Investments Glossary

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Active Management: An approach to investing in which the portfolio manager seeks to outperform a given benchmark portfolio.

Agent: The role of a broker/dealer firm when it acts as an intermediary between its customer and another customer. For this service the broker receives a commission.

Alpha: Portfolio’s return relative to the return of the portfolio’s benchmark.

Appreciation: The percentage change in the market value of a property or portfolio over the period of analysis.

Asset Allocation: Process of allocating investments optimally across a set of asset classes

Asset Class (Type): A broadly defined generic group of financial assets, such as stocks or bonds.

Attribution Analysis: A comparison of an account’s performance to its benchmark to identify sources of returns that are different from the benchmark and the impact that this has on an account’s performance.

Basis Point: A measurement used to describe the percentage change in the value or rate of a financial instrument (1/100 of 1 percent, .0001 in decimal form).

Benchmark: An index derived from database information that allows for comparative performance evaluation within an asset class.

Best Execution: Refers to executing client transactions so that the client’s total cost is the most favorable under the particular prevailing circumstances at that time.

Beta: A measure of the sensitivity of a given investment or portfolio to movements in the overall market.

Broker: Refers to a person or entity registered with the National Associated of Security Dealers and provides investment services (research, soft dollar, etc.) and/or execution services.

Carried Interest: The mechanism by which general partners are compensated for their performance. The general partner’s carried interest is its share of the partnership’s profits, and generally ranges from 10-30% of the total.

Client-Directed Brokerage Arrangement: Refers to an arrangement whereby a client directs that trades for its account be executed through a specific Broker in exchange for which the client receives a benefit in addition to execution services. Client-directed brokerage arrangements include rebates, commission banking and commission recapture programs through which the broker provides the client with cash or services or pays certain obligations of the client. A client may also direct the use of limited lists of broker-not for the purpose of reducing Brokerage costs, but to effect various other goals (e.g., increased diversity by using minority-owned brokers) or geographical concentration.

Co-Investment: Investments where the management organization has a capital investment and ownership share.

Commercial Mortgage-Backed Securities: Investments that are collateralized by commercial real estate mortgages, similar to a mortgage backed security where payments to investors are received out of the interest and principal of the underlying mortgages.

Comingled Fund: A term applied to all open-ended and closed-ended pooled investment vehicles designed for institutional tax-exempt investors. A comingled fund may be organized as a group trust, partnership, corporation, insurance company separate account, private real estate investment trust, or other multiple ownership entity.

Commission: Refers to the amount paid to the Broker in addition to the price of the security and applicable regulatory fees, on an agency trade.

Commission Rate: Fee paid to a broker for executing a trade. The fee is based on the number of shares traded, the dollar amount, and the liquidity of the trade.

Corporate Governance: The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, formal policy and rule of law.

Counterparty: An individual or organization on the opposite side of a trade.

Credit Rating: A relative ranking of timely interest payment and principal repayment based on past records of debt repayment, current financial status, and future outlook for the company.

Currency: Any form of money that is in public circulation.

Diversification: Investing in a wide range of securities or asset classes in order to reduce financial risk.

Duration: The weighted average maturity of the present value of a bond’s cash flow stream. A measure of the change in price for a small movement in interest rates.

EAFE: Europe Australia Far East index, a global equity benchmark by MSCI index of 21 major developed nations. The index covers the top 80% of the publicly traded equities in each market.

Earnings Per Share: The portion of a company’s profit allocated to each outstanding share of common stock.

Emerging Market (EM): Emerging market as defined by an index provider, the classification differs between the equity and fixed income universe.

Fiduciary: Refers to any entity, or a natural person, that has discretionary authority or responsibility for the management of a client’s assets or other relationships of special trust.

General Consultant: A consultant that addresses questions concerning general types of investments.

General Partner: Managing partner of a limited partnership responsible for performing the day-to-day administrative operations of the partnership and acting as investment adviser to the partnership. The general partner typically invests 1 percent of the capital and retains 20 percent of the profits.

Government Bonds: Obligations of the U.S. government, regarded as the least risky, highest-grade securities issues. The major types of debt instruments issued by the U.S. government are: Treasury Bills, Savings Bonds, Treasury Notes, and Treasury Bonds.

Indexed Portfolio: A portfolio which replicates a broad market index (benchmark). Objective is to minimize tracking error while provided market returns.

Information Ratio: This is a measure used to determine how effectively an investment manager is able to add excess returns above a benchmark relative to the risk they have taken above the risk of their benchmark.

Infrastructure: This term typically refers to the technical structures that support a society, such as roads, water supply, sewers, power grids, telecommunications, and so forth.

Internal Rate of Return (IRR): The discount rate at which the present value of future cash flows of an investment equals the cost of the investment. It is determined when the net present value of the cash outflows (the cost of the investment) and the cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR.

Investment Adviser: Refers to any entity, or a natural person, that serves in the capacity of asset adviser to a client. The investment adviser may have sole, shared or no investment discretion over an account.

Investment Decision-Making Process: Refers to the quantitative and qualitative processes and related tools used by the investment adviser in rendering investment advice to its clients, including financial analysis, trading and risk analysis, securities selection, broker selection, asset allocation and suitability analysis.

Investment Guidelines: This is a document that establishes the parameters through which the investment manager will invest CTPF assets. These guidelines specify valid securities for the portfolio, the return expected from the manager, how the manager will be evaluated and the period over which the manager will be evaluated.

J-Curve: The J-Curve phenomenon is the effect of the cash flow behavior of a partnership. It can be summarized as the first year’s investment expenses of investing in a fund that has yet to harvest its capital gains in the future. This normally translates into a negative IRR in the early years of the fund. The plot of the partnership values versus time generally resembles a letter “J.”

Liquidity: Refers to availability of a security to be traded. An issue that is readily available is considered to be liquid, an issue that does not trade very often is deemed “illiquid.”

Mezzanine: Mezzanine investments are in unsecured or junior obligations in financing. They typically earn a current coupon or dividend and have warrants on common stocks or conversion features to enhance returns.

Opportunistic: A phrase characterizing an investment in underperforming and/or undermanaged assets typically purchased from distressed sellers, utilizing high levels of leverage with the expectation of near-term increases in cash flow and value.

Par Value: The underlying stated value of a bond. The par value serves as the basis for calculating coupon payments and settlement details.

Passive Management: Passive managers utilize either a replication or optimization method to track a benchmark’s performance. With replication, every security in the portfolio is held in the exact proportion as the benchmark. Optimization seeks to mimic the risk and return characteristics of a benchmark by only holding a subset of the benchmark’s securities.

Performance Objective: Refers to each individual external manager’s designated benchmark and their performance target.

Private Equity: This investment consists of equity of privately held-companies. The role of private equity is to provide high real returns over long periods of time. The private equity allocation will be comprised of opportunities both within the U.S. and internationally. Specific types of strategies will include venture capital, buyout, and opportunistic/special situations investing.

Quantitative Analysis: Applies mathematical and statistical techniques to a single market sector or to asset allocation.

Rate of Return: The total income received over a period of time, including interest income, accretion of discount, amortization of premium, and change of market value; usually expressed as a percentage or in decimal format.

Real Rate of Return: Yield to the investor after adjusting for inflation.

Rebalancing: Adjusting the actual portfolio to the current strategic asset allocation because of price changes in portfolio holdings. Also: revisions to an investor’s target asset class weights because of changes in the investor’s investment objectives or constraints, or because of changes in capital market expectation, or to mean tactical asset allocations.

Request for Proposal (RFP): Refers to a search and selection process for hiring external money managers. The process provides minimum qualifications, description of duties, and a detailed questionnaire to be completed by the proposer. Selection is based on the firm’s investment process, personnel, performance, and fees.

Risk Management: The process of identifying the level of risk an entity wants, measuring the level of risk the entity currently has, taking actions that bring the actual level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.

Risk-Adjusted Return: Measure of how much risk is involved to produce the investment return.

Securities Lending: An agreement between a lender and a borrower to transfer ownership of a security temporarily in order to earn additional income. The lender retains ownership rights of the security and is entitled to any distributions that occur with respect to that security during the life of the loan, such as coupon and dividend payments. The borrower backs the agreement by delivering collateral to the lender, either in the form of cash, which is currently the dominant form of collateral in securities lending transactions, or other liquid securities, in an amount that exceeds the market value of the securities borrowed.

Sharpe Ratio: Risk-adjusted measure to determine the reward per unit of risk.

Soft Dollars: Refers to the use of brokerage commissions to pay for research and other services that are investment related.

Style Drift: The divergence of a portfolio from is stated investment style or objective.

Technical Analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.

Tracking Error: The standard deviation of the portfolio’s rate of return from that of the target index or performance benchmark.

Value-Added: A phrase commonly used by investment managers to describe a management approach to a property with the connotation that their skills will add value, which otherwise would not be realized.

Vintage Year: The year of fund formation and its first takedown of capital. By placing a fund into a particular vintage year, the limited partner can compare the performance of a given fund with all other similar type funds formed in that particular vintage year.

Warrant: A security that gives the holder the right to purchase securities from the issuer at a specific price within a certain time frame.