Glossary

A - E

F - J

K - O

P - T

U - Z

abtn

Short for actuariële en bedrijfstechnische nota.

AFM

Short for Autoriteit Financiële Markten

ALM

The process of analysing the interaction between the risks to assets and its liabilities. One example in insurance is duration risk which arises where assets and liabilities have different maturities.

Alpha

alpha is the term used to describe the risk adjusted outperformance of an investment. A large alpha indicates good performance relative to the market.

Alternatives

Non-traditional investments.

API

Short for Algemene Pensioeninstelling.

Asset-mix

Distribution of asset among different asset classes such as equities and fixed income, with a further breakdown regarding domestic and foreign investments.

Attribution

Set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return. The active return is the component of a portfolio's performance that arises from the fact that the portfolio is actively managed.

Different kinds of performance attribution provide different ways of explaining the active return.

Balanced mandate

Mandate to invest in a combination of traditional asset classes.

Available premium savings scheme

Also referred to as a money purchase scheme, this type of company pension scheme is increasingly replacing the financial salary version in terms of popularity. The amount of income you receive in retirement is directly related to how much you have contributed over your working life and how well your fund has performed.

Beta

A statistical measure of an asset’s sensitivity to market movements. If an asset’s price movements are exactly aligned with those of the market as a whole, the security has a Beta of 1. A Beta of less than 1 means that the security tends to move in line with the market (e.g. goes up in price when the market rises and down in price when it falls), but to a lesser degree than the market. A Beta of more than 1 means that the security tends to move in line with the market, but to a greater degree than the market. A Beta of 0 means that the stock’s price movements are not correlated to the market at all. A negative Beta means that the stock moves in an opposite direction to the market, rising when the market falls and falling in price as the rest of the market rises.

Bottom up

An investment management style that focuses on the analysis of individual stocks. Investment managers typically employ bottom-up, stock selection in combination with a top-down asset allocation policy that concentrates on economic and market analysis.

Buy and hold

A passive investment strategy. Under such a strategy there would be no buying or selling of stocks until the end of the portfolio’s

time horizon.

Commodities

A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole.

Correlation

Describes the way in which two investments have moved relative to each other. Correlation coefficients range between +1.0 for assets which consistently move in the same direction, and -1.0 for assets which consistently move in the opposite direction. Assets with a correlation of zero were unrelated. Portfolios combining assets with low correlations provide diversification or risk reduction benefits, potentially without decreasing total portfolio return.

Corporate Bond

Debt issued by a corporation. Bond holders have priority over stock holders in the case of corporate bankruptcy.

Credit

Debt issued by a corporation. Bond holders have priority over stock holders in the case of corporate bankruptcy.

Credit Risk

This is the probability that interest or capital on a corporate bond will not be paid when due. Credit risk is made up of two components, the default rate and the recovery rate. the default rate is the proportion of bonds that miss a payment. The recovery rate is the amount that an investor can recover from a defaulted bond.

Currency hedging

Hedging of currency risk through currency forward transactions

Currency risk

The risk of depreciation by investing in foreign currencies.

DB

Short for Defined Benefit.

DC

Short for Defined Contribution.

Defined Benefit (DB)

This is where the rules of the scheme decide how much pension the member will get. There are different ways of working out the size of the pension, but the member will know which system the scheme uses. The most common type of defined benefit scheme is a final salary scheme. (See also Final Salary Scheme)

Defined Contribution (DC)

Also referred to as a money purchase scheme, this type of company pension scheme is increasingly replacing the financial salary version in terms of popularity. The amount of income you receive in retirement is directly related to how much you have contributed over your working life and how well your fund has performed.

Derivaten

A collective name for futures, options and warrants.

Dividend

The share of a company’s profit from the current year, or from reserves generated from previous years’ profits, that the directors decide to distribute to ordinary shareholders. Ordinary equity dividends are payable from earnings after tax and after minority interest, extraordinary items and preference shares have been provided for. Dividends are approved at companies’ general

meetings. Interim dividends are part payments of the annual dividends..

DNB

Short for De Nederlandsche Bank.

Duration

The length of time before a bond matures. Corporate bond funds generally have a mix of short and long duration bonds..

EMD

Short for Emerging markets debt.

Emerging markets

Relatively small stockmarkets in newly industrialised or developing countries that are likely to become players on the world economic stage e.g. Turkey, India, Latin America..

Emerging markets debt (EMD)

Emerging market bonds are issued by governments of emerging economies, where political and economic instability make the risk of default higher.

Engagement

Engagement means entering into a constructive dialogue with companies about subjects such as the environment, society and corporate governance; a dialogue in which not only the risks and negative effects are discussed but one in which by way of cooperation consideration is given to the opportunities offered by changing (economic) conditions.

The objective is to secure shareholder value in the long term.

Ethical Investment

Ethical Investment (also referred to as sustainable or socially responsible investment) is a form of investing which takes not only the traditional financial indicators into account but also the impact of company’s governance and business activities on people, the environment and the wider economy. A carefully executed policy in respect of sustainable management is an essential condition to create value for investors. The companies that excel in the long term are those that not only know how to avoid sustainability risks successfully but can also spot opportunities and benefit from them.

Equity

Shareholders’ interest in a company as represented by the issued share capital and reserves.

Fixed Income

Debt issued by a government, a company or a local authority where the annual interest to be paid is set on issue. Usually the date of repayment is also set on issue.

FTK

Short for financieel toetsingskader.

Fund of funds

A Fund or trust that invests in the shares of other investment trusts or other Funds.

Governance

Governance refers to the regulations and guidelines put in place to ensure the proper management of a company's affairs by its board of directors and management. Corporate Governance teams in companies monitor corporate management to make certain that they are operating their business in accordance with those regulations and guidelines and will engage with them and exercise proxy votes in support of this objective.

GTAA

Short for Global Tactical Asset Allocation.

High yield bond

A high risk bond that has a low credit rating below investment grade. It therefore offers a high yield to encourage investors. It is judged to have speculative as well as purely investment characteristics.

Indexatie

A passive investment strategy within which the portfolio is constructed so as to replicate an index and thus match the total return performance of that index. Indexation removes the need for decisions as to stock selection and the timing of investments.

Index-Linked Bond

A bond whose coupon and principal payments are linked to the UK General Index of Retail Prices (RPI). It is thus a largely inflation-proofed instrument, giving the investor an assured real return if held to maturity. The first index-linked bond in the UK was issued in 1981.

Informatie ratio

A measure of the efficiency of converting risk into return. Specifically, it is the amount of additional return above that of the chosen benchmark for each unit of risk (defined by the standard deviation of relative returns) with all figures measured in percentages per annum. For example, a manager able to produce a 1% outperformance per annum of a benchmark with a risk of 2% per annum will have an information ratio of 0.5..

LDI

Short for Liability Driven Investments.

MiFID

Short for Markets in Financial Instruments Directive.

OPF

Short for Stichting voor Ondernemingspensioenfondsen.

OTC-derivaten

Short for Over-The-Counter derivaten.

Over the counter

A decentralised market where participants are linked by computer and telecommunications systems. The term is used to describe dealings between market participants outside of recognised exchanges.

Passive management

A portfolio strategy that seeks to remove the risk of under- or outperforming a specified index or benchmark by matching the movement of that index or benchmark. The most common form of passive management is replication, whereby a manager seeks to replicate the performance of a particular index through the purchase of all, or a sample, of that index’s constituents.

Private equity

Holdings in unquoted companies which can include financing management buy-outs, management buy-ins and start-ups.

Rating

Evaluation by a credit rating agency, such as Moody’s or Standard & Poor’s, of an issue’s investment quality. An issue’s rating may change as the borrower’s anticipated ability to service interest an redemption payments changes. See downgrade, upgrade.

Screening

In many cases, investment portfolios are screened against negative criteria. Generally, consideration is given to which products and processes contravene national (or international) agreements and treaties. Subsequently companies that have any involvement with these products and processes can be excluded from the investment universe.

However, screening can also mean identifying companies that have positively distinguished themselves in respect of certain themes deemed important by the clients. Positive screening involves seeking out companies that provide products or services that support sustainable development or are aligned with external targets such as the UN Millennium Development Goals or global targets to reduce greenhouse gas emissions linked to climate change.

Socially Responsible Investment

Socially Responsible Investment (also referred to as sustainable or ethical investment) is a form of investing which takes not only the traditional financial indicators into account but also the impact of company’s governance and business activities on people, the environment and the wider economy.

A carefully executed policy in respect of sustainable management is an essential condition to create value for investors. The companies that excel in the long term are those that not only know how to avoid sustainability risks successfully but can also spot opportunities and benefit from them.

Voting

Voting should be based on a number of international standards, which can take on different forms in different regions. The intended result is the maintenance and enhancement of shareholder value by combining managerial accountability with transparent reporting.

Sustainable Investment

Sustainable Investment (also referred to as ethical or socially responsible investment) is a form of investing which takes not only the traditional financial indicators into account but also the impact of company’s governance and business activities on people, the environment and the wider economy. A carefully executed policy in respect of sustainable management is an essential condition to create value for investors. The companies that excel in the long term are those that not only know how to avoid sustainability risks successfully but can also spot opportunities and benefit from them.

Swap

An agreement to receive (or pay) a fixed rate in return for paying (or receiving) a floating rate. The fixed rate need not be an interest rate, it can be anything e.g. an index, inflation etc. Swaps are traded over the counter and the terms can be tailored to suit each party. The simplest form of swap is a vanilla interest rate swap. Receiving an interest rate swap is equivalent to buying a bond and paying is equivalent to selling a bond.

Swaption

An option on a swap. Buying a swaption gives you the right but not the obligation to enter into a swap transaction at a specified future date at predetermined terms.

Top down

An active management style which has as its starting point an assessment of broad macroeconomic issues. This analysis generates the decision as to asset allocation between different asset classes (c.f. bottom-up).

Tracking error

A statistical term which measures the likely difference between the performance of a portfolio and the underlying benchmark.

Traditional investments

Equity and fixed income.

VB

Short for Vereniging van Bedrijfstakpensioenfondsen.

Volatility

A measure of the extent to which prices move. If the price of an underlying asset moves to a greater extent than before, its volatility is said to have increased and vice versa. So far as options are concerned, as volatility increases, the risk to the options writer also increases and the premium will rise.

Yield

The annual rate of return expressed as a percentage. There are a number of different types of yield and, in some cases, different methods of calculating each type:

1. Simple Yield: coupon payments as a percentage of the bond’s principal amount.

2. Current Yield: coupon payments as a percentage of the bond’s market price. This price should be gross of accrued interest. Also known as flat yield and running yield.

3. Yield to Maturity: the rate of return of a bond held to maturity when both the interest payments and the gain or loss of capital are taken into account. It assumes that coupon payments are reinvested at the same rate as the yield to maturity. Also known as redemption yield.

4. Nominal Yield: the yield of a bond, calculated as the annual coupon payout divided by the face value and expressed in percentage terms.

5. Real Yield: for conventional bonds this is the yield to maturity minus the inflation rate. For index-linked Gilts it is the guaranteed yield above inflation over the life of the bond, if held to maturity.

Yield curve

A graph formed by plotting and linking the yields of a range of bonds of differing maturities in a particular market (for example UK Gilts) at one point in time. The term is also commonly used to describe the range of available issues in a bond market. There are three main shapes of yield curve:

1. Positive, ascending or normal. In this case, interest rates rise as maturities lengthen.

2. Flat or horizontal. Similar yields are found for all maturities.

3. Negative, descending or inverted. Interest rates fall as maturities lengthen.