If you are new to investing, you may hear investment experts rattling off foreign terms like “alpha”, “beta” and “gamma” and think: “It’s all Greek to me.”

They aren't spelling out concepts using the phonetic alphabet - although that would be wise!

Investment managers use these Greek letters to describe important concepts. So, if you’re an investment newbie you would benefit from a quick lessons in “investment speak”.

Index

The performance of a market is usually measured by an index made up of the shares in the market.

Alpha

Alpha is the active or excess return that an investment has managed to unlock over and above the performance of a market, index or benchmark. Fund managers who actively choose the shares, bonds and other financial instruments for you are active managers who aim to deliver alpha.

Usually an active manager chooses shares and other instruments in line with an investment strategy and will adapt its choice as conditions in the market change. You pay higher fees for this.

Beta

Beta is generally used to describe the returns the market will deliver if you tracked its investments. The All Share index is used to measure the beta of the JSE.

Passive fund managers, who earn returns for you by tracking a market index, aim to deliver beta to you. You pay lower fees for this.

The investment industry also measures the beta of shares or funds by seeing how closely they track the market and whether their returns are as volatile (up and down) as the market. If a fund invests in shares that outperform the market, its beta increases with the investment risks it takes.

Gamma

Gamma is a term coined by Morningstar to quantify the value of financial planning advice. In a research paper, Morningstar set out to determine the “gamma” of financial advice. It found that people who get good financial advice have a retirement income that is 29% higher than those who do not. Morningstar says this is equal to earning alpha of 1.82% a year.

At a recent Business Day / Financial Mail Investment Dialogues event passive and active fund management experts debated the pros and cons of index tracking funds.

Gryphon is a passive asset manager. Its chief investment officer Reuben Beelders said at the event index-tracking funds “won’t shoot the lights out”, but will continually track performance of the market, following its shorter-term ups and downs, but also its longer-term general upward trend. Active fund managers, on the other hand, may at times achieve returns that are well above or below that which the market delivers.

Investors sometimes confuse two types of passively managed funds, index-tracking funds and smart beta funds.

Index-tracking funds

It’s a fund that seek to replicate the performance of a broad market or sector-specific index.

The index that measures the performance of a market sector, for example the JSE Industrial index, tracks the performance of the shares in the same proportion as the shares listed in that index.

A fund that tracks this kind of index – known as a market capitalisation index – will give you the performance of that market index less the fee that passive managers charge, which is typically much lower than the fee active managers charge.

Smart beta fund 

Some asset managers aim to earn better returns than the market by exposing funds to certain “factors” – for example, by selecting shares in smaller companies or shares that are undervalued relative to what they should be worth.

A smart beta fund follows rules to select shares, bonds or other investments that have certain attributes or factors.

Some “factors” that smart beta managers look for are the momentum factor: stocks with a history of outperforming and are likely to continue to outperform; and the quality factor: companies that are regarded as quality stocks have, for example, low debt, stable earnings, strong corporate governance, and low volatility, as well as ones that have more solid, stable returns over time.

A smart beta fund may track shares that have the attributes of either one factor or a combination of factors. These funds usually cost a bit more than index-tracking funds.

How to choose?

Combining investment strategies is good for diversification, but to work out what is best for you, you must consider the returns you need to earn and time you have to invest. 

If you can’t decide, remember the third investment Greek: gamma. Sound advice should never be underestimated.

Despite a higher cost, you may end up earning more alpha as a result of the gamma return.

Admit it, it feels great to be able to understand that sentence!