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Glossary
Glossary

Active strategies: investment strategies where the fund manager is trying to add value and R-squared: measures (on a scale of 0 t o100) the amount of movement of a fund’s return that
outperform the market averages (for that style of investing). Typically, these investment strategies can be explained by that fund’s benchmark. An R-squared of 100 means that all movements of
have higher associated costs due to the active involvement in the portfolio management process a fund are completely explained by movements in the associated index (benchmark).
by the fund manager(s). For this type of investment strategy, the Scorecard System™ is trying to Returns-based style analysis: uses a fund’s return series to help identify the style of the fund.
identify those managers who can add value on a consistent basis within their own style of This is done by comparing those returns across a specific time period to a series of index
investing. returns of various styles (Large Cap Growth, Small Cap Value, etc.) over the same period.
Alpha: a measure used to quantify a fund manager’s value added. Alpha measures the difference Through quadratic optimization, the best fit style is calculated. Once the best fit is found, the
between a portfolio’s actual returns and what it might be expected to deliver based on its level of fund’s style can then be analyzed and weightings toward each asset class can be made.
risk. A positive alpha means the fund has beaten expectations and implies a skillful manager. A Sharpe ratio: a ratio developed by Bill Sharpe to measure risk-adjusted performance. It is
negative alpha means that the manager failed to match performance with the given risk level. calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the
Asset allocation strategies: investment strategies that invest in a broad array of asset classes result by the standard deviation of the portfolio returns to measure reward on a per unit of risk
that may include U.S. equity, international equity, emerging markets, real estate, fixed income, basis. For example, if a bond fund returns 6% and has a standard deviation of 4% and the risk-
high yield bonds and cash (to name a few asset classes). These strategies are typically structured free rate is 2% then the Sharpe Ratio for this fund will be 1. (6-2)/4=1.
in either a risk-based format (the strategies are managed to a level of risk, e.g., conservative or Significance level: indicates the level of confidence (on a percentage basis) with which the
aggressive) or, in an age-based format (these strategies are managed to a retirement date or life statement “the manager’s annualized excess return over the benchmark is positive” or “the
expectancy date, typically growing more conservative as that date is approached). For this type of manager’s annualized excess return over the benchmark is negative,” as the case may be,
investment strategy, the Scorecard System is focused on how well these managers can add value holds true.
from both asset allocation and manager selection. Standard deviation: of return measures the average deviations of a return series from its mean
Beta: a measure of risk that gauges the sensitivity of a manager to movements in the benchmark (average) return. A large standard deviation implies that there have been large swings in the
(market). If the market returns change by some amount x, then the manager returns can be return series of the manager. The larger the swing, the more volatile the fund’s returns and
expected to change by Beta times x. A Beta of 1 implies that you can expect the movement of a hence more implied risk. For smaller swings the opposite is true. Standard deviation helps us
fund’s return series to match that of the benchmark. A portfolio with a beta of 2 would move analyze risk by revealing how much the return on the fund is deviating.
approximately twice as much as the benchmark. Style drift: is the tendency of a fund to deviate from its investment style over time is style drift.
Downside deviation: also referred to as downside risk. The downside standard deviation shows This generally occurs because of a change in the fund’s strategy, the manager’s philosophy or
the average size of the deviations (from the mean) when the return is negative. even a portfolio manager change. During the 1990’s dotcom boom, for example, many
Excess return: the difference between the returns of a mutual fund and its benchmark. managers – regardless of the strategies they were initially bound by – were able to justify buying
Explained variance: the explained variance measures the variance of the fund that is explained tech stocks for their portfolio, in hopes of capitalizing on the tech boom in the market at that
by the benchmark (similar to the R-squared statistic). time. Consequently, their styles “drifted” from their original strategy.
Information ratio: a measure of the consistency of excess return. The ratio is calculated by taking Tracking error: refers to the standard deviation of excess returns or the divergence between
the annualized excess return over a benchmark (numerator) and dividing it by the standard the return behavior of a portfolio and the return behavior of a benchmark. Tracking error is
deviation of excess return (denominator). The result is a measure of the portfolio management’s reported as a “standard deviation percentage” difference that accounts for the volatility between
performance against risk and return relative to a benchmark. This is a straightforward way to the return of a fund versus its benchmark.
evaluate the return a fund manger achieves, given the risk they take on. Volatility of rank: is measured by taking the median of a series of numbers, or taking the
Median rank: refers to the midpoint of the range numbers that are arranged in order of value absolute value of the distance of each individual number to that median, then finding the median
(lowest to highest). of those distances. Volatility is used because it makes a better companion to the median than
Passive strategies: investment strategies where the fund manager is trying to track or replicate the standard deviation. Standard deviation is commonly used when measuring volatility around
some area of the market. These types of strategies may be broad-based in nature (e.g., the fund the mean (average), while volatility of rank is used for medians.
manager is trying to track/replicate the entire U.S. equity market like the S&P 500) or may be more Up/Down capture: a measure of how well a manager was able to replicate or improve on
specific to a particular area of the market (e.g., the fund manager may be trying to track/replicate periods of positive benchmark returns, and how badly the manager was affected by periods of
the technology sector). These investment strategies typically have lower costs than active negative benchmark returns. For example, if a fund has an up capture of 120 that means that
investment strategies due to their passive nature of investing and are commonly referred to as the fund goes up 12% when the benchmark moves up 10%. The same fund has a down capture
index funds. For this type of investment strategy, the Scorecard System is focused on how well of 90 so that means the fund returns a -9% when the benchmark returns a -10%.
these managers track and/or replicate a particular area of the market with an emphasis on how
they compare against their peers.

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