​Investment​ Management

​Investment Fundamentals














Common Investment Vehicles 

Stocks: share of ownership of a public corporation; also known as equities

Bonds: loan with interest issued by a corporation, municipality, government or other entity

Cash equivalents: short-term investments held in lieu of cash and readily convertible into cash

Fixed income: security that steadily provides a regular amount of money usually in the form of interest or dividends (e.g., bonds preferred stock)

Guaranteed investment contracts (GICs): a deposit arrangement with an insurance company that guarantees both the principal and the interest repayments

Real estate: equity ownership in land, buildings and improvements; returns are generated by rent or appreciation

Mortgages: contracts between a lender and a property owner; also known as trust deeds

Alternative investments: financial products that are not one of the three traditional asset classes (stocks, bonds, cash); examples include derivatives, hedge funds and private equity

Key Investment Principles

Alpha: the amount of investment return than an active investment manager attempts to achieve over a market index

Asset allocation: choosing assets from different asset classes according to a plan's time horizon, risk tolerance, investment objective and policy

Basis point: one percent equals 100 basis points; used to measure very small changes or differences between yields on fixed income securities

Beta: measure of how an investment's price moves in relation to a financial market as a whole; the higher the beta, the higher an asset's risk and the higher the return required

Diversification: mixing a wide variety of assets in an investment portfolio to reduce its risk

Duration: measure of the sensitivity of a bond's price to a change in interest rates; a determination of risk for a bond

Market index: measure that tracks the performance of a specific group of assets to represent a particular market

Modern Portfolio Theory: the belief that a risk-averse investor can use diversification in the creation of an investment portfolio to maximize expected return for a given level of market risk

Price/earnings ratio: the current share price of a stock divided by its current or estimated future earnings per share; a high P/E ratio suggests investors expect higher earnings growth in the future

Return: the money gained or lost on an investment

Risk: the chance that an investment will not achieve a desired result

Time horizon: the amount of time a plan has to achieve its objectives; for pension plans, the investment time horizon is long term, many years; for a health and welfare plan it's typically shorter, in a range of six months to five years

Volatility: measure of changes in the value (price) of an asset or investment portfolio; higher volatility usually indicates higher risk

​Investment Consultants vs Investment Managers 

An investment manager, also called a money manager, manages and invests plan assets according to the objectives and policies of the trust; typically makes quarterly reports to trustees.

An investment consultant, also called an investment monitor, advises and assists trustees in establishing investment objectives and policies, evaluating types of investments, reviewing asset allocation and selecting and monitoring the performance of investment managers

Investment Policies

A written investment policy statement for a benefit plan provides guidance in managing trust assets and direction to the investment managers. It typically includes this type of information:

  • ​Annual meeting schedule for the investment committee
  • Investment objectives
  • Asset allocation
  • Cash flow requirements
  • Rebalancing guidelines
  • Policy prohibitions
  • Investment management structure
  • Performance measures
  • Process for appointing, reviewing and terminating investment managers
  • Voting of proxies

It may also include:

  • ​Background information on the plan
  • Identification of fiduciaries and custodians
  • Lines of authority and delegation

Common Investment Mistakes to Avoid

  • ​Assuming the investment manager that performed the best this year will perform best in the future
  • Not rebalancing the trust's portfolio
  • Basing an investment firm's capabilities on the personality of an individual​