Active investment management
Active investment management strategies are the opposite of passive investment strategies (defined below). Active portfolio managers regularly take investment positions that clearly differ from those of the portfolio's performance benchmark, with the objective of outperforming the benchmark over time. In addition to the upside potential of outperforming the benchmark, there's also the downside possibility of underperforming the benchmark. In an efficient market, there should be roughly the same magnitude of outperformers and underperformers for any given benchmark.
Agency securities (aka government agency securities)
Debt securities issued by U.S. government agencies created by Congress to fulfill specific needs, such as providing credit to home buyers or farmers (such as the Federal Home Loan Bank and the Federal Farm Credit Bank). Some agency securities are backed by the full faith and credit of the U.S. government, while others are guaranteed only by the issuing agency. Agency securities typically offer somewhat higher yields than U.S. Treasury securities with similar maturities. That's because these securities may involve greater risk of default than securities backed by the U.S. Treasury. There can be no assurance that the U.S. government will provide financial support to a government agency when it is not obligated by law to do so. Though it's not one of the three biggest sectors of the U.S. taxable bond market (which are Treasuries, mortgage-backed securities, and corporates), agencies represent a sizeable, significant U.S. government bond sector.
Alpha is typically used to represent the value added or subtracted by active investment management strategies. It shows how an actively managed investment portfolio performed compared with the expected portfolio returns produced simply by benchmark volatility (beta) and market changes. A positive alpha shows that an investment manager has been able to capture more of the upside movement in the benchmark while softening the downswings. A negative alpha means that the manager's strategies have caught more benchmark downside than upside.
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) is a parallel tax system that was created to keep high income individuals from avoiding taxes through various deductions and exemptions.
Asset-backed securities (ABS)
A form of securitized debt (defined below), ABS are structured like mortgage-backed securities (MBS, defined below). But instead of mortgage loans or interest in mortgage loans, the underlying assets may include such items as auto loans, home equity loans, student loans, small business loans, and credit card debt. The value of an ABS is affected by changes in the market's perception of the assets backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing any credit enhancement.
Austerity measures describe official actions (typically taken under duress) by financially challenged governments (those that are under the threat of otherwise not being able to meet all of their obligations to debt holders and other creditors) to reduce the amount of money they spend, freeing more of it for paying off liabilities. Austerity measures commonly involve deficit cutting, reduced spending, and cuts in government benefits and services provided. They are considered a "necessary evil," along with revenue-raising measures, for bringing government budgets back into financial balance.
Balanced Blended Index (Custom)
Considered the benchmark for the American Century Balanced Fund. It combines two widely known indices in proportion to the asset mix of the fund. Accordingly, 60% of the index is represented by the S&P 500 Index, which reflects the approximately 60% of the fund's assets invested in stocks. The blended index's remaining 40% is represented by the Barclays U.S. Aggregate Bond Index, which reflects the roughly 40% of the fund's assets invested in fixed-income securities.
Barclays 3 Year Municipal Bond Index
A rules-based, market-value weighted index engineered for the long-term tax-exempt bond market. This index is the 3 year (2-4) component of the Municipal Bond Index.
Barclays 7 Year Municipal Bond Index
A rules-based, market-value weighted index engineered for the long-term tax-exempt bond market. This index is the 7 year (6-8) component of the Municipal Bond Index.
Barclays 10 Year Municipal Bond Index
A rules-based, market-value weighted index engineered for the long-term tax-exempt bond market. This index is the 10 year (8-12) component of the Municipal Bond Index.
Barclays Global Aggregate Bond Index
A broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.
Barclays U.S. 1-3 Month Treasury Bill Index
The 1-3 month component of the U.S. Treasury Bill Index. The U.S. Treasury Bill Index includes U.S. Treasury bills with a maturity from one up to (but not including) 12 months. It excludes zero coupon strips.
Barclays U.S. 1-3 Year Aggregate Bond Index
The 1-3 year component of the U.S. Aggregate Bond index. The U.S. Aggregate Bond Index represents securities that are taxable, registered with the Securities and Exchange Commission, and U.S. dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Barclays U.S. 1-3 Year Government Bond Index
A component of the U.S. Government Bond Index, which includes treasury and agency securities. The securities have a maturity of one year or more and less than three years.
Barclays U.S. 1-3 Year Government/Credit Bond Index
A component of the U.S. Government/Credit Bond Index, which includes Treasury and agency securities (U.S. Government Bond Index) and publicly issued U.S. corporate and foreign debentures and secured notes (U.S. Credit Bond Index). The bonds in the index are investment-grade with a maturity between one and three years.
Barclays U.S. Aggregate Bond Index
Represents securities that are taxable, registered with the Securities and Exchange Commission, and U.S. dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Barclays U.S. Aggregate Credit-Intermediate Bond Index
The intermediate component of the U.S. Credit Bond Index which invests in publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements.
Barclays U.S. Corporate A-Rated Bond Index
Consists of publicly issued U.S. corporate and specified foreign debentures that are registered with the Securities and Exchange Commission and meet specific maturity, liquidity, and quality requirements. This index is the A-rated component of the U.S. Corporate Investment Grade index.
Barclays U.S. Corporate Bond Index (investment-grade)
Consists of publicly issued U.S. corporate and specified foreign debentures that are registered with the Securities and Exchange Commission and meet specific maturity, liquidity, and quality requirements.
Barclays U.S. Corporate High-Yield Bond Index
Covers the universe of fixed-rate, non-investment grade corporate debt of issuers in non-emerging market countries. Eurobonds and debt issues from countries designated as emerging markets are excluded.
Barclays U.S. GNMA Index
Covers the mortgage-backed pass-through securities of the Government National Mortgage Association (GNMA). It is the GNMA component of the U.S. Mortgage Backed Securities Index. The index is formed by grouping the universe of individual fixed rate GNMA pools into generic aggregates.
Barclays U.S. Government/MBS Index
Combines two components of the U.S. Aggregate Bond Index. The U.S. Government component includes U.S. Treasury and U.S. government agency securities with remaining maturities of one year or more. The Mortgage-Backed Securities component covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
Barclays U.S. High-Yield 2% Issuer Capped Bond Index
A component of the U.S. Corporate High-Yield Bond Index, which covers the universe of fixed-rate, non-investment grade corporate debt of issuers in non-emerging market countries. It is not market capitalization-weighted--each issuer is capped at 2% of the index.
Barclays U.S. Intermediate Government/Credit Bond Index
Made up of investment-grade fixed-rate debt securities with maturities from one up to (but not including) 10 years from the U.S. Government Bond and U.S. Credit Bond indices.
Barclays U.S. MBS Index (mortgage-backed securities)
A component of the U.S. Aggregate Bond Index and covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
Barclays U.S. Treasury Bellwethers (3 M)
A market value-weighted index of investment-grade fixed-rate public obligations of the U.S. Treasury with maturities of three months, excluding zero coupon strips.
Barclays U.S. Treasury Bond Index
The U.S. Treasury component of the U.S. Government/Credit Bond Index (a subset of the U.S. Aggregate Bond Index), is composed of public obligations of the U.S. Treasury with a remaining maturity of one year or more and excludes Treasury Bills.
Basis points are used in financial literature to express values that are carried out to two decimal places (hundredths of a percentage point), particularly ratios, such as yields, fees, and returns. Basis points describe values that are typically on the right side of the decimal point--one basis point equals one one-hundredth of a percentage point (0.01%). So 25 basis points equals 0.25%, and 50 basis points equals 0.50%. Only when basis points equal or exceed 100 does the value move to the left of the decimal point--100 basis points equals 1.00%, 500 basis points equals 5.00%, etc.
Beta is a standard measurement of potential investment risk and return. It shows how volatile a security's or an investment portfolio's returns have been compared with their respective benchmark indices. A benchmark index's beta always equals 1. A security or portfolio with a beta greater than 1 had returns that fluctuated more, both up and down, than those of its benchmark, while a beta of less than 1 indicates less fluctuation than the benchmark.
Breakeven inflation rate
The breakeven inflation rate is the difference between the nominal yield (usually the market yield, which includes an inflation premium) on a fixed-income investment and the real yield (with no inflation premium) on an inflation-linked investment of similar maturity and credit quality. If inflation averages more than the breakeven rate, the inflation-linked investment will outperform the investment with the nominal yield. Conversely, if inflation averages below the breakeven rate, the investment with the nominal yield will outperform the inflation-linked investment. Breakeven inflation rates are also considered useful measures of inflation expectations-higher breakeven rates represent higher inflation expectations (and higher relative prices for inflation-linked investments), while lower breakeven rates represent lower inflation expectations (and lower relative prices for inflation-linked investments). Therefore, ideally, investors want to purchase inflation-linked investments when breakeven rates are relatively low because that's typically when prices are also relatively low.
An acronym for the economies of Brazil, Russia, India, and China combined. These are considered to be large developing economies that are part of a global, twenty-first century shift in economic power and influence away from the more established, traditional developed economies of the twentieth century.
Build America Bonds (BABs)
A form of taxable municipal debt (defined below) issued under the Build America Bond program. This program was designed to allow municipalities to sell taxable bonds for capital projects while receiving a rebate from the federal government for a portion of their borrowing costs. The program was meant to attract investors such as pensions and overseas mutual funds that don't typically buy municipal debt. The U.S. government launched the Build America Bond program in the wake of the 2008 Financial Crisis (under the American Recovery and Reinvestment Act of 2009) to provide much-needed funding for state and local government capital projects--including public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities, etc.--at lower borrowing costs. The U.S. Treasury subsidizes this debt by paying rebates directly to Build America issuers. This is in contrast to most municipal debt, which is subsidized by providing federal tax-free income to investors.
A key financial ratio measuring a bank or other financial institution's financial stability. It's the ratio of the financial institution's capital (its stock) divided by its risk-weighted assets (defined in this Glossary). Typically, the higher the ratio (the more company capital compared with risk-weighted assets), the more financially stable the financial institution. A financial institution with a higher capital ratio is considered more protected against operating losses (more stable) than a financial institution with a lower ratio.
Chicago Board of Trade (CBOE) Volatility Indexes
Volatility indexes are forward-looking measures of the market's expectations of volatility (or how much a stock index's price moves). The CBOE manages and publishes three of the most widely used volatility indexes based on three major stock indexes: The VIX Index tracks the expected 30-day future volatility of the S&P 500 Index, the VXN Index tracks the expected 30-day future volatility of the NASDAQ-100 Index and the VXD Index tracks the expected 30-day future volatility of the Dow Jones Industrial Average Index. VIX, VXN and VXD are the ticker symbols for these three volatility indexes. The VIX in particular is a widely used measure of market risk and is often referred to as the "investor fear gauge."
Citigroup U.S. Broad Investment-Grade (BIG) Bond Index
A market-capitalization-weighted index that includes fixed-rate Treasury, government-sponsored, mortgage, asset-backed, and investment-grade issues with a maturity of one year or longer.
Collateralized mortgage obligations (CMOs)
A form of securitized debt (defined below) derived from mortgage-backed securities (MBS, defined below). It's a form of derivative security (defined below). Like most MBS pass-through securities, CMOs are typically backed by pools of residential mortgages and their payments. But not all investors want to receive the monthly payments of principal and interest that "plain vanilla" MBS pass-throughs offer--some prefer just the principal, some prefer just the interest, or some want payments with other particular/special characteristics. For them, the cash flows from MBS can be pooled and structured into many classes of CMOs with different maturities and payment schedules, creating securities with very specific characteristics and behaviors. These characteristics and behaviors can vary widely. Some CMOs can offer less risk than "plain-vanilla" MBS, or can help offset other forms of risk in a diversified portfolio, but others can be much more volatile. CMOs typically have two or more bond classes, called tranches. Each tranche has its own expected maturity and cash flow pattern. The unique cash flow patterns of each CMO tranche allow investors to tailor their mortgage exposure to meet a range of investment objectives, since different classes can have different risk/return characteristics.
Commercial mortgage-backed securities (CMBS)
MBS that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties, including office buildings, shopping centers, industrial parks, warehouses, hotels, and apartment complexes.
Commodities are raw materials or primary agricultural products that can be bought or sold on an exchange or market. Examples include grains such as corn, foods such as coffee, and metals such as copper.
Commodity intensity refers to commodity usage per unit of economic growth. An emerging, more manufacturing-based economy will usually be more commodity intensive in terms of its growth than will a more developed, service-oriented economy.
Conference Board Consumer Confidence Index (CCI)
The Conference Board Consumer Confidence Index ® (CCI) is a barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on two components: (1) Consumers' perceptions of current business and employment conditions; and (2) Consumers' expectations for six months hence regarding business conditions, employment, and income (the expectations index).
Consumer Price Index (CPI)
CPI is the most commonly used statistic to measure inflation in the U.S. economy. It reflects price changes from the consumer's perspective. It's a U.S. government (Bureau of Labor Statistics) index derived from detailed consumer spending information. Changes in CPI measure price changes in a market basket of consumer goods and services such as gas, food, clothing, and cars.
Securities that can be converted at the investor's choice into other investments, normally into shares of the issuer's underlying common stock. Convertibles are typically issued as bonds or preferred stock. Convertible bonds, which provide an ongoing stream of income, can be converted into a preset number of shares of the company's common stock and have a maturity date. Unlike common stock, which pays a variable dividend depending on a corporation's earnings, convertible preferred stock pays a fixed quarterly dividend. It can be converted into common stock at any time, but often are perpetual.
Corporate securities (corporate bonds and notes)
Debt instruments issued by private corporations, as distinct from those issued by governments, government agencies, or municipalities. Corporate securities typically have the following features: 1) they are taxable, 2) they tend to have more credit (default) risk than government or municipal securities, so they tend to have higher yields than comparable-maturity securities in those sectors; and 3) they are traded on major exchanges, with prices published in newspapers.
Correlation measures the relationship between two investments--the higher the correlation, the more likely they are to move in the same direction for a given set of economic or market events. So if two securities are highly correlated, they will move in the same direction the vast majority of the time. Negatively correlated investments do the opposite--as one security rises, the other falls, and vice versa. No correlation means there is no relationship between the movement of two securities--the performance of one security has no bearing on the performance of the other. Correlation is an important concept for portfolio diversification--combining assets with low or negative correlations can improve risk-adjusted performance over time by providing a diversity of payouts under the same financial conditions.
Coupon interest rate
The coupon interest rate is the stated/set interest rate that is assigned to each interest-paying fixed-income security when it is issued. It is used to calculate the security's periodic interest payments to investors; the coupon rate is applied to the security's principal value to generate interest payments.
CRB® BLS Foodstuffs Index
A subset of the Commodity Research Bureau's Spot Market Price Index and measures the price movements of hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat, and sugar.
A form of financial analysis used primarily to determine the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer's debt securities. Credit analysis is typically an important component of security analysis and selection in credit-sensitive bond sectors such as the corporate bond market and the municipal bond market.
Credit quality reflects the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer's securities. Common measurements of credit quality include the credit ratings provided by credit rating agencies such as Standard & Poor's and Moody's. Credit quality and credit quality perceptions are a key component of the daily market pricing of fixed-income securities, along with maturity, inflation expectations and interest rate levels.
Credit Rating Agency (CRA)
A Credit Rating Agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In the United States, the Securities and Exchange Commission (SEC) permits investment banks and broker-dealers to use credit ratings from "Nationally Recognized Statistical Rating Organizations" (NRSRO) for similar purposes. As of January 2012, nine organizations were designated as NRSROs, including the "Big Three" which are Standard and Poor's, Moody's Investor Services and Fitch Ratings.
Credit rating downgrade
The act, by a credit rating agency (such as Standard & Poor's, Moody's or Fitch), of reducing its credit rating for a debt issuer and/or security. This is based on the agency's evaluation, indicating, to the agency, a decline in the issuer's financial stability, increasing the possibility of default (defined below). A downgrade should not to be confused with a default; a debt security can be downgraded without defaulting. (And, conversely, a debt issuer can suddenly default without being downgraded first--credit ratings and credit rating agencies are not infallible.)
Measurements of credit quality (defined below) provided by credit rating agencies (defined below). Those provided by Standard & Poor's typically are the most widely quoted and distributed, and range from AAA (highest quality; perceived as least likely to default) down to D (in default). Securities and issuers rated AAA to BBB are considered/perceived to be "investment-grade"; those below BBB are considered/perceived to be non-investment-grade or more speculative.
Credit risk is the risk that the inability or perceived inability of the issuers of debt securities to make interest and principal payments will cause the value of those securities to decrease. Changes in the credit ratings of debt securities could have a similar effect.
A risk-management strategy, as part of a foreign investment strategy, currency hedging is designed to reduce the impact from changes in the relative values of currencies involved in the foreign investment strategy. In any foreign investment strategy, a significant part of the potential risk and return comes from exposure to relative currency value fluctuations. If exposure to those currency fluctuations is minimized, investors can experience more of a "pure play" exposure to the foreign investments. There is a variety of possible currency hedging strategies, ranging from swaps, options, and spot contracts to simply buying foreign currencies.
A measurement for evaluating the economic health of a country, the most commonly used debt-GDP ratio measures a country's government debt divided by its gross domestic product-the value of all final goods and services produced by that country. Lower ratios are viewed more favorably than higher.
With regard to the U.S., it's a cap (a set dollar amount limit, now in the tens of trillions of dollars) established by Congress on the total debt the U.S. federal government can legally borrow. It's essentially the U.S. credit limit. The cap applies to debt owed to the public (in the form of government-issued bills, notes, and bonds, which represent almost two-thirds of total federal debt) plus debt owed to federal government trust funds (such as those for Social Security, Medicare, and the Federal Housing Administration).
This is a debt or loan repayment expression. It describes the amount of money required within a given period (usually a year) to keep current on required/scheduled repayments of outstanding debt, including interest and principal.
Failure of a debtor to make timely payments of interest and principal as they become due, or to meet some other provision of a bond indenture. In the event of default, bondholders may make claims against the assets of the issuer to recoup their principal.
A credit quality measurement used in bond or other debt analysis, a default rate measures how often a particular type of bond (categorized by issuer, sector, credit rating, etc.) or other borrower has defaulted (missed or delayed scheduled payments) over a given period of time. Default rates are also used as an economic measurement since they tend to rise and fall with the health of the economy.
Deflation is the opposite of inflation (see Inflation); it describes a decline in prices for goods, assets and services, and is considered a highly undesirable economic outcome by economists and policymakers.
These are securities whose performance and/or structure is derived from the performance and/or structure of other assets, interest rates, or indexes. If used moderately and in appropriate situations, derivatives can help stabilize portfolios and/or enhance returns. However, if used in excess and/or in inappropriate circumstances, they can be harmful, potentially causing portfolio instability and/or losses. Derivatives are similar to medicine in their behavior--usually safe when used as directed, potentially toxic when abused. There are many different types of derivative securities and many different ways to use them. Some derivative securities, such as mortgage-related and other asset-backed securities, are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. Futures and options are commonly used for traditional hedging purposes to attempt to protect portfolios from exposure to changing interest rates, securities prices or currency exchange rates, and for cash management purposes as a low-cost method of gaining exposure to a particular securities market without investing directly in those securities. Certain derivative securities may be described as structured investments. A structured investment is a security whose value or performance is linked to an underlying index or other security or asset class. Structured investments include collateralized mortgage obligations (CMOs), described more fully above. Structured investments also include securities backed by other types of collateral.
Dow Jones Select Dividend Index
Comprised of 100 stocks that are selected to the index by dividend yield, subject to screens for dividend-per-share growth rate, dividend payout ratio, and average daily dollar trading volume.
Duration is an important indicator of potential price volatility and interest rate risk in fixed income investments. It measures the price sensitivity of a fixed income investment to changes in interest rates. The longer the duration, the more a fixed income investment's price will change when interest rates change. Duration also reflects the effect caused by receiving fixed income cash flows sooner instead of later. Fixed income investments structured to potentially pay more to investors earlier (such as high-yield, mortgage, and callable securities) typically have shorter durations than those that return most of their capital at maturity (such as zero-coupon or low-yielding noncallable Treasury securities), assuming that they have similar maturities.
Exchange-traded fund (ETF)
Similar to a mutual fund, an exchange-traded fund (ETF) represents a group of securities, but the ETF trades on an exchange like an individual stock. An ETF generally follows the performance of an index, such as the S&P 500 Index.
From an economic overview or government budgeting perspective, entitlement programs are types of government programs that provide individuals with personal financial benefits (or sometimes special government-provided goods or services) to which an indefinite (but usually large) number of potential beneficiaries have a legal right when they meet specified eligibility requirements. The beneficiaries are normally individuals, but can also be organizations. The most important examples at the federal level in the U.S. include Social Security, Medicare, and Medicaid.
Equity market neutral strategies
Equity market neutral strategies seek to eliminate the risks of the equity market by holding up to 100% of net assets in long equity positions and up to 100% of net assets in short equity positions. These strategies attempt to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, etc. If successful, these strategies should generate returns independent of the equity market. Equity market neutral portfolios have two key sources of return: 1) the Treasury Bill return (the interest on proceeds from short sales held in cash as collateral), and 2) the difference (the "spread") between the return on the long positions and the return on the short positions. Stock picking, rather than broad market moves, should drive most of a market-neutral strategy's total return (save for any return from the 100% cash position).
European Central Bank
Together with the national central banks of the European Union member states whose currency is the Euro (€), the European Central Bank (ECB) defines and implements the monetary policy for the Euro area.
European Union (EU)
The EU refers to the European Union, a political and economic confederation of 27 member states with the goal of promoting peace, stability, and prosperity. Member nations are: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. The eurozone or monetary union portion of the EU construct consists of 17 of the 12 member states listed above.
The eurozone is sometimes referred to as the euro area and represents the member states that participate in the economic and monetary union (EMU) with the European Union (EU). The eurozone currently consists of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Excess return, in investment management literature, is used in risk-adjusted return (defined below) discussions and risk-adjusted return calculations, such as the Sharpe Ratio (defined below). It equals the return of a portfolio minus the return of what is considered to be a relatively risk-free asset, such as a U.S. Treasury bill.
Extended equity strategies
Extended equity strategies attempt to provide better returns than possible with long-only investments. An example of an extended equity strategy is a 130/30 portfolio, which gets its designation from taking a 130% long position and a 30% short position. In practice, this would mean $100mm invested in stocks that are viewed as attractive. Next, the manager would borrow and sell short $30mm of unattractive stocks. Then the manager uses the proceeds from the short sale to buy an additional $30mm of attractive stocks. This results in a portfolio that has 130% long and 30% short exposure to stocks, or "extended" exposure to equities relative to a long-only, 100% stock portfolio. It's important to point out that here is the risk of theoretical unlimited amount of loss with short selling, (i.e. the price of the short-sold stocks increases; the long position can only go down to $0).
Fannie Mae (FNMA--Federal National Mortgage Association)
Fannie Mae is a GSE (defined below) established by Congress. It's similar to Freddie Mac (defined below), with a publicly owned corporate structure. (Fannie Mae's stock (FNM) trades on the New York Stock Exchange.) These two giant GSEs increase liquidity in the U.S. mortgage market by purchasing mortgages from lenders, then typically repackaging (securitizing, defined below) the debt and reselling it to investors, helping to create a "secondary" market for mortgages. The GSEs' main purpose is to assure that mortgage money is available for borrowers. But they don't lend money directly. Instead, they purchase mortgages from "primary" lenders like mortgage companies, banks, and credit unions. That allows the primary lenders to replenish their funds and lend more money to homebuyers. The GSEs finance their mortgage purchases by issuing mortgage-backed securities (MBS) and other debt instruments (often referred to as agency debt, even though, technically, the GSEs aren't government agencies). GSE debt is considered to have relatively high credit quality based on its implicit government backing, reinforced by what happened during the Financial Crisis in 2008. Since Fannie Mae and Freddie Mac were placed into government conservatorship in September 2008, the government has pledged to support any shortfall in the balance sheets of the two GSEs. The U.S. Treasury has said it will ensure that both GSEs can maintain a positive net worth and fulfill all of their financial obligations. This statement of support lends credence to the very high credit ratings of MBS and other debt issued by Fannie and Freddie.
Federal funds rate (aka fed funds rate)
The federal funds rate is an overnight interest rate banks charge each other for loans. More specifically, it's the interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. It's an interest rate that's mentioned frequently within the context of the Federal Reserve's interest rate policies. The Federal Reserve's Open Market Committee (defined below) sets a target for the federal funds rate (which is a key benchmark for all short-term interest rates, especially in the money markets), which it then supports/strives for with its open market operations (buying or selling government securities).
Federal Reserve's short-term interest rate target
Also known as the target interest rate for the federal funds rate. The federal funds target rate is determined by meetings of the Federal Reserve's Federal Open Market Committee, which normally occur about eight times a year. The federal funds rate is an overnight interest rate banks charge each other for loans.
The scheduled expiration of various forms of fiscal stimulus that if withdrawn and combined with possible tax increases, could significantly impact economic growth and municipal credit conditions.
FOMC (Federal Open Market Committee)
FOMC (Federal Open Market Committee) This is the committee that sets interest rate and credit policies for the Federal Reserve System, the U.S. central bank. The committee decides whether to increase or decrease interest rates through open-market operations of buying or selling government securities. The committee normally meets about eight times per year.
Freddie Mac (FHLMC-Federal Home Loan Mortgage Corporation)
Freddie Mac is a GSE (defined below) established by Congress. It's similar to Fannie Mae (defined above), with a publicly owned corporate structure. (Freddie Mac's stock (FRE) trades on the New York Stock Exchange.) These two giant GSEs increase liquidity in the U.S. mortgage market by purchasing mortgages from lenders, then typically repackaging (securitizing, defined below) the debt and reselling it to investors, helping to create a "secondary" market for mortgages. The GSEs' main purpose is to assure that mortgage money is available for borrowers. But they don't lend money directly. Instead, they purchase mortgages from "primary" lenders like mortgage companies, banks, and credit unions. That allows the primary lenders to replenish their funds and lend more money to homebuyers. The GSEs finance their mortgage purchases by issuing mortgage-backed securities (MBS) and other debt instruments (often referred to as agency debt, even though, technically, the GSEs aren't government agencies). GSE debt is considered to have relatively high credit quality based on its implicit government backing, reinforced by what happened during the Financial Crisis in 2008. Since Fannie Mae and Freddie Mac were placed into government conservatorship in September 2008, the government has pledged to support any shortfall in the balance sheets of the two GSEs. The U.S. Treasury has said it will ensure that both GSEs can maintain a positive net worth and fulfill all of their financial obligations. This statement of support lends credence to the very high credit ratings of MBS and other debt issued by Fannie and Freddie.
FTSE Gold Mines Americas Index
A regional subset of the FTSE Gold Mines Index which reflects the performance of the worldwide market in shares of companies whose principal activity is in the mining of gold.
FTSE Gold Mines Asia Pacific Index
A regional subset of the FTSE Gold Mines Index which reflects the performance of the worldwide market in shares of companies whose principal activity is in the mining of gold.
FTSE Gold Mines Europe, Middle East, Africa Index
A regional subset of the FTSE Gold Mines Index which reflects the performance of the worldwide market in shares of companies whose principal activity is in the mining of gold.
Investment "fundamentals," in the context of investment analysis, are typically those factors used in determining value that are more economic (growth, interest rates, inflation, employment) and/or financial (income, expenses, assets, credit quality) in nature, as opposed to "technicals," which are based more on market price (into which fundamental factors are considered to have been "priced in"), trend, and volume factors (such as supply and demand), and momentum. Technical factors can often override fundamentals in near-term investor and market behavior, but, in theory, investments with strong fundamental supports should maintain their value and perform relatively well over long time periods.
A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. Futures contracts are typically used as a hedging/risk management tool in portfolio management.
General obligation (GO) bonds
One of the biggest sectors in the municipal securities (defined below) market. Typically, these bonds are secured by the full faith and credit pledge (defined above) of the issuer and usually supported by the issuer's taxing power (tax revenues provide the means by which most interest payments are made). GO bonds can be issued by states, counties, cities, towns and regional districts to fund a variety of public projects, including construction of and improvements to schools, highways, and water and sewer systems.
Ginnie Mae (GNMA -- Government National Mortgage Association)
Ginnie Mae is a U.S. government-owned corporation (a government agency), created in 1968, which guarantees the timely payment of principal and interest payments on residential mortgage-backed securities (MBS, defined further below). Ginnie Mae guarantees only securities backed by residential mortgage loans insured by government agencies, such as the Federal Housing Administration and the Department of Veterans Affairs. Ginnie Mae neither originates nor purchases mortgage loans. It also does not purchase, sell, or issue securities. Instead, private lending institutions (mortgage companies, commercial banks, etc.) approved by Ginnie Mae originate eligible loans, pool them into securities, and issue Ginnie Mae MBS. The interest and principal on the MBS Ginnie Mae guarantees have always been explicitly backed by the full faith and credit of the U.S. government, making the credit quality of these bonds essentially the same as that for U.S. Treasury securities, but with typically higher yields (since mortgage interest rates tend to run higher than Treasury yields, plus Ginnie Mae MBS, like all other MBS, face prepayment risk (defined below) when interest rates decline).
Government-sponsored enterprises (GSEs)
GSEs are privately owned corporations created by Congress to provide funding and help to reduce the cost of capital for certain borrowing sectors of the economy such as homeowners, students, and farmers. GSE securities are generally perceived to carry the implicit backing of the U.S. government, but they are not direct obligations of the government. Probably the two best-known examples of GSEs are the Federal National Mortgage Association (FNMA, aka Fannie Mae); and the Federal Home Loan Mortgage Corporation (FHLMC, aka Freddie Mac), which are defined further above. In the investment universe, GSEs are most often discussed in the context of mortgage-backed securities (MBS) and U.S. government agency securities (agency debt). It is important to note that although GSEs are commonly referred to as "agencies", there is a difference between a GSE and a government agency. One example of a government agency that is not a GSE is the Government National Mortgage Association (GNMA, aka Ginnie Mae, defined further above), which has the explicit backing of the U.S. government.
Refers to the risk that a negative news media headline about one security issuer, incident or sector could affect the demand for and pricing of a much wider swath of securities, including those that have no direct relation to the securities headlined and whose fundamentals (defined above) remain intact. Financial analyst Meredith Whitney's appearance on "Sixty Minutes" in December 2010 was a classic example of the potential impact of headline risk, when her prediction of "a spate of municipal bond defaults" helped trigger a massive municipal bond market selloff, even though most municipal bonds actually faced no immediate default threat at that time, and the number of municipal defaults actually declined in the subsequent 12 months.
Ibbotson Intermediate-Term Treasuries Index
Constructed by Ibbotson Associates using long-term historical data. The index calculates total returns from historical index prices and calculates income using a coupon accrual method. The index replicates intermediate-term bond performance by selecting the Treasury bond with maturity closest to five years, holds it for the calendar year, then rolls to the next five-year bond.
Inflation adjustment (for TIPS)
The inflation adjustments for TIPS include upward or downward changes to both principal and interest payments based on changes in the Consumer Price Index (CPI).
Inflation-linked (or inflation-indexed) securities
Debt securities that offer returns adjusted for inflation, a feature designed to eliminate the inflation risk that has long been the bane of fixed income investors. Typically, the principal of these securities is indexed to a widely used inflation measure or benchmark. U.S. Treasury inflation-protected securities (TIPS) are one popular form of inflation-linked securities.
Information Ratio (IR)
IR is a risk-adjusted return (defined below) measure for comparing the performance of active investment managers (defined above) over time. Its purpose is to help determine how much return an active manager has added per unit of active management risk. Think of IR as a Sharpe Ratio (defined below) for active investment management; the IR is more focused than the Sharpe Ratio. Starting with the Sharpe Ratio's formula, if we replace the excess return (defined above) in the numerator with a portfolio's active return (the average annualized return of an actively managed portfolio minus the average annualized return of the portfolio's benchmark over a given period, adjusted for the portfolio's market risk exposure), and you replace the Sharpe Ratio's standard deviation (defined below) of excess returns in the denominator with the standard deviation of a portfolio's active returns over the period, you have the IR. While the Sharpe Ratio expresses the amount of excess return per unit of overall risk, the IR computes only the active management-driven (alpha) returns per unit of alpha-driven risk. And while the Sharpe Ratio's excess returns are calculated with regard to what is considered to be a relatively risk-free asset, such as a U.S. Treasury bill, the IR's active returns are calculated with regard to each portfolio's specific market benchmark. The higher the IR, the better. The IR should be measured over a meaningful period of time, typically at least three to five years. The IR is not perfect--it can be influenced by external factors such as changes in market volatility. The standard deviation of active returns in the IR's denominator is called tracking error (defined below).Tracking error will tend to increase in volatile markets for even the best active managers.
Institute for Supply Management (ISM) Manufacturing Index
Published on a monthly basis, the ISM surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A composite diffusion index of national manufacturing conditions is constructed, where readings above (below) 50 percent indicate an expanding (contracting) manufacturing sector.
Institute for Supply Management (ISM) Non-Manufacturing, or Service, Index
Published on a monthly basis, the ISM surveys nearly 400 non-manufacturing firms from 60 sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. A composite diffusion index of national non-manufacturing conditions is constructed, where readings above (below) 50 percent indicate an expanding (contracting) manufacturing sector.
Typically used in reference to fixed income securities that possess relatively high credit quality and have credit ratings in the upper ranges of those provided by credit rating services. Using Standard & Poor's ratings as the benchmark, investment-grade securities are those rated from AAA at the highest end to BBB- at the lowest. To earn these ratings, securities, in the judgement of the rating agency, are projected to have relatively low default risk.
J.P. Morgan Global Government Bond Index
The J.P. Morgan Global Government Bond Index is intended to represent the global government bond market. By including only traded issues, the index provides a realistic measure of market performance for international investors.
Lipper Equity Income Funds Index
An equally weighted index of the 30 largest funds that seek high current income and growth of income through investing 60% or more of their portfolio in equity instruments.
Lipper Large Value Funds Index
An equally weighted index of the 30 largest mutual funds with a value based investment strategy to purchase securities of companies with market capitalizations above Lipper's USDE large cap floor.
Lipper Small-Cap Value Funds Index
An equal dollar-weighted index of, typically, the 30 largest mutual funds within the Small-Cap Value fund classification, as defined by Lipper. The index is adjusted for the reinvestment of capital gains and income dividends.
What most people think of as "normal" ownership of an asset or investment, giving the owner the right to transfer ownership, the right to any income generated by the asset, and the right to any profits or losses due to value changes. Generally, investors take long positions under the assumption that the value of what they own will go up and/or generate a significant amount of income.
The Maastricht Treaty, signed February 7, 1992, in Maastricht, the Netherlands, created the European Union (EU) and led to the creation of the euro(€); the single currency adopted by most EU member states.
Market capitalization is the market value of all the equity of a company's common and preferred shares. It is usually estimated by multiplying the stock price by the number of shares for each share class and summing the results.
Equity market neutral strategies seek to eliminate the risks of the equity market by holding up to 100% of net assets in long equity positions and up to 100% of net assets in short equity positions. These strategies attempt to exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, etc. If successful, these strategies should generate returns independent of the equity market. Equity market neutral portfolios have two key sources of return:
- the Treasury Bill return (the interest on proceeds from short sales held in cash as collateral)
- the difference (the "spread") between the return on the long positions and the return on the short positions. Stock picking, rather than broad market moves, should drive most of a market-neutral strategy's total return (save for any return from the 100% cash position).
It's important to point out that here is the risk of theoretical unlimited amount of loss with short selling, (i.e. the price of the short-sold stocks increases; the long position can only go down to $0).
Money market instruments
Short-term debt instruments (such as certificates of deposit, commercial paper, Treasury bills, banker's acceptances, and repurchase agreements) that are valued for their relative safety and liquidity.
Mortgage-backed securities (MBS)
A form of securitized debt (defined below) that represents ownership in pools of mortgage loans and their payments. Most MBS are structured as "pass-throughs"--the monthly payments of principal and interest on the mortgages in the pool are collected by the financial entity that is servicing the mortgages and are "passed through" monthly to investors. The monthly and principal payments are key differences between MBS and other bonds such as Treasuries, which pay interest every six months and return the whole principal at maturity. Most MBS are issued or guaranteed by the U.S. government, a government-sponsored enterprise (GSE), or by a private lending institution.
MSCI AC (All Country) World IMI Real Estate Index
A free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of the Real Estate Industry Group, as defined by the Global Industry Classification Standard (GICS), in 45 developed and emerging markets. The MSCI World IMI Real Estate Index offers an exhaustive representation of the market by targeting all large, mid, and small cap companies with a market capitalization within the top 99% of the investable equity universe, subject to a global minimum size requirement. It is based on the Global Investable Market Indices methodology.
MSCI Pacific ex.-Japan Index
A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in the Pacific region excluding Japan.
MSCI U.S. REIT Index
Broadly and fairly represents the equity REIT opportunity set with proper investability screens to ensure that the index is investable and replicable. The index represents approximately 85% of the US REIT universe.
Municipal securities (munis)
Debt securities typically issued by or on behalf of U.S. state and local governments, their agencies or authorities to raise money for a variety of public purposes, including financing for state and local governments as well as financing for specific projects and public facilities. In addition to their specific set of issuers, the defining characteristic of munis is their tax status. The interest income earned on most munis is exempt from federal income taxes. Interest payments are also generally exempt from state taxes if the bond owner resides within the state that issued the security. The same rule applies to local taxes. Another interesting characteristic of munis: Individuals, rather than institutions, make up the largest investor base. In part because of these characteristics, munis tend to have certain performance attributes, including higher after-tax returns than other fixed income securities of comparable maturity and credit quality and low volatility relative to other fixed-income sectors. The two main types of munis are general obligation bonds (GOs) and revenue bonds. GOs are munis secured by the full faith and credit of the issuer and usually supported by the issuer's taxing power. Revenue bonds are secured by the charges tied to the use of the facilities financed by the bonds.
Municipal yield ratio
A yield ratio (defined below) most often used to determine the relative value of municipal securities compared with U.S. Treasury securities. The ratio consists of the yield of a municipal security of a certain maturity divided by the yield of a U.S. Treasury security of the same maturity.
No-load mutual funds
No load mutual fund shares do not carry an additional sales charge or commission, which would typically be paid to a financial advisor for load funds. Generally, no load mutual funds are purchased directly from the investment company or through a brokerage platform without the assistance of a financial advisor.
For most bonds and other fixed-income securities, nominal yield is simply the yield you see listed online or in newspapers. Most nominal fixed-income yields include some extra yield, an "inflation premium," that is typically priced/added into the yields to help offset the effects of inflation (see Inflation). Real yields (see Real yield), such as those for TIPS (see TIPS), don't have the inflation premium. As a result, nominal yields are typically higher than TIPS yields and other real yields.
Owners' equivalent rent
CPI does not measure changes in shelter costs by looking at home prices, but by measuring the amount of rent that could be paid to substitute a currently owned house for an equivalent rental property. Owners' equivalent rent (OER) is a dollar amount that is published by the U.S. Bureau of Labor Statistics to measure the change in implicit rent, which is the amount a homeowner would pay to rent or would earn from renting his or her home in a competitive market.
Passive investment management
Passive investment management strategies are the opposite of active investment strategies (defined above). Passive strategies are based on the philosophy that it's difficult for portfolio managers and investors to outperform the financial markets over time, especially since managers and investors are saddled with trading and other investment management costs. So passive strategies are designed to mimic market benchmark indices and minimize trading costs. It's important to note, however, that passive strategy returns rarely equal benchmark performance exactly. That's because trading costs are still involved, and because passively managed portfolios often don't own every security in the benchmarks. Instead, passive managers try to reduce trading costs by holding only benchmark securities that tend to track the benchmark's overall performance.
The personal consumption expenditures ("PCE") price deflator- which comes from the Bureau of Economic Analysis' quarterly report on U.S. gross domestic product-is based on a survey of businesses and is intended to capture the price changes in all final goods, no matter the purchaser. Because of its broader scope and certain differences in the methodology used to calculate the PCE price index, the Federal Reserve ("the Fed") holds the PCE deflator as its preferred, consistent measure of inflation over time.
"Phantom Tax" or "Phantom Income" for direct owners of Treasury inflation-protected securities (TIPS)
TIPS (defined below) adjust their principal values and interest payments for inflation. As with other directly owned Treasury securities, TIPS principal, including the inflation adjustments, is not paid back to investors until the securities mature. However, the principal adjustments are taxed by the IRS as income in the year in which they occur, even though no actual payments are made in those years to investors who own TIPS directly. This is why this income is called "phantom income" and the tax on it is known as the "phantom tax." Investors can avoid the phantom income/tax issue for TIPS by holding TIPS in tax-deferred retirement accounts. Mutual funds and exchange-traded funds (ETFs) typically take the "phantom" factor out of TIPS ownership by distributing the principal adjustments as taxable dividends. As with direct ownership of TIPS, the tax consequences of these distributions by mutual funds and ETFs can be reduced by holding TIPS-owning instruments in tax-deferred retirement accounts.
Typically used in reference to mortgage-backed securities (MBS, defined above). Refers to the risk that mortgage refinancing activity might increase when market interest rates decline, which is generally not favorable for MBS investors. When homeowners refinance their mortgages, MBS investors are "prepaid," shortening the life of their investments and forcing investors to reinvest the proceeds under lower interest rate conditions than what were most likely prevailing at the time of the original MBS investment. Price adjustments for prepayment risk are one factor that helps explain why MBS, despite their generally high credit quality, have higher yields than comparable-maturity Treasury securities.
Price changes from market changes (for bonds and other fixed-income securities)
These are short-term price changes reflected in the daily market pricing of fixed-income securities prior to maturity. These price changes can reflect market adjustments in inflation expectations, credit quality perceptions, and/or interest rate levels. These price changes are not locked in unless the security is sold prior to maturity.
Price to earnings ratio (P/E)
The price of a stock divided by its annual earnings per share. These earnings can be historical (the most recent 12 months) or forward-looking (an estimate of the next 12 months). A P/E ratio allows analysts to compare stocks on the basis of how much an investor is paying (in terms of price) for a dollar of recent or expected earnings. Higher P/E ratios imply that a stock's earnings are valued more highly, usually on the basis of higher expected earnings growth in the future or higher quality of earnings.
Producer Price Index (PPI)
Measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
Quantitative easing (QE)
A form of monetary policy used by central banks to stimulate economic growth. In QE, a central bank (such as the U.S. Federal Reserve) buys domestic government securities to increase the domestic money supply, lower interest rates, and encourage investors to make investments in riskier assets such as stocks and high-yield securities.
R-squared is a portfolio performance and risk measure that indicates how much of a portfolio's performance fluctuations were attributable to movements in the portfolio's benchmark index. R-squared can range from 0-100%. An r-squared of 100% indicates that all portfolio performance movements were attributable to movements in the benchmark index-they correlate perfectly to the benchmark. Conversely, an r-squared of 0% indicates that there is no correlation between the performance movements of the portfolio and the benchmark.
For most bonds and other fixed-income securities, real yield is simply the yield you see listed online or in newspapers (see Yield) minus the premium (extra yield) added to help counteract the effects of inflation (see Inflation). Most "nominal" fixed-income yields (see Nominal yield) include an "inflation premium" that is typically priced into the yields to help offset the effects of inflation. Real yields, such as those for TIPS, don't have the inflation premium. As a result, TIPS yields and other real yields are typically lower than most nominal yields.
Profits generated by a company that are not distributed to stockholders as dividends. Instead, they are either reinvested in the business or kept as a reserve for specific objectives, such as paying off debt or purchasing equipment. Retained earnings are also called "undistributed profits," "undistributed earnings," or "earned surplus."
One of the biggest sectors in the municipal debt (defined above) market. Unlike a general obligation (GO) bond (defined above), revenue bonds are not backed by a municipal issuer's taxing authority. Instead, interest and principal are secured by the net revenues (tolls, fees, or other charges tied to usage) from the project or facility being financed. Revenue bonds are issued to finance a variety of capital projects, including construction or refurbishment of utility and waste disposal systems, highways, bridges, tunnels, air and seaport facilities, schools and hospitals.
Risk-adjusted returns, in financial literature, are investment returns that are not just measured for their absolute magnitude over time. They are also measured for the amount of risk that was used to achieve them, and the potential impact of that risk on returns over time. The philosophy behind measuring risk-adjusted returns is to better understand and predict both upside potential and downside risk from investments based on the amount of risk that is used to achieve their returns.
Risk-weighted (or risk-adjusted) assets
Within the context of measuring the financial stability of banks and other financial institutions, the risk-weighted assets figure is an aggregate of a financial institution's assets (usually loans to its customers) after the loans have been individually adjusted for their risk. This involves multiplying each loan by a factor that reflects its risk. Low-risk loans are multiplied by a low number, high-risk by high. The aggregate number can then be used to calculate the financial institution's capital ratio (defined in this Glossary). Lower risk-weighted assets typically result in higher capital ratios, and higher risk-weighted assets usually translate to lower capital ratios.
Russell 1000® Growth Index
Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.
Russell 1000® Index
A market-capitalization weighted, large-cap index created by Frank Russell Company to measure the performance of the 1,000 largest publicly traded U.S. companies, based on total market capitalization.
Russell 1000® Value Index
Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.
Russell 2000® Growth Index
Measures the performance of those Russell 2000 Index companies (the 2,000 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.
Russell 2000® Index
Market-capitalization weighted index created by Frank Russell Company to measure the performance of the 2,000 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization.
Russell 2000® Value Index
Measures the performance of those Russell 2000 Index companies (the 2,000 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.
Russell 2500TM Growth Index
Measures the performance of those Russell 2500 Index companies (the 2,500 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.
Russell 2500TM Index
A market-capitalization weighted index created by Frank Russell Company to measure the performance of the 2,500 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization.
Russell 2500TM Value Index
Measures the performance of those Russell 2500 Index companies (the 2,500 smallest of the 3,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.
Russell 3000® Growth Index
Measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 3000® Utilities Index
A sub-index of the Russell 3000 Index, is a capitalization weighted index of companies in industries heavily affected by government regulation, including among others, basic public service providers (electricity, gas and water), telecommunication services, and oil and gas companies.
Russell 3000® Value Index
Measures the performance of the broad value segment of the U.S. equity universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell Midcap® Growth Index
Measures the performance of those Russell Midcap Index companies (the 800 smallest of the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.
Russell Midcap® Value Index
Measures the performance of those Russell Midcap Index companies (the 800 smallest of the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.
Russell Top 200® Index
Measures the performance of the 200 largest securities of the 3,000 publicly traded U.S. companies in the Russell 3000® Index, based on total market capitalization. It is not an investment product available for purchase.
S&P GSCI® (Goldman Sachs Commodities Index)
A composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets.
S&P MidCap 400® Index
Provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis.
S&P/Case-Shiller Home Price Indices
Provide measures for the U.S. residential housing market, tracking changes in the value of residential real estate both nationally as well as in 20 metropolitan regions. The S&P/Case-Shiller U.S. National Home Price Index tracks the value of single-family housing within the United States. The index is a composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly.
Sector allocation in a fixed-income context refers to the portfolio managers' decision to invest in a particular broad market sector or industry. The ultimate sector allocation decision is likely to combine macroeconomic views with judgements about inter-sector and intra-sector relative values, among other reasons.
Debt resulting from the process of aggregating debt instruments into a pool of similar debts, then issuing new securities backed by the pool (securitizing the debt). Asset-backed and mortgage-backed securities (ABS and MBS, defined further above) and collateralized mortgage obligations (CMOs, defined above) are common forms of securitized debt. The credit quality (defined above) of securitized debt can vary significantly, depending on the underwriting standards of the original debt issuers, the credit quality of the issuers, economic or financial conditions that might affect payments, the existence of credit backing or guarantees, etc.
Security selection in a fixed-income context refers to a judgement about a security's relative attractiveness based on an analysis of a number of factors, including yield, structure, credit quality, and term to maturity, among other factors. For example, a bond may be identified as undervalued if its yield is higher than that of comparable bonds, or if the credit quality of the underlying issuer is thought to be stronger than that of other bonds with comparable yields.
Developed by Nobel Laureate William F. Sharpe in the 1960s, the Sharpe Ratio is a simple but useful risk-adjusted measure of returns, showing the amount of return (reward) earned per unit of risk from any asset with a risk component. More specifically, the Sharpe Ratio shows how much excess return (portfolio return minus the return of what is considered to be a relatively low-risk asset, such as a U.S. Treasury bill, over a given period of time) is received per unit of risk over that same time period. Risk, in the Sharp Ratio's case, is shown as the standard deviation (defined below) of the portfolio's excess returns over that same time period. The higher the Sharpe Ratio, the better, theoretically, the portfolio's risk-adjusted performance-portfolios with higher Sharpe Ratios tend to provide more return for the same amount of risk. The Sharpe Ratio is useful, but not perfect. It can be skewed by irregular return factors that can upset the standard deviation calculation, and it doesn't take into account the market risk (beta) exposure of the portfolio. Also, it was the product of a simpler time in investment management history, before sector specialization and the benchmarking of returns became prevalent.
Refers to selling short, the sale of a security or futures contract not owned by the seller (the seller borrows it for delivery at the time of the short sale). If the seller can buy the security or contract later (to return what was borrowed) at a lower price, a profit results. If the price rises, the borrower/seller suffers a loss. It's a technique used to 1) take advantage of anticipated price declines, or 2) to protect a profit in a long position (see Long position).
Short selling is a trading strategy intended to capitalize on a falling stock price. In a short sale, a portfolio manager borrows and sells the stock that he anticipates will decline in price. The manager does not own the stock. Instead, he must buy back the shares in the future to return them to the original owner. The profit (or loss) from short selling is the difference between the amount the manager originally sold the stock for and the amount paid to buy it back.
A country's own government-issued debt, priced in its native currency, that can be sold to investors in other countries to raise needed funds. For example, U.S. Treasury debt is U.S. sovereign debt, and would be referred to as sovereign debt when bought by foreign investors. Conversely, debt issued by foreign governments and priced in their currencies would be sovereign debt to U.S. investors.
Spreads (aka "interest-rate spreads", "yield spreads" or "credit spreads")
In fixed income parlance, spreads are simply measured differences or gaps that exists between two interest rates or yields that are being compared with each other. Spreads typically exist and are measured between fixed income securities of the same credit quality (defined above), but different maturities, or of the same maturity, but different credit quality. Changes in spreads typically reflect changes in relative value, with "spread widening" usually indicating relative price depreciation of the securities whose yields are increasing most, and "spread tightening" indicating relative price appreciation of the securities whose yields are declining most (or remaining relatively fixed while other yields are rising to meet them). Value-oriented investors typically seek to buy when spreads are relatively wide and sell after spreads tighten.
Spread sectors (aka "spread products," "spread securities")
In fixed income parlance, these are typically non-Treasury securities that usually trade in the fixed income markets at higher yields than same-maturity U.S. Treasury securities. The yield difference between Treasuries and non-Treasuries is called the "spread" (defined further above), hence the name "spread sectors" for non-Treasuries. These sectors--such as corporate-issued securities and mortgage-backed securities (MBS, defined above)--typically trade at higher yields (spreads) than Treasuries because they usually have relatively lower credit quality (defined above) and more credit/default risk (defined above), and/or they have more prepayment risk (defined above).
Standard deviation is a statistical measurement of variations from the average. In financial literature, it's often used to measure risk, when risk is measured or defined in terms of volatility. In general, more risk means more volatility, and more volatility means a higher standard deviation-there's more variation from the average of the data being measured. In this context, reducing risk means seeking lower standard deviation.
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
The acronym "STRIPS" describes both a government bond issuance program and the securities issued by the program. STRIPS are a form of zero-coupon security (defined below) created under the U.S. Treasury's STRIPS program. Originally, zero-coupon securities were created by broker-dealers who bought Treasury bonds and deposited these securities with a custodian bank. The broker-dealers then sold receipts representing ownership interests in the coupons or principal portions of the bonds. Some examples of zero-coupon securities sold through custodial receipt programs are CATS (Certificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts) and generic TRs (Treasury Receipts). The U.S. Treasury subsequently introduced a program called Separate Trading of Registered Interest and Principal of Securities (STRIPS), through which it exchanges eligible securities for their component parts and then allows the component parts to trade in book-entry form. STRIPS are direct obligations of the U.S. government and have the same credit risks as other U.S. Treasury securities. STRIPS are generally considered the most liquid (easily bought and sold) zero-coupon securities.
Swaps (aka swap agreements)
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate swaps (under which fixed- or floating-rate interest payments on a specific principal amount are exchanged) and total return swaps (under which one party agrees to pay the other the total return of a defined underlying asset in exchange for fee payments). In addition, credit default swaps enable an investor to buy/sell protection against a credit event of a specific issuer. The seller of credit protection against a security or basket of securities receives an up-front or periodic payment to compensate against potential default(s).
A tail event describes some rare, very unusual but nonetheless expected event. The "tails" of any statistical distribution (for example, a distribution of returns for an asset) are the extreme values at either end which have a very low probability of occurring but (should or when they occur) have large consequences (either negative or positive). With a normal (bell-shaped) distribution, tail events are usually those extreme values which have a 2.5% chance or less of occurring at either extreme (the upper or lower tail of the distribution).
Taxable municipal securities
These are municipal debt securities (defined above) that do not offer one of the primary features of the municipal sector: tax-exempt interest income. The reason why municipal debt interest is not always tax-exempt is because the federal government will not subsidize (with a tax exemption) the financing of certain activities that it either does not believe provide a significant benefit to the general public, or that it has chosen to subsidize in another manner. In the first case, the funding of investor-led, upscale housing developments, local sports facilities, and borrowing to replenish a municipality's underfunded pension plan are examples of municipal debt issues that are federally taxable. In the second case, bond programs, such as the Build America Bond program (defined above) are subsidized in other ways that don't utilize the federal income tax exemption. Taxable municipal securities offer yields more comparable with those of other taxable sectors, such as corporate-issued securities or those issued by U.S. government agencies, than to those of tax-exempt municipals.
Named for a U.S. economist, the Taylor Rule is a mathematical monetary-policy formula that recommends how much a central bank should change its nominal short-term interest rate target (such as the U.S. Federal Reserve's federal funds rate target) in response to changes in economic conditions, particularly inflation and economic growth. It's typically viewed as guideline for raising short-term interest rates as inflation and potentially inflationary pressures increase. The rule recommends a relatively high interest rate ("tight" monetary policy) when inflation is above its target or when the economy is above its full employment level, and a relatively low interest rate ("easy" monetary policy) under the opposite conditions.
Investment "technicals," in the context of investment analysis, are typically those factors used in determining value that rely more on market price behavior, trends, volume factors (such as supply and demand), and momentum, as opposed to "fundamentals," which are typically more economic (growth, interest rates, inflation, employment) and/or financial (income, expenses, assets, credit quality) in nature. Technical factors can often override fundamentals in near-term investor and market behavior, but, in theory, investments with strong fundamental supports should maintain their value and perform relatively well over long time periods.
"Tipping point" has slightly varied meanings depending upon the field of study, but is frequently defined as a series of small changes in an evolutionary process that ultimately lead to a significant change or point beyond which new circumstances and conditions obtain. For example, the point at which emerging economies go from being a long-time source of deflation to a source of inflation can be said to be an inflationary tipping point.
A form of municipal debt securities and securitized debt (each defined above) whose payment obligations are tied to a master medical lawsuit settlement agreement between 46 states and several major U.S. tobacco companies. In exchange for the states settling their lawsuits against the tobacco industry for recovery of tobacco-related health care costs and exempting the tobacco companies from private tort liability regarding harm caused by tobacco use, the companies agreed to curtail or cease certain tobacco marketing practices and to pay, in perpetuity, various annual payments to the states to compensate for the medical costs of tobacco-related illnesses. These tobacco industry payments have been securitized into municipal bonds. One underlying risk, among others, is that if certain conditions are met, the tobacco companies may reduce or suspend part of their payments.
For bonds and other fixed-income securities, total return is a standard performance measurement that incorporates both income (primarily from interest payments) and changes in the prices of the securities (see Price changes from market changes). It is viewed as a more complete measurement of fixed-income performance than yield alone.
Tracking error measures how much the return of an investment portfolio deviates from the return of its benchmark index. For example, an index fund (a mutual fund that's managed to closely match the performance of a particular index) should have a tracking error close to zero, while an actively managed portfolio (where the goal is outperforming the benchmark rather than simply tracking it) would typically have a higher tracking error, which can be potentially positive or negative.
Refers to Treasury futures contracts. Futures contracts are agreements to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. In this case, Treasury futures are contractual obligations to either buy (take delivery of) or sell (make delivery of) U.S. Treasury bonds or notes. The deliverable securities (30-year Treasury bonds, and 10-, five-, and two-year Treasury notes) are debt instruments backed by the full faith and credit of the U.S. government. Despite this linkage, Treasury futures contracts are not obligations of the U.S. Treasury and therefore do not share the full faith and credit guarantee that supports Treasury bills, notes, and bonds.
Treasury inflation-protected securities (TIPS)
TIPS are a special type of U.S. Treasury security designed to address a fundamental, long-standing fixed-income market issue: that the fixed interest payments and principal values at maturity of most fixed-income securities don't adjust for inflation. TIPS interest payments and principal values do. The adjustments include upward or downward changes to both principal and coupon interest based on inflation. TIPS are inflation-indexed; that is, tied to the U.S. government's Consumer Price Index (CPI). At maturity, TIPS are guaranteed by the U.S. government to return at least their initial $1,000 principal value, or that principal value adjusted for inflation, whichever amount is greater. In addition, as their principal values are adjusted for inflation, their interest payments also adjust.
See Chicago Board of Trade (CBOE) Volatility Indexes
See Chicago Board of Trade (CBOE) Volatility Indexes
See Chicago Board of Trade (CBOE) Volatility Indexes
Weighted average maturity (WAM)
Weighted average maturity (WAM) is a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. Typically, the longer the WAM, the more sensitivity the portfolio has to interest rate changes.
For bonds and other fixed-income securities, yield is a rate of return on those securities. There are several types of yields and yield calculations. "Yield to maturity" is a common calculation for fixed-income securities, which takes into account total annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.
A line graph showing the yields of fixed income securities from a single sector (such as Treasuries or municipals), but from a range of different maturities (typically three months to 30 years), at a single point in time (often at month-, quarter- or year-end). Maturities are plotted on the x-axis of the graph, and yields are plotted on the y-axis. The resulting line is a key bond market benchmark and a leading economic indicator.
Yield to maturity, and real yield to maturity
Yield to maturity is a common performance calculation for fixed-income securities, which takes into account total annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity. Real yield to maturity is simply yield to maturity minus any "inflation premium" that had been added/priced in. (See Real yield.)
A "spread," in fixed income parlance, is simply a difference. Yield spreads measure yield differences, typically between debt securities with high credit ratings (which typically have lower yields) and those with lower ratings (which typically have higher yields). Yield spreads can also be measured between debt securities with different maturities (shorter-maturity securities typically have lower yields and longer-maturity securities typically have higher yields).
An investment that can lure investors with an attractive yield that may not be fundamentally sustainable, or that may lead to undesired price volatility. Yield traps can lurk in both the equity and fixed income markets. They have a tendency to prey on those who can least afford them, including retirement investors looking for increased relative income and stability, who may have been too focused on their income goals and not enough on stability.
Zero-coupon securities (aka zeros) are debt securities that, unlike most of their debt security counterparts, make no periodic interest payments to investors. Instead, they are sold at a deep discount (with an imputed interest rate priced into the discount), then redeemed for their full face value at maturity. When held to maturity, a zero's entire return comes from the difference between its purchase price and its value at maturity.
30-Day SEC Yield
The 30-Day SEC Yield represents net investment income earned by a fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC Yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements.
11/15/2015 STRIPS Issue
A Treasury Interest STRIP Maturing in November 2015.
Sources: American Century Investments, Barclays Indices, Chicago Board of Trade, Dow Jones, Frank Russell Company, FTSE, Lipper, MSCI, NYSE, Standard & Poor's.
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