A
Asset Allocation
The distribution of assets in a portfolio between various asset classes such as common stocks, bonds, cash, real estate, venture capital, etc. Different approaches to the asset allocation decision are employed such as strategic, dynamic or tactical.
B
Balanced (asset class)
Investments in common stock, preferred stock and bonds which are combined in an effort to obtain the highest return consistent with a low-risk strategy. A balanced portfolio typically offers a higher yield than a pure stock fund and performs better than such a fund when stocks are falling. In a rising market, however, a balanced portfolio usually will not keep pace with an all-equity portfolio.Basis Point
1/100th of 1.0%, or 0.01%.Benchmark
In an investment context, a benchmark represents the return of a passive investment strategy for a particular asset class. For example, for Canadian equities, the TSE 300 is often considered a representative benchmark. Therefore, a manager’s active investment decisions can be judged relative to the benchmark.Bottom Up
An investment style where security selection is based on the fundamental analysis of companies rather than on macro economic analysis.
C
Capitalization
Often used as a measure of a company’s size, it is equal to the market value of the company’s share price times the number of shares outstanding (common stock). Small capitalization portfolio means a portfolio that contains stocks of companies with a capitalization smaller than the average capitalization of the market.Cash Equivalents
All fixed income securities that are highly liquid, with a known market value and a maturity, when acquired, of less than three months.Core Style
A strategy with investments in a large number of securities in each sector of the economy. Unlike an index strategy, a core strategy does try to exceed the return of the target index.Corporates
Debt obligations issued by private corporations. This type of debt instrument varies greatly in quality and liquidity as the terms of the obligation and the financial health of the issuer are factored in by the market.CPI
The Consumer Price Index (CPI) is a statistical device that measures the change in the cost of living for consumers. It is used to illustrate the amount of inflation that has taken place.CPP
The Canada Pension Plan (CPP) is a governmental pension plan that provides for benefits to workers and their families in the event of retirement, disability or death. CPP applies everywhere in Canada, with the exception of Quebec.Currency Hedging
A technique used by managers who invest in securities denominated in foreign currencies to minimize the effect of those currencies’ fluctuations against the Canadian dollar. A 100% hedge will neutralize the effect while a partial hedge will reduce the effect.
D
Derivative
A financial instrument whose value is “derived” from or based upon the value of other financial instruments or the level of a financial index. Also refers to financial instruments which have complex structures with option-like features. Futures, options and currency forward contracts are examples of derivatives.Diversification
The spreading of risk among a number of different investment opportunities which are not perfectly positively correlated. Since the assets are not perfectly correlated, losses of any one asset can be offset by gains on other assets.Duration
A measure (expressed in years) of a bond’s price volatility relative to a change in the general level of interest rates. In general, bonds with longer durations have greater sensitivity to interest rates.Duration - Active
Average portfolio duration is allowed to vary outside of a 20% range around the benchmark’s duration.Duration - Controlled
Average portfolio duration is maintained within a 20% range around the benchmark’s duration.Duration - Neutral
Average portfolio duration is maintained close to the benchmark’s duration.Duration - Tightly Controlled
Average portfolio duration is maintained within a 10% range around the benchmark’s duration.
E
Equity
Investment or ownership interest of shareholders in a corporation — stock as opposed to bonds.
F
Financial Times Europe, Australia and Far East Index:
This index is an international equity index from the following 23 countries:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Indonesia, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Philippines, Portugal, Singapore, Spain, Sweden, Switzerland, Thailand and United Kingdom.
The index has been tracking the international equity market since 1986. Standard and Poor's and the Financial Times jointly calculate the index, and are responsible for the day-to-day data gathering and processing which is necessary for the Index calculations. The World Index Policy Committee (WIPC) determines the overall policy and objectives of the Index, establishes selection criteria and construction techniques, and approves changes to the constituent securities of the Index.
The Stocks included in the Index must pass selection criteria based on size, liquidity, investment restrictions and economic sector representation.
The index is market value-weighted. The dividend used for the Index is the “gross” dividend which is the return non-resident shareholders are entitled to receive from foreign corporations before withholding tax is deducted at the country’s basic rate.Fixed Income
Debt instruments issued by corporations, governments or government agencies characterized by a fixed interest rate and stated maturity date. These represent the terms of the arrangement between someone who borrows money and someone who lends it.Flexible Pension Plan
A Flexible Pension Plan is a defined benefit pension plan which allows plan members to make Optional Ancillary Contributions in order to acquire Optional Ancillary Benefits.
G
Gross Rate of Return
Rate of return of a portfolio before deducting the fees charged by the investment managers for their services.Growth at a Reasonable Price Style
An investment style employed by investment managers who invest in companies which have superior growth prospects. However, security selection techniques try to identify those companies that are underpriced relative to other companies in the same industry or sector.Growth Style
An investment style employed by investment managers who invest primarily in companies that have superior growth prospects. Generally, these companies have higher price to earnings and price to book ratios and lower dividend yields.
H
Hedging
Strategy used to offset investment risk.Historical Beta
Beta is a measure of a stock’s (or portfolio) return volatility relative to the market (benchmark index). A beta of 1.00 means a stock has exhibited the same volatility as the market over the period measured. A beta of 0.85 means that, in general, the stock is less volatile than the market (moves 0.85% for each 1.00% move in the market) whereas a beta of 1.15 corresponds to a stock more volatile than the market (moves 1.15% for each 1.00% move in the market). An estimate of the historical beta of a portfolio is based on a simple linear regression of the portfolio returns vs the market returns.
I
Intermediate-Term Bond
Bonds with a maturity between three and ten years.Investment Grade
Bonds rated BBB (Baa) or higher by Standard & Poor’s Corporation and Moody’s Investor Services. Investment grade bonds are higher quality than high yield bonds and have lower credit risk.
L
LIF
A Life Income Fund (LIF) is a type of RRIF under which the owner of the LIF must withdraw, each year, a minimum amount prescribed by the Income Tax Act (Canada), up to a maximum amount prescribed by the pension legislation. It is now only in Newfoundland where the owner must use the balance of the funds when he/she reaches the age of 80 to purchase a life annuity.LIRA
A Locked-In Retirement Account (LIRA) is a type of RRSP where the funds are subject to pension legislation. These funds must be used to purchase a life annuity or be transferred to a LIF, an LRIF or a prescribed RRIF (Saskatchewan only) by the end of the year during which the owner of the LIRA reaches age 71, at the latest. The LIRA is available in all jurisdictions, with the exception of British Columbia and the federal (PBSA). These two jurisdictions provide rather for the locked-in RRSP that is very similar to the LIRA.Locked-in RRSP
A locked-in Registered Retirement Savings Plan is a type of RRSP where the funds are subject to pension legislation. These funds must be used to purchase a life annuity or be transferred to a LIF by the end of the year during which the owner of the locked-in RRSP reaches age 71, at the latest. The locked-in RRSP is available in British Columbia and the federal (PBSA).
Legislation of British Columbia still provides for age 69 as maturity age instead of age 71. However, the Superintendent of Pensions of B.C. allows locked-in RRSP issuers to defer the transfer of funds held in these vehicles to a LIF until December 31 of the year in which the owner of the locked-in RRSP attains age 71.Locking-in
A member cannot withdraw in cash the employer’s contributions and his/her contributions with interest. These contributions with interest must be used to provide a pension at retirement.Long-Term Bond
A bond with a maturity of ten years or more.LRIF
A Locked-in Retirement Income Fund (LRIF) is a type of RRIF under which the owner of the LRIF must withdraw, each year, a minimum amount prescribed by the Income Tax Act (Canada), up to a maximum amount prescribed by the pension legislation. The purchase of an annuity at age 80 is not required. The LRIF is only available in Manitoba and Ontario as well as in Newfoundland and Labrador. However, LRIFs cannot be purchased in Ontario after December 31, 2008.
M
Market Timing
A practice whereby a manager shifts between asset classes depending on the expected performance of each class. Can include timing between stocks and cash, or an unlimited number of asset classes. (see Tactical Asset Allocation.)Morgan Stanley Capital International (MSCI) Emerging Markets Free Index
An emerging markets index which measures the performance of stock markets in emerging countries around the world. The index consists of securities from the following 25 countries:
Argentina, Brazil, Chile, China, Colombia, Czech Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Korea (at 50%), Mexico, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Sri Lanka, Taiwan (at 50%), Thailand, Turkey and Venezuela.
MSCI’s goal is to accurately represent the buyable opportunities in the markets covered. Morgan Stanley uses the following criteria in defining emerging markets:
1) A Gross Domestic Product (GDP) Per Capita substantially below the average for developed economies. MSCI uses the World Bank’s definition of an Emerging country.
2) Substantially greater government regulation limiting or banning foreign ownership in industries or companies.
3) A lax regulatory environment, irregular trading hours, and/or less sophisticated back office operations, including clearing and settlement capabilities.
4) Restrictions on repartition of initial capital, dividends, interest and/or capital gains.
5) Greater perceived investment risk than in developed markets.
6) A general perception by the investment community that the country should be considered emerging.
The index is market value-weighted and is designed to reflect actual investability in markets and the constituents are screened for minimum liquidity.Morgan Stanley Capital International (MSCI) Europe Australia and Far East (EAFE) Index.
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom.
MSCI’s goal is to accurately represent the buyable opportunities in the markets covered. An independent group of country specialists regularly monitors the index constituents and adds or deletes companies to maintain representativeness.
The index represents approximately 60% of the combined market capitalization of the 20 countries. The index attempts to replicate the industry composition of each local market and includes a representative sampling of large, medium and small capitalization companies. The index is market value-weighted and calculated both with net (of foreign taxes) and gross dividends reinvested.Morgan Stanley Capital International (MSCI) World Index
A global index which measures the performance of stock markets in the United States, Europe, Canada, Australia, New Zealand and the Far East. The index currently consists of 1,500 securities from the following 22 countries:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, United Kingdom and United States.
MSCI’s goal is to accurately represent the buyable opportunities in the markets covered. An independent group of country specialists regularly monitors the index constituents and adds or deletes companies to maintain representativeness.
The index represents approximately 60% of the combined market capitalization of the 22 countries. The index attempts to replicate the industry composition of each local market and includes a representative sampling of large, medium and small capitalization companies. The index is market value-weighted and calculated both with net (of foreign taxes) and gross dividends reinvested.Municipal Bonds
Bonds issued by a state or local government or one of its agencies to supplement tax revenues for use in operating or capital expenditures. These debt instruments come in one of two forms, general obligation bonds and revenue bonds.Mutual Fund
An investment fund in which the investment company raises money from shareholders and invests in stocks, bonds, options, futures, currencies, or money market securities. These funds offer investors the advantages of diversification and professional management.
N
Nesbitt Burns Small Cap Index
Has been published since 1986. The universe of stocks in the Small Cap Index consists of the common shares of Canadian companies trading on the TSE and ME, with a market capitalization at the beginning of each month which does not exceed 0.1% of the total capitalization of the TSE 300 index. The index includes 400 stocks separated into five subindices: consumer, industrial, energy, interest sensitive, and resource. The index used is market-capitalization weighted and assumes reinvestment of dividends.
O
Optional Ancillary Benefits (OAB)
Benefits which are provided by optional ancillary contributions under a Flexible Pension Plan.Optional Ancillary Contributions (OAC)
Contributions made under a Flexible Pension Plan in order to acquire optional ancillary benefits.OAS
Old Age Security (OAS) is a monthly pension paid to Canadians who are age 65 or over.OSFI
The Office of the Superintendent of Financial Institutions (OSFI) is the entity making sure pension plans governed by the Pension Benefits Standards Act, 1985 (PBSA) comply with this act and are administered in accordance with its requirements.
P
Percentile Rank
Time-weighted rates of return are ranked against Mercer universes or peer groups. For example, an investment manager’s return may rank at the 20th percentile of a particular Mercer universe or peer group. This indicates that 80% of the investment managers in the sample had lower performance. The highest percentile rank is 1 and the lowest is 100.Portability
The legislated right to transfer vested and locked-in benefits to another registered retirement plan when the member leaves the service of his/her employer.Portfolio Turnover
Volume of shares traded as a percentage of total shares currently held in the portfolio during a given period of time.Price to Book Ratio (P/B)
The current price of a stock divided by its book value per share. For instance a stock selling for $20 a share whose book value is $5 per share has a P/B of 4.Price to Earnings Ratio (P/E)
The current price of a stock divided by its earnings per share. For instance, a stock selling for $20 a share that earned $2 per share in the last 12 months has a P/E ratio of 10.
Q
QPP
The Quebec Pension Plan (QPP) is a governmental pension plan that provides for benefits to workers and their families in the event of retirement, disability or death. QPP applies in Quebec. The QPP is similar to the CPP.Quality Rating
A measure of a bond issuer’s credit quality, or its ability to meet future contractual obligations. Two widely used bond rating systems are those of Moody’s Investor Service and Standard & Poor’s Corporation.Quartile
Represents a range of twenty-five percent of the outcomes. A first quartile rank means that the manager performed in the top twenty-five percent of its peer group or universe.
R
Real Estate Mercer’s Median
The median is derived from the Investment Performance Survey of Canadian Pooled Funds. It is based on the results of six Real Estate Pooled Funds with a total market value of 1.1 billion (Cdn $). Each pooled fund contained in the survey is eligible for Canadian institutional investors and is invested on a fully discretionary basis within the policy of the fund.Risk/Return Comparison
Analysis that presents the rate of return in relation to the volatility of those returns as measured by the annualized standard deviation of quarterly returns.RRIF
A Registered Retirement Income Fund (RRIF) is an arrangement under which the owner of the RRIF must withdraw, each year, a minimum amount prescribed by the Income Tax Act (Canada). A prescribed RRIF (Manitoba and Saskatchewan only) is similar to a RRIF with the exception that certain minimum pension legislation standards are retained, such as protection of spousal rights and creditor protection.
S
Scotia Capital Markets (SCM) 30 Day Corporate Paper Index
A market index that has been tracking performance in Corporate Paper since January 1960. It is a daily mark to market representative pieces of R1-Low Corporate Paper which have a term of 1 month by the SCM Money Market Desk.Scotia Capital Markets (SCM) Universe Bond Index
A daily index, with history available from December of 1979, for gauging performance in the Canadian domestic fixed income market. All publicly issued C$ domestic bonds rated BBB or above, with a term to maturity greater than 1 year, are eligible for inclusion. Currently, the index is comprised of approximately 800 issues representing a full cross-section of Government and Corporate credits and terms.Sector Biased
The portfolio tends to have a concentration in a particular sector or maintains in all market environments sector weightings which are significantly greater than or less than those of the benchmark.Sector Neutral
The portfolio’s allocation among sectors is similar to that of the market.Sector Rotation
An investment style under which the portfolio’s sector distribution will vary over time according to the investment manager’s perception of the attractiveness of the different sectors and subsectors of the market.Short-Term Bond
A bond with a maturity less than three years.Standard and Poor’s 500 Index
Contains a representative sample of 500 common stocks that trade on the New York and American Stock Exchanges and some over-the-counter stocks. The index represents about 80% of the total U.S. equity market capitalization yet less than 10% of the stock population. The capitalization range is from $340 million to $240 billion.
The index does not contain the 500 largest stocks. Standard and Poor’s first identifies important industry categories and allocates a representative sample of stocks to each group, generally those with the largest market values within their industry group.
The index is weighted by market capitalization and calculated on a total return basis with dividends reinvested.Standard Deviation
A measure of the dispersion of a set of numbers around the average. In a regression analysis (which assumes a normal distribution), 68% of the data points fall between 1 standard deviation below the average and 1 standard deviation above. Standard deviation is frequently used as a measure of risk (see Risk/Return Comparison).Systematic Risk
The component of return that is associated with the broad-based market. Systematic risk is the volatility of rates of return on stocks or portfolios associated with changes in rates of return on the market as a whole.
T
Target Index Return
The return derived from a portfolio invested in benchmark indices and weighted according to policy asset allocation targets.Tax-Free Savings Account (TFSA)
An investment vehicle that allows individuals to save money and benefit from a tax-free environment on the earnings generated and on withdrawals.Time-Weighted Rate of Return
A rate of return calculation. The time-weighted method removes the impact of cash flows on rate of return calculations. Time-weighted returns are an appropriate measure of an investment manager’s performance, since investment managers may not have direct control over the timing or amount of cash flows directed to them.Top Down
An investment style which begins with an assessment of the economy as a whole rather than by a fundamental analysis of companies.Tracking Error
A measure of how much a return series deviates from its benchmark. Mercer measures the tracking error by the standard deviation of quarterly excess returns.Treasury Securities
Securities which are direct debt obligations of the U.S. government. Backed by the “full faith and credit” of the United States, these bonds are considered among the safest of investments carrying AAA/Aaa ratings. Treasury Bills are short-term securities issued with three-month, six-month, and one-year maturities. Notes are intermediate-term obligations available in maturities of one to ten years. Bonds are long-term obligations with maturities greater than ten years.TSE 200 Index
Is a small capitalization index that tracks the performance of an investment in the 200 smallest Canadian incorporated securities included in the TSE 300 Index. It is a market-float weighted index, meaning that the larger the capitalization of a company, the more weight it carries in the index. All the dividends are reinvested at the index level on a daily basis.TSE 300 Index
Is an index that tracks the performance of an investment in 300 of the largest capitalized Canadian incorporated securities traded on the Toronto Stock Exchange. It is a market-float weighted index, meaning that the larger the capitalization of a company, the more weight it carries in the index. Since 1977, dividends have been reinvested at the index level on a daily basis.
V
Value Style
An investment style employed by investment managers who invest primarily in companies that appear to be undervalued relative to the market. Generally, these companies have lower price to earnings and price to book ratios and higher dividend yields.Vesting
A member is entitled to a deferred pension under the pension plan after the completion of a certain period of employment or of membership under the plan, and sometimes the attainment of a certain age.
If a member is not entitled to a deferred pension at termination of membership, he/she will be entitled to the refund of his/her contributions, if any, with interest. If a member is entitled to a deferred pension, he/she will be entitled to that deferred pension.
WXYZ
YMPE
The Year’s Maximum Pensionable Earnings (YPME) corresponds to the maximum amount of earnings of an individual that is used to determine the maximum amount of contributions and of benefits that must be paid to or from the Canada Pension Plan or the Quebec Pension Plan. The YMPE is revised annually.
