Avoid confusion when investing in mutual funds by understanding the different terms and definitions that are commonly used when discussing funds. Here are just a few to get you started. Feel free to call a mutual funds specialist at 1-800-50-PLACE or 1-919-719-7200 for more information or to begin investing in mutual funds today.
ALPHA: Alpha measures the difference between the fund's actual results and the results one would expect from a statistically average fund having the same beta in the same category. It is calculated with linear regression, a statistical routine, using 36 monthly observations.
BEST/WORST HISTORICAL PERFORMANCE: This section indicates the total returns and dates of a fund's best and worst months, quarters, 1-year, 3-year, and 5-year periods It is presented graphically on S&P's Mutual Fund Reports.
BETA: Beta measures a fund's sensitivity to changes in the overall market. The overall market is designated by the fund's category benchmark. Beta is calculated with linear regression using 36 monthly observations.
BULL/BEAR MARKET (Equity Funds): A bull market in stocks occurs when the S&P 500 (1) rises by at least 10% from its previous trough and (2) moves above its 39-week moving average. The bull market ends when the market reaches its peak and subsequently declines by at least 10% and below its 39-week moving average.
A bear market in bonds occurs when the yield of 10-year treasuries rises from its previous trough by at least 125 basis points. The bear market ends when the yield reaches its peak and subsequently declines by at least 125 basis points.
CATEGORY: Each mutual fund is placed into on e of six broad categories: domestic equity, domestic fixed income (taxable), domestic fixed income (tax-exempt), international equity, international fixed income or money market.
RANKS: The S&P Ranking is based on a fund's 3-year Sharpe ratio. Funds with at least three years of operating history are ranked according to how their Sharpe ratio compares to other funds in the same Style Category as follows:
A fund's 1-year, 3-year, 5-year and 10-year Style Category Ranks (referred to by Style Category name such as Large Cap Value Ranks, etc.) are shown for purposes of comparison.
As shown in the rankings section is the fund's Broad Category Rank, (which is referred to by Broad Category name such as Domestic Equity Rank, etc.). It is also based on the fund's three-year Sharpe ratio, but it differs from the S&P Ranking and Style Category Ranks in that it compares a fund to its Broad Category peers. One limitation of the Broad Category Rank is that funds within a single Broad Category may have dissimilar objectives. Thus, they may not represent a particular fund's true set of peers.
S&P's Risk Rank is based on the fund's standard deviation which is calculated from 36 monthly observations and then ranked against the fund's category. The percentage distribution of Risk Ranks are the same as the S&P Rankings. Thus, funds with standard deviations in the top 10% carry a Risk Rank of "High"; the next 20% are "Moderately High"; the middle 40% are "Moderate"; the next 20% are "Moderately Low"; and the lowest 10% carry a Risk Rank of "Low."
R-SQUARED (R2): R2 measures the degree to which a fund's behavior is related to an external benchmark. Consider an equity fund with an R2 of 86 relative to the S&P 500 Index. One could infer from the R2 statistic that 86% of the fund's historical behavior was attributable to movements in the S&P 500 Index
SHARPE RATIO: The Sharpe ratio measures the fund's risk-adjusted return. It is calculated as follows:
- Fund's Return - Treasury Bill Return
- Fund's Standard Deviation
When the fund is a municipal bond fund, the Treasury bill return is adjusted to reflect the tax treatment of the municipal bond fund. This measure is used in the S&P fund ranking.
STANDARD DEVIATION: Standard deviation measures the variability of a fund's returns. Funds with high standard deviations exhibit relatively more volatility than those with low standard deviations.
A fund's annual return can be expected to fall within one standard deviation of its average annual return two-thirds of the time. As an example, a fund with an average annual return of 12% and a standard deviation of 8 percentage points can be expected to produce an annual return that is within the range of 4% to 20% two-thirds of the time. During the remaining one-third of the time, it would be expected to fall outside of these boundaries.
STYLE: Each fund is classified into one of 42 investment styles based on the fund's historical pattern of investing. The styles are: Balanced Large-Cap, Balanced Mid-Cap, Balanced Small-Cap, Equity Sector, Large-Cap Blend, Large-Cap Growth, Large-Cap Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Small-Cap Blend, Small-Cap Growth, Small-Cap Value, High Yield Municipal (National), High Yield Municipal (Single State), Intermediate-Term Municipal (National), Intermediate-Term Municipal (Single State), Long-term Municipal (National), Long-term Municipal (Single State), Short-term Municipal (National), Short-term Municipal (Single State), Low Quality Bond, Intermediate-Term High Quality, Intermediate-Term Medium Quality, Long-term High Quality, Long-term Medium Quality, Mortgage Asset Backed, Short-term High Quality, Short-term Medium Quality, Specialty Bond, Developed Single Country, Emerging Single Country, Global, International, International Balanced, International Equity Sector, Regional Market/Developed, Regional Market/Emerging, Global Bond, Government Guaranteed Money Market, Municipal Money Market and Taxable Money Market.
STYLE COMPOSITION: Style Composition shows what mix of style benchmarks (Mid-Cap, Value, Corporate Bond, International, etc.) has best explained the fund's historical behavior over a period of time. Consistency of investment style or noteworthy shifts in a fund manager's approach can be identified in the Style Composition graph.
STYLE DRIFT: Style Drift measures the tendency of a fund to deviate from it specified investment style over time.