Keeping Investments & Pensions simple!

Spending all of our time in Lyons Financial advising clients in relation to their investments and pensions, researching markets and investment propositions, and meeting fund managers and investments specialists comes with a significant occupational hazard. The use of jargon! So first of all, our apologies if you have been on the receiving end of jargon from us. We’re now going to put that right by explaining some of the main terms that we commonly use in relation to pensions and investment markets, to ensure your understanding of them.

 

Asset Classes

This is a term that is used to describe the different types of underlying investment funds that make up a typical investment, pension or AVC portfolio. The most popular asset classes include the following;

  • Shares or Equity: Equity funds buy a fraction of the ownership of a range of companies. These shares (to denote a ‘share’ in the ownership) are typically traded on a stock exchange.
  • Bonds: Companies or governments issue these, where they effectively borrow money from investors in return for an agreed rate of return over an agreed period of time. There’s been a lot of talk over the last few years of countries in particular defaulting on these!
  • Cash: In a cash fund, the manager places money on deposit with a bank, across a range of varying maturity dates. This was seen as an absolutely secure means of investing, for which the returns gained are generally quite low or zero, as they are at the moment.
  • Property: This is where an investment fund (usually) buys a number of properties and the performance of the fund is dependant on the rise or fall of the value of these properties and the income they produce from rent.
  • Currency: In a currency fund, the investment is based on the performance of a number of currencies in relation to each other. A specialist manager identifies opportunities based on his/her knowledge and expectation of currency movements.
  • High Yield funds: This is another type of equity fund that is made up solely of shares in companies that have a common characteristic – a history of having paid and/or an expectation of higher than normal levels of dividends in the future.
  • Absolute Return funds: These are funds that use complex investment instruments to invest in a range of asset classes. By using these instruments and investment methods, they can produce positive investment returns in both rising and falling stock markets. This approach is utilised widely by hedge funds.

 

Most investors don’t want to “bet the house” on the performance of a single asset class or worse still, the performance of a single share price. As a result, we would usually recommend a diversified portfolio to investors. Rather than having all your eggs in one basket, this approach spreads the investment amount over a number of asset classes, and within each asset class over a number of underlying investments. The aim is that if one company / sector / region / asset class underperforms; the whole investment is not significantly affected. People in Ireland who had a significant amount of their investments tied up in property over the last decade probably rue not having a more diversified portfolio.

 

Portfolio Management Strategies

Active management is where a fund manager makes investment decisions in relation to investment assets with a view to outperforming an investment benchmark or peer group. In this strategy, they use their knowledge and expertise in relation to stock picking and market timing with the aim of beating their competitors.

Passive management on the other hand removes this need to get timing and stock picking right. Instead the investment fund simply mirrors the investment make-up of the benchmark to produce similar performance to the benchmark and achieve average returns. This reduces the risk of outperformance or underperformance against the benchmark. This investment strategy has gained in popularity, as seen through the growth of a range of index-tracking funds.

 

Investment Styles

The two most popular investment styles are value investing and growth investing.

Value Investing is where the fund manager seeks to buy shares or other securities that appear to be under-priced or “cheap” when they examine the shares using their investment analysis tools.  Warren Buffett has long been a proponent of this investment style.

Growth investing on the other hand is where fund managers invest in companies where they expect significant growth in the share price, even where the share price may look expensive using their investment analysis tools. This investment style fell out of favour somewhat after the dot-com bubble burst, where the expected growth of companies never materialised.

 

These are just a snapshot of some of the most often used terms / jargon used by Lyons Financial in discussing investments with clients. There are of course many more, and please never be afraid to ask us to slow down and explain them fully to you!

However it is of course one thing understanding the terms, another altogether knowing which is the right approach for you. But that is where our expertise comes in, understanding your specific investment objectives, determining your appetite and attitude in relation to taking risk and then guiding you towards the best investment solutions to fit your own requirements. You just can’t beat good, independent advice! And that’s what we deliver to you.

If there are any other terms that you would like explained, please leave them in the comments below and we’ll reply with an explanation.


28th April, 2015

Posted In: Advice, Financial, Insights