Equity Factor Investing Glossary
An investment strategy where an asset manager looks to outperform their benchmark by making investment decisions about which assets to buy, sell and hold in their portfolio.
A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a security or a portfolio and compares its risk-adjusted performance to a benchmark index. The excess return, relative to the return of the benchmark index, is the security or portfolio alpha.
Indices that do not adopt or adhere to the standard market cap method of developing an index.
The tendency for investment decisions to be influenced by the judgement or behaviour of the people that are managing the portfolio. This is the ‘human element' that can influence the outcome of an investment strategy that is not completely rules-based.
The market index or return target that the performance of an investment strategy is measured against.
Market beta is essentially the return of an asset class which an investor receives from investing broadly in a given market. A security or a portfolio's beta is a measure of its volatility, or systematic risk, in comparison to the market as a whole.
A beta of one indicates that the security or portfolio price will move in line with the market. A beta of less than one means that the security will be less volatile than the market and a beta of greater than one indicates that the security's price will be more volatile than the market.
A measure of transaction costs which looks at the difference between the quoted prices to buy (bid) and sell (offer) an asset in the market.
Capital Asset Pricing Model (CAPM)
A popular financial model that looks to determine the expected return on a risky asset using the risk-free rate of return (which is typically the return on government bonds), the expected return on the market as a whole, and the sensitivity of the risky asset's return to that of the overall market (otherwise known as the risky asset's ‘beta').
The failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honour the debt.
Expanding a portfolio across a variety of asset types in order to spread risk and limit potential overall losses.
A proprietary measure for earnings quality that predicts how likely a company will deliver positive, recurring earnings and sales growth next year. Companies with stable historical earnings growth that has not been distorted by accounting anomalies (e.g. by inappropriate accruals or extraordinary item) will likely have ‘high earnings sustainability'.
Equally weighted index
A market benchmark that is constructed by allocating across each security or sector in equal proportion.
The risk associated with a changing portfolio value due to large swings in market prices, resulting from unforeseen events.
A set of proprietary criteria to help narrow a respective investment universe and filter out those securities representing the highest unrewarded risk.
Fundamentally weighted index
A market benchmark that is constructed by allocating across securities based on accounting measures like sales, cash flow or book value.
Risk that is specific to an asset or a small group of assets.
A simple, cheap investment technique that mimics the construction and performance of a particular financial market or asset group.
Erosion of potential performance associated with costs incurred through transaction costs and management fees.
The amount of debt used to finance a company's assets. A firm with significantly more debt than equity is considered to be highly leveraged.
The risk stemming from a lack of ability to buy or sell an asset quickly in order to prevent, or minimise, losses.
Market capitalisation (market cap)
The total value of a company's stock, calculated by multiplying the current stock price by the number of shares outstanding.
Market cap-weighted index
Most frequently utilised type of market index whose individual components are weighted according to their market cap, so that larger components carry a larger percentage weighting within the Index.
Trends or patterns that may exist in a given market environment, allowing some securities or asset classes to outperform others. The securities themselves may exhibit price patterns in their trading.
Minimum Variance Index
A market benchmark that is constructed by allocating to securities based on their relative volatility.
An investment strategy that replicates a market index, buying, selling and holding securities based on the rules of the index
An assessment of the value of a security compared to the value of a similar security.
The expected return on an investment that has no risk of financial loss over a given investment period. Typically, this would be the return on highly rated government debt.
The amount an investor can expect to be paid for taking on extra risk.
A financial ratio that measures risk-adjusted performance.
An investment strategy aimed at maximising market beta, while minimising potential performance erosion associated with excessive transaction costs and management fees.
The (undiversifiable) risk inherent to the entire market or entire market segment.
The risk of collapse of an entire financial system or entire market. It refers to the risks imposed by interdependencies in a market, where the failure of a single entity or group of entities can cause a cascading failure, bringing down the entire market.
A form of portfolio risk that relates to the possibility that an investment will move more than the ‘normal distribution' pattern of returns, i.e. three standard deviations from the mean. The ‘fatter' the tail, the greater the probability that such an extreme move will occur.
Expenses incurred when buying or selling securities.
The level of disclosure or information that can be accessed about a particular investment strategy or underlying portfolio holdings.
The rate at which underlying portfolio holdings are changed (bought or sold) over the investment period.
A risk driver that is embedded in the market that adds additional risk (volatility) without necessarily adding additional returns.
The bespoke enhancement given to a product or service before offering this product or service to the end customer.
Stocks that appear to be cheap on the basis of a particular valuation metric (e.g. low multiples of earnings, cash flow or book value), thereby attracting investors who predict a future rise in price of the stock. The trap springs when investors buy into the company at a supposedly low price and the stock never improves.
A statistical measure of the dispersion of returns for a given security, portfolio or market index. Essentially, volatility refers to the amount of uncertainty or risk relating to the size of changes in a security or portfolio value. Commonly, the higher the volatility, the riskier the security or portfolio.
The income return on an investment. This refers to the interest or dividends received from a security, expressed as a percentage based on the investment's cost, its current market value or its face value.
The extra yield offered on an investment, in compensation for the greater risk associated with that investment. For example, liquidity risk and/or default risk.