SmartMoney - The Wall Street Journal

Alpha

Alpha measures the difference between a fund's actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Alpha is dependent on the accuracy of beta: If the investor accepts beta as a conclusive definition of risk, a positive alpha would be a conclusive indicator of good fund performance. Of course, the value of beta is dependent on another statistic, known as R-squared.

Average Credit Quality

Average credit quality gives a snapshot of the portfolio's overall credit quality. It is an average of each bond's credit rating, weighted by the relative size in the portfolio. For the purpose of Lipper's calculations, U.S. government securities are considered AAA bonds, nonrated municipal bonds generally are classified as BB, and other nonrated bonds generally are considered B.

Average Weighted Maturity

This figure is computed by weighting the maturity of each security in the portfolio by the market value of the security, then averaging these weighted figures.

We list Average Effective Maturity for Taxable Fixed-Income and Hybrid funds. We list Average Nominal Maturity for Municipal Bond Funds.

Average Effective Maturity
Used for taxable fixed-income funds only, this figure takes into consideration all mortgage prepayments, puts, and adjustable coupons; it does not, however, account for call provisions. The number listed is a weighted average of all the maturities of the bonds in the portfolio, computed by weighing each maturity date (the date the security comes due) by the market value of the security.

Average Nominal Maturity
Listed only for municipal bond funds, average nominal maturity is computed by weighting the nominal maturity of each security in the portfolio by the market value of the security, then averaging these weighted figures. Unlike Lipper's duration figure, it does not take into account prepayments, puts, calls, or adjustable coupons.

Back-End Load Sales Charge

Also called a deferred load, a back-end load sales charge is an alternative to the traditional front-end sales charge as it is only deducted at the time of sale of fund shares. The back-end load sales charge structure commonly decreases to zero over a period of time. Atypical back-end load sales charge structure might have a 5% charge if shares are redeemed within the first year of ownership, and decline by a percentage point each year thereafter. These loads are normally applied to the lesser of original share price or current market value. It is important to note that although the back-end load sales charge declines each year, accumulated annual distribution and services charges (the total 12b-1 fee) can sometimes offset this decline.

Beta

Beta, a component of Modern Portfolio Theory statistics, is a measure of a fund's sensitivity to market movements. It measures the relationship between a fund's excess return over T-bills and the excess return of the benchmark index. Equity funds are compared with the S&P 500 index; bond funds are compared with the Lehman Brothers Aggregate Bond index. Lipper calculates beta using the same regression equation as the one used for alpha, which regresses excess return for the fund against excess return for the index. This approach differs slightly from other methodologies that rely on a regression of raw returns.

By definition, the beta of the benchmark (in this case, an index) is 1.00. Accordingly, a fund 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 fund has performed 15% worse than the index in up markets and 15% better in down markets. A low beta does not imply that the fund has a low level of volatility, though; rather, a low beta means only that the funds market-related risk is low. A specialty fund that invests primarily in gold, for example, will often have a low beta (and a low R-squared), relative to the S&P 500 index, as its performance is tied more closely to the price of gold and gold-mining stocks than to the overall stock market. Thus, though the specialty fund might fluctuate wildly because of rapid changes in gold prices, its beta relative to the S&P may remain low.

Classification

Equity Portfolio Style combines both a fund's particular investment methodology and the size of the companies in which it invests. Investment methodologies include growth-oriented, value-oriented, or a blend of the two, and are determined by dividing the average price/earnings and price/book ratios of a fund by those of the S&P 500 and adding the results. Funds with a sum less than 1.75 are classified as value-oriented; blend-oriented funds are those with a sum equal to or greater than 1.75 but less than or equal to 2.25; and growth-oriented funds have a sum greater than 2.25. (The S&P 500 would have a sum of 2.00 because each of its ratios divided by itself equals one.) Equity style also measures the size of the companies held in a fund's portfolio by median market capitalization and classifies funds as either small cap, medium cap, or large cap. Lipper ties market cap to the relative movements of the market. The top 5% of the 5,000 largest domestic stocks in Lipper’s equity database are classified as large cap, the next 15% of the 5,000 are medium cap, and the remaining 80% (as well as companies that fall outside the largest 5000) are small cap. Lipper then determines a fund’s market cap by ranking the stocks in a fund's portfolio from the largest market-capitalized stock to the smallest, and then calculating the average weighted market capitalization of the stocks in the middle quintile of the portfolio. After a fund's market cap has been determined, Lipper places the fund in the large-cap, medium-cap, or small-cap group (noted above).

Fixed-Income Style focuses on the two pillars of fixed-income performance: interest-rate sensitivity and credit quality. Lipper splits fixed-income funds into three groups of rate sensitivity as determined by maturity (short, intermediate, and long) and three credit-quality groups (high, medium, and low). Nine possible combinations exist, ranging from short maturity/high quality for the safest funds to long maturity/low quality for the more volatile.

To calculate interest-rate sensitivity, Lipper uses average effective maturity (average nominal maturity for municipal-bond funds), which provides a more accurate description of a bond's true life than does a simple weighted maturity; the former takes into consideration all mortgage prepayments, puts, and adjustable coupons. Funds with an average effective maturity of less than four years qualify as short-term. Funds with bonds that have an average effective maturity greater than or equal to four years but less than or equal to 10 years are categorized as intermediate, and those with maturity that exceeds 10 years are long-term.

Fixed-income funds that have an average credit rating of AAA or AA are categorized as high quality. Bond portfolios with average ratings of A or BBB are medium quality, and those rated below BB are categorized as low quality. For the purposes of Lipper's calculations, U.S. government securities are considered AAA bonds, nonrated municipal bonds are classified as BB, and all other nonrated bonds are considered B.

Credit Quality

Average credit quality gives a snapshot of the portfolio's overall credit quality. It is an average of each bond's credit rating, weighted by the relative size in the portfolio. For the purpose of Lipper's calculations, U.S. government securities are considered AAA bonds, nonrated municipal bonds generally are classified as BB, and other nonrated bonds generally are considered B.

Deferred Sales Charge — Schedule of Decline

The actual percent charged, or amount you will pay during the corresponding time periods. This amount or percentage that your pay goes down as time goes on. (the longer you hold the fund the lower the sales charge).

Duration

Average duration provides a measure of a fund's interest-rate sensitivity — the longer a fund's duration, the more sensitive the fund is to shifts in interest rates. The relationship between funds with different durations is straightforward: A fund with a duration of 10 years is twice as volatile as a fund with a five-year duration. Duration also gives an indication of how a fund's NAV will change as interest rates change. A fund with a five-year duration would be expected to lose 5% from its NAV if interest rates rose by one percentage point or gain 5% if interest rates fell by one percentage point.

Lipper prints an average duration statistic provided by the fund company that incorporates call, put, and prepayment possibilities. These fund-company numbers may provide some indication of a fund's interest-rate sensitivity.

Expense Ratio

The 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. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis. 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 the net assets of the fund 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.