An approach to money management where the manager seeks to beat a predefined benchmark. Typically, higher fees are associated with this type of management, as you are paying a money manager for its ability to "add value" relative to passively investing in the benchmark. These managers typically take on greater "benchmark risk" (i.e. a greater likelihood of deviating from the benchmark).
Actuarial Accrued Liability
The present value of the estimated cost of benefits payable to active and retired members covering service rendered prior to the date of an actuarial valuation as determined by use of assumptions about the future and an actuarial cost method.
Assumptions which are made for the purposes of determining the contribution which must be made in order to fund the future liabilities. Actuarial assumptions are generally grouped into two categories: demographic (i.e. life expectancy, rate of retirement, number of years worked, etc.) and economic (inflation rate, the return on investments, etc.).
These are securities, usually very liquid, issued by either federally related institutions (arms of the federal government) or by government sponsored enterprises (GSEs) which are typically privately owned, but have an important public purpose and strong ties to the U.S. government. The Agency market is primarily comprised of GSEs which are typically not backed by the full faith and credit of the US government, and thus investors purchasing GSEs are exposed to credit risk, albeit considered minimal due to the agencies' importance and relationship to the government.
This is a measure used to determine a manager's contribution to performance based upon security selection. On a technical level, it is the excess return of a portfolio above the portfolio's benchmark adjusted for risk. A positive alpha indicates that a manager added value relative to the risk that it took on. A negative alpha indicates that the manager lost money relative to the risk that it took on.
As it relates to PSRS/PEERS, this asset class includes four distinct strategies referred to as "sub-asset classes" which include Private Real Estate, Private Equity, Private Credit and Hedged Assets.
The formal financial statement issued yearly by a corporation. The annual report shows assets, liabilities, revenues, expenses and earnings - how the company stood at the close of the business year, how it fared profit-wise during the year, as well as other information of interest to shareowners.
A technique employed to take advantage of differences in price. If, for example, ABC stock can be bought in New York for $10 a share and sold in London at $10.50, an arbitrageur may simultaneously purchase ABC stock here and sell the same amount in London, making a profit of $.50 a share, less expenses. Arbitrage may also involve the purchase of rights to subscribe to a security, or the purchase of a convertible security - and the sale at or about the same time of the security obtainable through exercise of the rights or of the security obtainable through conversion.
Everything a corporation owns or that is due to it: cash, investments, money due it, materials and inventories, which are called current assets; buildings and machinery, which are known as fixed assets; and patents and goodwill, called intangible assets.
Asset Allocation Decision
Choosing among broad asset classes such as equities, fixed-income securities and real estate.
Asset-Backed Securities (ABS)
These securities are backed by over-collateralized liquid assets such as car loans and credit card receivables, to illustrate some examples of the types of underlying collateral. ABS typically have short-to-intermediate maturities and are usually very liquid.
A group of investments that share similar characteristics. Types of asset classes include stocks, bonds and various alternative investments such as private equity and real estate.
Average Annual Total Return
The average annual profit or loss realized by an investment at the end of a specified calendar period, stated as the percentage gained or lost per dollar invested.
A condensed financial statement showing the nature and amount of a company's assets, liabilities and capital on a given date. In dollar amounts, the balance sheet shows what the company owned, what it owed and the ownership interest in the company of its stockholders.
A unit of measurement equal to 1/100th of one percent. For example, 0.53% is equal to 53 basis points and 1.00% is equal to 100 basis points.
A declining market.
An unmanaged group of securities whose overall performance is used as a standard to measure investment performance.
The present or potential recipient of a benefit.
This is a measure used to determine a portfolio's sensitivity to movements in a particular market or asset class. In technical terms, it is the expected percentage change in return for a portfolio based upon a 1% change in the market or asset class. For example, if the S&P 500 is up 1% for the month and a portfolio has a beta of 1.2, you would expect the portfolio to be up 1.2% (or 20% more than the market). In contrast, if a portfolio has a beta of .8, this indicates that if the market is up 1% for the month, this portfolio will be up .8% (or lagging 20% relative to the market). Essentially, beta helps to measure a portfolio's risk (volatility) relative to the market or asset class it is compared to.
A company known nationally for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends.
Basically an IOU or promissory note of a corporation, usually issued in multiples of $1,000 or $5,000, although $100 and $500 denominations are not unknown. A bond is evidence of a debt on which the issuing company usually promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date. In every case a bond represents debt - its holder is a creditor of the corporation and not a part owner, as is the shareholder.
An agent who handles orders to buy and sell securities, commodities or other property. A commission is charged for this service.
Payment for administrative costs incurred in trading securities; the cost of execution.
An advancing market.
Reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions and not paid out in actual dollars and cents.
Chartered Financial Analyst (CFA)
An investment professional that has met competency standards in economics, securities valuation, portfolio management, and financial accounting as determined by the CFA Institute.
Securities or other property pledged by a borrower to secure repayment of a loan.
Debt instruments issued by companies to meet short-term financing needs.
A pooling of funds from multiple investors, managed as one account. The client owns units in the pool; similar to a mutual fund.
The broker's basic fee for purchasing or selling securities or property as an agent.
Unprocessed goods such as grains, metals, and minerals traded in large amounts on a commodities exchange.
Securities that represent an ownership interest in a corporation. If the company has also issued preferred stock, both common and preferred have ownership rights. Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation. The terms 'common stock' and 'capital stock' are often used interchangeably when the company has no preferred stock.
The simultaneous change in value of two numerically valued random variables.
A measure that determines the degree to which two investment's movements are related. If two investments have perfect positive correlation (+1), you would expect them to move in lock-step with one another. If two investments have perfect negative correlation (-1) you would expect them to move in opposite directions of one another. Between perfect positive and perfect negative (+1 or -1) you have a scaled relationship between the two investments. A correlation of zero (0) implies no relationship between the movements of the two investments.
Those assets of a company that are reasonably expected to be realized in cash, sold or consumed within one year. These include cash, U.S. Government bonds, receivables and money due usually within one year, as well as inventories. Current liabilities – Money owed and payable by a company, usually within one year.
A numerical identification supplied by the Committee on Uniform Securities Identification Procedures for each security approved for trading in the United States. Most brokers and securities firms use this number to identify securities. Custodian – Either (a) a bank, agent, trust company, or other organization responsible for safeguarding financial assets or (b) the individual who oversees the mutual fund asset of a minor's custodial account.
Defined Benefit Plan
PSRS/PEERS administers a defined benefit retirement plan. Benefits are based on a set formula using years of credit, age at retirement, and highest average salary for a three-year period.
Defined Contribution Plan
A type of savings plan that allows participants to make pre-tax contributions that accumulate tax-free. Contributions, plus any earnings, are not subject to state or federal taxes until withdrawn, in most cases after retirement. The amount paid is determined by the amount of contributions made and the rate of return on the investment chosen.
A financial instrument whose value and characteristics are derived from the performance of some underlying investment, such as a stock, bond, commodity, or currency. Derivatives are often used to help large investors manage their risks and gain exposure to various investments at a relatively low cost compared to holding the underlying asset. Examples of derivatives include futures and options contracts.
The amount by which a preferred stock or bond may sell below its par value. Also used as a verb to mean "takes into account" as the price of the stock has discounted the expected dividend cut.
An account in which the customer gives the broker or someone else discretion to buy and sell securities or commodities, including selection, timing, amount, and price to be paid or received.
Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.
The payment designated by a corporate board of directors to be distributed pro rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortunes of the company and the amount of cash on hand and may be omitted if business is poor or the directors decide to withhold earnings to invest in plant and equipment. Sometimes a company will pay a dividend out of past earnings even if it is not currently operating at a profit.
A system of buying securities at regular intervals with a fixed dollar amount. Under this system, investors buy by the dollars' worth rather than by the number of shares. If each investment is of the same number of dollars, payments buy more shares when the price is low and fewer when it rises. Thus, temporary downswings in price benefit investors if they continue periodic purchases in both good and bad times, and the price at which the shares are sold is more than their average cost. Dollar-cost-averaging does not assure a profit and does not protect against loss in declining markets. Since dollar-cost-averaging involves continuous investment in securities regardless of fluctuating price levels of such securities, investors should consider their financial ability to continue purchases through periods of low price levels.
The process of investigating the details of potential and ongoing investments and managers by investors. The details include examination of the operations, management and verification of the material facts surrounding the investment.
This is a measure that reflects the change in the value of a fixed income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a 3-year duration means the bond will decrease in value by 3% if interest rates rise 1% and increase in value by 3% if interest rates fall 1%. Duration is used as a measure of the volatility of a bond. Generally, the higher the duration (the longer an investor needs to wait for the bulk of the payments), the more its price will drop as interest rates go up. Of course, with the added risk come greater expected returns. If an investor expects interest rates to fall during the course of time the bond is held, a bond with a long duration would be appealing because the bond's price would increase more than comparable bonds with shorter durations.
A statement, also called an income statement, issued by a company showing its earnings or losses over a given period.
The earnings report lists the income earned, expenses and the net result.
This is the line on the risk/return graph which reflects all of the "efficient portfolios" one can invest in, given the investment choices available. An efficient portfolio is a portfolio that provides the greatest expected return for a given level of risk, or the lowest risk for a given expected return.
Electronic Crossing Network
An increasingly popular and cost-effective means of trading securities where issues are traded by computer either intra-day or overnight. Reduces or eliminates market impact of trading and brokerage commissions.
Emerging Markets Equity
Emerging Markets Equity is a sub-asset class consisting of equity investments in companies in countries where the per capita income is below a predetermined level. Examples of emerging market countries include India, Brazil, South Africa, Mexico, Russia, Malaysia, Turkey, Poland, South Korea, Chile, and China to name a few. Emerging Markets Equity seeks to provide an opportunity for long-term capital appreciation in excess of inflation. This sub-asset class invests in countries where higher growth rates are expected, and thus one would expect higher returns. The emerging markets allocation provides another level of diversification for the total portfolio. Experience has shown that the emerging markets can be very volatile; however, as a part of the total portfolio, it can serve as an additional diversifier, reducing risk for the entire portfolio.
The ownership interest of common and preferred stockholders in a company.
Claims held by the residual owners of a firm. May also be referred to as common stock.
Fair Market Value
The amount the Systems could reasonably expect to receive in a current investment sale between a willing buyer and a willing seller (an orderly transaction) – that is, other than in a forced or liquidation sale.
One who can exercise discretionary authority or can control important aspects of a pension plan's management.
A corporation's accounting year. Due to the nature of their particular business, some companies do not use the calendar year for their bookkeeping. A typical example is the department store that finds December 31 too early a date to close its books after the Christmas rush. For that reason many stores wind up their accounting year January 31. Their fiscal year, therefore, runs from February 1 of one year through January 31 of the next. The fiscal year of other companies may run from July 1 through the following June 30. Most companies, though, operate on a calendar year basis.
Fixed Income Investment
A security issued by a borrower that obligates the issuer to make specified payments to the holder over a specific period. May also be referred to as "debt" or "bonds".
Analysis of industries and companies based on such factors as sales, assets, earnings, products or services, markets and management. As applied to the economy, fundamental research includes consideration of gross national product, interest rates, unemployment, inventories, savings, etc.
This number reflects the percentage of total liabilities that the System has already funded based upon the actuarial value of the assets. For example, if the System has a funded ratio of 96%, it implies that the System could pay 96 cents of every $1 owed to beneficiaries at that point in time.
Fund of Funds (FoF)
A "fund of funds" is an investment fund that uses an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment. There are different types of "fund of funds", each investing in a different type of collective investment scheme (typically one type per FoF), e.g. mutual fund FoF, hedge fund FoF or private equity FoF.
A standardized, transferable contract that trades on an organized exchange that requires delivery of a specified investment (stock index, stock, bond, currency) at a specified price at a predetermined date. Essentially, this allows one to replicate the performance of an investment without holding the underlying investment (i.e., you can obtain the return of the S&P 500 by owning an S&P 500 futures contract and you don't have to own all 500 stocks in the S&P 500 Index).
Obligations of the U.S. Government, regarded as the highest-grade securities issues.
Stock of a company with a record of growth in earnings at a relatively rapid rate.
A fund, usually used by institutions and wealthy individuals, which is allowed to use strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish their investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits
High Yield Bonds
This sub-asset class consists of investments in bonds issued by companies with below investment grade credit quality. High yield bonds provide high current income to the portfolio, while providing opportunities for capital appreciation when purchased at opportune times. This allocation is viewed as a tactical one, in that appropriateness of an allocation will be dependent upon the valuation of these investments and where we are in the economic cycle. Generally, we would expect allocations to this sub-asset class to increase at the tail-end of an economic recession and decrease as the economy recovers. Credit quality of these securities ranges from BB to CCC and are in non-default status. Investments in this portfolio may include both U.S. and non-U.S. issuers.
An aggregate value produced by combining several stocks or other investment vehicles together and expressing their total values against a base value from a specific date. It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments. Two of the primary criteria of an index are that it is investable and transparent. The difference between an index fund's performance and the index is called tracking error.
This is a measure used to determine how effectively a manager is able to add excess return above a benchmark (alpha) relative to the risk (tracking error) they have taken above the risk of their benchmark. The higher the information ratio the better the risk adjusted return of the manager has been.
An organization whose primary purpose is to invest its own assets or those held in trust by it for others. Includes pension funds, investment companies, insurance companies, universities and banks.
International Developed Equity
Investment in this sub-asset class includes investing in non-U.S. based companies that are domiciled in countries considered to be developed, as opposed to developing, based on per capita income levels. This sub-asset class provides long-term capital appreciation in excess of inflation. International equity may be diversified across portfolios of varying size, investment style, and exposure to opportunities in a variety of developed countries. The international developed equity portfolios provide an element of diversification relative to the domestic equity portfolios. Non-dollar currency exposure is another aspect of investing in this area that will impact performance and volatility of the asset class over the short-term, however, over the long-term, we would expect no additional return from the currency exposure.
An individual, or firm, who provides investment advice for a fixed fee, a fee based upon a percentage of assets, or a fee derived from brokerage commissions. Such advice generally includes portfolio constraints analysis, performance objectives setting, asset allocation counsel and investment manager evaluation, selection and monitoring services. It may, or may not, include performance measurement services.
Investment-grade Corporate Securities
These are securities issued by corporations that carry an investment grade credit quality rating ranging from AAA to BBB. The degree of credit quality associated with these bonds is lower than that of Agencies but above that of high-yield bonds. Corporations can be U.S. or International. Any non-dollar International holdings would be largely hedged back to the U.S. dollar. Liquidity characteristics of corporate securities can vary greatly—they are clearly less liquid than Agencies and the most common types of Mortgage-Backed Securities.
The curve realized by plotting the returns generated by a private asset fund (private equity, private real estate and private credit) against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first draw-down does not produce an equivalent book value. As a result, a private asset fund will initially show a negative return. When the first realizations are made, the fund returns start to rise quite steeply. After about three to five years, the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early-stage and expansion funds.
Large Capitalization Growth Stocks
These are stocks whose market capitalization is in excess of $5 billion according to the Morningstar database. In addition, these stocks possess the characteristics of growth companies, which in technical terms means that their price-to-earnings ratio is greater than the market average. It is expected that these stocks have the potential to increase earnings per share at a faster rate than the average stock within the market.
Large Capitalization Value Stocks
These are stocks whose market capitalization is in excess of $5 billion according to the Morningstar database. In addition, these stocks possess the characteristics of value companies, which in technical terms means that their price-to-earnings ratio is below the market average. These stocks are typically associated with mature companies that are expected to pay out a larger portion of their income in the form of dividends than their growth counterparts as opportunities to reinvest this income back into the company at above average growth rates are limited.
The practice of borrowing funds in order to purchase additional investments/assets.
All the claims against a corporation. Liabilities include accounts, wages and salaries payable; dividends declared payable; accrued taxes payable; and fixed or long-term liabilities, such as mortgage bonds, debentures and bank loans.
The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders.
The ability of the market in a particular security to absorb a reasonable amount of buying or selling at reasonable price changes. Liquidity is one of the most important characteristics of a good market.
Signifies ownership of securities. "I am long 100 U.S. Steel" means the speaker owns 100 shares.
This is a measure of the size of a corporation. It is simply the price of a company's stock multiplied by the number of shares outstanding of that particular stock.
The last reported price at which the stock or bond sold, or the current quote.
Revaluation of securities to fair market value.
The date on which a loan or bond comes due and is to be paid off.
The mean return for an asset class is the average return for the group of observations.
This is the middle return in a universe of returns. It is NOT the average return.
PSRS/PEERS eliglible particpant (active, inactive or termed).
Mortgage-Backed Securities (MBS)
These are highly liquid instruments that are backed by both the issuer's credit worthiness as well as the underlying mortgage collateral (primarily residential but some commercial). Agencies, most notably GNMA, FNMA and Freddie Mac, are the primary issuers of MBS with some issuance coming from private mortgage originators and banking institutions. The primary risk associated with MBS is the prepayment risk associated with the underlying mortgage collateral (long-term investors receive their investment back prematurely due to refinancing activity).
MSCI ACWI Free ex U.S. Index
A broad market capitalization-weighted index covering all emerging and developed world equity markets, except for the U.S.
A bond issued by a state or a political subdivision, such as county, city, town or village. The term also designates bonds issued by state agencies and authorities. In general, interest paid on municipal bonds is exempt from federal income taxes and state and local taxes within the state of issue. However, interest may be subject to the alternative minimum tax (AMT).
An automated information network that provides brokers and dealers with price quotations on securities traded over-the-counter. NASDAQ is an acronym for National Association of Securities Dealers Automated Quotations.
Net asset value (NAV)
Usually used in connection with investment companies to mean net asset value per share. An investment company computes its assets daily, or even twice daily, by totaling the market value of all securities owned. All liabilities are deducted, and the balance is divided by the number of shares outstanding. The resulting figure is the net asset value per share.
New York Stock Exchange (NYSE)
The largest organized securities market in the United States, founded in 1792. The Exchange itself does not buy, sell, own or set the prices of securities traded there. The prices are determined by public supply and demand. The Exchange is operated by NYSE Euronet a subisidary of Intercontinental Exchange (ICE).
This is the total return of an investment before taking into account the impact of inflation.
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time.
In the case of a common share, par means a dollar amount assigned to the share by the company's charter. Par value may also be used to compute the dollar amount of common shares on the balance sheet. Par value has little relationship to the market value of common stock. Many companies issue no-par stock but give a stated per share value on the balance sheet. In the case of preferred stock, it signifies the dollar value upon which dividends are figured. With bonds, par value is the face amount, usually $1,000.
An approach to money management where a manager seeks to replicate the performance of a predefined benchmark. Typically, lower management fees are associated with passive management relative to active management as there is no expectation for alpha in passive strategies.
Holdings of securities by an individual or institution. A portfolio may contain bonds, preferred stocks, common stocks and other securities.
A class of stock with a claim on the company's earnings before payment may be made on the common stock and usually entitled to priority over common stock if the company liquidates. Usually entitled to dividends at a specified rate - when declared by the board of directors and before payment of a dividend on the common stock - depending upon the terms of the issue.
The amount by which a bond or preferred stock may sell above its par value. May refer, also, to redemption price of a bond or preferred stock if it is higher than face value.
A popular way to compare stocks selling at various price levels. The P/E ratio is the price of a share of stock divided by earnings per share for a 12-month period. For example, a stock selling for $50 a share and earning $5 a share is said to be selling at a price-to-earnings ratio of 10.
The lowest interest rate charged by commercial banks to their most credit-worthy customers; other interest rates, such as personal, automobile, commercial and financing loans are often pegged to the prime.
This sub-asset class invests in the equity of privately held-companies. The role of this sub-asset class is to provide high real returns over long periods of time. The private equity allocation will be comprised of opportunities both within the U.S. and internationally. Specific types of strategies will include venture capital, buyout, and opportunistic/special situations investing.
Issuance of debt or equity directly to an investor or investors.
Written authorization given by a shareholder to someone else to represent him or her and vote his or her shares at a shareholders meeting.
Prudent Person Rule
Act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims.
This is an asset class consisting of publicly owned stock or other securities representing an ownership interest. This asset class includes domestic, hedged, developed international and emerging market equity.
This is an asset class consisting of various types of debt instruments including those issued by the U.S. Treasury, its agencies and corporations. Also included are securitized mortgages, asset-backed securities and dollar denominated debt issued by foreign nations.
A brisk rise following a decline in the general price level of the market, or in an individual stock. Rebalancing – Realigning the proportions of assets in a portfolio as needed.
Real Estate Investment Trust (REIT)
A form of corporate organizational structure specifically allowed for companies whose assets are made up primarily of real estate. REITs are required to pay out 90% of their net income to investors in the form of a dividend. Real estate primarily serves as a hedge against unanticipated general price inflation and may also provide a significant amount of income due to the nature of real estate in providing revenues from rental properties.
The return of a portfolio or investment after accounting for the effects of inflation.
Required Rate of Return
This is the real rate of return that the portfolio must generate in order to fund the liabilities per the actuarial assumptions being made. The real rate of return is the rate by which the long-term total returns exceeds the long-term inflation rate.
The uncertainty of outcome or the likelihood of a loss.
This is the return one would expect to earn on a "risk-free" investment. To an individual, the risk-free rate is normally defined by the return on a 3-month U.S. Treasury Bill; however, to a pension plan like PSRS/PEERS, its risk-free rate could be considered to be the asset that most highly correlates with its liabilities. Many academics have argued that this asset may very well be a Treasury Inflation Protected Security of very long maturity.
This is a return measure utilized to compare the return of two portfolios with different levels of risk. By "equalizing" the risk of both investments, you can compare the returns for an "apples-to-apples" comparison. The Sharpe Ratio is a common measure for obtaining risk-adjusted return comparisons.
In the aggregate, investors who take risk expect to be compensated for that risk with higher returns. The expected risk premium on an asset is the amount which the asset is expected to outperform to compensate for the additional risk. As an example - one should expect bonds to outperform cash because they subject the investor to inflation risk and in some cases credit risk and prepayment risk that an investor in a short-term Treasury Bill does not incur. If cash paid a higher return than bonds over long periods of time and cash had less risk than bonds, no one would invest in bonds because they would not be being compensated for the risks they were bearing. Thus, over very long periods of time one would expect stocks to earn a risk premium over bonds and bonds to earn a risk premium over cash. Think of a risk premium as a form of hazard pay for your investments. Just as employees who work relatively dangerous jobs receive hazard pay as compensation for the risks they undertake, risky investments must provide an investor with the potential for larger returns to warrant the risks of the investment.
Russell 1000 Growth Index
Contains those Russell 1000 Index securities with a greater-than-average growth orientation. These companies generally tend to have higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth values than the value universe.
Russell 1000 Value Index
Contains those Russell 1000 Index Securities with a less-than-average growth orientation. Securities in this index generally have lower price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth values than the more growth-oriented securities in the Russell 1000 Growth Index.
Russell 2000 Index
A market-capitalization-weighted index made up of the 2,000 smallest U.S. companies in the Russell 3000.
Russell 3000 Index
A market-captialization-weighted index made up of the 3,000 largest U.S. stocks, which represent about 98% of the U.S. equity market.
S&P 500 Index
Is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Securities and Exchange Commission, established by Congress to help protect investors. The SEC administers the Securities Act of 1933, the Securities Exchange Act of 1934, the Securities Act Amendments of 1975, the Trust Indenture Act, the Investment Company Act, the Investment Advisers Act and the Public Utility Holding Company Act.
Funds managed on an individual account basis; no pooling with other investors. The client owns the securities.
This ratio is often used to measure the risk-adjusted return of a portfolio. It is calculated by taking a portfolio's return above the risk-free rate (often defined as 3-month Treasury Bills) and dividing it by the risk level (standard deviation) of the portfolio. This measures how much return a portfolio or manager is producing for each unit of risk they take.
Also referred to as "shorting a stock", a short sale is the process of selling a stock that is not owned by the investor. If an investor has a negative view of a stock and believes its price will fall, shorting becomes an attractive action. Essentially, the investor will borrow the stock from someone who owns it (paying them a fee to borrow it), and then they will sell the stock. If the stock falls, there is a profit as the investor sold it at a higher price and is now able to buy it back cheaper and return it to the entity from whom it was borrowed. In contrast, if the stock goes up, the investor transacting the short sale loses money because they sold it at a lower price and now have to buy it back at a higher price.
Any fixed income investment with less than one year to maturity.
Small Capitalization Growth Stocks
These are stocks whose market capitalization is below $1 billion according to the Morningstar database. In addition, these stocks possess the characteristics of growth stocks, which in technical terms means that their price-to-earnings ratio is greater than the market average. It is expected that these stocks have the potential to increase earnings per share at a faster rate than the average stock within the market.
Small Capitalization Value Stocks
These are stocks whose market capitalization is below $1 billion according to the Morningstar database. In addition, these stocks possess the characteristics of value companies, which in technical terms means that their price-to-earnings ratio is below the market average. These stocks are typically associated with mature companies that are expected to pay out a larger portion of their income in the form of dividends than their growth counterparts as opportunities to reinvest this income back into the company at above average growth rates are limited.
The value of goods or services that brokerage houses supply to investment managers "free of charge" in exchange for the investment managers' business.
Sovereign wealth fund (SWF)
A sovereign wealth fund is a state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments. Sovereign wealth funds have gained world-wide exposure by investing in several Wall Street financial firms including Citigroup, Morgan Stanley and Merrill Lynch. These firms needed a cash infusion due to losses resulting from the credit crunch. Some sovereign wealth funds are held solely by central banks, which accumulate the funds in the course of their fiscal management of a nation's banking system; these types of funds are usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.
The difference between two prices.
A statistical measure used to determine the risk, or volatility, of a portfolio. It reflects the average deviation of the sample observations from the mean (average) of the observations. Since it measures the width of the range of return outcomes, the larger the standard deviation, the greater the risk (volatility) of the portfolio. For example, if the mean return of an asset class is 5% and the standard deviation is 10, you can expect the range of outcomes to be between +15% and -5% about 68% of the time assuming the returns are normally (i.e. equally) distributed around the mean.
An organized marketplace for securities featured by the centralization of supply and demand for the transaction of orders by member brokers for institutional and individual investors.
A dividend paid in securities rather than in cash. The dividend may be additional shares of the issuing company, or in shares of another company (usually a subsidiary) held by the company.
A swap is an agreement entered into by two parties where each agree to pay a particular stream of payments according to specified terms. Typically, one is paying a fixed rate, while the counterparty is paying a floating rate that varies with the performance of a particular investment benchmark.
Ten Largest Holdings
The percentage of a portfolio's total net assets or equity holdings in its ten largest securities positions. As this percentage rises, a portfolio's returns are likely to be more volatile because they are more dependent on the fortunes of a few companies.
A public offer to buy shares from existing stockholders of one public corporation by another public corporation under specified terms good for a certain time period. Stockholders are asked to "tender" (surrender) their holdings for stated value, usually at a premium above current market price, subject to the tendering of a minimum and maximum number of shares.
A telegraphic system that continuously provides the last sale prices and volume of securities transactions on exchanges. Information is either printed or displayed on a moving tape after each trade.
Interest or dividend income plus any realized or unrealized capital gain (or loss) on an investment.
This is a measure used to determine the amount by which the performance of a portfolio differs from that of a given benchmark. Technically, it is the annual standard deviation of the difference between the portfolio and the benchmark. It is a good measure to determine how consistently a manager achieves a return close to a pre-defined benchmark.
These are highly liquid securities issued by the United States Treasury that are backed by the full faith and credit of the United States government, and thus are perceived as having no credit risk.
Treasury Inflation Protected Securities (TIPS)
These securities are backed by the full faith and credit of the United States and are quite liquid. TIPS is a sub-asset class intended to generate a real return as inflation protection is a vital part of the instrument. Unlike nominal bonds, which will be hurt by increases in interest rates and inflation, TIPS will not. TIPS also provide a source of current income and reduce the overall volatility of the portfolio. In addition, this asset is viewed as the best hedge against the Systems' liabilities due to similarities in duration and inflation sensitivity, thus it is viewed as the best risk-free asset in relation to the liabilities.
A statistical technique used to determine the amount that can be expected to be lost from a portfolio of investments over a specified time frame.
Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price. A stock with a current market value of $40 a share paying dividends at the rate of $3.20 is said to return 8% ($3.20÷$40.00). The current yield on a bond is figured the same way.
The relationship between time-to-maturity and the yield for fixed income in a given risk class.
The yield of a bond to maturity takes into account the price discount from, or premium over, the face amount. It is greater than the current yield when the bond is selling at a discount and less than the current yield when the bond is selling at a premium.
The differences in yields on different types of fixed income securities which is a function of supply and demand, credit rating, and anticipated interest rate changes. Generally, the greater the "spread" of a bond compared to a U.S. Treasury Bond, the greater the risk of that particular bond investment.