online report consulting group Glossary of Investment Terms glossary of terms actively managed investment Relies on the expertise of a portfolio manager to choose the investment s holdings in an attempt to outperform a predetermined benchmark over the course of a full market cycle. aggressive portfolio Tends to encompass (1) relatively higher levels of exposure to equities and to investments outside the investor s home country and currency; and (2) relatively lower, or in some cases zero, levels of exposure to cash, to fixed income and investments inside the investor s home country, and to currency. These risk profiles may generally be expected to exhibit higher price volatility as measured by the standard deviations of annual returns from the portfolio and generally seek to generate a somewhat lower proportion of its returns from income as compared with capital gains. alpha Measures the difference between a fund s actual returns and its expected performance, given its level of risk as measured by Beta. A positive alpha risk indicates the fund has performed better than its Beta would predict. A negative Alpha indicates the fund s underperformance given the expectations established by the fund s Beta. The accuracy of Alpha is therefore dependent on the accuracy of Beta. Many investors see Alpha as a measurement of the value added or subtracted by a fund manager. alternative investments Generally refer to a diverse set of investment strategies that fall outside of the traditional purchase and sale of stocks and bonds. Some familiar examples of alternative investments include hedge funds, private equity and real estate. The appeal of alternatives lies in their potential to provide attractive risk-adjusted returns and additional diversification when compared to traditional asset classes. asset allocation How a portfolio is divided among different types on investments, such as stocks, bonds and cash. balanced portfolio A portfolio containing several different investment types. Most balanced portfolios are invested in stocks, bonds and money market instruments. basis point A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixedincome security. benchmark A standard against which the performance of a security, mutual fund or investment manager can be measured. beta Measures an investment s volatility relative to its benchmark. An investment with a Beta higher than 1.0 has historically been more volatile than the benchmark. Conversely, an investment with a Beta lower than 1.0 has historically been less volatile than the benchmark. See also volatility. bond A long-term debt security representing a contractual agreement by a company or government to repay borrowed money by a specified time at a specified interest rate. capital appreciation Increase in the price of an investment; also commonly referred to as the investment s growth. capital gain/loss (realized/ unrealized) The profit (loss) that results from a change in the price of an asset. A realized gain (loss) occurs when an investment security is sold as a price above (below) its cost.
capital preservation An investment objective in which protecting the investor s initial investment from loss is the primary goal. conservative portfolio Tends to encompass (1) relatively lower, or in some cases zero levels of exposure to equities and to investments outside the investor s home country and currency; and (2) relatively higher levels of exposure to cash, to fixed income and investments inside the investor s home country, and to currency. These risk profiles may generally be expected to exhibit lower price volatility as measured by the standard deviations of annual returns from the portfolio and generally seek to generate a somewhat greater proportion of its returns from income as compared with capital gains. consumer price index (cpi) A measure of inflation. The CPI is equal to the sum of prices of a number of goods purchases by consumers and weighted by the proportion each represents in a typical consumer s budget. credit quality A measure of the likelihood that a company will be able to make interest and principal payments on its bonds or other debt securities. Standard & Poor s Corporation and Moody s Investors Service rate the credit quality of publicly traded debt securities. Bonds with the highest credit quality ratings are known as investment grade, and bonds with poor credit quality ratings are known as speculative, high yield or junk bonds. current income Cash interest regularly received on fixed income investments and cash dividends regularly received on stocks. developed markets While not strictly defined, includes countries that (i) possess a per capita Gross Domestic Product substantially higher than the average for Emerging Markets; (ii) have fewer governmentimposed barriers to foreign investment; and (iii) have more strict regulatory environments. Investing in these countries is perceived as less risky because they are generally considered more politically and/or economically stable than countries in the Emerging Markets. Countries in the Developed Markets category include the United States, Canada, Japan and Germany, among others. diversification The process of investing in a number of different types of investments to reduce the risk of poor performance by any one type of investment having a big impact on overall portfolio results. Diversification does not ensure against loss. dividend Cash payment made by a company to stockholders. dividend yield Total amount of cash dividends received annually on a share of stock divided by the price of the stock. dollar-weighted return A method of calculating a portfolio return that looks at the total dollar values at the beginning and at the end of an investment, including any additions or withdrawals of funds, as well as the income and capital gains or losses. economic sectors Types of industries represented by the stocks held by the fund. The percentage of the fund s equity securities representing each economic sector is compared to the percentage of securities held in the fund s benchmark. emerging markets While not strictly defined, includes countries that (i) possess a per capita Gross Domestic Product substantially below the average for Developed Markets; (ii) have substantially greater government-imposed barriers to foreign investment; and (iii) may have lax regulatory environments. Investing in these countries is perceived as more risky because they may not be as politically and/ or economically stable as countries in the Developed Markets. Countries in the Emerging Markets category include Brazil, Chile, Mexico and Taiwan, among others. erisa The Employee Retirement Income Security Act. Passed in 1974, ERISA established the legal standards by which retirement plans are required to be managed. equity The ownership interest of common and preferred stockholders in a company. See also stock. exchange-traded fund More commonly known as ETFs, exchangetraded funds are investment vehicles designed to replicate the daily movement of a particular market index or other benchmark. Like stocks, ETFs are listed and traded throughout the day on a public exchange or equity market. Though some recent ETFs have actively managed components, virtually all exchange-traded funds are passively managed. expected return The return investors anticipate they will receive on an investment over some future period. The expected return often differs from the investors realized or actual return. expense ratio Measures a fund s annual expenses as a percentage of the fund s net assets. Expenses include all management and administrative fees, but exclude brokerage costs such as commissions. fiduciary A person or group vested with legal power and responsibilities that are to be used for the benefit of another person or group. fixed income investments Debt securities, such as bonds and money market instruments, with specified interest and principal payment dates and amounts. Can also include preferred stock. gross-of-fee performance A measure of investment performance consulting group morgan stanley 2
that does not include the impact of fees. growth stocks Stocks of companies whose earnings are expected to grow rapidly. investment grade Fixed income investments receiving high credit quality ratings. Bonds are considered investment grade if they have a BBB or better rating by Standard & Poor s Corporation or a Baa or better rating by Moody s Investors Service. See also credit quality. investment manager The individual or firm responsible for the day-to-day decisions involving an investment portfolio. The manager decides which stocks or bonds to buy or sell and when. Investment managers must be registered with the Securities and Exchange Commission and/or with the state there they do business. investment objective The goal of an investment strategy followed by an investor or investment manager. Investment objectives can be designed to generate longterm growth, current income or a combination of both. investment policy statement A summary of an individual s or institution s investment objectives that serves as a guide for many investment decisions. investment style Refers to a fund manager s general discipline and philosophy that is employed during the investment decisionmaking process. Among the most recognized equity investment styles are growth, value and core. investment sub-style Further sub-divisions that can help investors understand the investment approach of a particular manager and the possible performance and portfolio characteristics associated with that approach. liquidity The ease with which an investment may be bought or sold quickly without having a significant impact on the price of that investment. loss harvesting Selling securities at a loss to offset a capital gains tax liability. manager tenure Indicates the number of years the current portfolio manager has been managing a portfolio or fund. When more than one portfolio manager manages a portfolio or fund, the average tenure of the managers is listed. market capitalization The market value of a company. It equals the current stock price of a company multiplied by the total number of outstanding shares. market cycle Generally regarded as a time period of 5 to 10 years. market timing An attempt to sell investments before they decrease in value and buying them when they are about to increase in value in other words, to buy low and sell high. Investors who attempt to time the markets will move their money among stocks, bonds, cash or other investment instruments based on their expectations of short-term price changes in the capital markets. money market The market in which short-term, highly liquid, low-risk assets such as Treasury bills, bank certificates of deposit (CDs), corporate commercial paper and banker s acceptances are traded. mutual fund An investment company that invests in different types of securities, such as stocks or bonds, on behalf of individuals who have similar investment goals (i.e., the fund s shareholders). A mutual fund generally adheres to a distinct investment objective and investment policies. The assets are managed by a professional portfolio manager hired by the fund, and investors participate by owning shares of the fund rather than the fund s underlying securities. net-of-fee performance A measure of investment performance that includes the impact of fees. nominal return The return on an investment, not adjusted for the effect of inflation. passively managed investment Designed to mimic the holdings of a benchmark in order to match the benchmark s returns before expenses, not exceed them. p/e ratio (price/earning ratio) Determined by dividing the stock price by earnings per share. P/E ratios can be interpreted as how much an investor is willing to pay for one year s earnings. performance The change in value of an investment or portfolio over a specific period of time. The overall performance of an investment includes any income and realized and unrealized capital gains and/or losses. portfolio The combined securities held by an investor. portfolio characteristics Important information about the fund. Included are the name of the fund manager and the number of year s the manager has been overseeing the fund s investments. Portfolio characteristics also provide a breakdown of the fund s assets in the three major asset classes: stocks, bonds and cash. principal The amount of money borrowed by a company in issuing a bond or other fixed income security. For many fixed income securities, it represents the amount that must be repaid by the borrower upon maturity. real return The return on an investment minus the effects of inflation. representative holdings Indicate representative stocks that comprise significant percentages of the fund s investments. risk The possibility that the actual return on an investment will be different from the expected return. Typically, expect high potential returns for taking on greater risk. However, not investing aggressively consulting group morgan stanley 3
enough may lead to short fall. s&p 500 index A representative sample of the 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market. The Index is calculated using a baseweighted aggregate methodology, meaning the level of the Index reflects the total market value of all component stocks relative to a particular bas period. Total market value is determined by multiplying the price of its stock by the number of shares outstanding. securities and exchange commission (sec) A federal government agency, which was created by the Securities and Exchange Act of 1934, that regulates the securities industry and administers federal securities laws. separately managed account Often referred to as an SMA, a separately managed account typically consists of a customized portfolio of stocks, bonds or other assets managed on the investor s behalf by a professional portfolio manager. Because the investor directly owns all the underlying securities in a separately managed account, this type of investment potentially offers the opportunity to manage the timing of future tax liabilities, as well as other services tailored specifically to the investor s needs. sharpe ratio Measures a portfolio s rate of return based on the risk it assumed and is often referred to as its risk-adjusted performance. Using Standard Deviation and returns in excess of the returns of T-bills, it determines reward per unit of risk. standard deviation Measures the volatility associated with a given investment. The statistic measures the annualized quarterly variation in investment returns around the mean return. Unlike beta, which measures volatility relative to the aggregate market, standard deviation measures the absolute volatility. stock A type of security that signifies ownership in a corporation and represents a claim on part of the corporation s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. strategic asset allocation A portfolio strategy that involves setting target allocations for various asset classes, and periodically rebalancing the portfolio back to the original allocations when they deviate significantly from the initial settings due to differing returns from various assets. In strategic asset allocation, the target allocations depend on a number of factors such as the investor s risk tolerance, time horizon and investment objectives and may change over time as these parameters change. tax management Utilizing taxloss harvesting and other techniques to attempt to minimize tax liabilities at the portfolio level. tactical asset allocation An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. time horizon The amount of time until the allotted money is needed. This can typically be one, five, or even ten years. time-weighted return A measure of the compound rate of growth in a portfolio. total return Indicates the short- and long-term investment returns earned by the fund, along with the returns of its benchmark and/or index. tracking error Represents the Standard Deviation of the Excess Return. This provides a historical measure of the variability of the fund s returns relative to its benchmark. A fund with a low Tracking Error would have quarterly Excess returns that have exhibited very low volatility. treasury bills A short-term debt obligation backed by the US government with a maturity of less than one year. Also called T-bills, Treasury bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks). treasury bonds U.S. Treasury obligations that mature in more than ten years. treasury notes U.S. Treasury obligations that mature in two to ten years. unified managed account A professionally managed private investment account that is rebalanced regularly and can encompass every investment vehicle (e.g. mutual funds, stocks, bonds and exchange traded funds) in an investor s portfolio, all in a single account. value stocks Stocks that are trading at a discounted price relative to the company s perceived worth, earnings or cash flow. volatility Fluctuations in the value of a security or investment portfolio. Volatility is viewed as a measurement of an investment s risk. wash sale A transaction where an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain. consulting group morgan stanley 4
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market. The Lipper Large Cap Core Fund Average includes the 30 largest largecap core funds tracked by Lipper Inc. Lipper averages are equally weighted total returns of all the active funds available in the category. The average includes net reinvested dividends. Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results. Investing in the market entails the risk of market volaility. The value of all types of investments may increase or decrease over varying time periods. Diversification does not assure a profit or protect against loss. 2014 Morgan Stanley Smith Barney LLC, member SIPC. Consulting Group is a business of Morgan Stanley Smith Barney LLC. 2014-PS-138 2/14 consulting group morgan stanley 5