12b-1 Fee Taken from a fund’s prospectus, 12b-1 fees represent the annual charge deducted from fund assets to pay for distribution and marketing costs. If fee levels have changed since the end of the most recent fiscal year, the actual fees will most commonly be presented as a recalculation based on the prior year’s average monthly net assets using the new, current expenses. Although contract-type distribution costs are listed in a fund’s prospectus, these are maximum amounts and funds may waive a portion, or possibly all, of this fee. Actual fees thus represent a closer approximation of the true costs to shareholders. Adjustable Coupon A bond with floating coupon payments that are adjusted at specific intervals. The bond is payable to the bondholder upon demand following an interest rate change. Generally, the current money market rate is what is used to set the interest rate, plus or minus a set percentage. Alpha Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a security or mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the security or fund relative to the return of the benchmark index is a fund’s alpha. American Depositary Receipts (ADRs) An ADR is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. Dollars and trade like any other stock, with the underlying security held by a U.S. financial institution overseas. Annualized Standard Deviation Annualized standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Average Effective Duration Average Effective Duration measures the expected volatility of a bond fund in response to interest rate fluctuations. Average Maturity Average maturity is used for taxable fixed-income instruments and is a weighted average of all the maturities of the bonds in a portfolio. It is computed by weighting each maturity date (the date the security comes due) by the market value of the security. Average effective maturity takes into consideration all mortgage prepayments, puts, and adjustable rate coupons, but does not account for call provisions. Longer-maturity generally means that the portfolio is more interest-rate sensitive than its shorter counterparts. Bear Market A bear market is a prolonged period in which investment prices are falling or are expected to fall, accompanied by widespread pessimism. Although figures can vary, a downturn of 15%-20% in a key index (Dow Jones Industrial or S&P 500®, for example) from a recent peak over at least a two-month period is considered an entry into a bear market. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in U.S. history was the Great Depression of the 1930s. If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead referred to as a correction. Beta Beta, which is a component of Modern Portfolio Theory, measures a portfolio’s sensitivity to market movements. Specifically, it measures the relationship between the portfolio’s excess return over T-bills (representing a risk-free rate) relative to the excess return of the portfolio’s benchmark. By definition, the beta of the benchmark is 1.00. Accordingly, a portfolio with a 1.10 beta has performed 10% better than its benchmark index – after deducting the T-bill rate – than the index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the portfolio has performed 15% worse than the index in up markets and 15% better in down markets. A low beta does not imply that the portfolio has a low level of volatility; rather, a low beta means that the portfolio’s market-related risk is low. Beta is often referred to as systematic risk. Brady Bonds Brady Bonds are bonds issued by emerging countries under a debt reduction plan. These bonds are usually collateralized by specially-issued U. S. Treasury 30-year zero-coupon bonds purchased by the debtor country. Bull Market A bull market is a prolonged period in which investment prices are rising or are expected to rise. A bull market may also be a prolonged period of time when prices are rising in a financial market faster than their historical average. Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom or investor psychology. The longest and most famous bull market is the one that began in the early 1990s in which the U.S. equity markets grew at their fastest pace ever. Carry Trade In general, a Carry Trade entails borrowing (short) and paying interest in order to buy (long) something else that has higher interest. Currency Carry Trade Example For a currency carry trade, an investor would borrow (short) in a low-interest-rate currency and then take a long position in a higher-interest-rate currency, betting that the exchange rate will not change so as to offset the interest rate differential. Here’s an example of a “Yen carry trade:” A trader borrows 1,000 Yen from a Japanese bank, converts the funds into U.S. Dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% – 0%), as long as the exchange rate between the countries does not change. These transactions are generally done with a lot of leverage, so a small movement in exchange rates could result in huge gains or losses unless hedged appropriately. Fixed Income Carry Trade Example With a positively sloped yield curve (short rates lower than long rates), one might borrow at low short-term rates to finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. However, if long-term interest rates unexpectedly rose (and long-term bond prices fell as a result), the carry trade could become unprofitable. If this occurred, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. This could exacerbate the increase in long-term interest rates, i.e., push the rates even higher. Convexity Convexity measures the deviation of a bond’s price/yield curve from a straight line; that is, convexity measures the degree of curvature of the price/yield relationship. This figure, used in conjunction with duration, provides a more accurate approximation of the percentage price change resulting from a specified change in a bond’s yield. Correlation Correlation measures how two or more securities, or portfolios and mutual funds, move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 (perfect negative correlation) and +1 (perfect positive correlation). A correlation close to +1 means a strong positive relationship, while one near -1 means a strong negative correlation. A score of 0 (zero) would mean no correlation between the two securities or portfolios, but is highly unlikely. Cost of Carry Cost of carry is a cost incurred because of an investment position. A negative carry position is one in which the cost of financing a security position or financial futures position exceeds the yield earned. A positive carry position occurs when a strategy of holding two offsetting positions creates an incoming cash flow from one that is greater than the obligations of the other. Similar to arbitrage, positive carries generally occur in the currency market where interest paid to investors in one currency is more than they have to pay to borrow in another currency. Current Yield Where available, this figure is calculated as the asset-weighted sum of each underlying security’s coupon divided by the current price. For Barclays Bond Indices, the current yield is calculated as the average coupon divided by the average current price. Debt/Total Capital Debt/Total capital, which is a measure of financial leverage, is calculated by dividing long-term debt by total capitalization (the sum of equity plus preferred equity and long-term debt). All else being equal, stocks with high debt/total cap ratios are generally riskier than those with low debt/total cap ratios. Note that debt/total capital figures can be misleading due to accounting conventions. That is, since balance sheets are based on historical cost accounting, they may bear little resemblance to current market values. Dividend Yield This percentage is calculated by dividing a company’s total dividends paid over the trailing 12 months by its current per-share price and multiplying by 100. Dow Jones Industrial Average (Dow Jones) A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange. It has been a widely followed indicator of the U.S. stock market since October 1, 1928. Downside Capture The downside capture ratio measures a manager’s performance in down markets relative to a particular benchmark. A down market is one in which the market’s quarterly (or monthly) return is less than zero. For example, a ratio of 50% means that the portfolio’s value fell half as much as its benchmark index during down markets. Dual Contract A dual contract investment advisory arrangement occurs when the investor or end client is required to execute a separate investment advisory agreement with both the sponsor and advisor/subadvisor. Earnings Per Share (EPS) Earnings Per Share (EPS) is a company’s profits per share of common stock. Fees 12b-1 Fee Taken from a fund’s prospectus, 12b-1 fees represent the annual charge deducted from fund assets to pay for distribution and marketing costs. If fee levels have changed since the end of the most recent fiscal year, the actual fees will most commonly be presented as a recalculation based on the prior year’s average monthly net assets using the new, current expenses. Although contract-type distribution costs are listed in a fund’s prospectus, these are maximum amounts and funds may waive a portion, or possibly all, of this fee. Actual fees thus represent a closer approximation of the true costs to shareholders. Contingent Deferred Sales Charge – CDSC A fee (sales charge or load) that mutual fund investors pay when selling Class-B fund shares within a specified number of years of the date on which they were originally purchased. It is also known as a “back-end load” or “sales charge.” The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough. For example, a contingent deferred sales load might be 5% if an investor holds his or her shares for one year, 4% if the investor holds his or her shares for two years, and so on until the load goes away completely. The rate at which this fee will decline will be disclosed in the fund’s prospectus. Front End Load A commission or sales fee charged at the time of the initial purchase for an investment, usually mutual funds. It is deducted from the investment amount and thus, lowers the size of the initial investment. For mutual funds, the use of loads may be used to prevent frequent fund trading, which can hurt a fund if it has to hold large cash reserves to meet payouts. A majority of the front end load is paid to the selling broker. Gross Expense Ratio Gross expense ratio is the most recent fiscal year end audited expense ratio, before expense reimbursements. Management Fee Taken from a fund’s prospectus, the management fee most commonly represents the actual costs shareholders paid for investment management and administrative services during the fund’s prior fiscal year. If fee levels have changed since the end of the most recent fiscal year, the actual fees will most commonly be presented as a recalculation based on the prior year’s average monthly net assets using the new, current expenses. Although contract-type management costs are listed in a fund’s prospectus, these are maximum amounts, and funds may waive a portion, or possibly all, of those fees. Actual fees thus represent a closer approximation of the true costs to shareholders. Prospectus Ratios Prospectus ratio is the most recent fiscal year end audited expense ratio, net of reimbursements, but grossed up to include expense offsets. This ratio must include contractual changes on a go-forward basis. Redemption Fee The redemption fee is an amount charged when money is withdrawn from a fund. This fee does not go back into the pockets of the fund company but rather into the fund itself and does not represent a net cost to shareholders. Also, unlike contingent deferred sales charges, redemption fees typically operate only in short, specific time periods, commonly 30, 180 or 365 days. However, some redemption fees exist for up to five years. Charges are not imposed after the stated time has passed. These fees are typically imposed to discourage market-timers, whose quick movements into and out of funds can be disruptive. The charge is normally imposed on the ending share value, appreciated or depreciated from the original value. Sales Fees Also known as loads, sales fees represent the maximum level of initial (front-end) and deferred (back-end) sales charges imposed by a fund. The scales of minimum and maximum charges are taken from a fund’s prospectus. Because fees change frequently and are sometimes waived, it is wise to examine the fund’s prospectus carefully for specific information before investing. (See also CDSC, Front End Loads and Redemption Fees.) Total Expense Ratio The annual expense ratio, taken from the fund’s annual report, expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs and all other asset-based costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. If the fund’s assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as fund net assets grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may also opt to waive all or a portion of the expenses that make up their overall expense ratio. Trailing Commission The trailing commission, or trailing fee, is a recurring revenue stream that many mutual fund companies pay to advisors. Most fund managers pay a trailing commission, which is calculated periodically on the market value of the client’s fund balance. The trailing commission is paid out of the revenue that the fund manager earns. Wrap Fee A wrap account is an investment program in which a client’s funds are placed with one or more money managers, and all fees are included in one comprehensive fee, generally a percentage of the value of the assets in the account. The wrap fee bundles together a suite of services, such as brokerage, advisory, research and management. This fee generally covers all administrative, maintenance, commission, trading and management expenses. Wrap-fee investment programs may include separate accounts, multi-discipline strategies and mutual fund asset-allocation programs. Forward EPS Growth Expectations Forward EPS Growth Expectations is the growth rate of future earnings per share (EPS) measured by combining the estimates of the analysts covering a public company Fund of Funds A Fund of Funds is a fund that specializes in buying shares in other mutual funds rather than individual securities. Quite often this type of fund is not discernible from its name alone, but rather through prospectus wording. Information Ratio Information ratio is a ratio of portfolio returns above the returns of a benchmark (usually an index) to the volatility of those returns. The information ratio (IR) measures a portfolio manager’s ability to generate excess returns relative to a benchmark, but also attempts to identify the consistency of the investor. This ratio will identify if a manager has beaten the benchmark by a lot in a few months or a little every month. The higher the IR, the more consistent a manager is, and consistency is an ideal trait. Interest-Rate Sensitivity Interest-Rate Sensitivity measures a portfolio’s sensitivity to a parallel shift, in either direction, in interest rates. Sensitivity is stated as a percent change in the price of a bond for a given shift (typically 25 or 100 basis points) in rates. This measurement is closely related to duration, and the two figures are often used interchangeably. Jensen’s Alpha Jensen’s Alpha is a risk-adjusted performance measure that represents the average return on a portfolio over and above that predicted by the Capital Asset Pricing Model (CAPM), given the portfolio’s beta, its benchmark and the risk-free rate. Jensen Alpha is one of the ways to determine if a portfolio is earning the proper return for its level of risk and the value added of an active strategy. Market Capitalization This figure represents the current stock-market value of a company’s equity. It is calculated as the current share price times the number of shares outstanding as of the most recent quarter. Market Neutral Market neutral is a strategy undertaken by an investor or an investment manager that seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and to decrease the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors and so on. There is no single accepted method of employing a market-neutral strategy. Mean Return Mean return represents the annualized average return of a portfolio from which the standard deviation is calculated. It is often also considered the expected return for a portfolio over a given period, based on historic returns. Modified Duration Modified Duration is the name given to the price sensitivity and is the percentage change in price for a unit change in yield. Payout Ratio The payout ratio is the ratio of dividends paid to shareholders relative to earnings per share. PEG Ratio The PEG Ratio is equal to the Price/Earnings ratio divided by the projected EPS growth. Portfolio Turnover Portfolio turnover is a measure of how much buying and selling of securities a portfolio does during a particular period. A turnover of 100 percent means the portfolio has sold the equivalent of every security in its portfolio and replaced it with something else over a set period, usually one year. Price/Book Price/book (or P/B) ratio is calculated by dividing the market price of a company’s outstanding stock by its book value (total assets of a company less liabilities) and then adjusting for the number of shares outstanding. Stocks with negative book values are usually excluded from this calculation. To compute a portfolio’s average P/B, each holding is weighted by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the final P/B. Price/Earnings Price/earnings (or P/E) ratio is a comparison of the cost of the company’s stock and its trailing 12-month earnings per share. In computing the average for our mutual funds and separate account strategies, AMG Funds inverts each security’s P/E ratio to limit the effect abnormally large ratios can have on the fund’s average. Then, each portfolio holding is weighted by the percentage of equity assets it represents. A high P/E usually indicates that the market will pay more to obtain the company’s earnings because it believes in the firm’s ability to increase its earnings. P/Es can also be artificially inflated if a company has very weak trailing earnings, and thus a very small number in this equation’s denominator. A low P/E indicates the market has less confidence that the company’s earnings will increase; however, a manager with a “value investing” approach may believe such stocks have been overlooked or have undervalued potential for appreciation. R-Squared R-squared ranges from 0 to 100 and reflects the percentage of a portfolio’s movements that are explained by movements in its benchmark index. A portfolio with an R-squared of 100 means that all movement is completely explained by benchmark index movement. Thus, a portfolio that invests only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very little of the portfolio’s movement is explained by benchmark movement. An R-squared measure of 35, for example, means that movements in its benchmark index can explain only 35% of the portfolio’s movements. R-squared is used to ascertain the significance of a particular beta or alpha and generally a higher R-squared will indicate more useful alpha and beta figures Return on Assets (ROA) (definition for stocks) ROA is the percentage a company earns on its assets in a given year. The calculation is net income divided by average total assets. The better the company, the more profit it generates as a percentage of its assets. Return on Equity (ROE) (definition for stocks) ROE is the percentage a company earns on its total equity in a given year. A common way to calculate this ratio is to divide debt-free net income by average total equity. ROE shows how much profit a company generates on the money shareholders have invested in the firm. Rule 144a Rule 144a is an SEC rule issued in 1990 that modified a two-year holding period requirement on privately placed securities by allowing qualified institutional buyers to buy and trade unregistered securities among themselves. SEC 30-Day Yield The SEC yield is a standardized calculation method prescribed by the SEC for fairer comparisons of quoted yields. The calculation represents net income for the most recent 30-day period, which is annualized and shown as a percentage. Seven-Day Average Yields Seven-day average yields represent the average income that was distributed for the prior seven days, which is then annualized and shown as a percentage. Sharpe Ratio The Sharpe ratio is a risk-adjusted measure developed by William Sharpe. It is calculated using standard deviation and excess return to determine reward per unit of risk. First, the average monthly return of the 90-day Treasury bill (over a 36-month period) is subtracted from the portfolio’s average monthly return. The difference in total return represents the portfolio’s excess return beyond that of the 90-day Treasury bill, a risk-free investment. An arithmetic annualized excess return is then calculated by multiplying this monthly return by 12. To show a relationship between excess return and risk, this number is then divided by the standard deviation of the portfolio’s annualized excess returns. The higher the Sharpe ratio, the better the portfolio’s historical risk-adjusted performance. Spread Duration Spread duration measures a security’s (or portfolio’s) sensitivity to changes in yield spreads. In this context, the “yield spread” refers to the incremental yield over comparable U.S. Treasury securities that a security (or portfolio) is currently delivering. Spread duration is commonly quantified as the percentage change in price for the security (or portfolio) resulting from a 1.0% (100 bps) change in spreads. An increase in spreads is called “widening” and would result in a price decline for a security (or portfolio) with positive spread duration. A decline in spreads is called “tightening” and would result in a price increase for a security (or portfolio) with positive spread duration. Standard Deviation Standard deviation is a statistical measure of the range of a portfolio’s performance. A high standard deviation suggests a wider range of returns and indicates that there is a greater potential for volatility. By definition, approximately 68% of the time, the total return is expected to differ from its mean total return by no more than plus or minus the standard deviation figure. Ninety-five percent of the time, the portfolio’s total return should be within a range of plus or minus two times the standard deviation from its mean. (These ranges assume that returns fall in a typical bell-shaped distribution.) For example, an investor can compare two portfolios with the same average monthly return of 5.0%, but with different standard deviations. The first has a 3-year standard deviation of 2.0, which means that its range of returns for the past 36 months has typically remained between 1% and 9%. On the other hand, assume that the second has a 3-year standard deviation of 4.0 for the same period. This higher deviation indicates that this portfolio has experienced returns fluctuating between -3% and 13%. Step Coupon Bond A step coupon bond is a bond with a coupon that increases (“steps up”) periodically. TBAs (“To Be Announced”) Transactions A TBA transaction represents a contract for the purchase or sale of mortgage-backed securities (including fixed-rate or variable-rate mortgages) to be delivered at a future agreed-upon date. These pools are guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac; however, the specific pool numbers or the number of pools that will be delivered to fulfill the trade obligation or terms of the contract are unknown at the time of the trade. Thirty-Day Average Yields The thirty-day average yield represents the average income that was distributed for the prior 30 days, which is then annualized and shown as a percentage. Total Return When measuring performance, total return is the actual rate of return of an investment or a mutual fund over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Tracking Error Tracking error, which is often referred to as the active risk of the portfolio, measures how closely a manager’s returns track the returns of a benchmark index. Specifically, tracking error measures the standard deviation of the excess returns a portfolio generates compared to its benchmark. This gives an indication of the volatility of a portfolio versus its benchmark. If a manager tracks a benchmark closely, then tracking error will be low. If a manager tracks a benchmark perfectly, then tracking error will be zero. Tracking Error Tracking error, which is often referred to as the active risk of the portfolio, measures how closely a manager’s returns track the returns of a benchmark index. Specifically, tracking error measures the standard deviation of the excess returns a portfolio generates compared to its benchmark. This gives an indication of the volatility of a portfolio versus its benchmark. If a manager tracks a benchmark closely, then tracking error will be low. If a manager tracks a benchmark perfectly, then tracking error will be zero. Trailing 5-Year Revenue Growth The average growth rate of a company’s total sales over the previous five years. Treynor Ratio Treynor Ratio, which was developed by Jack Treynor, measures reward per unit of beta risk. It measures returns earned in excess of that which could have been earned on a less risk investment per each unit of market risk. The Treynor Ratio relates the difference between the portfolio return and the risk-free rate to the portfolio beta for a given time period. Upside Capture The upside capture ratio is a measure of a manager’s performance in up markets relative to a particular benchmark. An up market is one in which the market’s quarterly (or monthly) return is greater than or equal to zero. For example, a ratio of 50% means that the portfolio’s value increased half as much as its benchmark index during up markets. Weighted Average Dividend Yield For each holding in the portfolio, dividend yield is the total dividends paid over the trailing 12 months relative to the current share price. The weighted average is calculated by measuring each company’s dividend yield in proportion to the size of the holding in the portfolio. Weighted Average Life (WAL) Weighted average life (WAL) is the average length of time that each dollar of unpaid principal on a loan, a mortgage or an amortizing bond remains outstanding. WAL indicates how many years it will take to receive half the amount of the outstanding principal. The time weightings are based on the principal pay downs, i.e., the years with more principal payments will have a higher weight. Yields Yields are used mainly for money market funds and are equal to the daily net income available for distribution, annualized, divided by outstanding shares of record and shown as a percentage. Yield to Maturity (YTM) YTM is the percentage rate of return earned on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate. Zero-Coupon Bond A zero-coupon bond has no stated interest rate and pays only the principal portion at a stated date in the future. The bonds are issued at a discount to par and the difference between the discount, and par is the return to the bondholder.