Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
active management: an investment approach that seeks to outperform benchmark returns and differs from passive management strategies which are constructed to replicate benchmark returns. RCM’s focused fundamental approach to equity investing is designed to provide our active managers with the information they require to produce returns in excess of the market.
active return: the portfolio’s return minus the benchmark’s return.
active risk: the risk associated with active return, commonly known as tracking error (TE). Active return is calculated as the standard deviation of monthly active returns (although quarterly active returns are sometimes used). Active risk encompasses all of the additional positive and negative risk an investor assumes when making active investment decisions.
American Depositary Receipt (ADR): represents ownership in the shares of a foreign company trading on U.S. financial markets.
alpha: the active return adjusted for a portfolio’s beta (β) and is a component of the Capital Asset Pricing Model (CAPM). Note the term alpha is sometimes used to describe active return, the difference between a portfolio’s return and its benchmark.
annualized returns: whereas cumulative returns give the actual return, an annualized return is the geometric average annual return. Standard practice calls for annualizing returns for periods greater than 12 months. For example, a cumulative return of 21% over two years is equal to annualized rate of 10%.
asset allocation: the process of allocating an investment among various asset classes typically stocks, bonds and cash.
B
basis point: one hundredth of 1%, or 0.01%.
bear market: a market condition that is defined by falling stock prices.
benchmark: the most commonly used benchmark is an index, such as the S&P 500 Index. Benchmarks represent the investment returns of an asset class or market segment. By comparing an investment’s returns to those of a benchmark, an investor can determine how well it performed relative to the average returns of a given market.
beta: a measure of a portfolio’s sensitivity to the market. A portfolio beta of less than one, for example 0.80, would imply that, if the market increases/decreases by 10% over a given period, the portfolio can be expected to increase/decrease by 8% (0.80*10%).
bull market: a market condition that is defined by rising stock prices.
C
call option: options serve as “place holders” in the market. A holder of a call option has a contractual right to purchase a given security at a predetermined price during a given time interval or at a set date in the future. The price stipulated in the call option contract is referred to as its strike price. Also see put option
capitalization (Cap): refers to the total value of a company’s, portfolio’s, or index’s assets as measured by security price(s). Market Cap is frequently used to denote a stock’s “size.” Also see Market Cap
cash: frequently refers to both cash balances and very liquid cash equivalents like short maturity treasury bills. In investment portfolios, the cash allocation will vary over time with market conditions but will frequently lie somewhere between 0.5% and 5%. Having cash on hand provides the Portfolio Manager with the ability to add to an investment portfolio without selling existing holdings.
Chartered Financial Analyst (CFA): a professional designation conferred by the CFA Institute, formally known as the Association for Investment Management and Research (AIMR), to individuals engaged in the financial and investment sector who successfully complete a series of three examinations and work for a specified period of time in the investment industry.
CFA Institute: “A Global membership organization that awards the CFA designation, CFA Institute leads the investment industry by setting the highest standards of ethics and professional excellence and vigorously advocating fair and transparent capital markets.” The CFA Institute was formerly known as the Association for Investment Management and Research (AIMR). See www.cfainstitute.org for additional information.
commingled funds: an investment vehicle similar to mutual funds in that investments from several clients are pooled together and one portfolio is managed under a particular strategy. Whereas the client maintains direct ownership and control over the securities that comprise a Separately Managed Account (SMA) or Segregated Account (SA), they do not have direct ownership or control over the stock shares that comprise the commingled fund. A commingled vehicle may be an appropriate substitute in cases where a client would like to allocate a percentage of their assets to a particular strategy, but cannot meet the minimum investment requirements of an SMA or SA. Also see: Separately Managed Account (SMA)
correlation: measures the degree to which two sets of data are related. The higher the correlation, the stronger the relationship between both sets of data. When the correlation is 1 or -1, a perfectly linear positive or negative relationship exists; when the correlation is 0, there is no relationship between the two sets of data. In practice, a portfolio’s returns and its benchmark’s returns are highly correlated.
cumulative returns: represent the percentage change in the value of an investment portfolio between two points in time.
D
defined benefit plan (DB plans): employer-sponsored retirement programs where the future benefits a retiree expects to accumulate are defined prior to retirement and are frequently a function of the employee’s salary level and tenure. To meet future guaranteed benefits payments, the employer acts as the plan sponsor by contributing to and managing the fund’s assets to ensure the plan will be able to meet the liabilities associated with the retirement income of its employees. As such, the plan sponsor assumes all investment risk.
defined contribution plan (DC Plans): retirement savings plans where both employers and employees contribute to employee-specific retirement accounts. Under a DC plan, the employee is charged with managing their retirement savings assets and, therefore assumes all investment risk.derivatives: encompass a wide array of different financial contracts including forwards, futures, swaps and call and put options. Derivatives differ from traditional securities in that the value of the contract is ‘derived’ from an underlying asset. For example, the value of a futures contract for oil is a function of the price of oil. While many of the assets underlying a derivatives contract are tangible in nature, i.e. commodities, stocks, bonds, etc., others reflect the value of intangibles such as interest rates, indices and curiously enough, weather. Derivatives provide unique avenues for an investor to speculate on price movements or protect their assets from price declines. Also see: call option, forward contract, futures contract, option, put option and swaps
diversification: modern investment management theory holds that the optimal investment portfolio is a diversified portfolio. By diversifying a portfolio across multiple assets that are not perfectly correlated, the overall risk of the portfolio is lessened allowing the investor to simultaneously maximize their expected return while minimizing potential downside risk.
dual research platform: RCM’s unique dual research platform consists of Sector Fundamental Research and GrassrootsSM Research. The Sector Fundamental Research Department is responsible for equity analysis across the capitalization spectrum (large, mid, small and micro cap) domestically and, increasingly, internationally. GrassrootsSM Research is anything but traditional. Relying on the techniques of investigative journalism, GrasrootsSM Research is designed to provide RCM analysts and portfolio managers with a “reality check” for investment decisions by providing main street views of companies, products and services, as well as emerging marketplace trends.
Also see: GrassrootsSM Research & Sector Fundamental Research
E
efficient-market hypothesis: argues that all relevant information is immediately disseminated and digested by all market participants. As a consequence of everyone making buy and sell decisions based upon the same information, it is assumed that market prices for all securities instantaneously change as new information arises, and always equal their intrinsic value.
endowment: typically gifted to universities and non-profits, an endowment is a fund established to support and maintain ongoing services, programs and research efforts.
equity: ownership in any asset in excess of all debts associated with that asset. Stocks are commonly referred to as equities as they represent an ownership interest.
F
fixed income securities: More commonly referred to as bonds, fixed income securities are debt bearing investments such as government and corporate bonds, tax exempt municipal notes, and shorter-term commitments like commercial paper. While many make regular coupon (interest) payments at a fixed rate, bonds can be structured to provide a variable interest rate, equity conversion options and different degrees investment risk.
forward contract: Initially used by commodity producers to lock in a price today for a good to be delivered in the future, forward contracts can now be made for interest rates, currencies in addition to other financial instruments. Unlike futures contracts, most forwards are not traded on exchanges and do not come in standard sizes.
foundation: a non-profit organization established to provide financing to further a particular goal or program.
fundamental investment analysis: The goal of fundamental analysis is to uncover mis-priced securities through thorough company research. To accomplish this task, analysts exhaustively exam a firm’s financial statements and may meet with company management, customers and suppliers to gain an understanding of what sales and earnings will likely be in the months/years ahead. Once the analyst understands a company and its position within an industry, they can determine whether its stock price is likely to increase over time, and by how much.
futures contract: a standardized contract to buy or sell an underlying asset at a pre-determined price at some future point in time. Used for commodities, securities and interest rates, futures contracts are exchange traded instruments.
Back to topG
Global Investment Performance Standards (GIPS®): “a set of ethical principles that establish a standardized, industry-wide approach to how investment firms should calculate and report their investment results to prospective clients in a way that ensures fair representation and full disclosure. The GIPS standards were based on and preceded in North America by AIMR Performance Presentation Standards.” Please see RCM’s composite presentations for an example of a GIPS® compliant presentation and www.cfainstitute.org for additional information.
GrassrootsSM Research: a proprietary network of independent researchers who uncover information ahead of the larger market, provide new investment ideas and perspectives, identify events potentially impacting RCM portfolios, and provide an increased level of conviction to supplement Sector Fundamental Research, serving as a “reality check” on investment decisions. GrassrootsSM Research is the second component of RCM’s unique dual research platform. For more information about GrassrootsSM Research please visit www.grassrootsresearch.com.
Gross Domestic Product (GDP): is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.
growth investing: RCM specializes in Growth-Style investing. As a growth manager, we look for companies that will be able to realize above-average earnings growth rates over time. However, simply buying a stock we expect to experience robust earnings growth is only half of the story – in order for our clients to “beat the market” we must find growth stocks that other investors have underestimated, and are thus mis-priced by the market.
H
hedge: while hedges can be structured in a number of different ways using a wide array of securities, the end goal is the same – to protect against unforeseen price fluctuations. For example, a U.S. citizen who holds shares in a Spanish company may enter into a dollar-Euro swap agreement to effectively remove the effect changes in the $/€ currency exchange rates will have on the investment’s return.
hedge fund: frequently structured as private investment partnerships, hedge funds are not easily defined by one particular investment strategy. Hedge funds use varying degrees of quantitative inputs, derivative strategies, leverage, and/or market neutral approaches to investing. Hedge funds serve sophisticated investors, have high minimum investments requirements, frequently require invested funds to remain in the fund for predetermined lengths of time, and are not regulated to the same degree as Registered Investment Advisors (RIAs).
I
index investing: a passive approach to investing where a portfolio is constructed to mimic the performance of a specific index.
information ratio (IR): a risk adjusted performance metric typically used to evaluate active strategies. IR is calculated by dividing active return by active risk.
institutional investor: an organization charged with investing a sufficiently large amount money, frequently on behalf of a group of individuals. Examples of institutional investors include retirement plans, insurance companies, foundations and endowments.
L
The London Interbank Offered Rate (LIBOR): the interest rate at which banks can borrow in the London Interbank Market. LIBOR is a widely used benchmark for cash managers.
liquidity: refers to the ease with which a security can be sold in a market without affecting its price. More specifically, liquid assets like treasury bills are easily converted into cash whereas relatively illiquid assets like real estate take time to sell and convert into cash.
M
market capitalization (Market Cap): often used as a measure of the size of a firm and refers to the total market value of all outstanding shares. For example, a company with 100,000 shares outsanding with a current market price of $20 a share, would have a market cap of $2,000,000. At RCM we offer investment strategies that concentrate holdings in Large Cap, Mid Cap, Small Cap, or Micro Cap companies.
mutual fund: unitized funds available to institutional and retail clients. The assets of the underlying clients are pooled into a single portfolio managed to a pre-defined strategy. Provides economies of scale and are an idea route to market for smaller clients who do not meet the necessary minimum investment requirements for a separately managed account/segregated account. Also see pooled fund.
O
option: a type of derivative where the option owner has the contractual right to purchase or sell a security at a predetermined price at some point in the future.
P
passive investing: a “hands-off” approach to investing where a portfolio is constructed to mimic the performance of a specific index.
performance attribution: a performance analysis technique where investment returns are attributed to factors that affect performance. Attribution analysis is useful in identifying the drivers of a portfolio’s active return. Some factors commonly used in attribution analysis are sector, industry, and country, beta, size and stock specific factors. RCM portfolio managers routinely use attribution analysis to review and refine their investment decisions.
pooled fund: unitized funds available to institutional and retail clients. As the name suggests the assets of the underlying clients are pooled into a single portfolio managed to a pre-defined strategy. Provides economies of scale and are an idea route to market for smaller clients who do not meet the necessary minimum investment requirements for a separately managed account/segregated account. Also see mututal fund.
price to earnings (P/E): is a valuation ratio caluated by dividing the price per share by the earnings per share (EPS) and is one way to measure how inexpensive or expensive a stock is. A lower P/E indicates that you are paying less per unit of earnings. In general, stocks with expected high earnings growth trade with higher P/E values.
put option: an option that gives the holder the right to sell a particular security at a predetermined price sometime in the future.
Q
quantitative management: while most investment processes incorporate some quantitative analyses, investment managers incorporate quantitative techniques in different manners and to varying degrees. A purely quantitative portfolio manager will rely entirely on the output of their models in the stock selection process, and entirely on their portfolio optimizer for their portfolio construction.
R
return: typically expressed as a percentage change of an investment’s value over a period of time. Also see: active return and total return.
RIMS (RCM Investment Management System): RCM’s proprietary in-house portfolio and stock database analysis platform. It is used for daily online and hardcopy access to portfolio and benchmark stock and industry weights, characteristics, and factor exposures. RIMS provides a standard set of stock and portfolio functions including stock and portfolio sorting and screening, portfolio against benchmark characteristics and sector weights, portfolio contribution, and multiple-portfolio holdings by sector reports.
risk: refers to the chance that an outcome will differ from initial expectations. In an investment context, risk includes both positive and negative surprises and is typically expressed using measures of variance. Also see: active risk, risk-free rate, risk premium, risk-return, risk tolerance and total risk.
risk-free rate: the return an investor can expect to receive without assuming any risk. While no investment is completely without risk, U.S. Treasury Bills are often used as a proxy.
risk premium: the additional return an investor requires for assuming more risk.
risk-return: refers to the commonly held belief that in order for an investor to realize higher returns, they must assume additional risk.
risk tolerance: an investors willingness and/or ability to assume a given amount.
S
Sector Fundamental Research: a component of RCM’s Dual Research Platform comprised of analysts in the world’s key financial centers dedicated to conducting fundamental analysis on companies in their sector of expertise. Also see: Dual Research Platform & GrassrootsSM Research
Separately Managed Account (SMA)/Segregated Accounts (SA): client accounts managed under a particular investment strategy. Investors in a SMA/SA own the shares that are purchased for their portfolios and can impose their own guidelines on the investment manager (i.e. no tobacco stocks). SMA/SAs tend to have the largest minimum investment of all of RCM’s products and comprise a substantial portion of RCM’s assets under management.
Sharpe ratio: a measure of risk-adjusted performance and can be thought of as the amount of risk assumed to generate each unit of return. The greater the ratio, the better the historical risk adjusted performance.
standard deviation: a commonly used measure of volatility and expresses the dispersion of observations from the mean (expected value). The greater the standard deviation of investment returns, the more those returns deviated from a central value over a given time period.
swaps: financial contracts that essentially involve trading the returns from one asset for those of another. Swaps are frequently used to hedge against interest rate, exchange rate, or security price changes and are sometimes used to gain exposure to the returns of an asset without actually purchasing the underlying.
T
total return: the percentage change in the investment’s value which includes income from dividends and interest as well as capital appreciation.
total risk: represents the combined risks associated with investing and combines those risk elements that can be diversified away and those that are systematic and born by all investors.
tracking error: represents the standard deviation of the difference between the percentage returns of an investment and a benchmark. Thus, tracking error provides a measure of the volatility of active returns.
transaction costs: refers to the costs associated with buying or selling securities and include those received by the broker and the custodian.
transition costs: refers to the various costs involved in changing investment managers. These costs can be quite substantial particularly when institutional investors move assets from one manager to another.
V
value investing: an investment strategy where mangers generally buy stocks that they believe are undervalued by the market and therefore trading at less than their intrinsic value.
volatility: refers to the variation in an investment’s returns and is frequently measured by standard deviation.
Y
yield: most commonly used to represent the percentage return of an investment. Yield is often used to describe the portion of a security’s returns that is attributed to dividend payments.
