The following terms and definitions are provided for informational purposes only. |
Investment strategy that 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.
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.
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.
Apportioning of investment funds among asset classes, such as cash, equities, and fixed income.
Asset Allocation Fund
At GMO, an Asset Allocation Fund provides asset allocation through investment in other GMO Trust mutual funds.
1/100th of a percent.
A prolonged period of falling security prices.
A standard by which something can be measured or judged. Often used as a synonym for Index.
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.
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.
An investment strategy that emphasizes finding individual companies which are expected to outperform the index return, before considering broad economic trends.
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.
A security that represents ownership in a public corporation.
In a fixed income security, convexity measures the way duration and price change when interest rates change.
The bank or trust company that holds a mutual fund's assets (stocks, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions.
A security, such as an option or a futures contract, whose value is derived from the value of the underlying asset.
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.
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.
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.
Abbreviation for the Morgan Stanley Capital International Europe, Australia, Far East Index, a well known, independently maintained and published large capitalization international stock index. See Table of Benchmark Definitions for additional information.
A modification of EAFE where GMO reduces the market capitalization of Japan by 40% relative to EAFE. See Table of Benchmark Definitions for additional information.
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.
Acronym for the Employee Retirement Income Security Act of 1974. ERISA governs qualified retirement savings plans.
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.
Fund of Funds
Fund that 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.
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.
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 on a prespecified date.
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.
A security that 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.
(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.
A passive portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index.
Fee paid to the fund manager for providing investment management.
The notion that an asset's value reverts to an average or equilibrium value. 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.
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 traded on the secondary market.
An acronym for Net Asset Value. The NAV 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.
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 that gives a right to buy is a Call Option, and an option that gives a right to sell is a Put Option.
A portfolio management strategy that seeks to match the composition, and therefore the performance, of a selected market index. Also referred to as Indexing.
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 high P/E ratios compared with income stocks.
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.
Fee paid to and retained by a mutual fund that is designed to allocate transaction costs caused by shareholder purchases to the shareholder generating the activity, rather than to the fund as a whole.
Investment strategy that combines strategic quantitative analyses of countries, industries, and sectors with sophisticated computer models to select particular stocks.
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.
Fee paid to and retained by a mutual fund that is designed to allocate transaction costs caused by shareholder redemptions to the shareholder generating the activity, rather than to the fund as a whole.
Real Estate Investment Trusts (REITs) are managed vehicles that 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.
Abbreviation for Return on Equity. ROE is an accounting ratio of net profits divided by equity.
A unit of ownership in an equity security, such as a mutual fund or common stock.
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.
An owner of shares in a mutual fund.
Shareholder Service Fee
Fee paid to an investment management company for providing client services and reporting services.
Statement of Additional Information (SAI)
An addendum to a mutual fund's prospectus that includes further disclosure about the fund's operations.
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.
The return on investment that 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.