Glossary

A

Active Management: An investment strategy where a portfolio manager makes specific investments with the goal of outperforming an investment benchmark index.

Actuary: A professional who analyzes financial risks using mathematics, statistics, and financial theory, often involved in the pension fund sector to determine funding levels and liability management.

Asset Allocation: The process of distributing investments among various asset categories, such as stocks, bonds, real estate, and cash, to achieve a desired risk-return profile.

Asset-Liability Matching (ALM): A strategy in pension fund management that seeks to ensure that assets are invested in a way that matches the timing and amount of liabilities.

B

Benchmark: A standard against which the performance of a security, mutual fund, or investment manager can be measured. Common benchmarks include the S&P 500 and the MSCI World Index.

Bond: A fixed-income security that represents a loan made by an investor to a borrower, typically corporate or governmental, with periodic interest payments and return of principal at maturity.

C

Capital Markets: Financial markets where long-term debt or equity-backed securities are bought and sold, such as the stock market and bond market.

Consulting Agreement: A contract between a pension fund and an asset consultant outlining the services to be provided, including investment advice, performance analysis, and asset allocation strategies.

Custodian: A financial institution that holds securities and other assets in electronic or physical form for safekeeping on behalf of the pension fund.

D

Defined Benefit (DB) Plan: A pension plan where the benefits are calculated based on factors such as salary history and duration of employment. The employer typically bears the investment risk.

Defined Contribution (DC) Plan: A pension plan where the contributions are defined, but the future benefits depend on investment performance. The employee typically bears the investment risk.

Diversification: A risk management strategy that involves mixing a wide variety of investments within a portfolio to reduce risk.

E

Endowment: A financial asset, in the form of a donation made to a non-profit group or institution, consisting of investment funds and other property.

Equity: The value of shares issued by a company, representing ownership interest in the corporation.

F

Fiduciary Duty: The legal obligation of one party to act in the best interest of another. In the context of pension funds, trustees and asset consultants owe fiduciary duties to the plan participants.

Fixed Income: Investments that provide a return in the form of fixed periodic interest payments and the return of principal at maturity. Examples include bonds and certificates of deposit.

G

Governance: The system of rules, practices, and processes by which a pension fund is directed and controlled. This includes the roles and responsibilities of the board of trustees and other stakeholders.

I

Investment Policy Statement (IPS): A document that outlines the principles and guidelines for managing the investment portfolio of a pension fund, including asset allocation, risk tolerance, and performance benchmarks.

Index Fund: A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500.

L

Liability-Driven Investment (LDI): An investment strategy that focuses on matching the investment strategy to the pension fund’s liabilities in order to minimize the risk of underfunding.

Liquidity: The ease with which an asset can be converted into cash without significantly affecting its price.

M

Manager Selection: The process of evaluating and choosing investment managers for the pension fund, based on factors such as performance, strategy, and fees.

Market Value: The current price at which an asset can be bought or sold in the market.

P

Portfolio Management: The art and science of making decisions about investment mix and policy, matching investments to objectives, and balancing risk against performance.

Private Equity: Equity capital that is not listed on a public exchange, typically involving investment in private companies or buyouts of public companies.

Pension Fund: A fund established by an employer to facilitate and organize the investment of employees’ retirement funds.

R

Real Assets: Physical assets that have intrinsic value, such as real estate, commodities, and infrastructure.

Risk Management: The process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions.

S

Strategic Asset Allocation: A long-term approach to asset allocation that sets target allocations for various asset classes based on the pension fund’s investment objectives and risk tolerance.

Sustainable and Responsible Investing (SRI): An investment strategy that considers environmental, social, and governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.

T

Tactical Asset Allocation: A dynamic strategy that actively adjusts asset allocation to take advantage of market opportunities and manage risk.

Trustee: An individual or organization that holds and manages assets for the benefit of another. In the context of pension funds, trustees are responsible for managing the fund in the best interests of the beneficiaries.

V

Valuation: The process of determining the current worth of an asset or a company.

Y

Yield: The income return on an investment, such as the interest or dividends received from holding a particular security, usually expressed annually as a percentage based on the investment’s cost, current market value, or face value.

A

Asset: Any resource owned by an individual or entity that is expected to provide future economic benefits. Examples include stocks, bonds, real estate, and cash.

Appreciation: An increase in the value of an asset over time.

Arbitrage: The simultaneous purchase and sale of an asset to profit from a difference in the price.

Average Hourly Earnings: A measure of the average amount of income workers earn per hour in a given period, often used as an indicator of wage inflation.

B

Balance of Payments (BOP): A comprehensive record of a country’s economic transactions with the rest of the world, including trade, investment, and transfer payments.

Balance Sheet: A financial statement that summarizes an entity’s assets, liabilities, and shareholders’ equity at a specific point in time.

Bear Market: A market condition where prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining.

Bonds: Debt securities issued by corporations, governments, or other entities to raise capital, promising to pay back with interest.

Budget Deficit: Occurs when a government’s expenditures exceed its revenues, leading to borrowing and debt accumulation.

Bull Market: A market condition where prices of securities are incressing, and widespread optimism causes the positive sentiment to be self-sustaining.

C

Capital: Financial assets or the financial value of assets, such as cash and investments, used by a business to produce goods or services.

Capital Gains: The profit earned from the sale of an asset, where the selling price exceeds the purchase price.

Commodities: Basic goods used in commerce that are interchangeable with other goods of the same type, such as oil, gold, and wheat.

Consumer Confidence Index (CCI): A survey that measures how optimistic or pessimistic consumers are regarding their expected financial situation, affecting their spending behavior.

Consumer Price Index (CPI): An index that measures the average change in prices paid by consumers for a market basket of goods and services over time, used as a key indicator of inflation.

Capacity Utilization Rate: The percentage of an economy’s total production capacity that is actually being used over a specific period, indicating economic health and potential inflationary pressures.

D

Deflation: A decrease in the general price level of goods and services over a period, often associated with a reduction in the supply of money or credit.

Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.

Dividend: A distribution of a portion of a company’s earnings to its shareholders, usually in the form of cash or additional stock.

Disposable Income: The amount of money households have available for spending and saving after income taxes have been accounted for, influencing consumer spending.

Durable Goods Orders: A measure of new orders placed with manufacturers for long-lasting goods, such as appliances and vehicles, indicating future manufacturing activity.

E

Equity: The value of an ownership interest in an asset or business, calculated as the difference between the asset’s value and any debts owed on it.

Exchange Rate: The value of one currency for the purpose of conversion to another.

Expansion: The phase of the economic cycle where the economy is growing and moving from a trough to a peak.

Exports: Goods and services produced in one country and sold to other countries, contributing to a nation’s GDP and trade balance.

F

Factory Orders: A monthly measure of the value of new orders for both durable and non-durable goods, providing insight into future manufacturing activity.

Fiscal Policy: Government policies regarding taxation and spending to influence the economy. Forex (Foreign Exchange Market): The global marketplace for buying and selling national currencies.

G

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country’s borders in a specific time period, a primary indicator of economic health.

Gross National Product (GNP): The total monetary value of all goods and services produced by the residents of a country, including income from abroad, reflecting the economic strength of a nation.

H

Hedge: An investment made to reduce the risk of adverse price movements in an asset, typically through derivatives such as options and futures.

Hyperinflation: Extremely high and typically accelerating inflation, often exceeding 50% per month.

Housing Starts: The number of new residential construction projects begun during a specific period, indicating the health of the housing market and overall economic activity.

Household Debt: The total amount of debt, including mortgages, credit cards, and loans, owed by households, impacting consumer spending and financial stability.

I

Inflation Rate: The percentage increase in the general price level of goods and services over a period, reflecting the cost of living and purchasing power.

Industrial Production Index (IPI): A measure of the output of the industrial sector, including manufacturing, mining, and utilities, indicating the level of industrial activity.

Interest Rate: The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.

L

Labor Force Participation Rate: The percentage of the working-age population that is either employed or actively seeking employment, indicating the active portion of the labor market.

Leading Economic Index (LEI): A composite index of several economic indicators that tend to change before the overall economy, used to predict future economic activity.

Liquidity: The ease with which an asset can be converted into cash without affecting its market price.

Liability: A company’s legal debts or obligations that arise during the course of business operations.

M

Market Capitalization: The total market value of a company’s outstanding shares of stock, calculated by multiplying the share price by the number of shares.

Monetary Policy: The process by which a central bank, currency board, or other regulatory authority controls the supply of money, interest rates, and inflation.

Money Supply (M1, M2): The total amount of money in circulation or in existence in an economy.

M1 includes physical currency and demand deposits, while M2 includes M1 plus savings deposits, small-denomination time deposits, and retail money market mutual funds.

N

Net Income: A company’s total earnings, calculated as revenue minus expenses, taxes, and costs.

Nominal Value: The stated value of an asset, without adjustment for inflation or other factors.

O

Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). It offers the buyer the right, but not the obligation, to buy or sell a security at an agreed-upon price within a certain period.

P

Personal Consumption Expenditures (PCE): A measure of consumer spending on goods and services, indicating the economic activity and inflationary pressures.

Portfolio: A range of investments held by an individual or institution.

Prime Interest Rate: The prime interest rate in South Africa is the benchmark interest rate that commercial banks charge their most creditworthy customers, typically large corporations. It is the rate at which banks lend to their preferred clients and serves as a base rate for other interest rates, such as those on mortgages, personal loans, and business loans.

Private Equity: Capital investment made into companies that are not publicly traded.

Producer Price Index (PPI): A measure of the average change over time in the selling prices received by domestic producers for their output, indicating inflation at the wholesale level.

R

Real GDP: GDP adjusted for inflation, providing a more accurate representation of an economy’s true growth rate.

Repo Rate: The repo rate (repurchase rate) is the interest rate at which the South African Reserve Bank (SARB) lends money to commercial banks. It is a key monetary policy tool used by the SARB to control inflation, manage economic growth, and stabilize the national currency.

Retail Sales: A measure of the total receipts of retail stores, indicating consumer spending trends and economic health.

Recession: A significant decline in economic activity across the economy, lasting longer than a few months, typically visible in GDP, real income, employment, industrial production, and wholesale-retail sales.

Return on Investment (ROI): A measure of the profitability of an investment, calculated as the net profit divided by the initial cost of the investment.

S

Securities: Tradable financial assets such as stocks, bonds, and options.

Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.

T

Trade Balance: The difference between a country’s exports and imports of goods and services, indicating the economic relationship with the rest of the world.

Treasury Yield Curve: A graph showing the yields on U.S. Treasury securities at different maturities, indicating expectations for interest rates and economic activity.

Tariff: A tax imposed on imported goods and services.

Treasury Bonds: Long-term government debt securities with a maturity of more than 10 years.

U

Unemployment Rate: The percentage of the total labor force that is unemployed and actively seeking employment, indicating labor market health.

Underwriting: The process by which an underwriter brings a new security issue to the public, involving the determination of the offering price, the purchase of the securities from the issuer, and the sale of the securities to investors.

V

Volatility: A statistical measure of the dispersion of returns for a given security or market index, often associated with the level of risk.

Venture Capital: Financing provided to startups and small businesses with high growth potential in exchange for equity or partial ownership.

W

Wealth Management: A comprehensive service that includes financial and investment advice, accounting and tax services, and estate planning for affluent clients.

Wholesale Price Index (WPI): A measure of the average change in prices of goods at the wholesale level, used to assess inflationary trends before they reach consumers.

Y

Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.

Yield Curve: A line that plots interest rates of bonds having equal credit quality but differing maturity dates, typically showing the relationship between short-term and long-term interest rates.

V

Zero-Coupon Bond: A bond that is issued at a deep discount to its face value but pays no interest. Instead, it provides a profit at maturity when the bond is redeemed for its full face value.

Agent

When acting as agent, a transition manager takes responsibility to act in the client’s best interests. The alternative to agency trading is a principal transaction, where the transition manager commits capital to what a client needs to sell and vice versa.

Crossing

A “cross” trade is one in which buyer and seller meet without disclosing their intentions to the general marketplace. The confidentiality of a cross trade reduces market impact and eliminates the need to pay some or all of the bid/ask spread. There are many mechanisms for achieving crosses. Many managers’ preeminent franchise in equity block trading is founded on the ability to “find the other side” of trading needs without having to release information to the general marketplace.

Derivatives

Derivatives can be used to maintain, increase, or decrease exposure to the asset classes included in the transition. Subject to determining the authority, suitability, and willingness of the client to enter into derivatives transactions, a transition manager may use Index Futures, Bond Futures, Swaps, and/or Exchange Traded Funds, depending on anticipated cost versus tracking error and usefulness in providing economic value to the implementation of the overall plan.

Explicit costs

Commissions and taxes generated from a portfolio transition. Because they are easily identifiable, one can measure them more easily than implicit costs. These costs can be viewed as the iceberg that sits above the waterline—highly visible, but usually the smaller element of the cost of a transition.

External crossing

Transition managers utilize external crossing networks when they are unable (or prohibited) to use internal sources of liquidity (such as in-house index funds, or other client portfolios making trades) to prevent having to sell or buy securities in the open market, at a higher price.

Fiduciary

According to the CFA Institute, a fiduciary is defined as a person acting with responsibility on behalf of a client as a trusted advisor, with a duty of loyalty ensuring that reasonable care will be exercised in relation to a client’s investment assets, and that all investment actions should be carried out for the sole benefit of the client, in the client’s best interest. All investment managers, consultants, and other advisors, such as transition managers, have fiduciary responsibility towards acting in a client’s best interests, but not all are willing to be a “named fiduciary”, accepting total responsibility for the making (and accepting the outcome) of investment decisions. Some transition management providers, who also are registered investment advisers, may not be a named legal fiduciary with respect to transitions.

Implementation shortfall

Captures all aspects of cost (implicit and explicit) and is, therefore, the most comprehensive measure of performance in a portfolio transition. Assumes that the portfolio restructuring is undertaken instantaneously at the outset and at zero cost. The value of each individual transaction is compared to this benchmark, as are the mark-to-markets for all transactions not completed. The implementation shortfall is the sum of these calculations. While it does not consider what happens to the target securities after they are purchased, it does measure the true cost of getting from point A to point B (at the time point B is reached) for each individual security.

Implicit costs

Execution and trading costs associated with a Transition, including:

• Opportunity cost—refers to the price movement that occurs while executing the transition. It is the cost/gain associated with the time gap in transferring from the legacy portfolio to the target portfolio.
• This cost can be minimized via transaction optimization.
• Market impact—the amount by which you move the price of a security by placing an order in the market. Crossing can minimize market impact.
• Bid/Ask spread—the cost of being a liquidity demander rather than a provider. Internal crossing Internal crossing refers to the ability of a transition manager to trade securities during a transition through their own internal index funds, or other client portfolios, reducing trading costs because there is no need to buy or sell the security in the open market.

Legacy portfolio

Portfolio from which the securities are being transitioned.

Operating costs

Open market trading should be thought of as the “round trip” effect of selling a security in the marketplace, at its current market value, and then buying whatever new security one needs in its place, again, in the market. The explicit disadvantage of open market trading is the much higher cost of commissions, with commissions paid for every one security sold and every new one purchased. Open market trades also leave a portfolio vulnerable to opportunity costs and market impact costs.

Pre-trading analysis

Specific reports that can be generated prior to a transition that include liquidity, bid/ask, sector, currency, country, theoretical risk bid, exchange, market cap, market impact, performance, style risk, trading pattern and index tracking reports. These reports should estimate the risks involved in the transition. The magnitude of those risks, and their sources, are compared with market impact costs estimated by the transition manager’s proprietary models. The pre-trade analysis represents a game plan for the transition that is later used for comparison with actual results.

Pre-trading analysis

The total costs of the transaction are measured versus a pre-specified benchmark in a report. Within this analysis, expectations of commissions, taxes, and duties and in many cases bid/ask spreads are compared and contrasted versus the results.

Target portfolio

Portfolio to which the securities are being transitioned.

Transparency

The transition process that provides for a clear, transparent, and auditable process through every stage and results in a full audit trail.

VWAP

Volume Weighted Average Price, or VWAP, is a measure of evaluating transaction costs. Simply put, to calculate the VWAP, add up the Rand amount traded for every transaction (price times shares traded) and then divide by the total shares traded for the day. Another way of making an approximate VWAP calculation is to take the open, close, high, and low prices for a security for the day, and then divide by four. Some brokers will guarantee a VWAP price to investment managers, but do not take into account the need for timeliness, or best execution, for a particular client.