Glossary of Terms

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A	[ Top ]

Alpha: A measure of the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the fund has performed better than expected given its beta. Conversely, a negative alpha indicates the fund’s underperformance, given its beta.
Annuity: A regular periodic payment made by an insurance company to a policyholder for a specified period of time.
Asset Allocation: A combination of stocks, bonds, and cash used by investment mangers to achieve investment goals.
Asset/Liability Management: The task of managing funds to accomplish two goals: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.
Average Credit Quality: An average of all the credit quality positions for a fund’s bond holdings as rated by the major credit ratings agencies (i.e. Moody's and S&P). U.S. Government bonds carry the highest credit rating, while bonds issued by speculative or bankrupt companies usually carry the lowest credit ratings. Anything at or below BB is considered a high-yield or "junk" bond.


B	[ Top ]

Balanced Fund: A fund that seeks both income and capital appreciation by investing in a generally fixed combination of stocks and bonds. These funds generally hold a minimum of 25% of their assets in fixed-income securities at all times.
Barbell: A way to structure a bond portfolio using equal proportions of long and short bonds to create a portfolio with the price volatility of an intermediate bond.
Basis Point: One-hundredth of a percentage point. For example, 50 basis points equals 0.50%.
Bellwether Issue: In the secondary market, the bellwether issue is the most recently auctioned Treasury issues for each maturity. Also called on-the-run issue.
Benchmark: An index or combination of indices used to characterize a manager.
Beta: Beta represents the systematic risk of a portfolio and measures its sensitivity to a benchmark. The beta of the market is 1.00. A beta greater than 1.00 indicates the fund will be more sensitive to market movements both upwards and downwards. Likewise, a beta less than 1.00 indicates the fund will be less sensitive to upward and downward market movements.
Bonds: Bonds are debt and are issued for a period of more than one year. The US government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.


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Callable Bond: A bond that can be repaid early, at the issuer’s discretion. A callable bond allows an issuer to refinance debt at a lower rate, should interest rates drop below the coupon rate on the bond. If interest rates have dropped significantly since the date of issue, a callable bond will trade as though its maturity were shortened to the call date or the earliest time at which the bond can be redeemed.
Capital Appreciation: The taxable income generated when a security is sold. The amount of appreciation is measured by subtracting the purchase price from the sale price.
Capital Gains: Taxable income generated only when a security is sold. This figure is calculated by subtracting the purchase price from the sale price. Under IRS regulations, funds must distribute 98% of their capital gains each year to avoid paying taxes on them. Shareholders pay taxes on these distributions, even if the gains are reinvested. Further capital gains can be generated by selling shares in a fund for more than the original purchase price.
Closed-end fund: An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value.
CPI: Consumer Price Index. An economic statistic that measures the price of a representative basket of goods and services. The change in CPI over time measures the rate of price inflation in the economy.
Credit Quality: For fixed-income investments, credit quality is an estimate of the likelihood of the bond issuer to default either on interest or principal payments. Independent rating agencies, most notably Standard & Poor’s or Moody’s, issue quality ratings as a service to investors. Morningstar classifies bond mutual funds by their quality based on the average S&P rating for all holdings in the portfolio as follows: high quality (AA or higher), medium quality (A to BBB), and low quality (BB or lower). Investors demand a higher yield on bonds with lower credit quality as compensation for the greater risk of default. The difference in yield compared to U.S. Treasury securities is referred to as “credit spread”.
Cyclical Stock: Stock that tends to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles, and paper.


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Deferred Load: A back-end sales charge imposed when investors redeem shares. The percentage charged generally declines the longer shares are held. This charge, often coupled with 12b-1 fees as an alternative to a traditional front-end load, diminishes over time.
Defined Benefit Plan: A pension plan obliging the sponsor to make specified dollar payments to qualifying employees.
Defined Contribution Plan: A pension plan whose sponsor makes specified contributions into the plan on behalf of qualifying participants
Deterministic Models: Liability-matching models that assume that the liability payments and the asset cash flows are known with certainty.
Discount Rate: The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds.
Dividends: The distribution of earnings to stockholders by a company. Dividends are usually paid out from current earnings.
Dollar Cost Average: Method of purchasing securities by investing a fixed amount of money at set intervals. The investor buys more shares when the price is low and fewer shares when the price is high, thus reducing the overall cost.
Dow Jones Composite: Also known as the 65 Stock Average, consists of DJ Industrial Average, the DJ Transportation Average, and the Dow Jones Utility Average. The composite, like the other Dow Jones Indices, is a price-weighted index. Price-weighted indices are derived by adding up the prices of the components and dividing this sum by a stock split-adjusted divisor. Dividends are reinvested to reflect the actual performance of the underlying securities.
Duration: This statistic is commonly used as a risk measure for fixed income instruments (e.g., bonds). It measures the amount of time required for the average dollar to be returned to the investor, through principal, coupon, or other payments. More importantly, it indicates the percentage change in the price of a bond or other fixed income instrument in response to a one percentage point change in market interest rates. Bonds are commonly categorized into risk categories as follows: short term (less than 3.5 years), intermediate term (3.5 - 6.0 years), and long term (over 6 years). A bond’s duration will almost always be shorter than its maturity, with the exception of zero-coupon bonds, for which maturity and duration are equal.


E	[ Top ]

Earnings Per Share (EPS): A company's profit divided by its number of outstanding shares. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term. The one-year (historical) EPS growth rate is calculated as the percentage change in earnings per share. The prospective EPS growth rate is calculated as the percentage change in this year's earnings and the consensus forecast earnings for next year.
Earnings Momentum: An increase in the earnings per share growth rate from one reporting period to the next.
Effective Duration: The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price-taking into account that expected cash flows will change as interest rates change due to the embedded option.
Employee Retirement Income Security Act (ERISA): The 1974 law that regulates the operation of private pensions and benefit plans.
Endowment: Gift of money or property to a specified institution for a specified purpose.
Enhanced-Index Fund: A fund that attempts to match an index’s performance. Unlike an index fund, however, Enhanced-Index funds attempt to better the index by either adding value or reducing volatility through selective stock-picking.
Excess Return: The difference between the returns of two portfolios. Usually excess return is the difference between a manager's return and the return of a benchmark for that manager.
Expense Ratio: The percentage of fund assets paid for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund’s NAV. Sales charges are not included in the expense ratio.


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Federal Funds Rate: The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.
Fiduciary: One who must act for the benefit of another party.
Front-end Load: The initial, or front-end, sales charge is a one-time deduction from an investment made into the fund. The amount is generally relative to the amount of the investment, so that larger investments incur smaller rates of charge. The sales charge serves as a commission for the broker who sold the fund.
Fund of Funds: A fund that specializes in buying shares in other mutual funds rather than individual securities. Quite often this type of fund is not discernible from its name alone, but rather through prospectus wording (i.e.: the fund’s charter).


G	[ Top ]

Geometric Mean Return: A compounded and annualized rate of return.
Growth Stocks: Investors employing a growth investment style buy stocks of companies the investors anticipate will show strong earnings momentum. Growth stocks are often characterized by high valuation ratios (e.g., price-to-earnings ratios). See also: value stocks
Gross Domestic Product (GDP): An economic statistic that measures the total output of the economy, which is the financial value of all finished goods and services purchased within the economy. The growth or decline of GDP, measured as a percentage change and adjusted for inflation, is used by economists a key indicator of economic health. Falling GDP indicates recessionary conditions, while excessive growth may trigger price inflation.
Guaranteed Investment Contract (GIC): A pure investment product in which a life company agrees, for a single premium, to pay at a maturity date the principal amount of a predetermined annual crediting (interest) rate over the life of the investment.


H	[ Top ]

Hedging: A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. A hedge can help lock in profits. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss.
High-Yield Bond: A bond with a speculative credit rating of BB (S&P) or Ba (Moody's) or lower. Junk or high-yield bonds offer investors higher yields than bonds of financially sound companies. Two agencies, Standard & Poors and Moody's Investor Services, provide the rating systems for companies' credit.


I	[ Top ]

Immunization: A bond portfolio strategy whose goal is to eliminate the portfolio's risk, in case of a general change in the rate of interest, through the use of duration.
Index: Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stock, bond, and some commodities markets, in terms of market prices and weighting of companies the index.
Inflation: The rate at which the general level of prices for goods and services is rising.
Information Ratio: A measure of the consistency of excess return. This value is determined by taking the annualized excess return over a benchmark (style benchmark by default) and dividing it by the standard deviation of excess return.
Investment Objective: Indicates a particular fund’s investment goals, based on the wording in a fund's prospectus.


J	[ Top ]

Junk Bond: See "High-Yield Bond."


L	[ Top ]

Leading Economic Indicators: Economic series that tend to rise or fall in advance of the rest of the economy.
Lehman Brothers Aggregate Bond Index: A benchmark index made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million.
Liability: A financial obligation.
Liability Funding Strategies: Investment strategies that select assets so that cash flows will equal or exceed the client's obligations.


M	[ Top ]

Market Capitalization: A means of categorizing funds based on the relative size (stock market capitalization) of the underlying companies they invest in.
Market Value: The current value of the security. For stocks, the market value = security price x the number of shares held. For bonds, the market value = bond price x the number of bonds held.
Money Purchase Plan: A defined benefit contribution plan in which the participant contributes some part and the firm contributes at the same or a different rate. Also called an individual account plan.
MSCI Indices: Morgan Stanley Capital International Inc. (MSCI) maintains a set of indices commonly used by institutional investors as benchmarks for international stock markets. The most commonly cited index is the Europe, Australasia, Far East (EAFE) Index, which covers developed markets within the indicated regions. The MSCI EAFE is typically used as a benchmark for broadly diversified “international” or “foreign stock” funds and accounts. The MSCI World Index covers all developed markets in the world including the United States, and is typically used as a benchmark for broadly diversified “global” or “world” stock funds and accounts. MSCI maintains many specialized indices covering other developed regions, emerging markets, and specific countries.
Mutual fund: Mutual funds are pools of money that are managed by an investment company. They offer investors a variety of investment objectives, depending on the fund and its investment mandate. Some funds, for example, seek to generate income on a regular basis while others seek capital preservation and still others seek to invest in companies that are growing at a rapid pace. Funds can impose a sales charge, or load, on investors when they buy or sell shares. Many funds are no-load and impose no sales charges. Mutual funds are investment companies regulated by the Investment Company Act of 1940.


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NASD - National Association of Securities Dealers: A self-regulatory organization for the securities industry with jurisdiction over certain broker-dealers. The NASD enforces broker-dealers’ compliance with securities regulations, including the requirement that they maintain sufficient levels of net operating capital. It also conducts market surveillance of the over-the-counter (OTC) securities market.
NAV - Net asset value: The share price of an open-end mutual fund. Funds compute this value by dividing the total net assets by the total number of shares.
Net Assets: The month-end net assets of the mutual fund, recorded in millions of dollars. Net-asset figures are useful in gauging a fund’s capitalization size, agility, and popularity.
No-load mutual fund: An open-end investment company whose shares are sold without a sales charge. There can be other distribution charges such as 12B-1 fees. A true no-load fund has neither a sales charge nor a distribution fee.
Nonqualified plan: A retirement plan that does not meet the IRS requirements for favorable tax treatment.


O	[ Top ]

OTC (over the counter): A name for a security that is not listed on an exchange. The OTC is the major trading market for all US bonds, as well as many small- and large-capitalization stocks. Whereas non-OTC stocks trade on the floor of actual stock exchanges, OTC issues are traded via telephone and computer networks connecting dealers in stocks and bonds. The dealer may or may not be a member of a securities exchange, but he or she must be a member of the NASD.
Offshore fund: A mutual fund whose headquarters is based outside the United States.
Open-end fund: Mutual fund that continually creates new shares on demand. Mutual fund shareholders buy the funds at net asset value and may redeem them at any time at prevailing market prices.


P	[ Top ]

Passive Management: A strategy that relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities.
Pension Benefit Guaranty Corporation (PBGC): A federal agency that insures the vested benefits of pension plan participants, established through ERISA legislation.
Present Value: The value of a future payment, receipt, or cash flow expressed in today’s dollars. The present value of an amount is always less than the amount to be received in the future.
Price/Book Ratio: The weighted average of the price/book ratios of all the stocks in a fund’s portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value.
Price/Cashflow Ratio: This represents the weighted average of the price/cash-flow ratios of the stocks in a fund's portfolio. Price/cash-flow represents the amount an investor is willing to pay for a dollar generated from a particular company's operations. Price/cash-flow shows the ability of a business to generate cash and acts as a gauge of liquidity and solvency.
Price/Earnings Ratio: The weighted average of the price/earnings ratios of the stocks in a fund’s portfolio. The P/E ratio of a stock is calculated by dividing the current price of the stock by its trailing 12 months’ earnings per share.
Prospectus: A fund's formal written statement, generally issued on an annual basis. In this statement the fund sets forth its proposed purposes and goals, and other facts (e.g.: history and investment objective) that an investor should know in order to make an informed decision.
Proxy: Authorization, whether written or electronic, that shareholders' votes may be cast by others.


Q	[ Top ]

Qualified Retirement Plan: A retirement plan established by employers for their employees that meets the requirements of Internal Revenue Code Section 401 or 403 and is eligible for special tax considerations. Employers can deduct plan contributions made on behalf of eligible employees on the business's tax return as business expenses. Plan earnings are not taxed to the employee until withdrawn.


R	[ Top ]

R-squared: Reflects the percentage of a fund’s price movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all movements of a fund can be explained by movements in the index. A low R-squared indicates that very few of the fund’s movements can be explained by movements in its benchmark index.
Risk: Degree of uncertainty of return on an asset. Often defined as the standard deviation of the return on total investment.
Russell Indices: The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Subsets of this index include the Russell 2000® Index, which measures the performance of the 2,000 smallest companies, and the Russell 1000® Index, which measures the performance of the 1,000 largest companies in the Russell 3000. Each index has a Growth and Value sub-index; stocks are classified by style based on price-to-book ratios and forecasted growth rates.


S	[ Top ]

Securities & Exchange Commission (SEC): A federal agency that regulates the US financial markets. The SEC also oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractice in the securities markets.
Semi - Standard Deviation: The semi-standard deviation is a characterization of the downside risk of a distribution. Essentially it represents the standard deviation of all returns falling below the mean. The semi-variance of the returns below the mean (to the left of the distribution) is calculated. The semi-standard deviation is the square root of the semi-variance. The semi-variance (standard deviation) is always lower than the total variance (standard deviation) of the distribution.
Sharpe Ratio: A risk-adjusted performance measure developed by William Sharpe. It is calculated by taking the annualized return of a mutual fund that is in excess of the risk-free rate and dividing it by the standard deviation of returns. The higher the Sharpe Ratio, the better the fund’s historical risk-adjusted performance
Standard Deviation: A statistical measure of volatility, indicates the 'risk' associated with a return series.
Standard & Poor's Indices: The Standard & Poor’s 500® is an unmanaged index of 500 stocks generally representative of large companies (as measured by market capitalization). The Standard & Poor’s Midcap 400® and Smallcap 600® are unmanaged indices generally representative of mid-sized and small companies respectively.


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12B-1 fees: The percent of a mutual fund's assets used to defray marketing and distribution expenses. The amount of the fee is stated in the fund's prospectus. A true no load fund has neither a sales charge nor a 12b-1 fee.
Tactical Asset Allocation: Portfolio strategy that allows active departures from the normal asset mix according to specified objective measures of value. Often called active management.
Tracking error: The standard deviation of the difference of two return series.
Treynor Ratio: The Treynor Ratio is a measure of performance per unit of market risk. It is the portfolio's excess return over the risk-free rate divided by the portfolio's beta to the selected benchmark. Also known as the Reward to Volatility Ratio.
T-Statistic: The T-Statistic is related to the information ratio and tells how significant the information ratio is. It takes into account the time over which the information ratio was achieved. Generally, a T-Stat of 2.0 or greater is considered significant.
Turnover Ratio: A measure of the fund’s trading activity. The percentage loosely represents the percentage of the portfolio’s holdings that have changed over the past year.


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Unsystematic Risk: Also called diversifiable risk or residual risk. Risk that is unique to a company that can be eliminated through diversification.


V	[ Top ]

Value Added: Value added is the risk adjusted return generated by an investment strategy: the return of the investment strategy minus the return of the benchmark.
Value Stocks: Investors employing a value investment style buy stocks of companies they believe are under-priced based on their fundamental ability to generate earnings, in anticipation that the price performance of the stock will reverse. Value stocks are often characterized by low valuation ratios (e.g., price-to-earnings ratios). See also: growth stocks.
Variable annuities: Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio.