Absolute Return Target
An absolute return target is the annual return goal set by an investor after accounting for inflation, expenses, and a desired real return. For instance, if inflation is expected to be 3% per year, and a foundation's expenses represent 1% of its assets each year, that foundation's absolute return target might be 9% to cover these and provide a 5% return.
A blended benchmark is used to measure the relative performance of the entire portfolio against a blend of indices. To take a simple example, if an investor's assets are allocated to 70% stocks and 30% bonds, the portfolio's performance would be measured against a blended benchmark consisting of 70% in a stock index, and 30% in a bond index.
An approach to asset allocation whereby a passive vehicle (the ‘core') is used to gain beta exposure to a certain market segment (for example, small cap value stocks), and that passive exposure is enhanced by the addition of one or more active managers (the ‘satellites'), which are put in place to generate alpha.
Cost vs. Market Value
A private foundation is required to pay an annual federal excise tax (which can require quarterly estimated tax payments) equal to 2% of the foundation’s net investment income. The tax rate for a particular year can be reduced to 1% if the foundation satisfies certain distribution requirements for that year. To be eligible for the reduced tax rate for a particular taxable year, a foundation must make qualifying distributions paid out before the end of that taxable year at least equal to the sum of (i) the foundation’s average distribution ratio for the prior five years multiplied by the value of its current net non-charitable-use assets (as specifically defined) and (ii) one percent of its current year’s net investment income. For purposes of this test, qualifying distributions include grants, reasonable administrative expenses, and certain other expenditures. The test for determining whether the tax rate is reduced from 2% to 1% uses some of the same terms as the separate 5% minimum annual payout requirement but is not the same thing; it is possible to satisfy the 5% payout requirement and yet still have to pay excise tax at the 2% rate.
A hedge fund is a lightly-regulated, private manager of capital that can engage in a wide variety of investment strategies, including short-selling (betting on stocks to go down) and arbitrage (taking advantage of small price discrepancies between two securities), amongst many others. Hedge funds can use borrowed money to enhance their returns. They typically charge a management fee of 1-2% of assets under management, plus an "incentive fee" of 20% of profits made.
An index is a grouping of securities intended to represent a broad segment of the market: for instance, the S&P 500 index is composed of the stocks from the 500 largest companies in the United States, while the Barclays Aggregate Bond Index contains a wide selection of investment-grade bonds. Active investment managers are commonly measured against the index which corresponds to their respective universe. A bond manager, for example, may be compared to the Lehman Aggregate Bond Index in order to determine whether his or her decisions to include or exclude bonds from the portfolio (i.e. active management) resulted in improved performance over simply holding the entire group of bonds (i.e. the index).
Investment Policy Statement
A document which outlines the investor’s return target, comfort level with regard to risk, broad guidelines for asset allocation and/or specific investment mandates (social, etc.). Before implementing an investment plan for a client, the advisor first works with the client to create an IPS to guide that plan.
Much like hedge funds, private equity groups are lightly-regulated. They pursue opportunities outside of the public markets (hence the "private" in their name). Within this category, buyout groups purchase all of a company's stock on the public markets and take that company private, looking to re-sell the shares at a later date for a profit, typically after making operational improvements at the company. Venture capital groups invest in small, start-up companies (typically in technology); this is a high risk-reward strategy that aims to make a large profit on a handful of successes that outweighs the larger number of failures.
Active managers are typically measured against the index which best represents the stock universe from which their choosing their investments. For instance, a manager that invests in large, U.S.-based companies will usually be measured against the S&P 500 index, which is an index of the 500 largest companies in the U.S.
The return on an asset due to price appreciation plus any dividends paid. For example, say an investor buys a stock for $10. If the investor later sells that stock for $12, and received a dividend of $2 while holding the stock, the total return is 40% ($2 gain from price appreciation, plus $2 gain from dividend, divided by the $10 purchase price).