Office of Investment Management

Glossary of Endowment and Investment Terms

Alternative Investments

A type of investment strategy contrasted to traditional, marketable investments such as stocks and bonds; typically, these investments include private equity (venture capital, leveraged buyout funds), real estate, distressed securities, oil and gas funds, hedge funds, managed futures, emerging markets and timberland. These assets are less liquid and have lower correlations to traded securities. Pepperdine University’s endowment invests in alternative investments classified within the categories of absolute return, private equity, and inflation-hedged strategies. This asset class is used to diversify risk and it has the potential for above average returns relative to marketable stocks and bonds.

Absolute Return Fund

An investment program capable of producing consistently positive returns regardless of market direction. Typically, such a fund is a low volatility and low correlation strategy offering diversification.

Asset Allocation

The distribution of endowment or investment pool assets among various asset classes (e.g., cash, equities, bonds, real estate, venture capital, etc.).

Average Annual Total Return

A hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total returns smooth out variations in performance; they are not the same as actual year-by-year results. Also known as compounded annual return.

Bonds

Any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity.

Cash and Cash Equivalents

Short-term liquid assets (e.g., Treasury bills, commercial paper, certificates of deposit, nonconvertible bonds with remaining maturities of under one year).

Inflation Rate - CPI

Measured in terms of Consumer Price Index (CPI) to reflect changes in the price of goods and services. Affects the purchasing power of endowment.

International Securities

Stock or bond investments traded overseas or outside of the U.S. financial markets. Differs from the term global investments which includes securities traded in American markets.

Investment Management Fees

Charges incurred for the external or internal management of assets; in addition, bank custody fees are included.

Quasi-Endowment

A type of endowment which is treated as permanent capital and functions like a true endowment. Permits spending of principal and income as provided in the gift agreement or by administrative authorization.

Spending Rate

Expressed as a percentage of market value, it represents amounts withdrawn from an investment pool or endowment. Distribution is calculated as an annual rate and may include earned income as well as net realized or unrealized gains.

Spending Policy

The guideline an institution uses to determine annual distributions from its endowment (e.g., spend all income, spend 5% of three-year moving average market value, increase spending by 5% each year). Pepperdine’s endowment spends 5% of a five-year moving average.

Stocks

Ownership positions in companies that can be traded. Often produce current income, which is paid in the form of quarterly dividends. The holders’ claims are subordinate to the claims of preferred-stock holders and bondholders. Also referred to as equities.

Total Return

The change in value of an investment in a portfolio over a given period. Total return is the sum of income and dividends plus or minus any realized and unrealized gain or loss. Performance for the endowment is usually measured in terms of total return.

True Endowment

Assets donated for support of designated activities to provide permanent capital and an ongoing stream of current income for the University. True endowments are intended to support an activity in perpetuity.

Yield

The rate of income earned on invested assets calculated as a percentage of total market value; consists of interest and dividend income earned from cash, money market, bond, stock, or mutual fund holdings as well as rent or royalty from property or partnership investments.