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

The type of investment management where the investment manager selects the stocks to be included in a portfolio, usually based upon certain investment criteria, such as stocks traded on US markets and falling in a certain market capitalization range.

Active Trading Risk

Portfolios that are actively managed and, under appropriate circumstances, may purchase and sell securities without regard to the length of time held. A high portfolio turnover rate may have a negative impact on performance by increasing transaction costs and may generate greater tax liabilities for clients with taxable accounts.

All Cap

A stock portfolio that invests in equity securities regardless of market capitalization.

Attribution Analysis

A measure of the extent to which certain factors contribute to the difference in performance between the portfolio and the portfolio’s benchmark, which is known as active return.  This attempts to determine which component of the portfolio performance, stock selection or sector allocation, contributed more to the portfolio’s overall performance.

B

Behavioral Finance

An area of finance that utilizes psychological theories and economics to help to clarify investor decision making (why people make irrational investment decisions) and market fluctuations.

Behavioral Biases

Human tendencies that lead people to form specific views centered on pre-determined beliefs and opinions.  These filters can affect investment decisions, which can be avoided by following trading and investing rules, thus eliminating such blockages leading to clearer decision making.

Benchmark

A benchmark (or index) is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.  Most indexes weigh companies based on market capitalization.  The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Financial indexes assume reinvestment of dividends and other earnings but do not reflect the impact of fees, applicable taxes, or trading costs, which may reduce the returns shown. The financial indexes referenced herein are provided for informational purposes only.

Beta

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Bottom-up Research, Analysis and Investing

An investment approach that de-emphasizes the significance of economic and market cycles by focusing on the analysis of individual companies rather than on the industry in which that company operates or on the economy as a whole.

Business Cycle

The recurring phases of economic activity that a business experiences over an extended period of time. The phases of a business cycle, which may vary in frequency and length, include growth (expansion), peak, recession (contraction), trough and recovery.

C

Catalyst

Something that initiates or causes an important event to happen.  See also Earnings Catalyst

Company Fundamentals

Qualitative and quantitative factors which investors attempt to utilize in their analysis of a company that contribute to its economic well-being (examples of these factors include, but are not limited to, a company’s balance sheet and income statement). A company’s fundamentals differ from its “technicals,” which may be driven by market price and other similar short-term factors.

Core Index

Broader Index where neither growth nor value characteristics predominate.  The Core Indices to which Systematic refers are Russell 1000® Index, Russell Mid Cap® Index, Russell 2500™ Index, Russell 2000® Index, Russell 3000® Index, and MSCI EAFE index.

D

Debt Coverage Ratio (DCR)

The measurement of whether a company has enough cash to cover its debt, the higher the ratio the easier it is for a company to get financing.

Discounted Cash Flow (DCF)

Valuation method used to estimate the attractiveness of an investment opportunity.  The estimated present value of future cash flows accounting for various factors impacting the value of money over time, such as interest payments

Discretionary Assets Under Management (AUM)

The assets for which the client has delegated responsibility to the investment manager.

E

Earnings Catalyst

A series of data points that attempt to provide conviction that a company has reached a sustainable level of improvement in its earnings lifecycle.

Earnings Estimate

An estimate of a company’s future earnings.

Earnings Lifecycle

The concept that every public company, throughout its existence, will go experience periods of more favorable to less favorable earnings.

Earnings Quality

Total earnings which result from improved sales or cost reduction, as compared to contrived profits from aggressive accounting practices, such as buildup of inventory.

Earnings Surprise

The amount by which the earnings reported in quarterly or annual reports for a market index or portfolio’s constituent stocks are, on average, above or below Wall Street analysts’ earnings estimates.

Economic Sector

An area of the economy in which businesses engage in the same or related activities. Examples of economic sectors are technology, health care, energy, utilities and telecommunications.

Economic Cycle

The period of time from when an economy expands and then goes into recession and then back to health, which can be affected by such factors such as inflation, domestic and/or international politics.

Economic Sector

An area of the economy in which businesses engage in the same or related activities. Examples of economic sectors are technology, health care, energy, utilities and telecommunications.

Enterprise Value (EV)

An alternative measure of a company’s value calculated by adding a company’s debt, minority interest and preferred shares to its market capitalization and subtracting total cash and cash equivalents.

Estimate Revision

Average increases or decreases in Wall Street analysts’ earnings estimates across the constituent stocks.

F

Factor Based Investing

Investment style that seeks to identify a broader set of criteria to consider when selecting stocks such as beta, size and volatility in order to obtain excess returns in various market cycles.

Factor Based Research

Investment research which focuses on risk and behavioral investment factors that has provided greater performance historically, as compared to index returns to produce higher investment returns.

Fiduciary Duty

The responsibility to act in the best interest of the client, which includes both duties of care and loyalty.  This duty requires disclosure of material facts and conflicts of interest to clients.

Foreign Securities Risk

Investments in foreign securities, including foreign securities represented by American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and foreign securities trading on US stock exchanges, involve risks relating to political, social and economic developments abroad, as well as risk resulting from the differences between the regulations to which U.S. and foreign issuer markets are subject. These risks include, without limitation: different accounting and reporting practices, less information available to the public, less (or different) regulations of securities markets, more complex business negotiations, less liquidity, more fluctuations in prices, delays in settling foreign securities transactions, higher costs for holding shares (custodial fees), higher transactions costs, vulnerability to seizure and taxes, political or financial stability, smaller markets and different market trading days.

Free Cash Flow (FCF)

A company’s operating cash flow minus its capital expenditures.

Fundamental Analysis

A method of evaluating a stock that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the stock’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

G

Gross Domestic Product (GDP)

The total market value of goods and services produced by a specific country within its borders during a set time, usually a calendar year.

I

Index

An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.  Most indexes weigh companies based on market capitalization.  The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Financial indexes assume reinvestment of dividends and other earnings but do not reflect the impact of fees, applicable taxes, or trading costs, which may reduce the returns shown. The financial indexes referenced herein are provided for informational purposes only.

Industry

Companies with extremely similar business activities, products and/or services are classified as belonging to the same industry. Industries are further grouped together into larger economic sectors. Example of industries within the financial sector are commercial banks, insurance and consumer finance.

International

A portfolio which focuses on securities traded on foreign markets as compared to domestic ones.

Intrinsic Value

The determination of a stock’s value utilizing fundamental analysis and not such a strong emphasis on its market value.  The factors that can be considered include brand-name recognition, management expertise or tangible assets included on a balance sheet at a cost significantly below market value.

Investment Life Cycle

The stages of investment ownership from purchase, management for income or profit, reduction in profits and finally to sale.  All phases of the cycle are considered in calculating an actual rate of return, including such factors as purchase costs, management fees, cash flows, appreciation, depreciation and costs of sale.

Investment Risk

This in general can be defined as deviation from an expected outcome, either positive or negative.  Some degree of short term volatility is necessary for an investor to achieve long-term higher returns.   General risk factors experienced in equity investing can include liquidity risk, company specific risk, portfolio concentration risk and general equity market risk.

L

Large Cap

A company with a market capitalization value generally greater than $10 billion, which may vary among brokerages. Large cap is an abbreviation of the term “large market capitalization”.

Liquidity

The ability of a security to be converted into cash rather easily.

Liquidity Risk

Exists when particular investments are difficult to sell. Although most of a portfolio’s securities are generally liquid at the time of investment, securities may become illiquid after purchase by the portfolio, such as during periods of market turmoil. When a portfolio holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if a portfolio is forced to sell these investments to meet redemptions or for other cash needs, the portfolio may suffer a loss. In addition, when illiquidity in the market exists for certain securities, a portfolio, due to limitations on the investments in illiquid securities, may be unable to achieve its desired level of exposure to a certain sector.

M

Market Capitalization

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. This is used to determine a company’s size, as opposed to sales or total asset figures.

Market Cycles

Periods of varying frequency and duration wherein security prices are generally rising or falling.

Market Risk

The market prices of a portfolio securities may go up or down, sometime rapidly or unpredictably.  If the market prices of the securities owned by the portfolio fall, the value of your investment portfolio will decline. The value of a security may fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest rates or currency rates, lack of liquidity in the markets or adverse investor sentiment. Market prices of securities also may go down due to events or conditions that affect particular sectors or issuers. Your portfolio may experience a substantial or complete loss of any individual security.

Mid Cap

A company with a market capitalization generally between $2 and $10 billion, which may vary among brokerages.   Mid cap is an abbreviation for the term “middle capitalization”.

MSCI EAFE

The MSCI (Morgan Stanley Capital International) EAFE Index (Europe, Australasia, Far East) is a free-float adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the United States and Canada.

MSCI EAFE Value

The MSCI EAFE Value Index captures large and mid cap securities exhibiting overall value style characteristics across Developed Market Countries around the world, excluding US and Canada.

O

Operating Cash Flow (OCF)

The amount of cash a company generates from its normal business operations, excluding external financing or other sources of income.

P

Performance Attribution

A measure of the extent to which certain factors contribute to the difference in performance between the portfolio and the portfolio’s benchmark, which is known as the active return.  This attempts to determine which component of portfolio performance, stock selection or sector allocation, contributed more
to the portfolio’s overall performance.

Portfolio Selection Risk

The value of your portfolio may decrease if the investment manager’s judgment about the attractiveness, quality, value or market trends affecting a particular security, industry or sector is incorrect.

Positive Earnings Surprise

When the earnings reported in a company’s quarterly or annual report are above Wall Street analysts’ earnings estimates.

Price-to-Book Ratio (P/B)

A measure of stock valuation, calculated by dividing the market price of a stock by its book value per share. For example, a stock selling for $20 per share with wholesale book value of $5 per share has a P/B Ratio of 4.

Price-to-Earnings Ratio (P/E)

A measure of stock valuation, calculated by dividing the market price of a stock by its earnings per share. For example, a stock selling for $20per share that earned $2 per share in the last 12 months has a P/E ratio of 10.

Q

Qualitative Analysis

Financial analysis, which utilizes subjective judgment based on such factors as management expertise, industry cycles, strength of research and development, and labor relations to recommend investment decisions.

Quantitative Analysis

Financial analysis that utilizes measureable data and research to recommend investment decisions.

R

Real Estate Investment Trusts (REITs)

A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

Real Estate Investment Trusts (REITs) Risk

Equity REITs can be affected by any changes in the value of the properties owned. A REIT’s performance depends on the types and locations of the properties it owns and on how well it manages those properties or loan financings. A decline in rental income could occur because of extended vacancies, increased competition from other properties, tenants’ failure to pay rent or poor management. A REIT’s performance also depends on the company’s ability to finance property purchases and renovations and manage its cash flows. Because REITs are typically invested in a number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Loss of status as a qualified REIT or changes in the treatment of REITs under the applicable tax law, could adversely affect the value of a particular REIT or the market for REITs as a whole.

Risk-Adjusted Performance

A measure of performance that considers the amount of risk taken in achieving an investment’s actual returns.

Risk Control / Reduction

This is a primary objective of Systematic’s investment process and there are a number of risk control measures employed in our strategies. The risk factors experienced by our strategies are primarily the risks of equity investing in general, namely liquidity risk, company specific risk, portfolio concentration risk and general equity market risk. To manage liquidity risk, we employ a minimum liquidity threshold to help ensure we do not establish a position in a stock that we will not be able to effectively trade without having an undue impact on the share price. Company specific risk and portfolio concentration risk are managed through the broad and prudent diversification of the portfolio.  Company specific risk is mitigated by the large number of holdings and approximately equal weighted nature of the portfolio which results in relatively small position sizes.  Sector concentration is limited typically to a maximum of 30% in any one economic sector and the ranking procedure employed ensures broad sector representation in the final portfolio.  Additional risk controls include our strict sell discipline, daily monitoring of the portfolio and formal rebalancing process.

Russell 1000® Value Index

The Russell 1000 Value Index measures the performance of those Russell 1000® Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index.

Russell 2000® Index

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index, which includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Russell 2000® Value Index

The Russell 2000 Value Index measures the performance of those Russell 2000® companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index.

Russell 2500™ Value Index

The Russell 2500 Value Index measures the performance of those Russell 2500™ companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2500™ Index measures the performance of the 2,500 smallest companies in the Russell 3000® Index.

Russell 3000® Value Index

The Russell 3000® Value Index measures the performance of those Russell 3000® Index companies with lower price-to-book ratios and lower forecasted growth values. The stocks in this Index are also members of either the Russell 1000® Value or the Russell 2000® Value Indexes. The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization.

Russell Midcap® Value Index

The Russell Midcap Value Index measures the performance of those Russell Midcap® companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000® Value Index. The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index.

S

Sector Risk

Companies that are in similar industries or sectors may be similarly affected by particular economic or market events. To the extent an account has substantial holdings within a particular industry or sector, the risks associated with that industry or sector increase.

Small Cap

A company with a market capitalization generally between $300 million and $2 billion, which may vary among brokerages.  Small cap is an abbreviation for the term “small capitalization”.

Small or Medium Sized Company Risk

Investing in small- and medium-sized companies involves greater risk than is customarily associated with more established companies. Stocks of such companies, particularly developing companies, generally are subject to more volatility in price than larger company securities. Among the reasons for the greater price volatility are the less certain growth prospects of smaller companies, the lower degree of liquidity in the markets for such securities, and the great sensitivity of smaller companies to changing economic conditions. Smaller companies often have limited product lines, markets, or financial resources and their management may lack depth and experience. Such companies usually do not pay significant dividends that could cushion returns in a falling market.

 

SMID (Small-Mid) Cap

A company with a market capitalization generally consisting of small cap stocks and mid cap stocks typically at the lower end of the middle capitalization spectrum, which may vary among brokerages.

S&P 500® Index

A market value-weighted index of the stocks of 500 publicly traded U.S. companies chosen by Standard & Poor’s for market size, liquidity and industry group representation that are considered leading firms in dominant industries.

Stock/Company Specific Risks

Stocks may be volatile, their prices may go up and down dramatically over the shorter term. These price movements may result from factors affecting individual companies (e.g., quality of management risk, reputational risk, price per share risk and product development risk), industries, the securities market as a whole or the overall economy. Because the stocks a portfolio holds fluctuate in price, the value of the client’s portfolio will go up and down.

V

Valuation

The process of estimating what something is worth. Items that are usually valued are a financial asset or liability.

Valuation Metric

A type of fundamental analysis, which typically contrasts one security to a similar one, such as in the same industry group, or within its own historical context.  In addition, a group of securities can be compared to another group. Valuation metrics can include Price to Book Ratio and Price to Sales.

Valuation Multiple

The value of an asset is judged against a key statistic, which must have a logical relationship to the asset being compared.  This enables similar asset values from one company to be contrasted to another as they are both compared to the same key statistic.  A common valuation multiple for example is price to earnings ratio (P/E).

Value Equity Investing

An investment strategy that seeks to identify stocks believed to be currently undervalued by the market as indicated by a trading price lower than the stocks’ perceived intrinsic value.

Value Trap

Stocks with certain fundamental attributes that suggest intrinsic value, but that ultimately never outperform the market.

Value Stock Risk

Value stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. Value stocks tend to be inexpensive relative to their earnings or assets compared to other types of stocks. However, value stocks can continue to be inexpensive for long periods of time and may not ever realize their full value.

Volatility of Returns (Standard Deviation)

The variation of stock prices related to the return of the overall portfolio. Standard deviation is a statistical measure of the range of a portfolio’s performance. A high standard deviation suggests a wider range of returns and indicates that there is a greater potential for volatility.