Investment Glossary


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A

Active Management: An investment approach that seeks to outperform benchmark returns.

Alpha: The additional return earned by a security or portfolio, in excess of a particular benchmark. Historical alpha measures excess returns over time.

Asset Allocation: The process of choosing the right investment class, such as stocks, bonds and cash equivalents, and allocating funds to them, in order to achieve a portfolio's investment objectives.

Asset Allocation Funds: Asset allocation funds have the ability to shift assets among asset classes (for example equities, bonds, and short-term instruments). Asset allocation funds take the concept of a private asset manager - a skilled professional who builds and manages a comprehensive portfolio for a client - and apply it to a mutual fund.

B


Basis Point: A unit of measurement equal to 1/100 of one percent.

Benchmark: An index that serves as a standard against which a fund's performance is measured. For example, a fund may be compared to a benchmark such as the Standard & Poor's 500 Index in order to assess how it performs over time.

Beta: A measure of risk, expressed as the volatility of a stock or portfolio relative to the market. The greater the beta, the greater the volatility.

Blue-chip Stocks: Stocks of well-established companies that have had a history of earnings and dividend payments, as well as a reputation for sound management and quality of products and services. While not all large cap stocks are blue chip stocks, there is usually a large cap bias to blue chip stocks.

Bond: An interest-bearing promise to pay a specified sum of money -- the principal amount -- due on a specific date.

Bond Funds: Registered investment companies whose assets are invested in diversified portfolios of bonds.

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C

Call Feature: The terms of the bond contract giving the issuer the right or requiring the issuer to redeem or "call" all or a portion of an outstanding issue of bonds prior to their stated dates of maturity at a specified price, usually at or above par.

Capital Gains: This is earnings from the sale of a security at a higher price than the original purchase price.

Capital Gains Tax: This is a tax on profits from the sale of certain assets such as securities and real estate.

Capital Market: The market where capital funds -- debt (bonds) and equity (stocks) -- are traded.

Collective Funds: Like mutual funds, collective funds are "pooled" vehicles that commingle the assets of multiple individuals or organizations to cost effectively invest in a diversified portfolio. However, mutual funds must be registered as investment companies under US securities laws. Bank collective funds are organized as group trusts, and are exempt from this registration requirement.
Collective funds are regulated by the Office of the Comptroller of the Currency (OCC), which enforces US banking laws. Mutual funds are registered with, and supervised by, the Securities and Exchange Commission (SEC), which enforces US securities laws.

Credit Creation: Refers to the process of creating new purchasing power out of nothing.

Current Yield: The ratio of interest to the actual market price of the bond stated as a percentage

Cyclicals: Stocks of companies whose business prospects are tied to economic cycles. For example, steel companies often do poorly in a recession, when consumers are buying fewer large items such as cars and refrigerators.


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D

Derivative: A financial contract that is one step removed (or derived) from a share of stock, commodity, interest rate, currency or market index. A stock option, for example, is a derivative security whose value depends on the price of the underlying stock. Derivatives can be used by investors as a speculative tool, or to protect assets against changes in value.

Disequilibrium: Since the necessary conditions to obtain equilibrium are so stringent that they only ever apply in a theoretical environment, we know that there cannot be equilibrium in any market in the real world. All markets are in a state of disequilibrium, hence rationed, hence determined by quantities (short side principle) not prices. For more see 'New Paradigm in Macroeconomics', R. Werner, Palgrave Macmillan, 2005.

Dividends: Mutual fund dividends are paid out of income from the fund's investments. The tax on such dividends depends on whether the distributions resulted from interest income, or dividends received by the fund.

E

Emerging Market: A securities market that is of smaller size or that has a short operating history, for example, Greece, Russia, China, and Brazil. Usually volatility and risks tend to be higher than in other markets.

Expense Ratio: Annual percentage of fund's assets that is paid out in expenses. Expenses include management fees and all the fees associated with the fund's daily operations.

F

Futures Contract: An obligation to buy or sell a particular asset or commodity at a future date and at a pre-set price. Unlike forward contracts, futures are exchange-traded securities and are subject to strict regulation.

G

Global Funds: These broadly diversified funds offer the highest level of diversification among international funds because they can invest anywhere in the world, including the U.S.

Growth Funds: Growth funds are designed to pursue capital appreciation over the long-term. Some growth funds are broad-based, meaning that they have a wide range of stocks and industries in which they can invest. Others have a narrower focus - for example, they may invest in a particular type of stock, such as small-cap or cyclical stocks, or use a specialized approach to stock selection, such as investing only in stocks that are currently underpriced. Growth funds are more volatile than more conservative income or money market funds and generally reflect changes in market conditions and other company, political, and economic news.

Growth Stocks: Stocks of companies that have shown or are expected to show rapid earnings and revenue growth. Growth stocks are riskier investments than most other stocks and usually make little or no dividend payments to shareholders.

H

Hedge: A financial technique whose purpose is to offset the risk of loss from future price fluctuations. In a currency hedge, for example, a US investor who buys Japanese stocks would simultaneously purchase a futures contract in yen, in order to protect himself against a decrease in the value of the Japanese currency, which would lower the return of his stock investment in dollar terms.

I

Index Funds: A passively managed, limited-expense (advisor fee no higher than 0.50%) fund designed to replicate the performance of an unmanaged stock index on a reinvested basis.

Index Investing (also called passive investing): an investment strategy in which the goal is to replicate the results of a particular market index or benchmark.

Institutional Investor: 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, universities, and banks.

Investment Grade or Investment Grade Bond: The broad credit designation given to corporate and municipal bonds which have a high probability of being paid and minor, if any, speculative features. Bonds rated Baa and higher by Moody's Investors Service or BBB and higher by Standard & Poor's are deemed by those agencies to be "investment grade."


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J-K

Junk Bond: A bond rated lower than Baa/BBB, also called a "high-yield" bond. Junk bonds are speculative compared with investment grade bonds.

L

LLI: Leading Liquidity Index. Proprietary indicator of Profit Research Center Ltd. which measures the net credit creation of the central bank.

Load: A sales charge added to the price of the fund. Mutual funds that don't have any sales charges are called no-load funds.

M

Market Capitalization: In a Company Profile, the last closing share price times the latest number of shares outstanding.

Market Neutral: A way of investing such that a positive return can be achieved, no matter whether the market is rising or falling. This may take the form of buying (taking a 'long position') when the market is expected to rise, and selling (even if one does not own the asset, which is called 'shorting') when it is expected to fall. An overall market neutral strategy can also be achieved on an international scale by suitable asset allocation, such as buying stocks in an accelerating economy and buying bonds in a decelerating economy.

Mid-cap Stocks: An investment categorization based on the market capitalization of a company.

Modern Portfolio Theory: An investment approach that emphasizes the rigorous analysis of risk and return as the basis for investment decisions. Modern portfolio theory holds that investors weigh risk and return when making investment choices, and that they generally seek higher returns in exchange for assuming greater levels of risk. The theory also emphasizes three elements that are crucial to building portfolios, including asset allocation; optimization of the risk/return tradeoff; and performance attribution.

Moving Averages: The average price of a mutual fund calculated periodically over some designated period of time and plotted on a chart against actual price. The effect of a moving average is to minimize short-term price fluctuations and highlight long-term price fluctuations. A long-term moving average is the average of each week's closing adjusted NAV for the past 13 to 39 weeks. The long-term moving average chart shows the weekly average for the past two years and four months for the domestic and international equity funds. The Select funds have an additional short-term moving average chart that shows the daily average for the past three months. A short-term moving average is the average of each day's closing adjusted NAV for the past 13 and 39 weeks.

Mutual Fund: An investment that pools shareholders money and invests it toward a specified goal. The group's money is invested by a professional investment manager.

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N

NASDAQ Composite Index: A market capitalization-weighted index that is designed to represent the performance of the National Market System which includes over 5,000 stocks traded only over-the-counter and not on an exchange.

Net Asset Value (NAV): The dollar value of one share of a fund determined by taking the total assets of a fund, subtracting the total liabilities, and dividing by the total number of shares outstanding.

Net Yield: Rate of return on a security net of out-of-pocket costs associated with its purchase, such as commissions or markups.

Nikkei 225 Average Index: The Nikkei-225 Stock Average is an unmanaged price-weighted index of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949, where the average price was Y176.21 with a divisor of 225.

Nominal Yield (Coupon Yield): The stated interest rate paid on a bond, computed by dividing the amount of annual income by the bond's par value.

O

Option: A right to buy or sell shares at a guaranteed price for a specific period of time.

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P

Paper: Any short-term debt security.

Par: The nominal or face value of a security as given on the certificate or instrument. The par value is the amount on which interest payments are calculated.

Portfolio: The mix and composition of an investor's holdings among different classes of securities such as bonds, mortgages, and common stocks.

Public Offering: This refers to the offering of stock to the investment public. This occurs after Securities and Exchange Commission regulatory regulations have been satisfied. The offering is usually made by an investment banker or syndicate, group of financial institutions, on behalf of the issuer (e.g., the company that wants to sell its stock to the public).

Put Option: A contract that gives the holder the right to sell a stock or bond at a future date and at a pre-set price.

Q

Quantitative Funds: Mutual funds whose portfolio management decisions are based on quantitative analysis, which is usually developed using computerized statistical models of market behavior.

R

R2: Beta should be considered with R-squared (R2), a historical measurement which indicates how closely a fund's past fluctuations have correlated with the fluctuations of its benchmark index, such as the S&P 500. For example, a fund with an R-squared of 0.80 indicates that 80% of the fund's past fluctuations were explained by fluctuations in the benchmark index. Generally, the higher the R2, the more meaningful the beta figure.

Ratings: Designations used by investors' services to give relative indications of credit quality.

Real Estate Investment Trust - REIT: A company, usually traded publicly, that manages a portfolio for real estate to earn profits for shareholders.

Redemption: The paying off or buying back of a bond by the issuer.

Relative Volatility: A ratio of a portfolio's standard deviation to the standard deviation of a benchmark index.

Return: The ratio of the value of an investment at the end of a period, plus any payouts during the period, divided by the initial value.

Risk: Simply put, risk is the possibility that a particular outcome may not occur. In investment terms, risk is used to define all of the uncertainty relating to the outcome, including upside as well as downside possibilities. (The popular definition of risk is the downside only). Risk in investment returns is measured by the variance of the historical returns.

S

Sector Funds: Sector funds invest in the stocks of one specific sector of the economy, such as health care, chemicals, or retailing. These funds tend to be more volatile than funds holding a diversified portfolio of stocks in many industries.

Security: Generally, an instrument evidencing debt of or equity in a common enterprise in which a person invests on the expectation of financial gain. The term includes notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable evidences of indebtedness or ownership.

Settlement: This refers to the point at which a broker either pays for the securities bought by an investor or receives payment from the investor that brought the securities.

Small-cap Stocks: An investment categorization based on the market capitalization of a company.

Stock Option: A contractual right that a corporation grants to an individual so that he/she may purchase a specified number of shares of stock at a specified price for a specified period of time. In general, there are two types of stock options, incentive stock options (ISO) and non-qualified stock options (NSO).

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T

Tokyo Stock Exchange (TOPIX): The Tokyo Stock Exchange Index (TOPIX) is a market capitalization weighted index of over 1,100 stocks traded in the Japanese market.

Total Return: Return on an investment, taking into account capital appreciation, dividends or interest, and individual tax considerations adjusted for present value and expressed on an annual basis.

U

Unit Investment Trust (UIT): An SEC registered investment company that invests in a portfolio of securities on behalf of investors who share a common objective. Investors receive periodic interest and, upon maturity, redemption value. The UIT is not actively managed.

V

Value Stocks: Stocks that are considered to be undervalued based upon such ratios as price-to-book or price-to-earnings (P/E). These stocks generally have lower price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth rates than growth stocks.

Volatility Measures: Volatility measures the variability of historical returns. Relative Volatility, Beta, and R2 compare a portfolio's total return to those of a relevant market, represented by the benchmark index. Standard Deviation is calculated independent of an index.

W

Withholding Tax: A tax assessed by the relevant tax authority on dividends and interest. Tax rates can vary by market, instrument, and type of investor. In some markets, withholding tax is partially refundable.

XYZ

Yield: The percentage of return an investor receives, based on the amount invested or on the current market value of holdings.

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