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.

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. Morningstar 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.

Day's Range

The highest and lowest price reached in one day's time.

Dividend

This is the cash payment per share made by the company to its shareholders every quarter. It is usually the part of profits that was not reinvested in the company. Dividends are taxed as income, not capital gains.

Ex-dividend date

The date of ownership to receive a dividend payment. When a company announces it will pay a dividend, investors are required to be shareholders of the stock by a certain date of record to receive the dividend. It's after this date of record that the stock is said to be ex-dividend.

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.

Five-year-annualized return

The average return each year over a five-year period. Takes into consideration the reinvestment of capital gains and dividends as well as price changes.

Market Capitalization

The total market value of a company or stock. It is calculated by multiplying the number of shares outstanding by the latest closing price of the stock. Generally speaking, small-cap stocks have market values below $1 billion, while large-caps have values in excess of $5 billion. Mid-caps fall inbetween.

Net Assets

This figure is recorded in millions of dollars and represents the fund's total asset base, net of fees and expenses.

One-year return

The amount a security or fund has appreciated in one year's time.

Open Price

The price of the security at the start of the current trading day.

Price/Book Ratio

The price/book (P/B) ratio of a fund is the weighted average of the price/book ratios of all the stocks in a fund's portfolio. Book value is the total assets of a company, less total liabilities (sometimes referred to as carrying value). A company's book value is calculated by dividing the market price of its outstanding stock by the company's book value, and then adjusting for the number of shares outstanding. (Stocks with negative book values are excluded from this calculation.) In computing a fund's average P/B, Lipper weights each portfolio holding by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the final P/B.

Previous Close

The last trade price of a stock at the end of yesterday's trading session. This value is updated just before the opening of today's trading session.

Price/Earnings Ratio

The price/earnings (P/E) ratio of a fund is the weighted average of the price/earnings ratios of the stocks in a fund's portfolio. The P/E ratio of a company, which is a comparison of the cost of the company's stock and its trailing 12-month earnings per share, is calculated by dividing these two figures. In computing the average, Lipper weights each portfolio holding by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the fund's final P/E. 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 fund manager or an individual with a 'value investing' approach may believe such stocks have an overlooked or undervalued potential for appreciation.

R-squared

R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.

Standard Deviation

Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. The standard deviation figure provided here is an annualized statistic based on 36 monthly returns. By definition, approximately 68% of the time, the total returns of any given fund are 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, a fund's total returns should be within a range of plus or minus two times the standard deviation from its mean. These ranges assume that a fund's returns fall in a typical bell-shaped distribution. In any case, the greater the standard deviation, the greater the fund's volatility.

Three-year-annualized return

The average return each year over a three-year period. Takes into consideration the reinvestment of capital gains and dividends as well as price changes.

Turnover

A measure of a fund's trading history that is expressed as a percentage. A fund with a 100% turnover generally changes the composition of its entire portfolio each year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities. Funds with higher turnover incur greater brokerage fees for affecting the trades. They also tend to distribute more capital gains than low-turnover funds, because high-turnover funds are constantly realizing the gains. A change in a fund's general turnover pattern can indicate changing market conditions, a new management style or a change in the fund's investment objective.

Volume

The total number of shares of a stock traded during a specific time period. (In this case, it is the latest trading day.) Unusually high volume days typically correspond with the announcement of company news, either positive or negative. In the absence of news, high volume can indicate institutional (or professional) buying and selling.

Year-to-date return

The appreciation of a fund or security from Jan. 1 of the current year to the present date.

Yield

Yield, expressed as a percentage, represents a fund's income return on capital investment for the past 12 months. This figure refers only to interest distributions from fixed-income securities, dividends from stocks, and realized gains from currency transactions. Monies generated from the sale of securities or from options and futures transactions are considered capital gains, not income. Return of capital is also not considered income. NMF — or No Meaningful Figure — appears in this space for those funds that do not properly label their distributions. We list N/A if a fund is less than one year old, in which case we cannot calculate yield.

Lipper computes yield by dividing the sum of the fund's income distributions for the past 12 months by the previous month's NAV (adjusted upward for any capital gains distributed over the same time period).

52-week range

The highest and lowest prices reached in 52 weeks’ time.