Jargon Buster - S

See ‘Equities’ for an explanation of this term.

Shorting is a method of making money when prices fall. It is generally done by selling an asset, say a company share, that the seller does not own. The seller hopes that when the time comes to buy the share back, it will be at a lower price and they can pocket the difference. Normally pension funds invest for the long-term, and do not allow their investment manager to do this as it will generally only work for short-term trades. But in recent years, pension funds and pension funds investment strategies have become increasingly complicated, and some parts of pension funds are occasionally invested in funds which do use this strategy.

See ‘Balanced manager’ for an explanation of this term.

This is simply the process which investment managers use to decide which shares they want to buy in a particular market. So if an investment manager is managing a range of Irish company shares, the ‘stock selection’ is simply their decision to own, say, Bank of Ireland shares, but not to own AIB shares. The ways in which these decisions are made can vary. Some are highly complicated, involving complicated mathematical models and equations, and others are just based on ‘instinct’. It is usually said to be the single most important skill that an investment manager needs.

This is the risk associated with owning shares in any one company. Obviously, if a pension fund’s total investments are in the shares of only 10 companies, on average each holding is worth 10% of the fund, and the ‘stock-specific risk’ of that holding is very high. If anything was to go very wrong for any one company, leading to a sudden and dramatic fall in the share price, the damage to the overall investments would be quite large. Indeed in a worst-case scenario, 10% of the value of the fund could be lost due to an ‘accident’ involving just one company.

But if the pension fund instead invested in, say, the shares of 500 companies, a disaster with one company could only lead to a loss of 0.2% of the fund – a dramatically lower loss than the 10% loss if the fund only invested in 10 different shares. So, the larger the number of companies that the pension fund invests in, the lower the ‘stock specific risk’ to the fund.