Glossary of investments: Get to know important technical terms

Alternative investments are suitable for achieving greater portfolio diversification. In general, this includes everything not belonging to the traditional investment categories, such as equities and bonds. Examples of alternative investments are: private equity, real estate, hedge funds or raw materials. Compared to traditional asset classes, alternative investments are often more complex, differently regulated and less liquid. This means they are to be classified as more demanding and bind invested capital longer. Consequently, a longer investment horizon is usually required. In return, this form of investment is less exposed to interest rate developments and the stock markets fluctuations, the so-called lower correlation.

The abbreviation "BVV2" stands for Ordinance on occupational retirement, survivors' and disability pension plans. The ordinance regulates relevant details such as the minimum interest rate, the conversion rate and investment regulations.
According to these investment regulations, the occupational pension institutions - the pension funds - are responsible for investing the money of their insured persons with an appropriate distribution of risk. They are therefore required to invest in different investment categories, regions and economic sectors in order to spread the risk appropriately. Different legal requirements apply to the individual asset classes with regard to how large their share may be, at most, in relation to the total assets. For example, a maximum of 50 percent of the total assets may be invested in equities, a maximum of 30 percent in real estate, and a maximum of 15 percent in alternative investments.

Cash flow refers to the positive result from the cash flow statement, in which all cash inflows and outflows of a company within a defined period are offset against each other. Ideally, you look at the cash flow over several years in order to compare different periods. The cash flow is also referred to as the cash or payment flow of a company and provides information about its liquidity and earnings. If the cash flow is positive, a company has generated a surplus. It can then use this, for example, to finance investments, pay dividends to shareholders or repay debts. If the cash flow is negative, more money has flowed out of the company than into it, which can indicate a liquidity bottleneck. The cash flow therefore allows conclusions to be drawn about the extent to which a company can finance itself, instead of being dependent on outside capital.

Duration measures how long it takes for an investor to recover the price of a bond through the bond's recurring fixed interest payments. In general, the following applies: The longer the duration of a bond is, the more its price will fall when interest rates rise - and vice versa. This is because when interest rates rise, the fixed interest rate of a bond is less attractive than that of newly issued, higher-interest bonds. So if interest rates rise by 1 percentage point, for example, a bond with an average maturity of five years would probably lose about 5 per cent of its value, as can be seen from the following example:
Someone has a bond of 100, which pays 2 per cent and has five years to go. So after five years his bond will bring him 110. If interest rates rise by 1 per cent, he could buy a bond of 100 with 3 percent interest. This would bring him 115 after five years. If you only look at the interest, it has a minus of five; in relation to the invested capital of 100, that makes 5 percent.

The abbreviation ESG relates to sustainability criteria that are taken into account as part of the investment process. As stated above, ESG stands for Environmental, Social and Governance. In contrast to traditional portfolios, ESG strategies take the aforementioned criteria into account in order to put together their portfolio in a correspondingly sustainable manner. There is no uniform standard for how ESG criteria are defined or weighted, but it is roughly as follows:

• Environment: Environmental factors are about the extent to which an organization pays attention to the protection of natural resources. These include energy consumption, energy use and measures to combat climate change throughout the supply chain.
• Social: Social factors include how an organization engages with society and how it treats people, for example in terms of health and safety at work.
• Governance: This is about responsible corporate governance based on transparency, proven industry standards or control processes.

A fund can be seen as a kind of collection pot. This is because many individual investors pay into the fund and thus become part-owners of the fund's assets on a pro rata basis. A professional fund management company invests this money according to an investment strategy in a variety of individual securities, such as shares, bonds or real estate, for example, in order to spread the risk broadly. For example, there are funds that invest in selected regions (e.g. Asia), specific sectors (e.g. food) or asset classes (e.g. equities). The fund manager constantly monitors the price development of the fund and makes adjustments if necessary. What's more, a distinction is made between open-ended and closed-end funds. With an open-end fund, investors can enter and exit at any time. This is not the case with a closed-end fund.
Income generated from price gains, dividends, interest or similar is distributed to the investors. In the case of a so-called accumulating fund, this is reinvested, which in turn increases the value of the fund units.