An asset class refers to a group of underlying investments that display similar characteristics, behave similarly in the marketplace and are subject to the same laws and regulations. The main asset classes are equities (stocks), bonds, cash and property. Each asset class has different risk and return characteristics, and will perform differently in any given market environment.

A market condition in which the prices of securities are falling and widespread pessimism causes the negative sentiment to be self-sustaining.

As investors anticipate losses in a bear market and selling continues, pessimism only grows. A bear market should not be confused with a correction, which is a short-term weakness in share prices.

The use of ‘bull’ and ‘bear’ to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.

A standard against which the performance of a security, fund or investment manager can be measured. Unit trusts are generally measured against an index or sector.

An approach that de-emphasises the significance of economic and market cycles. This approach focuses on the analysis of individual stocks. In a bottom-up process, an analyst focuses on the operational or business fundamentals that are specific to a company rather than on the industry in which that company operates or on the economy as a whole.

The bottom-up approach assumes that individual companies can do well even in an industry that is not performing very well. Making sound decisions based on bottom-up research entails a thorough review of the company in question. This includes becoming familiar with the company’s products and services, its financial stability and its financial reports.

A market condition in which the prices of securities are rising or are expected to rise. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. The use of ‘bull’ and ‘bear’ to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market. 

The growth achieved on an investment as measured by the increase in its market value over the amount invested.

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings. Unit trust investors can benefit from compounding by reinvesting their income distributions.

A risk management technique that combines a wide variety of investments within a fund. The rationale behind this technique contends that a fund made up of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the fund.

Diversification strives to smooth out unsystematic risk events in a fund so that the positive performance of some investments will neutralise the negative performance of others. Therefore, the benefits of diversification will hold only if the investments in the fund are not perfectly correlated.

Refers to the distribution of a portion of a company’s earnings (decided by the board of directors) to its shareholders. The dividend is most often quoted in terms of the rand amount each share receives (dividends per share). It can also be quoted in terms of a percentage of the current market price, referred to as dividend yield. Dividends are usually paid bi-annually or annually.

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. Dividend yield is calculated by dividing the dividend per share by the current share price and multiplying it by 100 to get a percentage.

A unit trust fund that invests predominantly in equities. Equity funds can be classified according to company size, investment style, geography and/or sector.

A method of evaluating a company or asset that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to analyse everything that can affect the company or asset’s value, including macroeconomic factors (such as the overall economy and industry conditions) and company-specific factors.

The underlying assets within a unit trust fund may earn income in the form of interest and dividends. This income is then declared and distributed among investors who can choose to have it reinvested or paid out to them.Content

The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.

A unit trust fund that invests in a combination of asset classes such as equities, bonds, property, etc. Also commonly known as an asset allocation fund.

A valuation ratio of a company’s current share price compared to its earnings per share. It is calculated by dividing the current share price by the earnings per share (usually from the last 12 months).
In general, a high PE suggests that investors are expecting higher earnings growth in the future compared to companies with a lower PE. However, the PE ratio doesn’t tell the whole story by itself. It’s usually more useful to compare the PE ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical PE. It would not be useful for investors using the PE ratio as a basis for their investment to compare the PE of a technology company (high PE) to a utility company (low PE) as each industry has different growth prospects.
It is important that investors note an important problem that arises with the PE ratio, and avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation. This means that the quality of the PE is only as good as the quality of the underlying earnings number.

Regulation 28 of the Pension Funds Act outlines the types of asset classes in which retirement investment vehicles (retirement annuities, pension/provident and preservation funds) may invest, and to what proportion. It aims to protect investors by limiting over-exposure to risky asset classes.

This involves analysing the ‘big picture’ or macro-variables such as GDP, currencies, etc. Analysts using this approach look at the economy and try to forecast which industry will generate the best returns. They then look for individual companies within the chosen industry and add the stock to their portfolios.

A measure of the total costs incurred in managing and operating a fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund’s total assets to arrive at a percentage amount, which represents the TER.

This measure reports the difference or standard deviation between a fund’s return and its benchmark’s return.

An analysis technique that uses subjective judgment based on non-quantifiable information, such as management expertise, industry cycles, strength of research and development, and labour relations. This type of analysis technique is different to quantitative analysis, which focuses on numbers. The two techniques, however, are often used together.
While most analysts rely largely on quantitative measures (ie metrics such as the debt-to-equity and price-to-equity ratios), supplementing the analysis with qualitative analysis increases the insight into the company. Using qualitative factors will often give analysts an edge since key factors, such as management, do not show up in quantitative analysis.

Subscribe to UP Quarterly