are regulated by the Collective Investment Schemes Control Act, provide investors with an economical way to invest any quantity of money whilst still obtaining the same level professional management and diversification of investment. Distinct advantages of unit trusts are that they include professional portfolio management, the ability to diversity a portfolio cost-effectively, relatively low transaction costs and the ability to buy and sell at will.
Value stocks: A share which is trading at a price lower than the company’s performance indicates is called a value stock. Generally, a value stock has an equity price which is lower than the share prices of similar companies in the same industry. Value stocks often arise out of bad publicity in relation to a particular company, or where a company is experiencing legal problems that reflect negatively on the shares’ prospects.
X: The fifth letter of Nasdaq Stock Exchange indicating that the listing is a mutual fund.
ZAR: This is the official national currency for South African and is the abbreviation for the Rand in forex exchange markets.
Author: Eric Jordaan, CFP®