An investor considered by many to be one of the greatest investors and mutual fund managers of all time. Sir John Templeton (1912-2008) founded the Templeton Growth Fund in 1954, which was one of the first U.S. mutual funds to embrace global investing. He is best known for his focus on the fundamental analysis of stocks and contrarian investing style, as well as his amazing sense of philanthropy. The life of Sir John Templeton was one of stark contrasts that is a must read for any serious scholar of investing. Similar to Warren Buffet, Templeton lived a life of relative frugality despite his accumulation of a vast fortune. Though born in the U.S., he renounced his U.S. citizenship in the late 1960s to avoid paying income taxes on his growing fortune. This controversial decision set the stage for him later being knighted as a naturalized British citizen.
More specific holdings of a general category of assets. A sub-asset class is a collection of assets that have common characteristics within both the asset class and the sub-asset class. The sub-asset class also has attributes that make it different than the parent group of assets. Diversification across asset classes in a portfolio balances its exposure to risks and reduces the volatility of the overall investment. Sub-asset classes can further identify and diversify the risks associated with the superclass. For example, stocks is an asset class, and large-capitalization stocks is a sub-asset class.
An atypical fund structure in which a fund, such as a hedge fund or mutual fund, is managed by another management team or firm than where the assets are held. Sub-advised funds are often found in wrap programs or variable annuities. Sub-advised funds are often smaller versions of larger mutual funds and hold the same stock proportions as the larger mutual fund. Because there are two management companies being paid, sub-advised funds can often have layered fees, so these funds should be examined closely before deciding to invest.
The investment approach or objective that a fund manager uses to make choices in the selection of securities for the fund's portfolio. While there are a variety of styles, there are nine basic investing styles for both equity and fixed-income funds. For stock funds, company size and value/growth characteristics determine the style. For bonds, style is defined by maturities and credit quality. The specific size parameters for stocks are large, medium and small-sized companies, which are determined by market capitalization. Value, growth and a value/growth blends are the three basic categories for stocks.Bond maturities are categorized as short term, intermediate term and long term. Credit quality is determined by a bond's status as a government or agency issue (high) and credit ratings for corporates and municipals of 'AAA' to 'AA' (high), 'A' to 'BBB' (medium) and 'BB' to 'C' (low).Variations and combinations of these basic categories, as well as consideration of special industries, industry sectors and geographic location, create investment styles for both stock and bond funds beyond the basic nine categories for each.
Created by Morningstar, a style box is designed to visually represent the investment characteristics of fixed-income (bond), domestic equity (stock) and international equity (stock) securities and their respective mutual funds. A style box is a valuable tool for investors to use to determine the asset allocation and risk-return structures of their portfolios and/or how a security fits into their investing criteria. There are slightly different style boxes used for equity and fixed-income funds. For stock funds (domestic and international), the horizontal axis of the style box is divided into three investment style categories: value, blend (a value/growth mix) and growth. The vertical axis is divided into three company-size (based on market-capitalization) indicators: large, medium and small.For bonds and bond funds, the horizontal axis is divided into three maturity categories: short-term, intermediate-term, and long-term. The vertical axis is divided into three credit-quality categories: high, medium and low (BB-C). Investors can use a style box to put together mutual fund portfolio and visually see the results as a total picture. For example, an investor looking for a relatively safe stock fund would seek out one categorized as a large-cap value fund. If that same investor is willing to accept more risk for the opportunity of a greater return, he/she might select a fund in the small-cap growth category. Putting dollar values on the fund selections in the same and/or differing category squares will readily reflect the risk-return parameters of the whole portfolio.
A fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds use fixed-income securities to give the fund capital protection through principal repayment along with the added gain of interest payments. The fund uses options, futures and other derivatives, which are often based on market indexes, to provide exposure to capital appreciation. These products are attractive to investors looking for downside protection who would also like to see gains from upside movements in the markets. Depending on the fund, the exact products and guarantees will vary. For example, if an S&P 500 structured fund protects 80% of its principal, this means that it will invest 80% of its funds in fixed-income products with little chance of falling below the principal amount. The rest of the fund is invested in derivatives that are exposed to the S&P 500 index. Investor will gain as the S&P 500 advances and will lose as it falls, but the fund won't fall below 80% of its starting value.
A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation. At the inception of the portfolio, a "base policy mix" is established based on expected returns. Because the value of assets can change given market conditions, the portfolio constantly needs to be re-adjusted to meet the policy.
A ratio used mainly in the context of hedge funds. This risk-reward measure determines which hedge funds have the highest returns while enduring the least amount of volatility. The formula is as follows: This formula uses the average for risk (drawdown) and return over the past three years. Drawdown is calculated at the maximum potential loss in the given year. Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment(s) are receiving a higher return relative to risk.The Sterling ratio is similar to the Sharpe ratio and the Sortino ratio, as it also produces a risk-adjusted return measurement. The Sterling ratio, along with the Sortino ratio, is primarily used by hedge funds as a way of advertising superior risk management.
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