GLOSSARY OF FREQUENTLY USED TERMS

Allocation Shifting

Model allocations will be adjusted based on changes to macro indicators. Asset Classes showing relative strength versus other Asset Classes will be emphasized; weakness will be de-emphasized or eliminated.

Asset Class Confirmed Sell Signal

An Asset Class Confirmed Sell Signal is a technical indicator used to identify the potential for a significant market decline. An Asset Class Confirmed Sell Signal occurs when five (5) technical indicators align signaling weakness in an Asset Class.

The five (5) components include:

  • Lower tops on Bullish Percents
  • Narrowing of leadership from individual sectors
  • Trend charts of major indices turning negative and important support areas violated
  • Percent Positive Trend indicators below 50%
  • Defensive Asset Classes giving relative strength buy signals over offensive classes

An Asset Class Confirmed Sell Signal does not occur at the top of a performance cycle. Value/Price declines during the process of receiving an Asset Class Confirmed Sell Signal. The Technical Leaders Portfolio Management System is not intended to move investors from Asset Classes at, or near, high values or move investors into Asset Classes at, or near, the bottom. It is intended to help determine if a decline represents a normal correction or the beginning of a more meaningful decline, for which model allocation adjustments are considered.

Bogey Check

Bogey Check is comparing the relative strength of an Asset Class versus cash. An Asset Class that fails against cash indicates there might be more risk in the Asset Class than a cash position.

Composition Titles

Model Composition Titles indicate the type of investment focus for a specific model.

The three (3) types of Composition Titles are:

  • Tactical: Uses investments that focus on specific asset categories and/or sectors.
  • Core: Uses investments that normally spread over multiple asset classes and/or sectors.
  • Blended: A combination of Tactical and Core positions.
Discretionary Management

An arrangement that permits the advisor(s) to buy and sell securities without obtaining the client’s consent prior to the transaction(s). The client must sign a discretionary disclosure with the advisor(s) as documentation of the client’s consent. This is sometimes referred to as a “managed account.”

ETF

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.

An ETF is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. The actual investment vehicle structure (such as a corporation or investment trust) will vary by country, and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.

ETF investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share (there are no minimum deposit requirements). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order. (For this reason, advisor-wrap accounts are a preferred format for investing in ETFs.)

There exists the potential for favorable taxation on cash flows generated by the ETF, since capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds.

Fundamental Analysis

A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

The end goal of fundamental analysis is to produce a value that an investor can compare with the security’s current price, with the aim of figuring out what sort of position to take with that security (underpriced = buy, overpriced = sell or short).

Model Differentiation

Models are assigned a Risk Category and Composition Title.

The risk categories include:

  • Ultra-conservative
  • Conservative
  • Moderate
  • Moderate-aggressive
  • Aggressive
  • Ultra-aggressive
Models

Client accounts are matched to one of our models based on their specific risk profile, account size and allocation needs. The models are actively managed using our Technical Leaders Portfolio Management System. Adjustments to holdings and allocation are proactively made by our investment committee.

We welcome client input and participation in selecting the appropriate model. Client is encouraged to inform Waller & Wax Advisors if their needs or risk tolerances have changed, which may result in a shift to a different model.

Modern Portfolio Theory

A theory of how risk-averse investors can construct portfolios to optimize, or maximize, expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

According to the theory, it’s possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper “Portfolio Selection,” published in 1952 by the Journal of Finance.

There are four basic steps involved in portfolio construction:

  • Security valuation
  • Asset allocation
  • Portfolio optimization
  • Performance measurement
Mutual Funds vs. ETFs

Taxes: (For taxable , non-retirement accounts)
Mutual funds are a direct participation investment vehicle. During the course of mutual fund share ownership, capital gains and dividends realized inside the fund are passed through to the investor. This results in a tax impact on the investor’s tax return, regardless of whether mutual fund shares have been sold. The capital gain and dividend tax recognition normally results in an adjusted cost basis, thereby avoiding double taxation upon final sale of the mutual fund shares. This can be problematic if the mutual fund has a large amount of “embedded” capital gains that are recognized shortly after a taxable investor purchases the shares. When the mutual fund shares are sold, the remaining capital gain (or loss) must be recognized on the tax return. This means you could owe taxes even if the mutual fund lost money since you invested.

The structure of an ETF normally does not create a capital gain or dividend pass through. An ETF investor pays gains or losses when the ETF shares are sold.

Holdings and Fees:
Mutual funds have been around longer than ETFs. Normally, ETFs track an index. The index might represent an industry, sector, commodity, currency, etc. ETFs generally contain multiple holdings from the representative index. Index holdings rarely change, which means the holdings inside most ETFs rarely change. For this reason, the ETF expenses tend to be relatively low. Mutual Funds tend to be actively managed by professional managers. The elevated level of activity typically results in higher management expenses.

Newton's First Law of Motion

An object at rest tends to stay at rest, an object in motion tends to stay in motion.

Passive Allocation vs. Active Allocation

Passive Portfolio Allocation is used when a portfolio will remain allocated to a selection of investments regardless of trends and movements. The intent of passive investing is to experience lower costs associated with owning the positions. The trade-off is a tendency to own investments through complete market cycles. A majority of the investments may outperform or under perform at any given time. Investors in passive allocation portfolios generally need to change from one portfolio to another in order to change their holdings and reach the desired change in allocation. Active Portfolio Allocation adjusts the investments based on the changing fundamental, technical or economic environment (see TILT Methodology.) Active Allocation does not assure investors they will avoid downsides. The purpose of Active Allocation is to shift away from Asset Classes and/or investments that are declining once a confirmed technical sell signal is received. Conversely, Active Allocation may shift towards Asset Classes and/or investments when a technical buy signal is received.

Rebalancing

The process of realigning the weightings of portfolio assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain a desired level of asset allocation.

Relative Strength

A momentum investing technique that compares the performance of a stock, exchange-traded fund or mutual fund to that of the overall market. Relative strength calculates which investments are the strongest performers, compared to the overall market, and recommends those investments for purchase. Relative strength is a “buy high, sell higher” strategy that assumes a stock whose price has been rising will continue its upward trajectory.

Risk Categories

The differences are identified by two primary characteristics: Willingness to expose to an asset class and willingness to shift between asset classes.

Willingness to Expose:
An aggressive investor is more willing to expose to “risk on” classes of investments. A conservative investor would prefer a large spread between differing Asset Classes as a means to further diversify their portfolio.

Willingness to Shift:
An aggressive investor is more willing to shift between asset classes as strength moves. A conservative investor prefers to maintain diversification, regardless of where strength may lie.
Blending the two concepts together results in portfolios that may see large shifts in holdings between asset classes as the environment changes.

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, but instead, use charts and other tools to identify patterns that can suggest future activity.

TILT Methodology

The concept of shifting allocations between Asset Classes designed to focus on areas of relative strength, while de-emphasizing or eliminating exposures to areas of relative weakness.

Wrap Account

An account in which an investment manager or investment advisor charges one straightforward fee in lieu of transaction commissions. The wrap-fee represents compensation for a bundle of services, such as investment advice, investment research, brokerage services and financial planning/wealth management services.

Wrap fees are generally set up to be a percentage of the assets under management. The wrap-fee is typically assessed quarterly and replaces traditional commissions that would otherwise be assessed on a per-transaction basis. The wrap fee is intended to provide payment for all the direct services the customer receives, as well as cover the administrative costs incurred by the investment firm.

This glossary is being provided in our subsequent data packet of our client Investment Plan. The purpose is to provide basic knowledge of some basic investing concepts as well as some of our processes and policies used to construct and manage their portfolio.

Investors should consider the investment objectives, risks and charges and expenses of mutual funds and exchange-traded funds carefully before investing. The prospectus contains this and other information about mutual funds and exchange-traded funds. The prospectus is available from your financial advisor and should be read carefully before investing.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV Part 2A as well as the client agreement.

Raymond James and Waller & Wax Advisors do not provide tax advice. Please consult your tax advisor.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Waller & Wax Advisors is an Independent Registered Investment Advisor.