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Term Definition
12b-1 fees An extra fee charged by some mutual funds to cover promotions, distributions, marketing expenses and sometimes commissions to brokers. A genuine, no-load fund does not have 12b-1 fees, although some funds calling themselves no-load do have 12b-1 fees (as do some load funds). 12b-1 fee information is disclosed in a fund's prospectus, is included in the stated expense ratio, and is usually less than 1 percent.
Annuity A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. All capital in the annuity grows tax-deferred. An early withdrawal penalty often applies.
Appropriate Universe/Category The Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio statistics and compositions over the past three years). Categorizing funds in this manner allows funds to be ranked relative to peers with similar investment patterns and objectives.
Asset Allocation The selection and combination of different investment types or asset categories in a portfolio to achieve a desired investment goal while reducing the overall risk of the total portfolio.
Asset Categories The components of an asset allocation strategy. Asset categories help define the general behavior of the assets in them. On a very broad level, they include cash, bonds and stocks, but within those categories there are additional sub-categories such as investment grade bonds or large cap stocks. Asset categories also provide benchmarks against which performance can be evaluated.
Blend Funds Combines the principles of the value and growth styles to choose stocks that have good growth prospects and fair or attractive valuations. The risk level of these funds is considered to be between that of value and growth funds.
Bonds Investments in the debt of governmental groups, their agencies or corporations. Bonds are also called fixed income securities because they generally pay a fixed amount of interest each year until maturity, when the principal is returned. Municipal bonds are the obligations of states and other local authorities and most are exempt from federal taxes. The municipal bond fund invests in a portfolio of municipal bonds that is nationally diversified. Bonds do fluctuate in price, so there will be variations in the daily value.
Diversification Reduces the risk of investments by combining assets or asset types that have different behaviors in a given market environment in a portfolio. For example, by combining cash and stock in a portfolio, the risk of the portfolio will be lower than if it only contained stock, because the value of cash does not fluctuate while the value of stocks do.
Equities The common stock of corporations that represents an ownership share of a company. The terms equity and stock are used interchangeably by investors. Equities present an opportunity to grow your investment unlike bonds, which are limited to paying interest and returning principal.
Expense Ratio The ratio of total internal expenses to fund assets. The expenses include, but are not limited to, items such as legal and custody charges, management fees and sales charges such as 12b-1 fees. Performance statistics are net of the expense ratio.
Foreign Stock Funds These funds invest at least 90 percent of assets in companies domiciled outside the United States. Foreign markets are exposed to different fundamental, economic and structural factors than the U.S. stock markets. As a result, these funds provide diversification above that of U.S.- only portfolios. Foreign funds are exposed not only to equity market risks, but currency market risks, and therefore tend to have higher overall risk than U.S.-only funds.
Fund Manager Individual or team responsible for making portfolio decisions for a mutual fund, pension fund or insurance fund. Commonly referred to as the managers.
Growth Funds Those funds that invest in companies that grow more rapidly than other companies. Much of the market value of a growth stock is derived from the firm's prospects for future growth. Growth is considered higher risk than value because if the growth does not materialize, the valuations will be adjusted to reflect the lower expectations and as a result, losses may occur.
Index Funds A passively managed mutual fund that tries to mirror the performance of a specific index, such as the Standard & Poor's 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.
Information Ratio A measure of risk-adjusted return. It measures the return of the fund over and above the return on an appropriate benchmark portfolio (for example the S&P 500, Russell 2000, etc.) per unit of excess risk taken (defined as the standard deviation of the return of the fund relative to the return on the index). The purpose of the measure is to determine whether the fund's manager has been able to consistently add value over the benchmark portfolio. The larger the information ratio, the more likely the manager's relative out-performance is the result of true skill (as opposed to luck) and therefore reasonably can be expected to be repeated.
Institutional Investors Entities with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks and endowment funds. Institutional investors are covered by fewer protective regulations because of the assumption that they are more knowledgeable and better able to protect themselves. They account for a majority of overall volume within the stock and bond investment arenas.
Large Cap Currently, companies with a market capitalization greater than $5 billion. The precise boundary changes with the market.
Liquidity The ability of an asset to be converted into cash quickly without the loss of principal.
Load A sales charge added to the purchase and/or sale price of some mutual funds and annuities. It may be charged when purchased (front-end load) or when sold (back-end load).
Market Capitalization 1) The sum of a corporation's long-term debt, stock and retained earnings; or 2) the market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share.
Mid Cap Currently, a company that is worth $1 billion to $5 billion in market capitalization.
Money Market Fund A mutual fund that invests in short-term debt instruments. In general, the net asset value of a money market fund is stable at $1 per share. The value of a money market fund is not guaranteed or insured in any way; however, it is considered a very conservative investment with very little risk of loss of principal. Money market funds pay interest consistent with the income on the underlying investments less the expenses of the fund.
Morningstar An independent, Chicago-based company considered the leading provider of mutual fund, stock and variable annuity investment data and analysis. It does not own, operate or hold any interest in mutual funds, stocks or insurance products.
Mutual Fund An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Benefits include diversification and professional money management. Shares are issued and redeemed on demand, based on the fund's net asset value, which is determined at the end of each trading session.
No-Load No sales charge is added to the purchase and/or sales price of mutual funds and annuities.
Principal The original amount of cash available for investment.
Return The percentage change in the value of assets over a given period. Generally includes income and market value changes, but excludes additions and withdrawals.
Sharpe Ratio A measure of risk-adjusted return. It measures the return of the fund over and above the return on the risk-free asset (defined as the three-month Treasury Bill) per unit of risk (defined as the standard deviation of the fund's return). The purpose of the measure is to determine whether the fund's risk is justified by the additional return generated. The larger the Sharpe ratio, the better the manager's performance.
Small Cap Currently, a company that is worth less than $1 billion in market capitalization.
Standard & Poor's 500 Also known as S&P 500. A market-value weighted index of 500 blue-chip stocks, considered to be a benchmark of the overall stock market.
Standard Deviation A generally accepted measure of investment risk or uncertainty. It measures the distribution of returns around the average for the period measured. The wider the distribution of returns, the less likely the specific returns are to fall close to the average.
Stock An instrument that signifies an ownership position, or equity, in a corporation, and represents a claim on its proportionate share in the corporation's assets and profits. Also referred to as equities.
Style Drift A departure from the expected investment pattern. The result can be performance that is significantly different from the benchmark and peer average. Early indications of style drift can be detected by examining the holdings and performance statistics of the fund. If the drift is the result of a long-term change in investment philosophy or strategy on the part of the fund manager, it ultimately may result in a change in category designation.
Treasury Bill Also known as Bill, T-Bill or U.S. Treasury Bill. A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of one year or less and exempt from state and local taxes.
Value Funds Value funds invest in companies whose price is considered inexpensive given their potential, relative to other companies. The assumption is that the value inherent in these firms will eventually be recognized. Value is considered to be lower risk than growth because the market price of value stocks is based primarily on current performance rather than on prospective growth.

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