Frequently Used Terms
Asset Allocation - Asset allocation is the long-term strategy for investing funds into various asset classes based on investment goals, time horizon, and risk tolerance. It is the primary determinant of investment return, and is defined by the investment policy for each fund.
Asset Class - Asset class refers to a set of related investment vehicles that have similar risk and return characteristics. Different types of asset classes would include domestic equities, international equities, fixed income, hedge funds, real estate, natural resources, and private investments.
Benchmark Returns - Benchmark returns are the returns for a specific index defined in the investment policy statement as the performance measurement standard for a particular asset class. The most commonly used benchmarks are market indexes such as the S&P 500 Index for common stocks and the Lehman Brothers Aggregate Index for bonds.
Book Value of an Endowment - The book value of an endowment represents all contributions, reinvested income and any realized gains or losses attributable to the sale of an investment held in the endowment.
Downside Risk - A risk metric that distinguishes between "good" and "bad" returns by assigning risk only to those returns below a return specified by an investor. Downside risk is considered a more effective risk measure than standard deviation (volatility) for two important reasons: 1) it is investor specific, and 2) it identifies return distributions that have higher probabilities for negative ("left tail") market events. Downside risk is also referred to as downside deviation or target semi-deviation.
Endowment Policy Portfolio - The endowment policy portfolio is the hypothetical portfolio consisting of each asset category weighted at the neutral or target asset class allocation outlined in the investment policy of each fund.
Endowment Policy Portfolio Return - The endowment policy portfolio return is the benchmark return for the endowment policy portfolio and is calculated by summing the neutrally weighted index return (percentage weight for the asset class multiplied by the benchmark return for the asset class) for the various asset classes in the endowment portfolio for the period.
Expected Returns - Expected returns are best estimates of what returns might be over some future time period. Expected returns are based on projection models of different possible scenarios. Each scenario is assigned a probability of occurrence. The result of weighting each scenario by its probability of occurrence is the expected return.
Expected Risk - Expected risk is the projected variability in future returns. A common measure of risk is standard deviation.
Hedge Funds - Hedge fund investments are broadly defined to include non-traditional investment strategies whereby the majority of the underlying securities are traded on public exchanges or are otherwise readily marketable. These types of investments can include: (1) global long/short strategies that attempt to exploit profits from security selection skills by taking long positions in securities that are expected to advance and short positions in securities where returns are expected to lag or decline; (2) arbitrage strategies which attempt to exploit pricing discrepancies between closely related securities, utilizing a variety of different tactics; and (3) event driven strategies that attempt to exploit pricing discrepancies that often exist during discreet events such as bankruptcies, mergers, takeovers, spin-offs and recapitalizations in equity and debt securities.
Investment Return - Investment return is the change in investment value during the period, including both realized and unrealized capital appreciation and income, expressed as a percentage of the market value at the beginning of the period. Investment return is also known as total return.
Long Position - A long position is a bet that prices will rise. For example, you have a long position when you buy a stock and benefit from prices rising. A long position is the opposite of a short position.
Market Value - Market value is the value of an investment determined by prevailing prices for that investment in an actively traded market including the investment.
Net Investment Return - Net investment return is total return after deduction of investment management fees and expenses.
Private Investments - Private investments consist of investments in the equity securities of private businesses including real estate. Private investments are held either through limited partnerships or as direct ownership interests. The private investment category also includes mezzanine and opportunistic investments.
Purchasing Power - The primary objective of the endowment funds is to preserve the purchasing power of the endowment over the long-term. This essentially means to increase the market value of the endowments over time by at a rate at least equal to the rate of inflation after all expenses and distributions and to increase annual distributions at a rate at least equal to the rate of inflation.
Realized Gain or Loss - Realized gain or loss represents any gain or loss attributable to the sale or disposition of an investment.
Short Position - A short position is a bet that prices will fall. For example, a short position in a stock will benefit from the stock price falling. Short positions are obtained by borrowing securities from another party, selling them and then repurchasing them at a later date, at a lower price, to return the shares to the original owner. The investor making the short sale pockets the difference between the price at which the shares were sold and the price at which the shares were repurchased to return to the original owner. A short position is the opposite of a long position.
Standard Deviation - Standard deviation is a measure of the variability of investment returns. It is the most commonly used measure of risk.
Total Return - Total return is the change in investment value during the period, including both realized and unrealized capital appreciation and income, expressed as a percentage of the market value at the beginning of the period. Total return is also known as investment return.
Unrealized Gain or Loss - Unrealized gain or loss represents the difference between the market value and book value of an investment.
Value-Added - Value-added is a measure of the increase in dollar value of endowment funds due to actual investment performance exceeding the performance of the policy portfolio.