Investment Terms Glossary

Investment terms glossary

Overview

A


Account

An investment fund managed for a limited number of investors with a specialized mandate.


Acquisitions

See leveraged buyouts.


Active Management

The process of holding assets at weights different than the benchmark. Active managers typically strive to outperform the assigned benchmark, though may also pursue other objectives such as decreased volatility of portfolio returns.


Active Risk

See tracking error.


Active Strategy

A popular strategy for those trying to beat the market average. Investors buy and sell securities based on short-term price movements and/or capture market trends to profit from. The mentality associated with active trading strategy differs from the long-term, buy-and-hold strategy found among passive or indexed investors.


Add-on Acquisitions

May also be known as “platform investing.”

A growth strategy, which involves the acquisition of a company that will be the base (or platform) from which future acquisitions will be made.

This strategy invests in consolidating industries by teaming with key industry management to build companies through acquisition and internal growth. Initially, an industry with an unrecognized market niche, high growth potential and no clear market leader is identified. If a suitable company can not be identified, the investment manager may recruit a management team to run the new business. The company’s management and the investment manager, acting as a team, will identify and negotiate to buy additional companies within the target industry. A “critical mass” is achieved when the investment manager consolidates formerly entrepreneurial-managed, fragmented operating units into a single portfolio company with standard operating procedures. As a result, the larger company becomes visible and attractive to a wider group of potential buyers. Other companies in the market typically are willing to pay a higher price earnings multiple to buy the portfolio company than paid by the investment manager for its component parts.


Adjourning a Shareholder Meeting

Extending the voting period past the meeting date, usually so the company can continue to solicit proxies to pass a management proposal or kill a shareholder initiative.


Advance Notice Provision

To prevent surprises at the annual meeting, many companies have adopted provisions specifying a precise time period (usually well before the meeting) during which shareholders must provide notice of their intention to nominate directors or present other business from the floor. If they do not meet the advance notice requirements, the company can bar them from nominating their candidates or bringing up their business at the meeting.


Advisory Board

A group of investors in the partnership whose primary functions are to address certain partnership related issues. Based on the roles and responsibilities outlined in the limited partnership agreement, the advisory board may review conflicts of interest and operating budgets, vote on partnership term extensions and perform other duties, as appropriate.


After Hours Trading (AHT)

Trading that occurs after the market closes when an investor can buy and sell securities outside regular trading hours.


Agency Securities

A low risk debt obligation that is issued by a U.S. government-sponsored enterprise (GSE) or other federally related entity. GSE’s include the Federal National Mortgage Association (FNMA), Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), and the Student Loan Marketing Association (SLMA). GSE’s were created to reduce the costs associated with borrowing for certain sectors of the economy.


Agency Trade

A trade in which the broker acts as agent and executes buy or sell for a customer.  A commission is charged for the service.


Agent

A person who has been legally empowered to act on behalf of another person or entity.


Aggregation of Profit and Losses

Aggregation of profit and losses ensures a fairer profit sharing between the general partner and the limited partners.  This calculation is based on the entire performance of the portfolio rather than on a deal by deal basis.


All Country World Index (ACWI)

A global equity benchmark by MSCI that includes developed and emerging markets.


Alpha

Represents the performance of a portfolio relative to its benchmark and is often considered the value that the investment manager adds to or detracts from a fund’s return.


Alternative Solicitation Process (ASP)

An alternative to the traditional RFP process and is the first step in hiring external managers.


American Depository Receipts (ADR)

Shares issued in the U.S. from a foreign company through a depository bank intermediary. A foreign company works with a U.S. depository bank as the intermediary for issuing and managing the shares. ADRs are traded on several U.S. exchanges including the NYSE and NASDAQ as well as over the counter.


Appraisal

An estimate or opinion of market value.


Appreciation

An increase in the monetary value of an asset over time.


Approved Currencies

The currencies of the countries where positions are permitted. For the Core portion of the CalSTRS Currency Management Program, the countries available to establish positions in are limited to those represented by the euro, Japan, Switzerland, United Kingdom, Australia, and Canada for approximately 80% of our overall non-U.S. dollar exposure.


Asian Corporate Governance Association (ACGA)

The Asian Corporate Governance Association is an independent, non-profit membership organization dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia. ACGA was founded in 1999 from a belief that corporate governance is fundamental to the long-term development of Asian economies and capital markets.


Asset Allocation

Process of allocating investments optimally across a set of asset classes.


Asset Class (Type)

A broadly defined generic group of financial assets, such as stocks or bonds.


Asset International Chief Investment Officer Magazine (AICIO)

A magazine and online media covering CIOs across the globe.


Asset Management

The various disciplines involved with managing real assets from the time of investment through the time of disposition. Proper asset management plans and policies include: requirements for operating and capital budgets, asset management, leasing, physical asset analysis, operational and financial reporting, appraisal, audits, accounting policies and asset disposition plans (hold/sell analyses).


Asset/Liability Management

Process of managing the use of assets and cash flows to reduce the firm’s risk of loss from not paying on a liability on time. Asset/liability management focuses on the timing of cash flows because many company managers must plan for the payment of liabilities. The process must ensure that assets are available to pay debts as they come due and that assets or earnings can be converted to cash.


Asset-backed Securities (ABS)

Investment securities which are collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, home equity loans, auto loans and receivables. ABS allow issuers to generate cash which can be used for more lending while giving investors in the ABS the opportunity to participate in a wide variety of income-generating assets.


Attribution Analysis

A method for evaluating the performance of a portfolio or fund manager. Attribution analysis is used to estimate the percentage of excess return explained by key drivers such as benchmark-relative country or sector weights.


AUD/USD

Australia Dollar/U.S. Dollar

B


Barrel of Oil Equivalent (BOE)

A unit of energy based on the approximate energy released by burning one barrel (42 U.S. gallons or 158.9873 liters) of crude oil. The U.S. Internal Revenue Service defines it as equal to 5.8 × 106 BTU. The value is necessarily approximate as various grades of oil have slightly different heating values.


Basis Point (BPS)

A common unit of measure used in finance to describe the percentage change in the value of financial instruments or the rate change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.


Benchmark

A standard against which investment performance can be measured. Generally, broad market and market-segment stock and bond indexes are used for this purpose.


Best Net Execution

Executing client transactions so that the client’s total cost is the most favorable under the particular circumstances at that time. According to the U.S. Securities and Exchange Commission, some of the factors a broker must consider when seeking best execution of a client’s order include the opportunity to get a better price than what is currently quoted, the speed of execution, and the likelihood that the trade will be executed.


Beta

A measure of the sensitivity of a given investment or portfolio to movements in the overall market.


Blank Check Preferred Stock

Preferred stock for which the board of directors has broad discretion to establish voting, dividend, conversion and other rights when the stock is issued. It gives the board flexibility to meet changing financial conditions, but it also could be used for defensive purposes, such as for a poison pill or for placement with a friendly investor to block a takeover attempt.


Blend (Growth & Income)

Mutual funds invested in securities that provide a combination of growth and income. They generally funnel most of their assets into common stocks of well-established companies that pay regular dividends. They may also invest in high-rated bonds.


Board Diversity

Generally, having minorities and women represented on corporate boards, as well as diverse skill-sets, backgrounds, experiences, ages and cultures.


Board Evaluation

A self assessment by boards to evaluate the board as a whole and individual members. Ideally, this assessment should cover items such as whether the necessary diversity of skills, backgrounds, experiences, ages, genders, cultural and ethnic composition is appropriate to the company’s long-term needs.


Bond Funds (Fixed Income Funds)

A mutual fund that buys interest-bearing debt securities. Bond funds typically specify whether their holdings are corporate, U.S. Treasury, municipal or government-sponsored enterprise bonds.


Bond Indenture

Contract associated with a bond. The terms of a bond indenture include a description of the bond features, restrictions placed on the issuer, and the actions that will be triggered if the issuer fails to make timely payments.


Bond Insurance

An insurance policy that a bond issuer purchases that guarantees the repayment of the principal and all associated interest payments to the bondholders in the event of default.


Borrower

An individual or organization that borrows securities in return for contracting into an obligation to return those securities together with a fee payment.


Breakeven Inflation

The level of future inflation required to obtain similar returns between an investment in linkers/TIPS and an investment in nominal bonds; expressed as the difference between nominal and real yields.


Breakpoint

A discount offered by a mutual fund on the front-end sales charge. The breakpoint may be offered if the client:

  • Is interested in making a large purchase.
  • Already holds other mutual funds offered by the same fund family.
  • Commits to regularly purchasing the mutual fund’s shares.

BRIC

Brazil, Russia, India and China.


Broad Market-weighted Performance Benchmark

With a market-weighted benchmark, the weighting of each asset class within the benchmark may change due to the market capitalization. Conversely, with a fixed-weighted benchmark, the weightings of each asset class are held constant.


Broker

An individual or firm that acts as an intermediary between an investor and a securities exchange. Because securities exchanges only accept trade orders from individuals or firms who are members of that exchange, investors need the services of exchange members.


Broker Votes

Proxy votes that can be cast by brokers, on “routine” issues, when no voting instructions are received from the beneficial owner within a specified period before a company’s annual meeting (usually 10-15 days, under stock exchange rules).


Brokerage and Research Services

Refers to services and/or products provided by a broker to an investment adviser through a brokerage arrangement, including trade execution; the furnishing of relevant advice relating to the purchasing and selling of securities; analysis and reports relating to relevant market information; and the performance of incidental functions, such as clearance, settlement and custody.


Brokerage Arrangement

Refers to an arrangement whereby a broker provides services or products in addition to execution.  Brokerage arrangements include investment adviser-directed and client-directed brokerage arrangements.


Brokerage Fee

Refers to the amount on any trade retained by a broker to be used directly or indirectly as payment for execution services and, when applicable, research supplied to the investment adviser or its client in connection with soft dollar arrangements or for benefits provided to the client in client-directed brokerage arrangements.  For these purposes, trades may be conducted on an agency or principal basis.


Brownfield

Occurs when a company or government purchases an existing operating facility with cash flow.


Buyout

Buyout investments involve the purchase of all or part of the stock or assets of a company utilizing a significant amount of borrowed capital as well as equity capital. Borrowed capital typically consists of some combination of senior and subordinate debt. The company may be privately or publicly owned, or a subsidiary or division of a privately or publicly owned company.

C


CAD

Canadian Dollar


Capital Appreciation

A rise in the value of an asset based on a rise in market price.


Capital Improvements

An addition of a permanent structural change or the restoration of some aspect of a property that will either enhance the property’s overall value, prolongs its useful life, or adapt it to new uses.


Capped Point

A ceiling, or the highest level to which something, such as an adjustable rate mortgage can go


Carbon Disclosure Project (CDP)

An organization based in the United Kingdom which works with shareholders and corporations to disclose the greenhouse gas emissions of major corporations.


Carried Interest

The general partner’s carried interest is its share of the partnership’s profits, and generally ranges from 10% to 30% of the total. A 20% carried interest is the industry norm for private equity.


CAC 40

France version of the Dow Jones comprised of 40 top stocks in France.


Cash Collateral Asset Management

Investment portfolio managers that are responsible for investing the cash taken as collateral from loans of securities. Each portfolio is diversified among different asset classes based on investment guidelines developed by CalSTRS and emphasizes safety of principal and adequate liquidity.


Cash Forecast

The projection provided by CalSTRS’ Operations unit of the sources and uses of cash for CalSTRS in the immediate future.


Change-in-Control Provisions

Provisions in executive compensation plans that allow plan participants to cash out options or accelerate benefits in the event of a change in control (sometimes called golden parachutes). The provisions may be explicitly written into a plan when it is adopted, or may simply give the board or compensation committee broad discretion to adjust awards when faced with a change in control. Some executive severance agreements provide payments in the event of the executive’s departure regardless of the reason. The U.S. Internal Revenue Code considers such payments “excessive” if they exceed 2.99 times an executive’s average annual compensation package.


Chartered Alternative Investment Analyst (CAIA)

The CAIA Charter is the educational benchmark for the alternative investment industry.


Chartered Financial Analyst® Institute (CFAI)

CFA® Institute is the global, not-for-profit association of investment professionals that awards the CFA® and CIPM® designations and offer a range of educational opportunities online and around the world.


Chartered Investment Counselor

A designation awarded by the Investment Adviser Association (IAA) to individuals who have earned the Chartered Financial Analyst® professional designation, who are currently working as investment advisers, and who have demonstrated investment counseling and advanced portfolio management skills, often by overseeing large accounts and mutual funds. CICs must work in an eligible position for an IAA member firm, uphold a code of ethical conduct and submit professional and character references.


Chicago Board Options Exchange (CBOE)

Founded in 1973, the first marketplace for trading listed options. In 2010, CBOE converted to a publicly-traded corporation, CBOE Global Markets. CBOE is one of the world’s largest exchange holdings companies.


Chinese Depository Receipt (CDR)

A type of depositary receipt that is traded on Chinese stock exchanges. A CDR is a certificate issued by a Chinese bank that represents a pool of foreign equity that is traded on local Chinese exchanges. Foreign companies can use CDRs to allow both Chinese institutional and private investors to own their stock.


Class Action

A civil lawsuit brought against a company by a group of persons (the class) similarly affected by the alleged misconduct of corporate officers and directors. Any recovery, less legal fees, is divided among all members of the class in proportion to their losses. Class action suits often allege false and misleading corporate statements, securities fraud or other breaches of directors’ duties to the shareholders.


Classified Board

On a classified or staggered board, directors are divided into separate classes, usually three, with each class serving overlapping three-year terms. Companies say this provides stability and continuity of leadership, but it also makes it harder for dissidents to win control of a target company, even if they win a proxy fight, since only a third of the directors are up for election in any one year. (Classification also reduces the effectiveness of cumulative voting by requiring a greater shareholder vote to elect a single director.)


Clean Energy and Technology Special Mandate

The Clean Energy and Technology Special Mandate (“Clean-Tech”) is a diversified portfolio of venture capital and buyout investments across the clean technology and clean energy universe. The program is global in scope and includes both fund investments and co-investments. Please see the definition for Private Equity Special Mandates.


Client

Refers to the entity, including a natural person, investment fund or separate account designated to receive the benefits, including income, from the brokerage generated through securities transactions.  A client may be represented by a trustee or other Fiduciary, who may or may not have investment discretion.


Client-Directed Brokerage Arrangement

Refers to arrangement whereby a client directs that trades, for its account, be executed through a specific Broker in exchange for which the client receives a benefit in addition to execution services. Client-directed brokerage arrangements include rebates, commission banking and commission recapture programs through which the broker provides the client with cash or services or pays certain obligations of the client. A client may also direct the use of limited lists of broker-not for the purpose of reducing Brokerage costs, but to effect various other goals (e.g., increased diversity by using minority-owned brokers) or geographical concentration.


Chicago Mercantile Exchange

The Chicago Mercantile Exchange (CME) (often called the “Chicago Merc,” or the “Merc”) is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board, an agricultural commodities exchange. Originally, the exchange was a non-profit organization. The Merc demutualized in November 2000, went public in December 2002, and merged with the Chicago Board of Trade (CBOT) in July 2007 to become a designated contract market of the CME Group Inc., which operates both markets. In August 2008, shareholders approved a merger with the New York Mercantile Exchange (NYMEX) and COMEX. CME, CBOT, NYMEX, and COMEX are now markets owned by CME Group.


Coalition for Environmentally Responsible Economics (CERES)

A non-profit, American network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges, such as global climate change. Founded in 1989, its core mission is integrating sustainability into capital markets.


Co-Investment

An equity co-investment is a minority investment in a company or asset made by investors alongside a private investment management firm. Equity co-investment typically enables investors to participate in attractive investments without paying the usual fees charged by a fund manager.


Co-Investment (Real Estate)

Investments where the management organization has a capital investment and ownership share.


Co-Investment (Private Equity)

Co-investments are investments made alongside general partners in underlying assets and securities, usually with lower management fees and carried interest.


Co-Investment Advisor

A co-investment advisor is an investment manager who manages a Separately Managed Account of co-investments on behalf of CalSTRS. Such an advisor may act as an Independent Fiduciary for co-investments that are outside of the Separately Managed Account if at least $25 million is invested in such transaction through the Separately Managed Account that is being managed on behalf of CalSTRS by such Co-investment Advisor.


Co-Investment Transaction (Private Equity)

A financing or series of financings that have an initial close on a given date and a final close no later than 365 days thereafter. Subsequent to the initial close, financings must have essentially the same terms or better to be considered a single transaction.


Collateral

An asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan. The collateral acts as a form of protection for the lender. That is, if the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.


Collateralized

A security that is secured by an asset.


Collateralized Debt Obligations (CDO)

A CDO can be thought of as a promise to pay cash flows to investors in a prescribed sequence, based on how much cash flow the CDO collects from the pool of bonds or other assets it owns. If cash collected by the CDO is insufficient to pay all of its investors, those in the lower layers (tranches) suffer losses first.


Collateralized Letter of Credit

A letter of credit issued by a fronting bank, which has pledged AAA-rated collateral to CalSTRS, in order for CalSTRS to issue a confirming letter of credit. CalSTRS is the beneficiary of the pledged collateral. This structure is typically used when the fronting bank has a low credit rating or no credit rating.


Collateralized Loan Obligations (CLO)

Security backed by the receivables on loans.


Commercial Mortgage-Backed Securities (CMBS)

Fixed-income investment products that are backed by mortgages on commercial properties rather than residential real estate. CMBS can provide liquidity to real estate investors and commercial lenders alike.


Commercial Paper

Commonly used type of unsecured, short-term debt instrument issued by corporations to meet short term liabilities.


Commercial Paper Funding Facility (CPFF)

A system created by the United States Federal Reserve Board during the global financial crisis of 2008 to improve liquidity in the short-term funding markets. The CPFF was created on October 27, 2008 and funded a special purpose vehicle (SPV) that purchased three-month unsecured and asset-backed commercial paper (CP) from eligible issuers. This resulted in greater availability of credit for firms doing business. It worked under the aegis of the Federal Reserve Bank of New York where the NY Fed finances the purchase of highly-rated unsecured and asset-backed commercial paper from eligible issuers via eligible primary dealers. The facility expired February 1, 2010. The final CP purchased matured on April 26, 2010. All CP notes purchased were repaid in full.

It was established again in March 2020 to support the flow of credit to households and businesses in response to the financial impact of the COVID-19 pandemic.


Commingled Fund

Comprised of assets from multiple accounts blended together so that it operates as a single portfolio. Commingled funds are professionally managed and invest in a variety of investment types and levels of risk. Commingled funds are not traded publicly and are not available for individual purchase.


Commission

Refers to the amount paid to the Broker in addition to the price of the security and applicable regulatory fees, on an agency trade.


Commission Rate

A charge for placing a securities trade.


Commodities

The sale and purchase of a good (e.g., oil, cattle, or soybeans) usually carried out through a futures contract on exchanges that standardize the quantity and minimum quality of the commodity being traded.


Commodity Trading Advisor (CTA)

An individual or firm that advises clients on or manages a managed future account, which contains options and futures. CTAs must register with the Commodity Futures Trading Commission and the National Futures Association.


Compensation Discussion & Analysis (CD&A)

Explain and justify the material elements of the company’s compensation of the named executive officers relative to the following items:

  • The objectives of the compensation program(s).
  • What each compensation program is designed to reward.
  • Each element of compensation.
  • Why each element was chosen.
  • How amounts and formulas for pay are determined.
  • How each compensation element and the company’s decisions regarding that element fit into its overall compensation objectives and affect decisions regarding other elements.

Competitive Bids/Offers

A proposal and price submitted by a vendor or service provider to a soliciting form for a business opportunity involving products or services.


Confidential Voting

Use of a secret ballot for shareholder votes, with results tabulated by an independent tabulator


Confirming Letter of Credit

A letter of credit issued by CalSTRS that confirms a fronting bank’s letter of credit. The CalSTRS confirming letter of credit is drawn upon in the event the fronting bank fails to pay upon a draw. CalSTRS is in the second loss position. The credit rating of the bond issue is based on CalSTRS’ rating.


Consortium

An investment in partnership with like-minded investors and a managing partner where the investors have more investment decision rights and governance rights. These investments may also be referred to as alliances or joint ventures.


Contractual Payment

Any cash flow stream delineated in a contract between two or more parties.


Convertible Preferred Stock

A class of stock having different rights than common stock, including a liquidation preference over common stock; and allowing the preferred shareholder to convert preferred shares into common shares at some specified conversion ratio. Conversion typically occurs in conjunction with and initial public offering, providing a means of liquidation for the preferred shareholder.


Core Investment

Typical core portfolio investments shall be mature, brownfield/existing assets that produce steady and predictable cash flows. These assets should be difficult to replicate and will be long life assets. The assets shall be located in well-established developed nations.


Core Style

A strategy that lacks significant systematic tilts such as value or growth


Corporate Bond

A type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or reaches maturity, the payments cease and the original investment is returned.


Corporate Governance (CG)

The relationship between all the stakeholders in a company. This includes the shareholders, directors and management of a company, as defined by the corporate charter, formal policy and rule of law.


Correlation

A statistic that measures the degree to which two securities, portfolios, or asset classes move in relation to one another.


Council of Institutional Investors (CII)

An organization with over 250 pension funds and investment related firms that serve to address investment issues of its members. The CII also provides educational seminars and other legal, regulatory and research services.


Counterparty

The other party that participates in a financial transaction, and every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller who is willing to sell and vice versa.


Counting Shareholder Votes

The way a company tallies proxy votes. Companies historically have counted votes in varying ways. Most specify in the proxy statement the vote required for passage of management proposals (majority of outstanding shares, majority of shares voting or supermajority vote). The method is often murkier on shareholder proposals, with some firms requiring a majority or supermajority of the outstanding shares for passage, or including abstentions and broker non-votes in the total votes cast, thus reducing the vote in favor of the resolution.


Credit Enhancer

A financial institution, such as a bank, or a pension plan, such as CalSTRS, that provides credit enhancement by issuing a letter of credit, which guarantees to investors that principal and interest payments will be made as scheduled, or a line of credit which provides liquidity support for the bond issue. When the bond issue is credit enhanced, the investor relies upon the creditworthiness of the credit enhancer rather than the issuer.


Credit Rating

A quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money, an individual, corporation, state or provincial authority, or sovereign government.


Cross-Hedging

Manage risk by investing in two positively correlated securities that have similar price movements. The investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.


Cumulative Voting

If cumulative voting is allowed at a company, shareholders can allocate the total number of votes they are entitled to cast in the election of directors in any fashion they wish (all for one candidate, split among two or three, or divided evenly among all director nominees). The total number is equal to the number of directors to be elected at the meeting multiplied by the number of shares eligible to be voted. This may enable holders of a minority stake to elect one or more directors if they vote all their shares for a single nominee or small, select number of nominees. It has been touted as a way for institutional investors to improve corporate governance by electing qualified, independent, accountable directors to boards, although companies say it could lead to a “constituency” representation and a divided board. While nearly half the states once mandated cumulative voting in corporate elections, most now leave it up to companies, and most companies have eliminated it.


Currency

Any form of money usually issued by a government and generally accepted at its face value as a method of payment.


Currency Effect

An increase or decrease in the value of a foreign investment or something bought and sold in a foreign country caused by a change in the exchange rate (the rate at which the currency of one country can be changed for the currency of another country).


Currency Forward

A forward contract that locks-in the price an entity can buy or sell currency on a future date (also known as the value date). In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified future date. These contracts cannot be transferred.


Currency Futures

Contracts for currencies that specify the price of exchanging one currency for another at a future date. The rate for currency futures contracts is derived from spot rates of the currency pair. Currency futures are used to hedge other trades or currency risks, or to speculate on price movements in currencies.


Currency Hedging

A strategy used to manage the risk associated with holding non-U.S. assets in its local currency.


Currency Option

Contract that gives the buyer the right, not the obligation to buy or sell a certain currency at a specified exchange rate on or before a specified date. Currency options allow traders to hedge currency risk or to speculate on currency moves.


Currency Overlay

The outsourcing of currency risk management to a specialist firm, known as the overlay manager. This is used in international investment portfolios to separate the management of currency risk from the asset allocation and security selection decisions of the investor’s money managers. The overlay manager’s positions are “overlaid” on the portfolios created by the other money managers, whose activities continue unaffected.


Currency Risk

The risk related to currency fluctuations. For CalSTRS, it is the fluctuation of any foreign currency compared to the U.S. dollar. Non-U.S. investments are complicated by the currency fluctuation and conversion between countries. A high quality investment in another country may prove to be worth less because of a weak currency.


CUSIP Number

A unique nine-character alphanumeric code appearing on the face of each stock or bond certificate that is assigned to a security by Standard & Poor’s Corporation. CU.S.IP numbers are the property of the American Bankers Association and are administered by Standard & Poor’s. The number is used to expedite clearance and settlement.


Custodian

A large and reputable financial institution that holds customers securities for safekeeping.


Cyber Meetings

Annual shareholder meetings conducted by remote communication, rather than at a specific site.

D


Debt Related Investment Strategies

Debt-related investments (as applied to the Private Equity asset class) involve the purchase and ownership of private securities that are debt-oriented (rather than equity-oriented). There are many different types of debt-related investment strategies including but not limited to mezzanine debt, distressed debt, direct lending, and convertible debt.


Deflation

A general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy.


Derivative

A financial security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. It’s value is determined by fluctuations in the underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.


Derivative Suit

A lawsuit brought by a shareholder on behalf of the corporation to remedy an alleged wrong to the corporation. Any settlement goes to the company, not to specific shareholders. Corporate governance or board changes, designed to help prevent the recurrence of the alleged breaches of directors’ duties, are sometimes included in the settlement of class action and derivative suits.


Deutscher Aktien Index (DAX)

Deutscher Aktien Index, formerly Deutscher Aktien-Index (German stock index) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system. According to Deutsche Börse, the operator of Xetra, DAX measures the performance of the Prime Standard’s 30 largest German companies in terms of order book volume and market capitalization. It is the equivalent of the FT 30 and the Dow Jones Industrial Average, and because of its small selection it does not necessarily represent the vitality of the economy as whole.


Developed Market

Countries with advanced economies and capital markets as designated by Dow Jones or Standard & Poor’s.


Digital (Digital Option, Binary Option)

An option with a fixed, predetermined payoff if the underlying instrument or index is at or beyond the strike at expiration. The value of the payoff is not affected by the magnitude of the difference between the underlying and the strike price.


Dilution

When stock options are exercised, a company’s profits and assets are spread over a larger number of shares, thus reducing, or “diluting,” the value and voting power of existing stockholders’ shares. Shareholders often consider the total potential dilution from all of the company’s option plans, including outstanding options and shares available for future grant, when voting on a new option plan proposal.


Direct Investment

An investment in which CalSTRS has a direct ownership interest in underlying infrastructure projects and/or assets. Direct investments are made outside of a limited partnership structure. While a co-investment is made alongside of a limited partnership investment, a direct investment is not. Direct investments need a greater level of due diligence and involve a greater level of risk in comparison to a co-investment.


Direct Pay Letter of Credit

The Direct Pay LOC Bank (CalSTRS) issues a fronting letter of credit and a bank issues a standby letter of credit. For this letter of credit, the investor (through the trustee) looks to the Direct Pay LOC Bank for all interest and principal payments to investors. The obligor then reimburses the Direct Pay LOC Bank. If the obligor fails to reimburse for the LOC drawing, the standby bank reimburses CalSTRS.


Discretion

The level of authority given to an investment manager over the investment and management of a client’s capital once that capital is allocated to the investment manager.


Disequilibrium

A situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term byproduct of a change in variable factors or a result of long-term structural imbalances.


Disinflation

A slowing down of price increases, usually during a recession, when sales drop and retailers are unable to pass on higher prices to consumers.


Distressed Debt

A form of recovery investing that focus on the debt of a distressed company. The investment in debt securities (generally senior-secured debt) of troubled or bankrupt companies.


Distributions

Cash and/or securities paid out to the limited partners from the limited partnership.


Diversification

A risk management strategy of holding a wide variety of distinct asset types, in an attempt at limiting exposure to any single type of asset.


Dow Jones Industrials (DOW 30)

Stock market index that tracks the stock prices of 30 large, publicly-owned companies trading on U.S. exchanges. It is a price-weighted index.


Dual Class Stock

Some companies have two or more classes of common stock, whose voting rights may vary. One class may have super voting rights (five or 10 votes per share), or a fraction of a vote, or no vote. Sometimes one class has special rights, such as the right to elect a certain percentage of the directors. One class is often held by a founding family or controlling shareholder to retain control of the company even though they don’t own a majority of the stock. Dual class capitalization plans are not antitakeover measures per se, but they may help management (or another insider group) deter a takeover when they control the class of stock with higher or special voting rights.


Due Diligence

An investigation, audit, or review performed to confirm that facts of a matter under consideration. In the financial world, due diligence requires an examination of financial records, legal documents, market studies, and other relevant information before entering into a proposed transaction with another party.


Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flow.

E


EAFE

MSCI Index that represents the performance of large and mid-cap securities across 21 developed markets, including Europe, Australasia, and the Far East, excluding the U.S. and Canada. It covers ~85% of the free float-adjusted market capitalization in each country.


Earnings Per Share

The portion of a company’s profit allocated to each outstanding share of common stock.


Emerging (Private Equity)

In private equity, first- second- and third-time funds are considered to be in the emerging space. The firm must have a maximum of 55% non-employee-owned ownership; that is, employees at the firm must own at least 45% of the equity of the firm. Generally, a firm has $600 million or less in assets under management (AUM) for expansion/buyout funds or $300 million or less in assets under management for venture capital funds.

For the purposes of this definition:

  1. Direct or indirect ownership (though a different legal entity owned by the employees) is included in the 45% employee ownership.
  2. The word employee includes principals, members, partners or any other individuals who are actively involved in the day-today operation of the firm.

Emerging Market (EM)

A country that is defined as emerging by a provider of investment indexes. The classification of countries as either developed or emerging depends in part on stage of economic development, market value of assets, asset liquidity, and market access.


Employer or Employing Agency

Means the State or any agency or political subdivision thereof for which creditable service subject to coverage by the State Teachers’ Retirement Plan is performed.


Enhanced Indexing Strategy

An investment approach that attempts to amplify the returns of an underlying portfolio or index. Enhanced indexing also attempts to minimize tracking error. This type of investing is considered a hybrid between active and passive management and is used to describe any strategy that is used in conjunction with index funds for the purpose of outperforming a specific benchmark.


Equal Access to the Proxy Statement

Giving shareholders access to corporate proxy statements for the purpose of nominating directors or commenting on the performance of the incumbent board, as some shareholder proposals have called for over the years.


Equity Expansion

Equity expansion investments involve the purchase of substantial, long-term minority equity positions in undervalued, privately or publicly held companies. This strategy is similar in style to later stage venture capital investments, except that equity expansion investments are generally larger, and are typically less technology oriented. These small and medium sized companies have grown from the start-up stage to profitability and are poised for continued rapid growth.


ESG

Topics such as climate change, energy use, political contributions, labor and human rights.


Exchange Traded Funds (ETFs)

Investment vehicle that holds assets such as stocks or bonds, and trades on exchanges at approximately the same price as the net asset value of its underlying assets.


Executive Compensation Packages

Executive compensation packages, including base salary, bonuses and stock awards, are governed by the compensation committee of the board, which approves them initially and has the discretion to change them. Shareholders’ only say in the matter usually has been in voting on proposed stock option plans or on requests to increase the number of authorized shares (which may be needed to implement option plans, among other things). Under federal law, companies can get a tax deduction for compensation packages of over $1 million paid to their top five executive officers only if the stock and cash bonus plans are “performance-based.” Companies set their own criteria for that.


Expected Active Risk

See forecast active risk.


Extended Settlement Practices

Settlement for currency forwards takes place on the value date. Value dates for CalSTRS Currency Management Program are limited to a maximum of one year.


External Management

Management of financial assets by an outside entity under contract to a CalSTRS Investment unit.

F


Failed Trade

Purchased or sold investment securities that are not delivered on the contracted settlement date.


Fair Market Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under the market conditions that exist at the measurement date.


Federal Reserve

The central bank of the U.S. and provides the country with a safe, flexible, and stable monetary and financial system. The Federal Reserve’s main duties include conducting national monetary policy, supervising and regulating banks, maintaining financial stability, and providing banking services, including influencing the supply of money and credit in the United States through its control of bank reserves. Also, called the Fed.


Fiduciary

A person or organization that acts on CalSTRS behalf to manage assets. A fiduciary owes to the other entity the duties of good faith and trust and acts in the other’s best interest.


Financial Accounting Standards Board (FASB)

A private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles within the United States in the public’s interest


First Time Limited Partnerships

A fund from a management team that has not previously been in CalSTRS’ Private Equity Portfolio.


First Time Separately Managed Account

An investment in a vehicle managed for one investor rather than many with a management team that has not previously been in CalSTRS’ Private Equity Portfolio.


Fiscal Stimulus

An attempt by a government to increase economic activity by reducing taxes, increasing government spending, or both.


Flow of Funds Analysis

Aggregate demand analysis involving trade balance and investment flows as it pertains to the foreign exchange market. Often driven by interest rate differentials, investors have incentives to buy into foreign markets that have higher average interest rates than their own by purchasing bonds, short-term notes, and even stocks. The resulting cross-border exchange creates increased demand for higher yielding currencies which affects foreign exchange rates.


Follow-On Limited Partnerships

The second and all subsequent funds raised by a management team that are included in CalSTRS’ Private Equity Portfolio.


Follow-on Separately Managed Account

The second and all subsequent separately managed accounts invested by CalSTRS and managed by a particular general partner.


Forecast Active Risk

The expected standard deviation of the difference between portfolio returns and benchmark returns as measured by CalSTRS risk management system. Forecast active risk is also known as expected active risk.


Forecast Tracking Error

The expected standard deviation of the difference between the returns of the portfolio and the returns of the benchmark. Tracking error is the dispersion of portfolio returns relative to the benchmark, a measure that quantifies the extent to which portfolio returns deviate from benchmark returns.


Forward Agreements

A customized contract between two parties to buy or sell an asset at a specified price on a future date. Forward contracts do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments. While their OTC nature makes is easier to customize terms, the lack of a centralized clearinghouse also gives rise to a higher degree of default risk.


Free Float

The market capitalization obtained by multiplying the price of each security by the number of shares readily available in the market. Instead of using all of the shares outstanding like the full-market capitalization method, the free-float method excludes locked-in shares such as those held by promoters and governments.


Front Running

The act of a broker or other entity entering into a trade because it has foreknowledge of a significant non-publicized transaction that will influence the price of the asset, resulting in a likely financial gain for the broker. Front-running is generally illegal because it takes advantage of private information not available to the public, and because it is often to the detriment of clients.


Frontier Market (FM)

A country that is more established than the least developed countries but still less established than the emerging markets.


Fundamental Environment

The economic environment encompassing: interest rates, inflation, gross domestic product, unemployment, inventories and consumer spending.


Fund-of-Fund (FOF)

An investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds, or other securities.


Futures

A legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

G


GBP/USD

British Pound/U.S. Dollar


General Consultant

A professional who provides advice on a broad range of investment topics, especially on publicly-listed assets.


General Partner

Managing partner of a limited partnership responsible for performing the day-to-day administrative operations of the partnership and acting as investment advisor to the partnership.


Global Depository Receipts (GDR)

Certificates issued by a depository bank, which represent ownership of an underlying number of foreign shares. GDRs are commonly listed on international stock exchanges such as the London Stock Exchange.


Global Industry Classification Standards (GICS)

Industry taxonomy developed in 1999 by MSCI and Standard & Poor’s (S&P) for use by the global financial community.


Global Real Estate Sustainability benchmark (GRESB)

An industry-driven organization committed to assessing the sustainability performance of real estate portfolios (public, private and direct) around the globe. The dynamic benchmark is used by institutional investors to engage with their investments with the aim to improve the sustainability performance of their investment portfolio, and the global property sector at large.


Government Accounting Standards Board (GASB)

An organization whose main purpose is to improve and create accounting reporting standards or generally accepted accounting principles (GAAP).


Government Bonds

A debt security issued by a government to support government spending and obligations. Government bonds are considered low risk investments since the government backs them. Because of their relative low risk, government bonds typically pay low interest rates.


Greenfield

Projects or assets that are new, under development or construction. These assets typically involve higher risk as they include design and construction risk on top of operating risk, but typically yield higher returns in the long-term. This contrasts with “brownfield” where the assets already exist and have a history of cash flow.


Ground Lease

An agreement in which a tenant is permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner.


Growth Style

Investment approach that overweighs securities of companies that typically have higher valuations and experience faster growth in sales and earnings.


GXPEI (State Street GX Private Equity Index)

A peer-based private equity index developed, owned and managed by State Street. The data for this index is derived from the cash flow data of State Street’s limited partner clients.

H


Hard Dollar

A term that refers to cash.


Hedge Ratios

A ratio that compares the value of a position protected through the use of a hedge with the size of the entire position itself.


High Water Mark

Highest cumulative benchmark-relative gain of an investment account. High water mark is a feature of some performance-based fee schedules.


High Yield

High Yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High yield bonds are more likely to default, so they pay a higher dividend yield than investment grade bonds to compensate investors.


High Yield Securities

A higher-risk debt security that is rated less than Baa3/BBB- by the rating agencies.


Hotel

May include budget, economy, mid-scale, upscale, luxury, extended stay and independent hotels and any other properties that provide hospitality services.


Hurdle Rate

A rate of return that must be met before the general partner can share in the carried interest.

I


Income

The component of return derived from property or portfolio operations during the period of analysis.


Incubation

Research and invest in new investment opportunities that will be required to demonstrate success before committing larger dollar amounts.


Independent Board Chair

A board chairman who meets the criteria for independent directors. This definition goes beyond simply separating the positions of chair and CEO. It means that not only should the CEO not be the board chair, but neither should the former CEO, another company employee or anyone else with ties to the company.


Independent Directors

Directors whose only nontrivial professional, familial or financial connection to the corporation or its CEO is their directorship. Various groups apply look back criteria under which they continue to define directors as non-independent for a specified period (usually two, three or five years) after the director’s affiliation with the company ceased.


Independent Fiduciary

A third party organization that provides non-discretionary specialized advisory services to Staff and acts as a fiduciary to CalSTRS and who by law must act in the best interests of CalSTRS and put the interests of CalSTRS above their own.


Index

A method to track the performance of some group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These may be broad-based to capture the entire market such as Standard and Poor’s 500 (S&P 500) or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.


Indexed Portfolio

A type of portfolio structured and managed to replicate the return and risk of a specified index.


Indices and Peer Groups

A series of databases with risk/return information that allows for comparative performance evaluation within an asset class.


Industrial

May include manufacturing, R & D Flex, Office Showroom, Freight forwarding/logistics and warehouse distribution.


Inflation

A quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods.


Inflation-Link

Investments that allow inflation risk to be mitigated contractually through inflation-adjusted pricing agreements such as water utilities where the user fees are linked to Consumer Price Index (CPI).


Inflation Linked Securities

A security in which payment of interest income on the principal is related to a specific price index, usually the Consumer Price Index (CPI). This feature provides protection to investors by shielding them from changes in the underlying index. The securities cash flows are adjusted to ensure that the holder of the bond receives a known real rate of return. An index-linked security or bond is also known as a real return bond in Canada, Treasury Inflation-Protected Securities (TIPS) in the U.S., and a LINKER in the U.K.


Inflation-Linked Assets

Securities designed to help protect investors from inflation. Inflation-linked assets are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation.


Infrastructure

The basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. The term can typically refer to the technical structures that support a society, such as roads (transportation assets), water supply, sewage systems, power grids, telecommunications, etc.


Initial Public Offering (IPO)

The sale or distribution of a stock or a portfolio company to the public for the first time.


Interest Rate Differentials

Measures the difference in interest rates of two similar interest-bearing assets. Traders in the foreign exchange market use IRD when pricing forward exchange rates.


Internal Rate of Return (IRR)

The discount rate at which the present value of future cash flows of an investment equals the cost of the investment. It is determined when the net present value of the cash outflows (the cost of the investment) and the cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR.


International Buyout

An international buyout fund is a limited partnership that generally focuses on acquisition, equity expansion, or later stage investment strategies; however, the fund’s primary geographic focus is outside of the United States.


Internal Management

Assets managed by an internal unit of the CalSTRS Investment branch.


International Network on Climate Risk (INCR)

INCR supports more than 90 institutional investors with assets exceeding $9 trillion by identifying the financial opportunities and risks in climate change and by tackling the policy and governance issues that impede investor progress toward more sustainable capital markets.


Investment Advisor

Refers to any entity, or a natural person, that serves in the capacity of asset adviser to a client. The investment adviser may have sole, shared or no investment discretion over an account.


Investment Decision-Making Process

Refers to the quantitative and qualitative processes and related tools used by the investment adviser in rendering investment advice to its clients, including financial analysis, trading and risk analysis, securities selection, broker selection, asset allocation and suitability analysis.


Investment Discretion

Refers to the sole or shared authority (whether or not exercised) to determine what securities or other assets to purchase or sell on behalf of a client.


Investment Grade Securities

Investment-grade is restricted to those bonds rated Baa3/BBB- and above by the rating agencies.


Investment Guidelines

A document that specifies constraints through which the investment manager will invest CalSTRS assets. These guidelines specify valid securities for the portfolio, permissible ranges of selected portfolio characteristics, the expected excess return of the portfolio, and how the portfolio will be evaluated.


Investment Manager (Infrastructure)

A company that, by contractual agreement, provides infrastructure investment opportunities and/or property asset management services.


Investment Manager (Risk Mitigating)

A person or organization that makes investments in portfolios of securities on behalf of clients under the investment objectives and parameters the client has defined. An investment manager may handle all activities associated with the management of client portfolios, from day-to-day buying and selling of securities to portfolio monitoring, transaction settlement, performance measurement, and regulatory and client reporting.


Investment Manager (Real Estate)

A person or organization that makes investments in portfolios of real estate and real estate-like investments on behalf of clients under the investment objectives and parameters the client has defined. An investment manager may handle all activities associated with the management of client portfolios, from day-to-day operations, research, development to portfolio management, transaction cash flow, performance measurement, and regulatory and client reporting.


Investment Officer

Any one of the in-house investment professionals in the CalSTRS Investment unit.


Investment Policy and Management Plan (IPMP)

This document outlines CalSTRS general and financial objectives including specific investment strategy. This document is the result of studies that include the assets and liabilities for CalSTRS.


Investment Strategy

A commitment to a single fund, separately managed account, joint venture or internally managed portfolio.


Investment Style

The systematic tilt of a portfolio relative to the market (e.g., growth vs value).


Investor Network on Climate Risk (INCR)

The Investor Network on Climate Risk is a network of investors and financial institutions that promotes better understanding of the financial risks and investment opportunities posed by climate change. INCR is coordinated by Ceres, a coalition of investors and environmental groups working to advance sustainable prosperity.


Investor Responsibility Research Center Institute (IRRCi)

The IRRC Institute (IRRCi) is a not-for-profit organization established in 2006 that serves as a funder of environmental, social and corporate governance research. The IRRCi provides unbiased research that does not advocate for any side of an issue. Instead, the research is a tool for investors, policymakers, and interested stakeholders to make informed, fact-based decisions.


Institutional Shareholder Services (ISS)

Provider of corporate governance and responsible investment solutions, market intelligence and fund services, and events and editorial content for institutional investors and corporations, globally.

J


J-Curve

The J-Curve phenomenon is the effect of the cash flow behavior of a partnership. It can be summarized as the first year’s investment expenses of investing in a fund that has yet to harvest its capital gains in the future. This normally translates into a negative IRR in the early years of the fund. The plot of the partnership values versus time generally resembles a “J.”


Joint Venture

Business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. Ownership within a joint venture can vary between parties: equal or majority/minority. This task can be a new project or any other business activity.


Just in Time Capital Call

The practice is to take capital calls as needed on a transaction per transaction basis.


Just vote no Campaign

A solicitation urging shareholders to withhold their votes from a board as a way of “sending a message” regarding the company’s performance or a specific corporate governance issue. Such efforts, usually involving letters to shareholders and press releases, call attention to the reasons for opposing the board, and often result in a substantial number of votes being withheld, at a cost far below that for conducting a full-fledged proxy contest.

K


Key Man Provision

Limited partners are demanding the right to suspend the funding of the partnership if some of the key people were to leave the firm. This provision is designed to assure the continuity of the firm, and to assure that success (if related to various individuals) stays within the firm.

L


Land

Undeveloped land parcels.


Large Cap Stocks

Stocks with relatively large market capitalizations, as defined by a provider of equity indexes.


Large Capitalization Style

A portfolio that is typically overweight large cap stocks relative to the market.


Lead Director

A director elected from among the board’s independent directors to serve as their leader at companies where the CEO is the board chair. The lead director would consult with the CEO/chair on the makeup of board committees, meeting agendas, board procedures, the adequacy of information given to the board and other issues, and convene executive sessions of the independent directors to assess CEO and corporate performance, conduct board evaluations, etc.


Lead Plaintiff

The shareholder chosen by the court to direct class action litigation. The lead plaintiff usually selects the lead counsel. The court may appoint co-lead plaintiffs.


Lendable Asset

A security that has an established market or demand by borrowers, such as domestic and international equities and fixed income, in order to provide liquidity and facilitate investment strategies.


Lender

An individual or organization that lends securities to a borrower.


Lending Terms

Specific requirements of a loan such as length of the loan, type of collateral, and rebate rate.


Letter of Credit

An instrument issued by a bank or pension plan that unconditionally promises to make debt service payments and provide liquidity support on a bond issue up to a stated amount for a specified period of time upon receipt of proper notice in the event of a default. Letters of credit are usually required for variable rate bond issues.


Leverage

An investment strategy of using borrowed money, or borrowed capital, to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.


Leveraged Buyouts (Acquisitions)

Acquisitions involve the purchase of all or part of the stock or assets of a company utilizing a significant amount of borrowed capital and a relatively small portion of equity capital. Borrowed capital typically consists of some combination of senior and subordinated debt. The company may be privately or publicly owned, or a subsidiary or division of a privately or publicly owned company. Acquisitions generally include companies with stable cash flows, high market share, and high profit margins, selling low or non-technology products in industries not subject to wide profitability swings. The general goal behind an acquisition investment is to acquire a company, division or subsidiary that is currently undervalued, and whose assets may be underutilized, and restructure and revitalize it. Ideally, the revitalized company can then be sold, recapitalized, or taken public at a substantial premium to its pre-buyout value


LIBOR

London Inter-bank Offered Rate serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and published each day by the Intercontinental Exchange (ICE).


Lifecycle Funds

Lifecycle funds, also known as target date funds, are mutual funds with an asset allocation designed to follow you throughout your working life into retirement. They frequently start out with aggressive investments and automatically grow increasingly conservative as you grow older. CalSTRS Pension2 Easy Choice Portfolios are similar to lifecycle funds but also are risk calibrated.


Limited Partner

The investors in a limited partnership, generally providing 99% of the capital and receiving 80% of the profits. Limited partners do not participate in the management of the partnership’s activities. However, they normally have the right to vote to approve or disapprove amendments made to the limited partnership agreement.


Limited Partnership

A partnership made up of two or more partners. The general partner oversees and runs the business while limited partners do not partake in managing the business. The general partner has unlimited liability for the debt and the limited partners have limited liability up to the amount of their investment.


Line of Credit/Liquidity Facility

This form of LOC is an availability to purchase securities under specific situations. The bonds or commercial paper that this facility supports may be remarketed on a daily, weekly, or monthly basis. There is a need to have their marketability guaranteed. If there is a failed remarketing, CalSTRS may be required to “purchase” these bonds and receive pre-agreed interest payments. In the case of commercial paper, this commitment may be revocable under certain circumstances.


LINKERS

See Inflation Linked Securities


Liquidity

The ease with which an asset can be converted into ready cash without affecting its market price.


Liquidity Portfolio

For CalSTRS’ purposes, this is the Short-Term Fixed Income portfolio that provides cash flow for funding transactions for CalSTRS, such as benefit payments, investment manager activity, and asset allocation. Examples of short-term investments include U.S. Treasury, Agency, and money market securities (commercial paper, certificates of deposit, Eurodollar deposits, and repurchase agreements).


Loan Fees

Loan fees can vary from a small percentage of the amount you borrow to a rather substantial percentage of the total value of what you’d be eligible to borrow.


Longer-Term Strategies

Private equity investments that are expected to have lower risk and reward profiles than traditional private equity investments. Such investments will likely be held for longer periods of time than traditional private equity investments. Management fees and carried interest will generally be lower than for traditional private equity investments.


Lookback Provision

The lookback provision guarantees that the stated profit allocation is met at the end of the partnership’s term with respect to the limited partners.

M


Majority of Independent Directors

There is widespread support in both the shareholder and business communities for having a majority of independent directors on corporate boards.


Management Buyout (MBO)

Buyout by the existing company’s management.


Management Fees

The management fee is designed to compensate the general partner. This fee is used to provide the partnership with such resources as investment and clerical personnel, office space, and administrative services required by the partnership. Generally, the fee ranges from 1.5% to 3.0% of capital commitments.


Margin Level

The amount of cash or eligible securities the borrower will deposit when borrowing securities.


Marked-to-Market

An adjustment in valuation to reflect the current market values of the respective securities in a portfolio. This process is also used to ensure that margin accounts are in compliance with maintenance requirements.


Market Capitalization

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.


Market Cycle

Referring to trends or patterns that emerge during different markets or business environments over time. During a cycle, some securities or asset classes outperform others because their business models align with conditions for growth.


Master Limited Partnership (MLP)

A business venture that exists in the form of a publicly traded limited partnership. MLPs combine a private partnership’s tax advantages with a stock’s liquidity. Investor’s receive tax-sheltered distributions from MLPs.


Mean Variance Optimization (MVO)

Mean–variance optimization (MVO) is a quantitative tool used to spread investment across different assets within a portfolio by assessing the trade-off between risk and return in order to maximize the return while minimizing any risks. The concept was devised by economist Harry M. Markowitz, who developed an algorithm to calculate optimized returns over a specified period. MVO is part of Markowitz’s modern portfolio theory (MPT), which assumes that investors will optimize their investment portfolios through diversifying their investments on a balanced risk–return basis. Markowitz’s concept of efficiency as laid out in MVO contributed to the development of the capital asset pricing model (CAPM).


Merger and Acquisitions (M&A)

Mergers and acquisitions are two broad types of restructuring through which managers seek economies of scale, enhanced market visibility, and other efficiencies.


Mezzanine

Mezzanine investments are in unsecured or junior obligations in financing. They typically earn a current coupon or dividend and have warrants on common stocks or conversion features to enhance returns.


Mid-Cap

Companies with a market capitalization in the mid-range of the broad market, as defined by an index provider.


Mixed-Use

Refers to services and/or products provided to an investment adviser by a broker through a brokerage arrangement that have the capacity to be used for both the investment decision-making process and management of the investment firm.


Monetary Stimulus

The Federal Reserve manipulates the money supply either through open market transactions, member bank reserve requirements, or changing the discount rate.


Monoline Insurer

Specializing in a single line or discipline of the financial services business. It is often a company operating in only one industry, product or service, such as credit card issuance, mortgages, or whole life insurance.


Mortgage-Backed Security (MBS)

An investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.


MSCI

A public company that publishes major global indices, such as EAFE and ACWI. Formally owned by two firms, Morgan Stanley and Capital International.


MSCI EAFE Plus Canada Index

The Morgan Stanley Capital International Europe, Australia & Far East Plus Canada Index. This index is a capitalization weighted index of all of the companies found in the developed country indices from Europe, Australasia, the Far East, and Canada that are in the MSCI World Index, as well.


Multi-Currency Horizon (MCH)

An accounting system that replaced original Batch processing of single currencies. It is a process set up by State Street Bank as part of their enterprise architecture.


Multi-Family

May include high-rise, low-rise, and garden complexes of multiple rental units in an apartment building. May also include condominiums, student-oriented complexes and senior rental housing with limited or no medical services.


Multi-Strategies

The Multi-strategies sub-asset class invests in private equity investments along with other private investments with fixed income, real estate, and hedge fund characteristics.


Multiple of Money

Multiple of money is often used to measure performance. This is a cumulative return, identifying the return on an investment over the term of the partnership. A multiple that is greater than one indicates that the partnership’s total value exceeds the amount of capital contributed to date, whereas, a multiple less than one indicates that the partnership’s total value is less than the amount of capital contributed. In summary, achieving a high annualized rate of return over a long period of time is more impressive than achieving a high annualized rate of return over a shorter period of time.

N


NASDAQ

The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange.


National Association of Corporate Directors (NACD)

NACD was founded in 1977 as the only national membership organization created for and by directors. NACD’s mission is to elevate board performance by providing board members with practical insights through world-class education, leading-edge research, and an ever-growing network of directors.


National Association of State Retirement Administrators (NASRA)

The association of state pension CEOs / Executive Directors


National Council on Teacher Retirement (NCTR)

The National Council on Teacher Retirement (NCTR) is constituted as an independent association dedicated to safeguarding the integrity of public retirement systems in the United States and its territories to which teachers belong and to promoting the rights and benefits of all present and future members of the systems.


Natural Resources

These investments utilize strategies that derive their return from the management of and the independent price movements in a particular resource. These investments are more specialized with a corresponding increase in risk. Sub-categories of this group include:

  • Oil and Gas – provides funding for the purchase or development of energy producing properties or companies operating within that sector.
  • Timberland/Farmland – provides funding for the purchase, development and/or lease of land for both growth and income-oriented strategies.

NCREIF Index

National Council of Real Estate Investment Fiduciaries Index; a property-level performance benchmark for institutionally owned real estate, calculated on a quarterly basis.


NCREIF Fund Open Ended Diversified Core Equity (NFI-ODCE) Index

A capitalization-weighted return index consisting of infinite life vehicles with multiple investors and the ability to enter and exit on a periodic basis. Funds maintain low leverage; equity ownership in U.S. stabilized office, retail, industrial, and multi-family and hotel properties.


Net Asset Value (NAV)

Equal to a fund or company’s total assets less its liabilities.


Net Operating Income (NOI)

Measures an income-producing property’s profitability before adding in any costs from financing or taxes.


New & Next Generation Mandate (NNG)

The New and Next Generation Manager Mandate was established by the Investment Committee in 2003. It involves partnerships that are raising their first-, second-, and third-time institutional funds or partnerships formed by junior or senior level partners that have left a prior partnership to form a new general partner. Please see the definition for Private Equity Special Mandates.


New Firm

Investment manager with whom CalSTRS Investment Unit has a contractual relationship of less than one year.


New York Mercantile Exchange (NYMEX)

A commodity exchange owned and operated by CME Group of Chicago.


New York Stock Exchange (NYSE)

A stock exchange based in New York City, which is considered the largest equities– based exchange in the world based on total market capitalization of its listed securities. Also known as the “Big Board”, the NYSE relied for many years on floor trading only, using the open outcry system. Today, more than half of all NYSE trades are conducted electronically, although floor traders are still used to set pricing and deal in high volume institutional trading.


Nominal Bond

A fixed-rate bond.


Nomination and Election of Directors

Most director nominations are made by the company’s nominating committee or full board, with the approval (or upon the recommendation) of the CEO and sometimes with the help of a search firm. Some companies say they will accept nominations from shareholders; some will not. No companies nominate more candidates than there are seats up for election, so unless there is a proxy contest, shareholders have no choice of who to vote for. Thus the “election” of directors actually is a ratification of the company slate.


Nominal Yields

The coupon rate on a bond that is fixed and applies to the life of the bond.


Non-Core Investment Program

A program that provides additional income to the Fund beyond the traditional asset classes within the investment office. The CalSTRS programs that fall into this category are: Credit Enhancement, Currency Hedging, Home Loan and Securities Lending.


Non-Developed Markets

Countries with developing economies and capital markets as designated by Dow Jones or Standard & Poor’s.


Non-traditional Asset Classes/Strategies

Investments whose investment performance is not correlated with that of stocks, bonds, real estate, private equity, and cash. It may include private credit, hedge funds, and commodities. CalSTRS may investigate alternative investment strategies within the traditional public asset classes.


Non-US (or Non-Dollar)

Investments made in currencies other than the U.S. Dollar.


Notional Amount

The value of the underlying asset in a derivative trade. It can be the total value of the position, how much value a position controls, or an agreed-upon amount in a contract.

O


Obligor

A person or entity who is legally or contractually obliged to provide a benefit or payment to another.


Office

May include multi-tenanted buildings in both central business district and suburban locations. Types of use in office buildings may include commercial banks, financial buildings that serve as office space, owner-occupied space including corporate headquarters and branch offices. Others, such as government administration buildings, medical offices and Office R & D which is used primarily for office, may also be included.


Oil and Gas

See natural resources.


Open End Diversified Core Equity Index (ODCE)

(“Odyssey”) Open End Diversified Core Equity Index – A capitalization– weighted return index consisting of infinite life vehicles with multiple investors and the ability to enter and exit on a periodic basis. Funds maintain low leverage; equity ownership in U.S. stabilized office, retail, industrial, and multi– family and hotel properties.


Opportunistic (Inflation Sensitive)

A phrase characterizing an investment in underperforming and/or undermanaged assets/projects. Such assets usually have greater risk/return characteristics than found in a typical core investment.


Opportunistic (Infrastructure)

A phrase characterizing an investment in underperforming and/or undermanaged assets/projects typically purchased from distressed sellers, utilizing high levels of leverage at times with the expectation of near-term increases in cash flow and value.


Opportunistic (Real Estate)

Investments that preponderantly include non-core investments and which are expected to derive most of their returns from appreciation and/or which may exhibit significant volatility in returns. This may be due to a variety of characteristics, such as exposure to development, significant leasing risk, high leverage, or a combination of risk factors.


Option

A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.


Organization for Economic Co-operation and Development (OECD)

The Organization for Economic Co-operation and Development. An organization that acts as a meeting ground for thirty-seven (37) countries (including the U.S. and Canada) which are advocates of the free market system and promotes policies that will improve the economic and social well-being of people around the world. The OECD provides a forum in which governments can work together to understand what drives economic, social and environmental change.


Other Unequal Voting Rights

Unequal voting rights provisions limit the voting rights of certain types of shareholders or grant special rights to others. For example, time-phased voting gives shareholders who have owned their stock for a certain length of time (such as four years) more votes per share than more recent purchasers; substantial shareholder provisions reduce or cap the voting power of a large shareholder once a certain ownership threshold, such as 10 or 20%, has been reached.


Over-The-Counter-Market (OTC)

The trading of commodities, contracts or other instruments directly between two parties off of a regulated exchange.

P


P&I

Pensions and Investments Magazine – the major media source covering pensions across the U.S.


Pacific Pension & Investment Institute (PPI)

An educational non-profit that focuses on the pacific rim investments.


Par Value

The nominal or face value of a bond. Par Value is important for a bond or fixed income instrument because it determines it’s maturity value as well as the dollar value of coupon payments.


Participants

Three major participants in the private equity market are investors (suppliers of capital), issuers (users of capital) and specialized intermediaries. These three participants are further defined below:

INVESTORS: Includes a variety of groups such as public and corporate pension funds, endowments, foundations, bank holding companies, insurance companies, and wealthy families.

ISSUERS: Includes thousands of start-up businesses that are established annually.

SPECIALIZED INTERMEDIARIES: Invest as principals rather than as agents, and generally take the form of limited partnerships. Institutional investors acquire limited partnership interests and become limited partners, while professional private equity managers serve as general partners.


Participation

An ownership interest in a letter of credit or liquidity facility issued by another financial institution. The ownership interest in the letter of credit or liquidity facility is sold or purchased to decrease/increase direct risk exposure to an obligor.


Partnership Expenses

Expenses borne by the partnership including costs associated with the organization of the partnership, the purchase, holding or sale of securities, and legal and auditing expenses.


Partnership Term

The term of the partnership is normally ten years, with the general partner reserving the right to terminate the partnership early or extend the term for a set period of time. This is generally subject to the approval by the limited partners.


Passive Management

Passive managers utilize either a replication or optimization method to track a benchmark’s performance. With replication, every security in the portfolio is held in the exact proportion as the benchmark. Optimization seeks to mimic the risk and return characteristics of a benchmark by only holding a subset of the benchmark securities.


Percentile

A measure used in statistics indicating the value below which a given percentage of observations in a group of observations fall.


Performance Objective

Refers to each individual external manager’s designated benchmark (example, Russell 1000) and their performance target (example, Russell 1000 + 1½%).


Poison Pills

Also known as shareholder rights plans because, in the event of a hostile takeover attempt, they give shareholders (except for the would-be acquirer) the right to buy stock in their own company or in the acquiring company at a deep discount, usually half price, if the bidder acquires a certain percentage (usually 15 or 20%) of the outstanding shares. Shareholders consider pills one of the most potent anti-takeover measures, but companies say they simply force a would-be acquirer to negotiate with the board. If the board approves the deal, it can redeem the pill; if not, and the potential acquirer was to proceed anyway, the pill could be triggered. With other shareholders then able to buy shares at half price, the target company would become financially unattractive and the voting power of the potential acquirer would be diluted i.e., acquiring the company under those terms would be like swallowing a poison pill.


Pool Managers

A set of investment managers that as a result of a search have been selected as eligible to be hired.


Portfolio

A grouping of financial assets such as stocks, bonds, commodities, currencies, cash equivalents, exchange-traded funds and closed funds. A Portfolio can also consist of non-publicly traded securities, like real estate and private investments.


Portfolio Companies

Portfolio companies are the companies in which the Limited Partnership has an investment.


Position

The amount of a particular security, commodity, or currency held or owned by a person or entity.


Preferred Return

A rate of return that must be met before the General Partner can earn carried interest.


Principal

Original sum of money borrowed in a loan or put into an investment.


Principal Paydown

A reduction in the principal amount of debt.


Principal Trade

A trade in which the broker acts on his own behalf and buys or sells for a customer.


Principles for Responsible Investment (PRI)

A United Nations-supported international network of investors working together to implement its six aspirational principles. It’s goal is to understand the implications of sustainability for investors and support signatories to facilitate incorporating these issues into their investment decision-making and ownership practices.


Private Equity Board Consultant

A Private Equity Board Consultant acts as an independent fiduciary advisor to the Investment Committee and provides expertise and advice related to the overall investment strategy, policies, and practices of the Private Equity Program.


Private Equity Special Mandates

Discrete private equity investment strategies (other than divestments which are covered by a separate policy) suggested by the CalSTRS Investment Committee that include, but are not limited to environmental, social, governance (ESG) matters in-State investments, or other factors that are expected to have a positive or neutral impact on the economic performance of the fund over the long term. See Special Mandate Policy.


Private Finance Initiate (PFI)

A way of creating public–private partnerships (PPPs) by funding public infrastructure projects with private capital. Capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. These schemes are sometimes referred to as PFI.


Private Securities Litigation Reform Act of 1995 (PSLRA)

The federal law aimed at reducing the number of “meritless” lawsuits brought against corporations. In passing the act, Congress sought to encourage the appointment of institutional investors as lead plaintiffs in securities fraud class action suits.


Proactive Portfolio

The Proactive Portfolio currently encompasses two Private Equity Special Mandates: (1) the Underserved Urban and Rural Mandate investing with private equity managers specializing in underserved urban and rural markets and (2) the New and Next Generation Manager Mandate investing in private equity managers that are of a “new and next generation” nature. Please see the definition for Private Equity Special Mandates.


Program Advisor

A Program Advisor provides expertise, advice and recommendations to support staff in the management and monitoring of an asset class or classes including, but not limited to, screening the universe of general investment opportunities and identifying those meeting CalSTRS’ selection criteria, assisting staff in performing due diligence on prospective investment opportunities, issuing investment recommendations, and maintaining a deal log of investment opportunities. A Program Advisor is also an Independent Fiduciary.


Property Management (Real Estate)

The day-to-day managing of property that is owned by another party or entity, overseeing of residential, commercial, and/or industrial real estate, including apartments, detached homes, condominium units, and shopping centers. The property manager acts on behalf of the owner to preserve the value of the property while generating income.


Property Management (Infrastructure)

The various functions that are performed at the property level in order to assure timely collection of rents, payment of expenses and supervision of on-site activities.


Proprietary Research Arrangement

Refers to an arrangement whereby the investment adviser directs a broker to effect Securities Transactions for Client accounts in exchange for which the Investment Adviser receives Research from, and/or access to, the “in-house” staff of the brokerage firms.


Prospectus

A prospectus is a document given to potential investors in connection with a public offering of securities. It is intended to provide potential investors with a written statement of all relevant information about the company — its history, operations, financial condition and key personnel. A prospectus is required by law; it provides information but not an endorsement.


Provided by a Broker

Refers to (1) in Proprietary Research Arrangements, research developed by the broker and (2) in Third-Party Research Arrangements, research for which the obligation to pay is between the broker and third-party research provider, not between the investment adviser and third-party research provider.


Proxy Contest

A solicitation by a dissident shareholder or group for seats on a company’s board. (Shareholder campaigns in opposition to certain management proposals, such as a merger or a dilutive stock option plan, are also sometimes referred to as proxy contests, but generally the definition refers to a fight for seats on the board.)


Prudent Manner

A fiduciary is required to act in a manner appropriately in keeping with the investment standard, in the best interest and for the sole benefit of CalSTRS’ participants and beneficiaries.


Public Company Accounting Oversight Board (PCAOB)

The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. The PCAOB also oversees the audits of broker- dealer compliance reports under federal securities laws.


Public Private Partnerships (PPP)

A government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. PPP involves a contract between a public sector authority and a private party in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project.

Q


Quality Ranges

Guidelines for the percentage of market value of a particular credit rating within a portfolio.


Quantitative Analysis

Technique that uses mathematical and statistical modeling, measurement, and research to understand behavior. Quantitative analysis represents reality in terms of numerical value and provides staff with tools to examine and analyze past, current, and anticipated future events.

R


Rate of Return

The net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.


Ratio

Represents the number of commission dollars to cash (hard dollars) required to purchase services. Examples: if a service cost $100 in cash, at a ratio of 1.8:1, the commission (soft dollar) cost would be $180 or 1.8 x 100 = $180


Realized Active Risk

The actual standard deviation of the difference between historical portfolio returns and benchmark returns.


Real Estate Operation Company

The corporation that manages real estate assets.


Real Rate of Return

Yield to the investor after adjusting for inflation (typically determined by the Consumer Price Index).


Real Yields

Nominal return from an investment adjusted for the effects of inflation.


Rebalancing

Adjusting the actual portfolio to the current strategic asset allocation because of price changes in portfolio holdings. Also: revisions to an investor’s target asset class weights because of changes in the investor’s investment objectives or constraints, or because of changes in capital market expectation, or to mean tactical asset allocation.


Rebate

The portion of interest or dividends earned by the owner (lender) of a stock that is paid by a short seller (borrower) of the stock.


Reference Price Index

An index that measures changes in consumer prices in the U.S. In the U.S., this index is the Consumer Price Index (CPI) that serves as a benchmark for future periods, allowing economists to judge the rate of U.S. inflation over time.


Rehabilitated

Projects and/or assets that need significant maintenance and repairs while generating some income from operations.


Reimbursement Agreement

An agreement between the credit enhancer and underlying obligor setting forth the terms and conditions of the letter of credit and the responsibilities of the obligor.


Repricing or replacing of Options

The practice of repricing outstanding underwater options at new, lower exercise prices, or canceling the underwater options and replacing them with new, lower-priced options. Companies say adjustment of out-of-the-money options is necessary to retain key employees when the stock price falls, but many shareholders feel it is unfair to cushion losses for managers when the shareholders are losing money on the stock. Shareholder approval is not required for repricing, although as a result of shareholder efforts, some companies have agreed not to reprice or replace options without it.


Request for Proposal (RFP)

Refers to a search and selection process for hiring external money managers. The process provides minimum qualifications, description of duties, and a detailed questionnaire to be completed by the proposer. Selection is based on the firm’s investment process, personnel, performance and fees.


Research

Refers to services and/or products provided by a broker, the primary content of which must, if used by the investment adviser, directly assist the investment adviser in its investment decision-making process and not in the management of the investment firm.


Restructuring/Recovery Investments

Recovery investments involve the investment of capital in companies experiencing anywhere from relatively minor, to extreme difficulties, to companies involved in bankruptcy proceedings. Recovery investing takes advantage of discounted securities of unhealthy, bankrupt (or near); under-performing, and/or under-capitalized companies and either ride or steer them back to recovery. To accomplish this goal, the various funds available use a variety of strategies. The strategies vary by the activity level and/or degree of control required by the acquirers, types of securities utilized, and the relative health of the target companies sought (from bankrupt to nearly healthy). Also, like LBO and venture capital managers, managers of ailing company funds each have a particular target company size preference and some have industry or sector preferences. Distressed debt investments are a form of recovery investing that focus on the debt of a distressed company. Distressed debt investing is defined as the investment in debt securities (generally senior-secured debt) of troubled or bankrupt companies.


Retail

May include neighborhood, community, regional, super-regional, fashion/specialty, power, theme/festival, outlet and single tenant centers in which tenants sell goods and services.


Risk Averse

An investor who chooses the preservation of capital over the potential for a higher-than-average return.


Risk Management

The process of identifying the level of risk an entity wants, measuring the level of risk the entity currently has, taking actions that bring the actual level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.


Risk-Adjusted Return

Defines an investment’s return by measuring how much risk is involved in producing that return.


Russell 1000 Index (R1)

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.


Russell 2000 Index (R2)

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.


Russell 3000 Index (R3)

The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market

S


Safe Harbor Transaction

A transaction where the State Teachers’ Retirement System extends credit enhancement to an Employing Agency. In such case, CalSTRS may have no more than a 25% involvement in the credit enhancement transaction at the time of issuance. In addition, persons affiliated with the System, Employing Agencies, and other California public sector retirement systems would not be permitted collectively to account for more than 50% of such credit enhancement transaction.


Sarbanes Oxley (SOX)

The Sarbanes–Oxley Act of 2002 (often shortened to SOX) is legislation enacted in response to the Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise. The act is administered by the Securities and Exchange Commission (SEC), which sets deadlines for compliance and publishes rules on requirements. The legislation not only affects the financial side of corporations, but also affects the IT departments whose job it is to store a corporation’s electronic records.


Secondary Limited Partnership Interests

Limited Partnership interests that have been transferred from the original limited partner who made the original capital commitment to a limited partnership fund.


Secondary Market Transactions

Secondary Market Transactions are purchases or sales of private equity related interests in which one or more of the original parties divests (or has divested). Such private equity interests may involve a single interest or pools of interests. Pools may be diversified (greater than three interests in a single transaction) or non-diversified (three or less interests in a single transaction).


Section 28(E) Safe Harbor

Refers to the “safe harbor” set forth in Section 28© of the U.S. Securities Exchange Act of 1934, which provides that an investment adviser that has investment discretion over a client account is not in breach of its fiduciary duty when paying more than the lowest commission rate available if it determines in good faith that the rate paid is commensurate with the value of brokerage and research services provided by the broker.


Sector

An industry or market sharing common characteristics. Investors use sectors to place stocks and other investments into categories like technology, health care, energy, utilities and telecommunications. Each sector has unique characteristics and a different risk profile.


Sector Allocation

Distribution of investments within one sector of a larger portfolio (e.g., the bond sector allocation of a portfolio with an equity and bond mandate).


Securities Lending

An agreement between a lender and a borrower to transfer ownership of a security temporarily in order to earn additional income. The lender retains ownership rights of the security and is entitled to any distributions that occur with respect to that security during the life of the loan, such as coupon and dividend payments. The borrower backs the agreement by delivering collateral to the lender, either in the form of cash, which is currently the dominant form of collateral in securities lending transactions, or other liquid securities, in an amount that exceeds the market value of the securities borrowed.


Securities Litigation Uniform Standards Act of 1998

Federal law requiring that securities class action suits against nationally traded companies be brought only in federal courts, and setting standards for bringing the suits. It was intended to prevent the shifting of securities suits from federal to state courts, frustrating the intent of Congress in passing the PSLRA.


Securities Transactions

Refers to any transactions involving a Broker, whether conducted on an agency basis or principal basis.


Securitized Assets

Debt investments that are collateralized by assets. Examples include: Mortgage Backed Securities, Commercial Mortgage Backed Securities and Asset Backed Securities.


SEK

Swedish Krona


Separate Account

An investment fund managed for one or two investors rather than many with a specialized mandate.


Settlement Date

The date when a trade is final, and the buyer must make payment to the seller while the seller delivers the assets to the buyer.


SGD

Singapore Dollar


Shareholder Service Fees

Fees paid to persons to respond to investor inquiries and provide investors with information about their investments.


Sharpe Ratio

A measure used to help investors understand the return of an investment compared to its risk.


Short Selling

An investment or trading strategy that speculates on the decline in a stock or other securities price. Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. Short sellers bet on, and profit from, a drop in a security’s price.


Short Slate

The nomination of one or a few directors by dissident shareholders, allowed by an SEC rule adopted in 1992 as part of its proxy rule reform. Under the rule, the shareholders can nominate one or more directors for a board and then indicate which management nominee(s) they will withhold their votes from to make room for the new candidate(s). The rule is intended to allow shareholders to replace one or more directors without seeking control of the company


Side-By-Side Investments (SBS)

A commitment to an underlying fund in one of the UUR or NNG fund-of-fund vehicles with a positive recommendation from the applicable manager or the Program Advisor.


Small Cap

Stocks of smaller companies, generally with a market capitalization of between $300 million and $2 billion.


Small Capitalization Style

A portfolio that is typically overweight small cap stocks relative to the market.


Social Infrastructure

Infrastructure projects and assets which focus on the facilities and networks to support the people and community, such as health services, judicial buildings, schools and universities, etc.


Soft Dollar Arrangement

Refers to an arrangement whereby the investment adviser directs transactions to a broker, in exchange for which the broker provides brokerage and research services to the investment adviser. Soft dollar arrangements include proprietary and third-party research arrangements, but do not include client-directed brokerage arrangements. Soft dollar arrangements are sometimes referred to herein as investment adviser-directed brokerage arrangements.


Soft Dollars

Brokerage fees that compensate the broker for both execution and research services. The use of soft dollars by investment managers is allowable only under SEC Section 28(e) safe harbor requirements, an SEC rule that enables U.S. brokers to bundle trade execution services and research and charge above-execution-only rates to U.S. clients.


Special Equity

See all non-venture capital related investment strategies, such as Leveraged Buyouts, Acquisitions, Special Situations, Mezzanine Investments, Subordinated Debt and Natural Resources.


Special Situation Fund

Special Situation funds represent a “catch-all” for non-traditional investments that do not fit either Special Equity or Special Funds. These will include minority, but often control positions in public companies, “white knight” efforts to support management to achieve long-term objectives, turnarounds and bankruptcy reorganizations, and other special situation profit opportunities. It is not the intention to invest in “unfriendly” business take-overs.


Split-Rated

The credit ratings of corporate and other securities are made by independent services such as Moody’s, Standard & Poor’s and Fitch. When a security receives ratings that are different among the rating services, the term “split-rated” is used to signify this difference in relative credit ratings.


Spread Income

Difference between the yield on the investment of the cash and the interest (rebate) paid to the borrower.


Standard & Poor’s 500 (S&P 500)

A well-known market-capitalization weighted index of approximately 500 large U.S. companies.


Standby Bond Purchase Agreement

A form of liquidity facility or enhancement.


Standby Letter of Credit

A letter of credit that is drawn upon only if there are insufficient funds from other sources.


State Street Bank (SSB)

CalSTRS’ master custodian for investment activity.


Strategic Asset Allocation

A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation


Structured Note

A security with one or more special features, such as making payments due dependent on the returns or other feature of an underlying index.


Style Drift

The divergence of a fund from its investment style or objective. It occurs if the returns of assets within a portfolio significantly diverge, or if a portfolio manager deviates from his or her stated investment mandate; e.g., a value fund manager who begins buying growth stocks.


Submitting Shareholder Proposals

Resolutions submitted by shareholders for inclusion in company proxy materials to be put to a shareholder vote. Most shareholder proposals are precatory-i.e., advisory. They are merely recommendations to the board, and are not binding, although many shareholders take the position that the board should implement the proposals if a majority of the shares vote in favor of the proposal.


Super Majority Voting Requirements

Some companies require the approval of two-thirds, three-fourths or even 80% of the outstanding shares to pass, repeal or amend a charter or bylaw provision or approve a merger. Many shareholders believe a simple majority vote should be sufficient to amend company bylaws or approve other corporate actions.


Swap Agreement

A derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Many swaps involve cash flows based on a notional principal amount such as a loan or bond. Usually the principal does not change hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating exchange rate, or index price.

T


Tactical Asset Allocation

Positioning in asset classes or asset types at weights different than the benchmark.


Technical Analysis

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value. Technical analysts often use charts to identify patterns that can suggest future activity. Technical analysts believe that historical performances of the market are indications of future performance.


Technical Environment

Evaluates the environment through historical market activity, such as prices and volume, and uses charts to identify patterns that may suggest future activity and/or trends.


The Financial Times Stock Index (FTSE)

The main UK stock index and a major global equity index provider.


Third-Party Research Arrangement

Refers to an arrangement whereby the investment adviser directs a broker to effect securities transactions for client accounts in exchange for which the investment adviser receives research provided by the broker, which has been generated by an entity other than the executing broker.


Ticker (Stock Symbol)

A unique four- or five-letter symbol assigned to a NASDAQ security that is used for identifying it on stock tickers, newspapers, on-line services, and in automated information retrieval systems. If a fifth letter appears, it identifies the issue as other than a single issue of common or capital stock.


Timberland/Farmland

See natural resources.


Treasury Inflation Protected Securities (TIPS)

Treasury Inflation Protected Securities – aka Linkers. These are U.S. Treasury issued inflation linked notes.


Total Return

The sum of the income and appreciation returns.


Tracking Error

The standard deviation percentage difference, which reports the difference between the return an investor receives and that of the benchmark they were attempting to imitate. Tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level.


Traditional Asset Classes

Stocks, bonds, real estate, private equity, and cash are fundamental components of an investment portfolio.


Traditional Property Type

Conventional property types such as office, multi-family residential, industrial, retail and hotel real estate; which are included within the NCREIF Index.


Transaction Fee Offsets

Transaction fee offsets are designed to eliminate misplaced management fees and align the actions of the general partner whose aim is to generate high capital gains, and not to earn additional fees for the firm. The general provision is that the earned fee will reduce the limited partners’ management fees.


Trustee

Person or firm that holds and administers property or assets for the benefit of a third party. Trustees are trusted to make decisions in the beneficiary’s best interests and often have a fiduciary responsibility to the trust beneficiaries.


Turnover

In reference to securities, it is the percentage that the portfolio is traded on an annual basis. It is calculated by dividing the smaller of purchases or sells by the total value of the portfolio.

U


Underwater Options

An option in which the underlying asset is a stock that is currently trading for less than the strike price of the option. This is considered an out-of-the-money option.


United States Treasury Securities

Debt issues of the U.S. Government, such as Treasury bills, notes, and bonds.


Underserved Urban and Rural Mandate (UUR)

The Underserved Urban and Rural Mandate was established by the Investment Committee in 2001 to seek private equity investment in the inner city and underserved portions of California and the U.S. Please see the definition for Private Equity Special Mandates.


US-CPI

The CPI-U Index is the non-seasonally adjusted U.S. City Average all Items Consumer Price Index for All Urban Consumers published monthly by the Bureau of Labor Statistics of the U.S. Department of Labor.


USD/CHF

U.S. Dollar/Swiss Franc


USD/JPY

U.S. Dollar/Japanese Yen

V


Value Date

A future point in time at which the value of an account, transaction or asset becomes effective. Value dates are used in determining the payment of financial products and accounts where there is a possibility for discrepancies due to differences in the timing of valuations.


Value Style

Investment strategy that involves overweighting stocks that typically trade at lower valuations and experience slower growth in sales and earnings.


Value-Added (Inflation Sensitive & Infrastructure)

A phrase commonly used by investment managers to describe a management approach to a property with the connotation that their skills will add value, which otherwise would not be realized.


Value-Added (Real Estate)

Properties that have in-place cash flow but seek to increase that cash flow over time by making improvements to or repositioning the property to increase value. Value add property projects can generate higher financial returns to investors however bear more moderate risk.


Venture Capital

Venture capital refers to investments in young, emerging growth companies in different stages of development. The stages of venture capital investing include the following:

SEED STAGE: An entrepreneur seeking capital to conduct research or finish a business plan.

EARLY STAGE: A company developing products and seeking capital to commence manufacturing.

LATE STAGE: A profitable or near-profitable high growth company seeking further expansion capital.

The common theme underlying all venture capital investments is the high-growth nature of the industries in which the investee companies operate and the active role played by the investor to identify additional management expertise and provide general business advice.


Venture Economics

Venture Economics is a compiler and publisher of private equity investment data. Venture Economics computes the internal rates of returns (IRRs) on a vintage year basis including pooled, upper, median, and lower quartile returns for each sub-category.

UPPER QUARTILE: The point at which 25% of all returns in a group are greater and 75% are lower.

MEDIAN QUARTILE: The mid-point of all returns, with half the sample less than or equal to the median, and half of the sample greater than or equal to the median.

LOWER QUARTILE: The point at which 75% of all returns in a group are greater and 25% are lower.

POOLED RETURNS: This is a composite of all median and upper quartile returns.


Vintage Year

Vintage Year can be defined in two ways:

  1. For the purpose of investment pacing, a vintage year is the calendar year for which a fund commitment is closed; or
  2. For the purpose of benchmarking, a vintage year is the calendar year an investment first draws capital.

By placing an investment into a particular vintage year, the investor can compare the performance of a given investment with other similar investments that have first drawn capital during that calendar year.


Volatility

A statistical measure of the dispersion of returns for a given security or market index. It represents the degree to which an asset’s price fluctuates around the mean price. In most cases, the higher the volatility, the riskier the security.

W


Warrant

A security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called the exercise price until the expiry date.


Whole Loans

A single loan issued to a borrower. Lenders of whole loans often sell them in the secondary market to institutional portfolio managers and agencies (Freddie Mac and Fannie Mae). Lenders sell their whole loans to reduce their risk. Rather than keep a loan on their books for 15 to 30 years, the lender can recoup the principal back almost immediately by selling the whole loan to an institutional buyer.


Withholding votes from directors

Sometimes referred to as voting against the board. Unless there is a proxy contest, with competing candidates for the board, there effectively is no such thing as voting against the board, since the official board nominees will always win no matter how small a vote they get. Some shareholders withhold their votes from the entire board (or the class standing for election) to indicate general dissatisfaction with company performance; others withhold support only from specific directors, for such reasons as poor attendance, conflicts of interest, failure to own company stock, or serving on a compensation committee that awarded excessive compensation packages. Some vote against boards that do not take actions recommended in shareholder proposals that get majority.

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ZAR

South African Rand