GIA Glossary

Glossary

 

Active Management
Investment strategy which seeks to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying particularly mispriced sectors of a market or securities in a market.
AIMR PPS
Published by the Association for Investment Management & Research (AIMR), the performance presentation standards (PPS) are intended as guidance for how a firm should present its performance to clients, prospects, and consultants in a fair and ethical manner. First introduced in 1987, the AIMR PPS are a voluntary set of standards that continue to evolve with the industry to promote fair representation and full disclosure.
Alpha
Value-added from active management over passive investing.
Annualized Rate
of Return
The average return over a period of years, taking into account the effect of compounding. Also called the compound growth rate. For example, a 100% return over five years is equivalent to an annualized rate of return of 14.9% per year.
Asset Allocation
Apportioning of investment funds among asset classes, such as cash, equities and fixed income.
Basis Point
1/100th of a percent.
Bear Market
A prolonged period of falling security prices.
Benchmark
A standard by which something can be measured or judged. Often used as a synonym for Index.
Beta
A measure of an asset's sensitivity to an underlying index or factor. For example, an asset with beta of 1.2 would be expected to return 12 percent if the market returned 10 percent and -12 percent if the market returned -10 percent. Beta is computed as an asset's correlation with the index times the ratio of the asset's standard deviation to the index's standard deviation.
Bond
An IOU (debt security) issued by a government or corporation that pays a stated rate of interest and returns the face value on the maturity date.
Bottom-Up Approach
An investment strategy that emphasizes finding individual companies which are expected to outperform the index return, before considering broad economic trends.
Bull Market
A prolonged period of rising security prices.
Buy and Hold
A strategy whereby an asset mix is bought and left unchanged throughout the investment horizon.
Call Option
See Option
Commodities
As the name suggests, commodities are undifferentiated lumps of naturally occurring materials. Value needs to be added to them by the application of knowledge. It is the investment in that process (of knowledge) that earns a return (rather than the commodities by themselves). Therefore, over the long haul, the price of the commodities themselves reverts to the cost of production.

(As a side comment: As societies become more sophisticated, knowledge generates ever greater returns. By contrast, societies in which commodities are highly valued are by definition more primitive.)
Common Stock
A security that represents ownership in a public corporation.
Contango
A fancy term for the current cash price of something being lower than a future price. This is the normal condition of prices. The opposite is "backwardation". Note that when the intermediate and longer term futures prices are consistently much higher than the cash prices, then inflation and/or inflationary expectations have become a major factor.
Contrary opinion theory
Broadly, buying when others are pessimistic and selling when they're optimistic. But using it effectively is obviously not that simple. One way that many successful investors use to determine when to apply it is to do the opposite of what is on the news. If a story has hit 'page one' or is on magazine covers then its much more frequently a time to sell, at least on the short term, than a time to buy.
Core
 inflation is basically regular CPI, with food and energy costs removed.
Conundrum
An insoluble or difficult problem; a dilemma: "the conundrum, thus far unanswered, of achieving full employment without inflation" (Arthur M. Schlesinger, Jr.) .
Convexity
In a fixed income security, convexity measures the way duration and price change when interest rates change.
CPI
Consumer Price Index - An indicator that is supposed to accurately measure the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. It is published monthly by the US Bureau of Labor Statistics, and is also sometimes incorrectly called or promoted as a cost-of-living index.
Credit
An agreement to borrow something of value and repay it later.
Crisis
1. A crucial or decisive point or situation; a turning point.

2. An unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change.
Current account
 Also frequently called the capital account, an account that tracks the movement of funds for investments and loans into and out of a country. It makes up part of the balance of payments.
Custodian
The bank or trust that holds a mutual fund's assets (stocks, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions.
Cycle
A periodically repeating sequence of events. Examples are the 22 year sunspot cycle, or the approximate 4 year US business cycle.
Debt
is created when someone with more stored work-value (money) than he needs, lends it to someone who has less than he needs. In exchange, the person with less money pledges to pay back the loan with his future work. Future work is eventually converted into stored work (money), and is paid back to the lender. Borrowers take loans from lenders because they want to obtain something of value to them. The thing of value, however, does not have equal value to all people. It will almost always be much more valuable to the borrower than to the lender. (Take a house, for example. The bank can't live in a house, so its value is far higher to the borrower than to the bank. That's essentially why banks lose money when they foreclose on houses. Banks must do work to get rid of the borrower, and, then, later, to find someone else for whom the house has value. Since work is money, banks lose money on foreclosures.).
Deflation
Less money created than there are goods available to buy with it. Most prices generally go down during a deflation. The best recent large example is the worldwide depression of the 1930s. Lack of demand and fear also play a part in exiting a deflation.
De-leveraging
is the reduction of debt by selling assets. Typically, the borrower is forced to sell higher-quality assets because, during times of general distress, nobody pays a dime for low-quality assets. Also, during times of general de-leveraging, prices are severely depressed because sellers (people that have to sell) vastly outnumber the few investors that are prepared (and able) to buy. (Of course, for the astute investor, these periods offer excellent buying opportunities because prices paid are usually substantially lower than the value received.)
Depression
A period of drastic decline in an economy, characterized by decreasing business activity, falling prices, and unemployment. They used to be called panics or crises before 1930. An alternate and general definition is a period when most people's standard of living drops very significantly. Economists disagree on the difference between a recession and a depression but in general a depression lasts much longer than a recession. Another way to tell the difference is to look at the changes in GDP. Many believe that a depression is any economic downturn where real GDP declines by more than 10% and a great depression is 20% or more.
Derivative Security
A security, such as an option or a futures contract, whose value is derived from the value of the underlying asset.
Distribution
Payment of a dividend or capital gain. Shareholders may take their distributions in cash or may have them automatically reinvested in additional shares of the same fund.
Diversification
The practice of holding a large number of assets in a portfolio so as to reduce the portfolio's sensitivity to an individual asset's return.
Dividend Discount Model
A valuation model for common stock that assumes that the present value of a stock is equal to the discounted value of its future stream of dividends.
Duration
The weighted average of the remaining maturity of the cash flows (discounted to present value) scheduled to be received under the instrument. Duration is a calculation that seeks to measure the price sensitivity of a bond or a bond fund to changes in interest rates. It measures bond price sensitivity to interest rate changes more accurately than maturity because it takes into account the time value of cash flows generated over the bond's life.
EAFE
Abbreviation for the Morgan Stanley Capital International Europe, Australia, Far East Index, a well known, independently maintained and published large capitalization international stock index.
Economics
The social science that deals with the production, distribution, and consumption of goods and services. The original meaning of the word was the art of managing one's own household, from the Greek: oikos (house) + nomine (to deal out).
Entry and exit points
The price at which an investment is bought and sold.
Equity Security
A type of security representing ownership in a corporation. Common stock, preferred stock and convertible securities are all equity securities. Equity securities are distinguished from debt securities, which do not represent ownership in the issuer.
Erisa
Acronym for the Employee Retirement Income Security Act of 1974. ERISA governs qualified retirement savings plans.
ETF
Exchange Traded Fund
A fund not unlike a mutual fund that tracks an index, a group of stocks, or some commodities, but can be traded like a stock. Because ETFs are traded on normal stock exchanges, they can be bought and sold at any time during the day unlike most mutual funds. Their price will fluctuate from moment to moment, just like any other stock's price, and they may be bought as well as sold much like a stock.
Ex-Dividend Date
When used in reference to mutual funds, the date the fund declares a dividend. When this occurs, the fund share price drops by the amount of the dividend. Expressed otherwise, the fund's assets are reduced by the amount of the distribution before the NAV is calculated.
Fed Funds Rate
The rate at which banks can do temporary borrowing to meet their legal reserve requirements.
Fiat currency
Money printed by a government as legal tender which is not redeemable in anything, such as silver or gold.
Financial distress
"The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revivial, but finally giving up in the final collapse." Charles P. Kindleberger, "Manias, Panics, and Crashes: A History of Financial Crises"
Force Majeure
A common clause in contracts which essentially frees one or both parties from liability or obligation when an extraordinary event beyond the control of the parties, such as war, strike, riot, crime, act of God (e.g., flood, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. Time-critical contracts may be drafted to limit the shield of this clause where a party does not take reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become likely or when they actually occur. Note also that a force majeure may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered.
Fund of Funds
Fund which invests in other mutual funds in the same fund family, instead of or in addition to investing directly in equity, fixed income or other types of investments.
Fundamental Analysis
The study of a company's business and financial status to help forecast future movements in its stock price. Analysts consider the company's past record of earnings and sales as well as company assets, management, and markets to predict trends that could affect a company's stock.
Futures Contract
A contract that has uniform terms concerning price, quantity, and expiration and that obligates the seller to pay the value of the contract to the buyer at a prespecified date.
GDP
Gross Domestic Product - the total value of all goods and services produced in a given country. It consists of total consumer, investment and government spending, plus exports and minus imports, and including earnings from foreign sources. Note that a switch was made in November 1991 from using GNP (Gross National Product) to GDP. A major difference is that GNP does not include earnings from foreign sources and GDP does. That factor can make the growth rate over 1% higher all by itself. Another difference is that the payments the government must make to service the national debt are missed in the GDP numbers, which again causes GDP to be higher than it actually is.
Hedge
A strategy used to offset investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. Often used as a defensive strategy in portfolios investing in non - U.S. securities to reduce the negative effects of unfavorable moves in currency exchange rates.
Illiquid Security
A security which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment.
Index
a) A benchmark against which to measure performance, such as the Standard & Poor's 500 Index.

b) A statistical composite that measures changes in the economy or financial markets, often expressed in percentage changes from a base year or from the previous month.
Indexing
A passive portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index.
Management Fee
Fee paid to the fund manager for providing investment management.
Mean Reversion
The notion that asset values revert to an average value or to an equilibrium value. Thus, if an asset's price is above its equilibrium value the presumption of mean reversion is that the asset's price will eventually decline to its equilibrium value. Similarly, if the price is below its equilibrium value the presumption is that the asset's price will eventually rise to its equilibrium value.
Mean Variance
Optimization
Mathematical calculation used to build portfolios that have the lowest possible portfolio variance for a given portfolio's expected return. The analysis uses return, risk and covariance forecasts to combine assets into optimal portfolios, meaning that the portfolios maximize return for different levels of risk.
Monte Carlo Simulation
Analytical method meant to imitate a real-life system. Monte Carlo simulation is particularly useful when you want to predict the overall outcome of a series of related events but only know the statistical probability of the outcome of each component event. For each uncertain variable (such as interest rates), there is a known range of values but an uncertain value for any particular time or event. A Monte Carlo simulation randomly generates values for uncertain variables over and over to simulate a model with various outcomes.
Mutual Fund
A diversified, professionally managed portfolio of securities that pools the assets of individuals and organizations to invest toward a common objective such as current income or long-term growth. Mutual funds are open-ended investment companies and are generally registered with the SEC under the Investment Company Act of 1940. Mutual funds issue redeemable shares and are distinguishable from closed-end funds, whose shares are trades on the secondary market.
NAV
An acronym for Net Asset Value per share. The net asset value of a share is determined for each Fund by dividing the total market value of the Fund's portfolio investments and other assets, less any liabilities, by the total outstanding shares of the Fund.
Option
An option is the right either to buy or to sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option which gives a right to buy is a call option, and an option which gives a right to sell is a put option.
Passive Management
A portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index. Also referred to as Indexing.
Portfolio Turnover
A measure of the trading activity in a fund's portfolio of investments -- that is, how often securities are bought and sold by the fund.
Price to Earnings Ratio
(P/E Ratio)
A method of valuing stocks, calculated by dividing the closing price of a company's stock by its annual earnings per share. Growth stocks tend to have a high P/E ratios compared to income stocks.
Prospectus
The official offering document that describes a fund and offers its shares for sale. By law, a prospectus must be given to all investors before they invest or with confirmation of their purchase.
Purchase Premium
Fee paid to and retained by a mutual fund that is designed to allocate transactions costs caused by shareholder purchases to the shareholder generating the activity, rather than to the fund as a whole.
Put Option
See Option
Quantitative Investing
Investment strategy which combines strategic quantitative analyses of countries, industries and sectors with sophisticated computer models to select particular stocks.
Redemption
The process of converting a shareholder's shares into cash. A registered open-end mutual fund must redeem shares at the price next determined after receipt of the shareholder's request.
Redemption Fee
Fee paid to and retained by a mutual fund that is designed to allocate transactions costs caused by shareholder redemptions to the shareholder generating the activity, rather than to the fund as a whole.
REIT
Real Estate Investment Trusts (REITs) are managed vehicles which invest in real estate or real estate-related assets.
Return of Capital
A fund distribution that exceeds earned income -- that is, a distribution that includes a portion of the investor's original principal. Return of capital is sometimes distributed to maintain the level of the distribution when income is not adequate to do so. It is generally not subject to taxes.
ROE
Abbreviation for Return on Equity. ROE is an accounting ratio of net profits divided by equity.
Share
A unit of ownership in an equity security, such as a mutual fund or common stock.
Share Class
The class of shares held by an investor in a mutual fund. Although a share class may have different distribution or shareholder servicing fees, all share classes of a fund pay the same management fees, and represent an interest in the total investment portfolio of the fund.
Share Holder
An owner of shares of a mutual fund.
Statement of Additional Information (SAI)
An addendum to a mutual fund's prospectus that includes further disclosure about the fund's operations.
Statistician
A person who can have one leg in a boiling pot of water and the other in a vat of ice water and tell you that on average he's comfortable. ;-)
Stock
An instrument or certificate that represents an ownership position in a corporation, and represents a claim on a proportional share in the corporation's assets and profits.
Top-Down Approach
An approach to investing in which the investor first looks at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.
Total Return
The return on investment which takes into account the change in price plus dividends or interest received. The total return for a fund reflects changes in net asset value and reinvestment of all distributions in additional shares of the fund.
Trade deficit
What its called when a country imports more than it exports. When its very large as a proportion of the economy and continues to grow, its a signal of danger for the future economy. Also called current account deficit and balance of payments deficit. Trade surplus is the opposite.