Accrual class - A CMO class that accrues interest that is not paid to the investor during the time of

accrual. The accrued interest is added to the remaining principal amount of the bond and is paid at

maturity. A Z-bond of a CMO is an accrual bond.


Active Investing - Fund’s manager attempts to beat the market and create alpha with various investing

strategies and buying/selling decisions. See Alpha.


ACWI ex-US - See MSCI All Country World ex-US Index.


Agency mortgage-backed security - A mortgage-backed security issued or guaranteed by Fannie Mae,

Freddie Mac, or Ginnie Mae.


Alpha – most often referred to as the measure of return in excess of the compensation for the risk borne,

so the return over a specified benchmark or active return due to an active portfolio mandate and not

passive. See Active Investing.


Alternative assets - Class or classes of investment assets that do not fall in the major conventional asset

groups (cash equivalents, fixed income investments, and equities). Generally refers to investments

in securities and/or assets that are not publicly traded, including Private Equity investments, or to

special trading strategies involving publicly- or institutionally-traded securities.


Application specific risk – The portion of total risk in a derivatives application which is due to factors

unique to the application as opposed to more systematic, market-related factors. For example, in an

option on a specific stock, the risk associated with the specific business results of the company

which issued the stock underlying the option would be application-specific risk, as opposed to the

overall risk of the stock market which would be Systematic Risk.


Arbitrage - Generally, the simultaneous buying and selling of the same security trading at two different

prices in two different markets, with the intention of producing profits from the price difference

with little or no risk. Perfectly efficient markets present no arbitrage opportunities. Perfectly

efficient markets seldom exist. See Convertible arbitrage; Fixed income arbitrage; Risk arbitrage.


Asset-backed security - A security supported wholly or mainly by a pool of assets in which the assets are

separated through use of a trust or other special purpose entity from the credit risk of any entity

(other than credit enhancers) involved in the financing. The collateral for asset-backed securities

may include any asset with a relatively predictable payment stream such as commercial bank loans,

franchise loans, royalty payments, home-equity loans, manufactured housing loans, trade

receivables, credit card receivables, automobile loans, equipment leases, high yield bonds,

subordinated classes of asset-backed securities, subordinated classes of mortgage-backed securities,



Asset class - A major investment group that exhibit similar risk and return characteristics over an

investment time frame; among asset classes are equity, fixed income, real asset/real return, and

strategic assets.


Assets/equity ratio - The total assets of a company divided by the total stockholder equity of the

company; a measure of financial leverage.

Asset mix - Specifies the percentage of assets in a portfolio invested in each major asset class.


Baseline portfolio – The cash-market based portfolio which will serve as the basis for calculating the

relative risk level of an equivalent derivatives application.


Benchmark index - An index that measures the performance of a specific group of assets or subgroup of



Basis Point - Equal to 1/100th of 1 percent; 100 basis points equal 1%.

Bear Market – period of weak performance and falling prices


Beta coefficient - Measure of a stock’s volatility relative to that of a specified index. The beta is the

covariance of a stock in relation to the overall stock market. Any stock with a higher beta is more

volatile than the market, and any stock with a lower beta can be expected to rise and fall more

slowly than the market.


Bull Market – period of increasing prices and strong performance


Buyouts (or “corporate restructurings”) - Refers to an investment strategy through which a fund

invests sufficient sums to acquire some degree of influence and control over existing operating

company. Also referred to as “going private” or, when debt is incurred, “leveraged buyout.”

Financial returns come from (a) improving the management, operations, and performance of the

company and/or (b) using the acquired company as a platform for further acquisitions to increase

the company’s profitability through growth in operating scale and market position (known as a

“buy-and-build” strategy).


Call option - The right to buy shares of a particular security or security index at a predetermined (strike)

price over some preset time period.


Cash equivalents - Highly liquid and very safe assets which are readily convertible to known amounts of

cash such as money market holdings, short-term government bonds, or Treasury bills.


Cash market - The physical market for a commodity or financial instrument.


Closed-end fund - A type of investment company that invests in the securities of other issuers. Closedend

funds have a fixed number of shares outstanding that trade publicly. Closed-end fund shares

may trade at either a discount from or a premium to their respective underlying net asset values.


Co-investment - In private equity investing, a direct private investment in the same issuer alongside a

private equity fund or investment vehicle in which the investor has also invested. That is, the

investor invests directly in the issuer when it may also invest indirectly in the same issuer through

the fund or vehicle. Co-investing permits the investor to acquire more exposure to the issuer’s

business prospects and facilitates the raising of needed capital by the issuer.


Collateral – Assets pledged to secure payment of a party’s obligation under a transaction. Collateral is a

risk reduction tool, which like many other such tools mitigates risk by reducing credit exposure.


Collateralized mortgage obligation (CMO) - A security that directs the total payment of principal and

interest of the collateral pool (mortgage pass-through securities or pools of such securities) to

structure different types and maturities of securities with different priority claims. The individual

bond classes of a CMO are referred to as "tranches." An agency CMO is issued or guaranteed by

the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage

Corporation (“Freddie Mac”), or the Government National Mortgage Association (“Ginnie Mae”).

Agency CMOs are backed by pools of agency pass-through securities. A “Private Label CMO” is a

CMO issued by a private entity and whose underlying collateral is a pool of pass-throughs

guaranteed by an agency of the United States or a government-sponsored enterprise. See Tranche;

Mortgage-backed security.


Commercial mortgage-backed security (CMBS) - A bond or other debt instrument collateralized by

loans which are secured by commercial real estate.


Commingled account – An account where the investor purchases a share of a fund, such as a mutual

fund, that others are invested in and each investor has an individual cost basis on the securities in

the portfolio. This differs from a separate account where the account is created specifically for the



Commissions recapture – A form of institutional discount brokerage that rebates a portion of trading

commissions directly to the institutional investor.


Commodities - Bulk goods such as grains, metals, and foods traded on a commodities exchange or on the

spot market.


Companion class (support class) - A CMO bond that absorbs the prepayment volatility of bond classes

which pay according to a principal payment schedule. The companion class provides prepayment

protection to other classes (PACs and TACs) as follows: the companions either absorb principal

payments in excess of the PAC schedule (when prepayments are fast) or they delay in amortizing

(when prepayments are slow).


Convertible arbitrage - Convertible bond arbitrage involves buying a fixed income security that is

convertible into stock while simultaneously selling short the corresponding stock. Pricing

inefficiencies between such related securities may permit the investor to profit whether the stock

price rises or falls because of the cash flows involved and the residual investment value of the

convertible security. An investment strategy designed to buy undervalued instruments that are

convertible into equity and then hedge out the market risk through a short sale of the equity security

or its functional equivalent.


Corporate restructurings - See Buyouts.


Correlation of return or correlation coefficient - A statistical measure, denoted by the letter “r”,

ranging from -1.0 to +1.0, of the degree to which the returns of two assets are related. Perfect

negative correlation (-1.0) indicates the returns of two assets move in exact opposite directions, i.e.,

when one asset’s return is positive, the other’s is negative. Perfect positive correlation (+1.0) means

that the two assets’ respective returns move exactly in the same direction. No correlation (0.0)

indicates that the respective returns of two assets fluctuate randomly.


Counterparty - The offsetting party in an exchange agreement.


Counterparty risk - The risk of loss surrounding the unwillingness or inability of a counterparty to

honor their obligation.


Covariance - A statistical term computed as the correlation between the return of two securities

multiplied by the standard deviation of returns for each of the securities; a measure of the co-risk of

two securities.


Covered option writing (option overwrite) - An option contract backed by the shares underlying the

option, i.e., the seller (the writer) of the option owns the underlying shares to deliver to the

purchaser in the event the option is exercised by the purchaser. A seller of covered options is selling

options against owned stock to collect premium income. The seller will benefit from the premium

income when the stock price remains stable or drops.


Custodian – is a financial institution that is responsible for safeguarding firm’s financial assets.

Debt service - Ongoing expenses associated with maintaining a debt position; the amount of debt service

equals the sum of interest expenses and non-capitalized lease expenses.


Depositary receipt - A receipt issued by a custodial bank that represents indirect ownership of a certain

number of shares of a specific foreign-based company held by the bank. American Depositary

Receipts, or ADRs, allow U.S. investors to buy foreign shares in the U.S. Global Depositary Receipts, or GDRs, are issued and cleared by Euromarket depositaries. Global Depositary Receipts are a Euromarket analog of ADRs.


Derivative - Financial product whose value or return is based on, derived from, or linked to the value of a

reference rate, exchange rate, interest rate, index, or currency or an underlying security, asset,

commodity, or any combination of underlying rates, indices, currencies or securities. These

investments include but are not limited to future contracts, swap contracts, options contracts, and

forward foreign currency exchange.


Derivative application – A definition of the intended use of a derivative-based position such as

replication or enhancing index returns, asset allocation or completion fund strategies, and various

alpha transport strategies.


Derivative application portfolio – The portfolio including derivative instruments, cash equivalents, and

other cash market assets established to replicate a specified baseline portfolio.


Directional strategy – utilize market movements, trends or inconsistencies when picking securities

across a variety of movements. Strategy includes long/short strategies. See Long/Short strategy.


Distressed securities - Debt or equity securities of an issuer in bankruptcy or perceived by the markets to

be near bankruptcy or insolvency, frequently as a result of claims made or judgments awarded

against the issuer or through mismanagement. In such cases, investors may conclude that the

market price may not fully reflect the intrinsic or realizable value of the enterprise going forward.


Diversification - Spreading a portfolio over many investments to avoid excessive exposure to any one

source of risk.


Divestiture – The partial or full disposal of an investment or asset through sale, exchange, closure or



Due Diligence – is generally the care a reasonable person should take before entering into an agreement

or transaction with another party and serves to confirm all material facts.


Duration - A measure of the average life of a bond, defined as the weighted average of the times until

each payment is made, with weights proportional to the present value of the payment.


EBITDA - Earnings before interest, taxes, depreciation and amortization. EBITDA is a commonly used

measure of the operating cash flow of a company.




Economic exposure - The total effective exposure of a derivative position. The economic exposure is the

product of the dollar value of the exposure and the market or systematic risk level of the exposure.

A common method of measuring economic exposure is with risk management tools such as “value

at risk.”


Equity – an investment in which an investor has a residual claim or interest in the assets of a company,

after all liabilities are paid. Its value is driven by the companies’ ability to utilize capital in order to

create a unique product and or service that can be sold in the market place at a profit.


Equity-linked security - A security that tracks the performance of another security or portfolio of

securities. An equity-linked security sometimes can be used to track the performance of foreign

securities in countries for which direct investment is difficult.


Equity market neutral - A hedge fund strategy that seeks to exploit differences in stock prices by being

long and short in stocks within the same sector, industry, market capitalization, country, etc. This

strategy creates a hedge against market factors. To be successful, equity market neutral strategies

require frequent portfolio rebalancing, liquidity, frequent trading, and effective cost controls.


Event-driven strategies - Strategies where the key deciding factor is some kind of capital market

transaction or event.


Exchange traded derivatives - A derivative instrument traded on an established national or international

exchange. These instruments “settle” daily in that cash exchanges are made between the exchange

clearing house and parties to the contracts consistent with the change in price of the instrument.

Fulfillment of the contract is guaranteed by the exchange on which the instruments are traded.

Examples include S&P 500 Index futures contracts and Goldman Sachs Commodities Index futures



Exchange-traded fund (ETF) - A basket of securities that trades like an individual stock listed on a

public exchange. An ETF is analogous to a retail mutual fund, except that the holder sells the shares

on the exchange instead of redeeming them through the fund, has lower costs and fees, and is

passively managed. ETFs usually, but not always, trade at a market price approximating the net

asset values of the underlying securities held by the ETF. Exchange-traded funds track a wide

variety of sector-specific, country-specific, and broad-market indexes. Common of ETFs include

SPDRs and i-shares. See i-shares; SPDRs.


External manager – An investment manager that is hired by LAGERS for the purpose of constructing

and managing investment portfolios consistent with the investment philosophy and disciplines they

were hired to implement. An external manager assumes fiduciary responsibilities with respect to

LAGERS assets.


Falling growth risk – The risk of loss surrounding weaker-than-expected growth, which will impact

companies via a fall in revenues and narrowing margins resulting in a decrease in profits.


Falling inflation risk – The risk of loss surrounding lower-than-expected inflation, which will lead to a

decline in interest rates, an increasing present value of future earnings, and reducing debt cost.


Fiduciary – See Investment Fiduciary


Financial assets - See Asset Class


Financial futures contract - An agreement that obligates the buyer to purchase and the seller to sell a

specified quantity of a particular financial instrument or security (such as U.S. Treasury bonds) on a

specified date at a specified price. A futures contract is typically standardized (traded on organized

exchanges), involves depositing margin, and affords the investor the opportunity to avoid actual

delivery of the securities through an offset or liquidation procedure. Futures are normally used as a

price-fixing mechanism for anticipated transactions or as a means of profiting from market

movements without buying or selling physical securities.


Fixed income – an investment in which its value is primarily based on a regular stream of cash flows

over an agreed upon period of time.


Fixed income arbitrage - A type of arbitrage through which an investor seeks to profit from mismatches

in price and yield of fixed income securities. The arbitrage may consist of buying one fixed income

security while selling another in anticipation of market changes in interest rates. An investment

strategy seeking to exploit pricing anomalies among fixed income securities. See Arbitrage;

Convertible arbitrage.


Floating rate class - A CMO bond class whose coupons reset periodically based on an index and may

have a cap or a floor. The coupon varies directly with changes in the index. A floating rate class is

in contrast to a fixed rate class in which the coupon is fixed throughout the life of the bond.

Forward contract - A non-standardized contract for the physical or electronic (through a bookkeeping

entry) delivery of a commodity or financial instrument at a specified price at some point in the



Fund - Refers generically to an investment vehicle that is created as a separate legal entity, frequently a

limited partnership, for the purpose of conducting and managing a program of investments pursuant

to stated investment guidelines or objectives. A fund typically has independent management and is

not a common-law agent of the investors, who are generally passive, although investors in the fund

may have certain rights with respect to fund management. Unless an exemption applies, funds are

generally required to register as investment companies under the Investment Company Act of 1940.

See Hedge; External manager.


Fund of funds - An investment vehicle that itself invests in other investment vehicles. For example, a

mutual fund that invests in other mutual funds would be a “fund of funds.” A fund of funds may be

useful as a means of providing an investor with an efficient means of employing or blending

multiple investment strategies through one investment vehicle. Funds of funds may have lower

volatility of returns and a correspondingly higher predictability of returns as a result of the blending

of strategies.


Fundamental analysis - The analysis of financial statements of companies, industry considerations of

companies, industry consideration, and broad economic and market factors in order to forecast their

future stock price movements. Fundamental analysts consider past record of assets, earnings, sales,

products, management, and markets in predicting future trends in these indicators of a company’s

success or failure. By appraising a firm’s prospects, these analysts assess whether a particular stock

or group of stocks is undervalued at the current market price.


Futures contract - A standardized contract for either the physical delivery of a commodity or instrument

at a specified price at some point in the future, or a financial settlement derived from the change in

market price of the commodity or financial instrument during the term of the contract.

General investment consultant – Advisor who helps with long-term investment planning and conducts

in depth work on formulating investment strategies in helping fulfill needs and goals of client’s

overall portfolio.


General partner -When used in reference to an investment limited partnership, which refers to the

partner having general personal liability and responsibility for management and conduct of the

investing business of the partnership. A general partner is frequently an entity affiliated with or

created and controlled by a sponsor of the investment vehicle or series of investment vehicles. In

contrast, a limited partner in an investment limited partnership enjoys limited liability for

partnership obligations and is not personally liable for the tort liabilities or contract obligations

incurred by the general partner on behalf of the partnership. However, general partners typically

seek to limit or reduce their personal liability through risk-allocation provisions in the partnership

and transaction documents to the extent permitted by applicable law. See Limited partnership;

Limited partner.


Global macro strategy – Strategy that takes sizable positions in share, bond or currency markets in

anticipation of global macroeconomic events in order to generate risk-adjusted return. Use

macroeconomic analysis based on global market events and trends to identify opportunities for

investment that would profit from anticipated price movements.

Government-sponsored enterprise (GSE) -An entity that was established and chartered by the federal

government to facilitate the flow of credit, primarily in the areas of housing, agriculture, and higher



Hedge - A term generally used to describe investment strategies other than the conventional long (buy

and hold) investments in bonds and equity securities. “To hedge” generally means to reduce risk.

Hedging strategies may employ the use of short sales, arbitrage, options, futures or forward

contracts, leverage (margin), or out-of-favor, distressed, or undervalued securities, or special

situations. Generally, hedging strategies may be expected to reduce a portfolio’s total risk by virtue of having a relatively low correlation to the other assets in the portfolio. See Arbitrage; Fund; Convertible arbitrage; Risk arbitrage; Special situations.


Hedge fund – An investment fund that can undertake a wider range of investment and trading activities

than other funds. As a class, hedge funds invest in a diverse range of assets but most commonly

trade liquid securities on public markets and may also use techniques as short selling. Examples of

hedge fund strategies include global macro, event-driven, directional, distressed, etc. See Short

sale, Global macro strategy, Event-driven strategy, Directional strategy, Distressed securities.


High-yield debt -Fixed income securities rated below investment grade due to the higher credit risk of

the issuer, and accordingly the issuer must pay a higher yield to investors to raise capital.

i-shares - A series of exchange-traded funds (ETFs) designed to track the performance of certain

domestic and international indexes (the international ETFs were formerly known as World Equity

Benchmark Shares or WEBS). Funds of i-shares are available for all major indexes. The term "ishares"

is a registered trademark of Barclays Global Investors, N.A. See Exchange-traded funds



ISDA netting agreement - The International Swaps and Derivatives Association (“ISDA”) is the global

trade association representing participants in the privately negotiated derivatives industry, covering

swaps and options across all asset classes. ISDA has produced generally accepted “Master

Agreements,” a 1992 ISDA Master Agreement (Single Currency – Local Jurisdiction) and a 2002

Master Agreement (Multicurrency – Cross Border), which all contain a Schedule thereto and may

contain a Credit Support Annex attached thereto, that are used by most counterparties in OTC

derivatives transactions.


Index - A statistical composite that measures the changes in financial markets. A stock market index

measures the ups and downs of stocks generally, reflecting market prices and the number of shares

outstanding for companies in the index. See S&P 500 Index.


Index Fund – See Passive investing.


Industry sector - For purposes of the diversification requirements for the active domestic stock

portfolios, industry sectors are defined as the economic sectors in use by S&P for the benchmark

indices, the S&P 500, the S&P 400, and the S&P 600, respectively, as amended from time to time.

Currently these industry sectors are as follows: Consumer Discretionary, Consumer Staples,

Energy, Financials, Health Care, Industrials, Information Technology, Materials,

Telecommunication Services, and Utilities.


Inflation - The rate at which the general level of prices for goods and services is rising, and subsequently,

purchasing power is falling.


Inflation-linked bond - Type of bond or note that links its capital appreciation, or coupon payments, to

inflation rates. This security guarantees a return higher than the rate of inflation if it is held to

maturity. Example of such bond is Treasury Inflation-Protected Securities (TIPS). See TIPS.

Interest only strip (IO) - A CMO bond class that receives some or all of the interest from the underlying

collateral and little or no principal. The IO strip of a CMO can be formed by stripping all or part of

the coupon interest from a class or by stripping part of the coupon flows from the collateral before

dividing it into classes. IOs benefit from slowing prepayments.


Interest rate risk - The risk of loss surrounding the fluctuation in interest rates, resulting in yield

changes, duration changes, changes in the yield curve slope, and changes in market-based measures

of interest rate volatilities.


Internal rate of return (IRR) - The discount rate at which the present value of cash outflows of an

investment equal the present value of cash inflows from the investment; a commonly used

performance measure for private equity funds.


International funds - With respect to the Alternative Assets Portfolio, refers to private or institutional

investment funds that invest primarily in the securities of issuers domiciled outside of the U.S. and

Canada and whose primary markets are outside of Canada and the U.S.A. A fund that invests

primarily in issuers domiciled in Canada will not generally be considered to be in the international

funds category.


Inverse floater -A floating rate CMO class whose coupon rate varies inversely with changes in the index.

Investment grade debt - Fixed income securities rated in one of the four highest rating categories (AAA

or Aaa, AA or Aa, A, and BBB or Baa) by an independent rating agency.


Investment fiduciary – a person who exercises discretionary authority or control in the investment of

assets, or who renders, for a fee, advice for the System.


Investment Management Company – is a firm that provides professional asset management services

and collectively includes all underlying platforms provided under its same name.


Investment Manager – is an individual or team of individuals who directs fund management decisions in

order to construct and manage an investment portfolio for LAGERS.


Initial public offering (IPO) - The first sale of stock to the public by a previously private company; that

is, a primary market equity security offering by a company whose stock is not publicly traded

before the offering date.


Leverage – A condition where the net potential monetary exposure of an obligation exceeds the value of

the underlying assets, which support the obligation. Leverage is inherent in derivatives since only a

small cash deposit is required to establish a much larger economic impact position. Thus, relative to

the cash markets, where in most cases the cash outlay is equal to the value of the asset acquired,

derivatives applications offer the possibility of establishing substantially larger market risk

exposures with the same amount of cash as a traditional cash market portfolio. Therefore, risk

management and control processes must focus on the total risk assumed in a derivatives application,

which is the sum of the application-specific risk and the market (systematic) risk established by the

derivative application.


Leverage or margin - Leverage in investments is a means of attempting to enhance return or value

through the use of borrowed funds. Buying securities on margin is an example of leverage.


Leverage risk - The risk of loss surrounding the measure of market leverage within assets.


Limited offering - See Private placement.


Limited partner - Refers to an investor in a limited partnership who receives a limited partnership

interest in exchange for investment of capital and the investor’s agreement to fund certain

partnership obligations.


Limited partnership - A limited liability entity formed under the laws of a particular state to operate a

business, hold assets, or conduct investment-related activities. A limited partnership must have at

least one general partner who is responsible for management and operations of the partnership, but

may have one or more limited partners whose liability for partnership obligations is limited. An

interest in a limited partnership is usually, but not always, a security. See General partner; Limited



Liquidity – the degree to which an asset or security can be bought or sold in the market without affecting

the asset’s price. It is characterized by the high level of trading activity. Assets that can be easily

bought or sold are known as liquid assets.


Liquidity risk – The risk of loss surrounding the liquidity of assets and the ability to raise the necessary

cash to cover debts and capital withdrawal requirements.


Long/short strategies - Strategies designed to invest in equity and/or fixed income securities, and

combine long investments with short sales (using securities borrowed from others for the purpose)

to reduce market risk exposure.


Margin transaction - The purchase of an asset using borrowed funds.


Mark-to-Market – A method of determining the value of securities by applying current trading prices of

similar or identical securities to the securities being valued.


Market capitalization or “cap” - Value of a corporation as determined by the market value of its issued

and outstanding common stock. It is calculated by multiplying the number of outstanding shares

times the current market price per share.


Market cycle – typically 3-5 years and is the movement from a period of increasing prices and strong

performance (bull market), through a period of weak performance and falling prices, or bear

market, and back again to new strength.


Market neutral strategies - Strategies that attempt to exploit pricing inefficiencies between related

securities. Balancing long and short exposures is intended to reduce the market risk.

Maturity date - The date on which the principal amount of a note, draft, acceptance, bond, or other debt

instrument becomes due and payable.


Mezzanine financing - Late-stage venture capital, usually one of the final rounds of financing prior to an

Initial Public Offering. Generally the financing is in the form of unsecured debt provided by

merchant banks and development capital fund managers to companies that are in a growth phase,

but that may not have access to equity capital or are unwilling to dilute their existing equity

shareholders. Mezzanine financing may also have attached warrants, rights or options that allow the

lender to participate in equity appreciation, usually in connection with an initial public offering. See

Initial public offering; Subordinated debt.


MidCap SPDRs - Standard & Poor’s Depositary Receipts that are designed to track the performance of

the S&P 400. These securities are similar to Standard & Poor’s Depositary Receipts (SPDRs)

except that the underlying security for the Mid Cap SPDR is the S&P 400, while that for the SPDR

is the S&P 500. See Standard & Poor’s Depositary Receipts (SPDRs).


Modern Portfolio Theory – Theory on how risk-averse investors can construct portfolios to optimize or

maximize expected return based on a given level of market risk, emphasizing that risk is an inherent

part of higher reward. See Risk.


Money market fund – An investment fund that provides investors with a safe place to invest easily

accessible cash-equivalent assets characterized as a low risk, low-return investment. Mutual funds

and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities

representing high-quality, liquid debt, and monetary instruments.


Morgan Stanley Capital International (MSCI) Indices - MSCI Indices are used worldwide to measure

the performance of international securities. Over 3,500 indices are calculated consistently to allow

comparisons across regions, countries, and industries. MSCI’s consistent approach to index

construction is intended to ensure the proper representation of the countries' underlying industry

distribution and market capitalization, and allows investors to accurately compare equity

performance across markets, regions, and sectors. The consistent construction methodology of the country indices allows for simple aggregation of the country indices to form regional indices. The

regional indices published by MSCI represent investable areas in both developed and emerging

markets as determined by global investment managers.


Mortgage-backed security - An obligation that is secured by or represents an interest in residential or

commercial mortgages that have been assembled in a pool to represent or secure payment of the

obligation. Mortgage-backed securities may be structured as pass-through securities (an undivided

ownership interest in the mortgage loan pool securing the securities); pay-through securities (debt

obligations which are secured by a pool of mortgage loans pledged as collateral); or mortgagebacked

bonds (a general obligation of the issuer collateralized on the basis of the liquidation value

of the property). Mortgage-backed securities may be structured as single class or multi-class

obligations such as an investment trust pool. See Tranche.


MSCI All Country World Index Free ex-US (ACWIF ex-US) - Equivalent to the EAFE Index plus the

MSCI Canada country index plus the MSCI Emerging Markets Free Index. See Morgan Stanley

Capital International (MSCI) Indices.


MSCI EAFE - Formerly the EAFE index- Europe, Australia, Far East Index which is currently based on

stock performance in the following 21 countries: Austria, Belgium, Denmark, Finland, France,

Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, U.K.,

Australia, Hong Kong, Japan, New Zealand, and Singapore. This index is maintained by Morgan

Stanley Capital International (MSCI) and may change occasionally. See Morgan Stanley Capital

International (MSCI) Indices.


MSCI Emerging Markets Free (EMF) - MSCI defines emerging markets generally as those markets

that have low GDP per capita relative to EAFE markets. Other important factors are considered

including local government regulations, limits or bans on foreign ownership, adequacy of the

regulatory environment, and even general perception of the markets risk by the investment

community. Free indices reflect the actual buyable opportunities, adjusted for local market

restrictions on share ownership by foreigners. See Morgan Stanley Capital International (MSCI)



Mutual fund (open-end fund) - A type of investment company that invests in the securities of other

issuers. Mutual funds have a variable number of shares outstanding that can be purchased and

redeemed only through the respective funds at net asset value.


Naked call (put) option - See Uncovered call (put) option.


NASDAQ - National Association of Securities Dealers (“NASD”) Automated Quotation (“AQ”) market.

The market where most domestic over-the-counter (unlisted) securities are traded. The NASDAQ

National Market System (NMS) is the market that comprises the greatest portion of over-thecounter



National Market System (NMS) - See NASDAQ.


Net asset value (NAV) - The market value of securities held by an investment company minus the

amount of liabilities; often expressed on a per share basis. See Closed-end fund; Mutual fund.

Netting - The process set forth in the ISDA Master Agreements by which the parties aggregate the

amounts owed by each of them under all outstanding transactions under such ISDA Master

Agreement and replace such amount with a single net amount payable by one party to the other

party. See ISDA Master Agreement.


Non-U.S. dollar bonds - Government, supranational, subnational, or corporate debt issued and payable in

currency other than U.S. Dollars.


Non-agency mortgage-backed security - Any mortgage-backed security, the principal and payment of

which are not guaranteed by any government agency or government-sponsored entity or enterprise.

Also referred to as “whole loans,” these loans consist primarily of home mortgage loans that do not

meet federal agency purchase or pooling criteria, frequently because of their size or underwriting



Normal Fee – The fee the manager earns when the portfolio return meets its performance objective which

is set by the required annualized excess return for its respective mandate.


Notional value – The value of a derivative's underlying assets at the spot price. In the case of an options

or futures contract, this is the number of units of an asset underlying the contract, multiplied by the

spot price of the asset. For example, one S&P 500 Index futures contract obligates the buyer to 250

units of the S&P 500 Index. If the index is trading at $1,000, then the single futures contract is

similar to investing $250,000 (250 x $1,000). Therefore, $250,000 is the notional value underlying

the futures contract. In the case of a swap, the “notional value” may be the agreed principal amount

on which the swap is based, but which neither party is obligated to pay to the other.


Operational risk - The risk of loss surrounding inadequate or failed internal processes, people or



Opportunistic investment - compelling tactical or non-traditional investment opportunities that may be

short-term or otherwise time-constrained, or may not fit within the generally accepted risk/return

parameters of specific asset classes or strategy groupings. Such opportunities may involve

capitalizing on short-term market dislocations or unique situations.


Option - An instrument that conveys the right but not the obligation to buy or deliver the subject of the

contract, which may be a financial instrument, at a specified price, at a specified future date. An

“American-style option” may be exercised on any business day prior to expiration. A Europeanstyle

option may be exercised only on a specified day or days, usually near or on expiration date.

Notwithstanding the name, most options listed on European exchanges are “American-style.”

Over the counter (OTC) derivatives - A derivative instrument which result from direct negotiation

between a buyer and a counterparty. The terms of such instruments are non-standard and are the

result of specific negotiations. Settlement occurs at the negotiated termination date, although the

terms may include interim cash payments under certain conditions. Examples include currency

swaps and forward contracts, interest rate swaps, and collars.


Passive investing – a style of management associated with mutual or exchange-traded funds where

portfolio mirrors a market index. It is the opposite of active management. Passive investing may

also be known as investing through an index fund.


Planned amortization class (PAC) - A CMO bond class that has a principal payment schedule which

can be maintained over a range of prepayment rates. The schedule is based on the minimum amount

of principal cash flow produced by the collateral at two constant prepayment rates known as the

PAC bands. Because a PAC bond pays according to a pre-established schedule from segregated

cash flows, it protects against prepayment risk (reinvestment risk) and weighted average-life

volatility associated with prepayments.


Portfolio attributes - Features or characteristics of a portfolio that distinguish the portfolio from the

comparative benchmark. These portfolio attributes often are identified through the use of

quantitative analysis. Common attributes include such features as price-earnings ratio, dividend

yield, price-to-book ratio, earnings growth rate, market capitalization, etc.


Portfolio optimization - Constructing a portfolio in order to achieve the best, or optimal, risk-return

profile for a given objective.


Prime Broker – acts as settlement agent, provides custody for assets, and has ability to borrow and lend



Principal-only strip (PO) - A CMO bond class that does not receive any interest. The PO is formed by

stripping coupon-bearing collateral into interest-only and principal-only segments. Since POs

represent a stream of principal payments purchased at a discount, POs benefit from faster than

expected prepayments.


Private equity investments - Refers generally to private investment transactions between issuers of

unregistered equity securities such as common and preferred stock, but the term is also used with

respect to debt having some equity characteristics or that are convertible into equity securities

through warrants, rights, options, or a conversion feature. By definition, a private equity transaction

involves a limited number of qualified investors pursuant to a private placement or limited offering

by the issuer. Although an issuer may have sold other securities to the public pursuant to a public

offering, the securities purchased in a private transaction are typically not offered to the public and

may not be publicly traded in the public securities markets until an effective registration occurs

under the securities laws (hence, “private”). Because the securities are unregistered and

transferability is limited, private equity investments tend to be illiquid. Qualified institutional

investors may invest in private equities directly or through funds such as limited partnerships or

similar investment vehicles that in turn invest in private equity or equity-like securities that, at the

time of the investment, are not publicly traded or offered to the public. See Co-investment; Fund;

Fund of funds; Initial public offering; Limited partnership; Mezzanine financing; Private

placement; Subordinated debt.


Private real estate investment – An asset class consisting of equity and debt investments in property.

Investments typically involve an active management strategy ranging from moderate reposition or

releasing of properties to development or extensive redevelopment. Investments are typically made

via private real estate fund, which pools capital from investors. These funds typically have seven to

ten year life span consisting of a two to three year investment period which properties are acquired

and a holding period during which active asset management will be carried out and the properties

will be sold.


Private placement (or “limited offering”) - An issue of securities that is exempt under applicable

regulations from the registration requirements of the Securities Act of 1933 because of the manner

in which the offering is made. As a general rule, securities sold to the public pursuant to a general

solicitation must be registered. The exemption from registration for a private placement is available

only if requirements under SEC and state regulatory agency regulations are met. SEC regulations

permit certain limited offerings (in number and type of investors as well as dollar value of the issue)

of unregistered securities to a limited number of qualified investors.


Proxy – An agent legally authorized to act on behalf of a shareholder that cannot attend a company’s

annual meeting and the proxy allows someone else to cast votes on the shareholder’s behalf. A

proxy discloses important information about issues to be discussed at an annual meeting, lists the

qualifications of management and board members, serves as ballot for elections to board of

directors, lists the largest shareholders of a company’s stock and provides detailed information

about executive compensation.


Put option - The right to sell shares of a particular security or security index at a predetermined (strike)

price over some preset time period.


Quantitative analysis - Analysis dealing with measurable factors as distinguished from such qualitative

considerations as the character of management or the state of employee morale. A valuation

methodology that relies on the analysis of historical and/or predicted data to identify portfolio

attributes that have added value to a portfolio over a business cycle. By tilting the composition of


the portfolio toward these positive attributes, the expected return of the portfolio relative to the

return of the benchmark index is enhanced.


R² or r-squared - A statistical measure of how much of a portfolio's performance can be explained by the

returns from the overall market (or a benchmark index). A measure of how much of a portfolio’s

risk characteristics is explained by the market (systematic risk). If a portfolio's total return precisely

matched that of the overall market or benchmark, its r-squared (relative to the chosen variable) is 1.

If a portfolio's return bore no relationship to the market's returns, its r-squared is 0. In technical

terms, the coefficient of determination, which is the square of the correlation coefficient between

two variables, measures the explanatory power of the regression (i.e., a statistical technique for

fitting a straight line to a set of charted data points). R-squared measures the percentage of the total

variation in the dependent variable (i.e., the portfolio) that is explained by the variation in the

independent variable (i.e., the benchmark index), as shown by the regression line.

Real asset/real return – an investment which its value is primarily based on the ownership or utilization

of a tangible asset or cash flows derived from an agreed upon measure of tangible assets.


Real estate investment trust (REIT) - A publicly-traded company or business trust that invests its equity

capital and debt in income-producing real estate and/or mortgages and that meets Internal Revenue

Code requirements for qualification as a REIT.


Regulatory risk - The risk of loss surrounding the material impact of changes in laws and regulations

regarding a security, business, sector or market.


Repurchase agreement - An agreement (contract) by one party to purchase securities at a specified price

from another party and a simultaneous agreement by the first party to sell the securities back to the

other party at a specified price and a specified time or on demand. The resale price includes

"interest" on the implicit secured loan. A repurchase agreement from the investor's perspective

always begins with a purchase of securities and ends with a resale.


Residual - The cash flows of a CMO which remain after meeting all debt service, deal structure, and

trustee expenses. A residual may be retained by the CMO issuer or be sold. The residual may be

structured as a payment or "no payment" residual.

Return (rate of return) - The sum of current income such as interest or dividends on a security or capital

investment and the change in the value of that security or capital investment, usually expressed as

an annual percentage rate.


Rising growth risk - The risk of loss surrounding stronger-than-expected growth, which will impact

companies via a rise in revenues and widening margins resulting in an increase in profits.


Rising inflation risk - The risk of loss surrounding higher-than-expected inflation, which will lead to a

rise in interest rates, a decreasing present value of future earnings, and raising debt cost.


Risk - In investing, the measurable possibility of losing or not losing value, particularly in the shorter

term. Risk is not the same as uncertainty, which is not measurable. Using statistical measures of

risk, Modern Portfolio Theory attempts to structure a portfolio on the “efficient frontier” so as to

produce maximum returns without incurring risk that is not commensurate with the expected return.

It is impossible to eliminate risk, which is inherent in every investment transaction. As a general

proposition, a prudent investor who incurs additional risk in a single investment expects a higher

corresponding return from that investment. A prudent investor may also seek to reduce overall

portfolio risk through diversification, which might result in higher-risk single investments that have

a low correlation of market risk with other elements of the portfolio, thereby reducing overall

portfolio risk.


Risk arbitrage (or “merger arbitrage”) - Arbitrage that includes the element of risk by virtue of the

strategy employed, such as when a trader buys the stock of a company being acquired in a merger

(expecting an increase in value) while simultaneously selling the stock of the acquiring company

(expecting a decrease in value). If the merger does not occur, significant losses may occur. Risk

arbitrage does not have the relatively low-risk characteristics associated with buying and selling the

same security on two different markets in order to exploit immediate price differences (market

inefficiency). A strategy seeking to capture the price spread between current market prices and the

value of securities upon successful completion of a takeover or merger transaction. See Arbitrage.


Secondary investments - Secondary investments (“Secondaries”) refer to the acquisition of existing

private equity limited partnership interests from investors motivated to sell their positions for

liquidity, shifts in investment strategy, or other portfolio management objectives. Secondaries

provide the investor with an opportunity to conduct due diligence on not only the general partner,

but also on existing portfolios of portfolio company investments. Secondary opportunities may be

presented in the form of an individual, “one-off” limited partnership interest or in a collective pool

of limited partnership interests.


Securities lending – Refers to the lending of securities by one party to another. An agreement between

parties requires the borrower provide lender with collateral that is equal to or greater than the

loaned securities. As payment for the loan, the parties negotiate a fee on the collateral which is

known as the short rebate. The lender will receive the difference between what it earns by

investing the collateral and the short rebate fee.


Sequential pay class - A type of CMO that allocates cash flow sequentially to a series of bonds whereby

all initial principal amortization and prepayments from the collateral are paid to the shortest

maturity class until it is fully retired, then to the next shortest class and so on until all classes are

paid down, i.e., the bond classes or tranches pay down in sequential order with no concurrent pay

components. Each regular class receives interest payments beginning in month one except for the

accrual class. See Accrual class.


S&P 500 Index (S&P 500) - WA recognized standard for measuring large-cap U.S. stock market

performance that is used extensively by money managers. The S&P 500 includes a representative

sample of leading companies in leading industries. The S&P 500 is calculated using a market

capitalization index methodology, meaning the level of the index reflects the total market value of

all 500 component stocks relative to a particular base period. The index holds each stock in

proportion to its total value, or market "capitalization," in the stock market. Therefore, if a stock

rises in price, its market capitalization rises and its share in the S&P 500 increases. Likewise, if a

stock price falls, its market value and its weight in the index decline.


S&P MidCap 400 Index (S&P 400) - Similar to the S&P 500 Index and the S&P 600 SmallCap Index,

this index measures the performance of the mid-size company (generally $250 million to $1 billion

capitalization) segment of the U.S. equities market. See S&P 500 Index.


S&P SmallCap 600 Index (S&P 600) - Similar to the S&P 500 and the S&P 400, this index measures

the performance of the small company (generally under $250 million capitalization) segment of the


U.S. equities market. See S&P 500 Index.


Sharing ratio – The percent of outperformance shared with the respective manager. It is calculated by

taking the normal fee divided by the required annualized excess return needed to earn such fee.


Short sale - The sale of an asset not owned by the seller in order to take advantage of an expected decline

in the asset’s price or to protect a profit position in an owned asset. For example, in a short sale of

stock the investor borrows shares of stock from someone who owns them and sells the stock in the

market for the current price, hoping to repurchase the stock later (to return it to the person from

whom the stock was borrowed) at a lower price than the price at which the shares were originally

sold. The profit or loss on a short sale is the difference between the price at which the stock was

sold and the price at which it was repurchased.


Short-term investment fund (STIF) – a type of fund that invests in short-term investments of high

quality and low risk. Goal of such fund is to protect capital with low-risk investments while

achieving a return that beats a relevant benchmark such as Treasury Bill Index or Cash.

Soft dollars - Means of paying brokerage firms for their services through commission revenue, rather

than through direct payments, known as hard-dollar fees.


Special situations - Refers to company-, securities-, market-, or industry-specific strategies designed to

exploit mispricing, corporate financial conditions, or market reactions or misunderstandings in a

way that has affected short-term values so as to create significant investment opportunities. Targets

of a special-situations strategy may include companies or securities that are under-researched,

involve newly-deregulated industries, are turnaround, merger, buyout, or bankruptcy reorganization

candidates, or are simply out of favor in the markets.


Spin-off - Form of corporate divestiture that results in a subsidiary or division becoming an independent

company. In a traditional spin-off, shares in the new entity are distributed to the parent

corporation’s shareholders of record on a pro rata basis.


Standard & Poor’s Depositary Receipts (SPDRs) - Exchange-traded securities that represent an

ownership interest in a long-term unit investment trust that holds a portfolio of common stocks

designed to track the performance of the S&P 500. The market value of a SPDR should

approximate 1/10th the value of the underlying S&P 500. A SPDR entitles a holder to receive

proportionate quarterly cash distributions corresponding to the dividends that accrue to the S&P

500 stocks in the underlying portfolio, less trust expenses. See Exchange-traded fund (ETF).


Standard deviation of returns - Statistical measure of the degree to which an individual value in a

probability distribution tends to vary from the mean (average) of the distribution; a commonly used

measure of variability of return.


Strategic Assets – an investment in which its value is primarily based on its ability to create value

beyond traditional asset classes, capitalizing on market dislocations, market timing, and/or unique



Stratified sampling - A common investment technique used in passive portfolio construction and

maintenance to replicate a portion of the targeted index. The portfolio manager chooses a subset of

stocks within the targeted index instead of holding each and every stock in its index proportion. The

subset of stocks is chosen using an optimization technique that takes stock return, risk, and

economic sector into consideration. This technique is particularly cost and time efficient when there

are a large number of stocks with low liquidity in the targeted index.


Style - A specific type of investment approach employed to select assets.


Style Drift – Divergence of mandate from its stated investment style or objective. See Style.


Subnational - Any issuer that is a political subdivision of a nation, including provinces, regions, states,

and local authorities and municipalities, or an enterprise owned by a subnational entity whose debtservicing

capacity is directly dependent on or strongly supported by its links to that governmental



Supranational - A multilateral development bank, multilateral lending institution, or European Union



Swap - A contract whereby the parties agree to exchange cash flows of defined investment assets in

amounts and times specified by the contract.


Systematic risk – The non-diversifiable risks associated with an investment in a particular asset market.

For example the financial, political, and other risks associated with a portfolio of common stocks

are known as “market” or systematic risks.


Tactical trading - An investment strategy based upon the prediction of the short- or medium-term

direction of market prices for various securities.


Targeted amortization class (TAC) - A CMO bond class that repays principal according to a

predetermined schedule derived by assuming a single constant prepayment rate. Like PACs, TACs

provide protection against contraction risk, i.e., the risk that prepayments will occur when interest

rates decline and force the investor to reinvest the cash flow at a lower rate. Unlike PACs, TACs do

not protect against extension risk, i.e., the risk that prepayments will slow down when interest rates

increase, causing the investor to realize less cash flow than could otherwise be realized by

reinvesting the cash flow at a higher rate.


Technical analysis - Research into the demand and supply for securities and commodities based on

trading volume and price studies.


Tenor – The agreed term or maturity of a privately-negotiated, over-the-counter derivative instrument.


TIPS (Treasury Inflation-Protected Securities) – are inflation-linked bonds issued by the US Treasury.

The principal is adjusted to inflation. See Inflation-Linked Bond.


Tracking error - Tracking error predicts the difference in returns between the managed portfolio and an

equal investment in the market. Tracking error includes the effect of residual risk (risk not

attributable to market influence) and market or systematic risk (beta is a measure of market risk).


Tranche - One of a related series of security issues, each with different cash flows, expiration dates, or

return patterns, created to meet differing investor or issuer requirements or to carve up the returns

from a set of underlying cash flows, such as from a pool of mortgages, in a marketable way.

Different tranches will have different payment and market risks. For example, a principal-only

tranche has a higher risk of prepayment before stated maturity. If market interest rates drop,

borrowers generally pre-pay their underlying mortgages in greater numbers, and the holder of the

tranche may have its investment terminated before maturity. See Collateralized mortgage obligation

(CMO); Mortgage-backed security; Z bond.


Turnover - The percentage of purchases and sales of securities in a portfolio during a given period of



Uncovered call (put) option - The purchase or sale of a call (put) option without owning the offsetting

long (short) position in the underlying security.


Value at risk (VAR) – An established method of measuring economic exposure risk. The measure

conveys the maximum potential loss (in dollars or percent of total assets) for a particular investment

position, for a particular period of time, for a particular level of confidence.


Variability of return - The degree to which an asset’s value fluctuates over time; the beta coefficient and

standard deviation of returns are commonly used statistical measures of variability of return.


Venture capital - Generally refers to a fund’s investments in relatively small, young companies that

develop new products, services and processes, primarily in technology-oriented ventures in varying

stages of development (e.g., seed, early-stage, mid-stage, later-stage). Investments are made in

diverse areas of anticipated growth such as information technology (hardware and software),

internet-related technology, life sciences, biotechnology, and medical services.


Very accurately defined maturity class (VADM) - A type of CMO that is derived from the Z-bond

accrual, i.e., derives all of its cash flows from the interest accretions of a Z-bond. VADMs protect

against extension in average life if rates rise and prepayments are lower than expected. VADMs

also protect against increases in prepayments because the Z-bonds that support them are usually the

last classes to begin repaying principal. VADMs are also known as “accretion-directed bonds.”


Vintage year - A term used in relation to a fund or investment vehicle and referring to the calendar year

in which the fund or vehicle had its first capital call.


Warrant - A security entitling the holder to buy a proportionate amount of underlying stock at some

specified future date at a specified price. A subscription warrant typically has an exercise price

higher than the current market price of the stock, while subscription rights or rights have an

exercise price lower than the current market price of the stock. Warrants are most commonly traded

as securities whose price is closely related to the value of the underlying stock. Issuing companies

often bundle their warrants with another class of security to enhance the marketability of the other

class. Unlike call options, which typically have terms of less than one year and are not written by

the issuer of the underlying security, warrants usually have terms longer than one year. Warrants

are usually issued by the corporate issuer of the underlying stock, but may be issued by third parties

against an underlying stock, basket of stocks or an index of stocks. See Derivative.


Yankee bond - The debt of a foreign issuer denominated in U.S. dollars.


Yield - The current income (dividends or interest) generated by a security expressed as a percentage of

the market value of the asset; yield is one component of return.


Z-bond - A CMO class (tranche) with a period of interest and principal lockout on which interest

accrues, with the accrual amount added to the principal balance of the bond. The Z-bond holder

begins to receive principal and accrued interest after the classes which precede the Z-bond are fully

paid down. A Z-bond is also known as an accrual bond or accretion bond. See Collateralized

mortgage obligation (CMO); Tranche


Missouri Local Government Employees Retirement System

Phone:   1-800-447-4334      Local:  573-636-9455        Fax:  573-636-9671     Email:


701 West Main St.     PO Box 1665     Jefferson City, MO 65102