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Frequently Asked Questions


Are Transparent Value funds index funds?

Although we use indexes in our portfolio construction process, our funds should not be confused with a traditional index fund. A traditional index fund is normally created around a publicly available index and is generally used as a means of providing an investor with broad market or sector exposure. The Dow Jones RBP IndexesSM    are licensed exclusively to Transparent Value for use in our funds.

The Transparent Value Funds use an index merely as a disciplined method of portfolio construction; the end result is a mutual fund that aims to provide investors with a hybrid investment strategy combining the benefits of passive investing, transparency and rules, with the alpha generating potential of fundamental analysis generally associated with active portfolio management. The funds use a passive management strategy designed to track the total return performance of their respective Dow Jones IndexSM   . This works to minimize the errors that can result from inconsistency and emotion inherent in a purely qualitative investment process and avoids the rigid limitations of purely quantitative strategies.

Behind the RBP®   methodology is a team of over 75 financial professionals, who are responsible for constructing and maintaining the financial models, and analyzing each company using a traditional fundamental DCF approach. The process is disciplined and is applied consistently to every company.

Why do you use beta and momentum?

The Dow Jones RBP®   Directional Series IndexesSM    are unique from other indexes in the Dow Jones RBP®   IndexesSM    family in that they incorporate beta and momentum screens as selection criteria with the aim of mitigating systemic and behavioral volatility. In combination, these factors are intended to enable the RBP®   probability to generate a cleaner signal.

How do you maintain the quality of the Required Business Performance®   scores?

We have developed a robust quality assurance program that together with the Quality Assurance Committee, maintains a dialogue with our senior analysts to ensure that our policies and procedures are continuously and rigorously tested.

How frequently is a company model updated?

The standard update process coincides with a company’s quarterly financial reporting cycle. However, the models are updated daily to reflect the prior day’s stock price.

What is the coverage universe?

We currently cover approximately 1,300 U.S. large-cap and mid-cap securities, and 600 European Large-Cap securities. We also cover TOPIX 30, a Japanese index. We expect to expand coverage of U.S. securities by the end of 2010.

Is there universal/standard approach to analysis, i.e. number of templates?

There are seven templates designed around the structure of financial reporting standards for various industries. The templates contain the discounted free cash flow models, RBP®   calculations, and probability calculations. While the format of the financial statements differs, the underlying calculation of RBP®   is the same.

Standard templates cover the following industries:
  • Energy/Oil & Gas
  • Real Estate
  • Banking
  • Home Builders
  • Broker Dealers
  • Insurance
  • Commercial

The most common industry classification, Commercial, refers to all sectors that do not fall into one of the other categories. In addition to the broad templates, there are standardized business models for various industries. These are the models that evaluate a diversified company’s individual lines of business and their contribution to total RBP®   .

What Cost of Capital is used in the financial models?

Transparent Value analysts use Weighted Average Cost of Capital (WACC) in all of the financial models. WACC is the weighted average of the cost of equity and the cost of debt based on the proportion of debt and equity in the company's capital structure. The proportion of debt is represented by Debt/Total Value, a ratio comparing the company's debt to the company's total value (equity + debt). The proportion of equity is represented by Equity/Total Value, a ratio comparing the company's equity to the company's total value

Glossary
RBP®
The revenue growth necessary to support the current stock price. Required Business Performance®    is used as a benchmark against which to measure management’s ability to perform in the future. It is calculated using a reverse discounted cash flow valuation model that uses the current stock price as the primary input.
RBP® Probability
The likelihood that management will deliver the Required Business Performance®    to support the stock price. It is calculated by fitting the company’s historical revenue growth to a distribution, then finding the company’s Required Business Performance within this historical distribution.
In the hypothetical example below, the company’s RBP®    Probability, represented by green, is 35% while its Behavioral Risk Indicator, represented by red, is 65%. RBP® Probability
Behavioral Risk Indicator
The likelihood that investors’ systematic behavioral biases have caused misalignment between the stock price and management’s ability to deliver. The Behavioral Risk Indicator is designed to capture the impact that human psychology has on the subjective valuation process used by investors. It is defined as one minus the RBP®  Probability.
In the hypothetical example below, the company’s RBP®    Probability, represented by green, is 35% while its Behavioral Risk Indicator, represented by red, is 65%. Behavioral Risk Indicator
RBP® Methodology
A system of fundamental stock analysis that uses a reverse discounted cash flow valuation model to determine what the stock’s current price implies in terms of future free cash flow and revenue (Required Business Performance®    ) as well as the calculation of the likelihood that management can deliver the Required Business Performance®    , known as RBP®    Probability.
RBP® Platform
The Transparent Value decision support tool consisting of an interactive database containing the proprietary data produced by Transparent Value. Included are the Required Business Performance®    (RBP®   ) values, RBP®    Probabilities and Behavioral Risk Indicators for more than 2,000 global stocks, the Transparent Value mutual fund rating system providing coverage of more than 3,000 funds, and also broad market indicators.
RBP® Snapshot
Provides updated company-specific RBP®    information based on the company's most recent quarterly financial data. The RBP®    Snapshot consists of the RBP®    probability and RBP®    values for a particular company.
The Funds are new and have limited operating history. An investment in the Funds involves risks, including loss of principal. No assurance can be given that the investment objectives described herein will be achieved. The Funds seek to track a quantitative strategy index, meaning that the Funds invest in securities comprising an index created by a proprietary model. The success of the Fund’s principal investment strategies depends on the effectiveness of the model in screening securities for inclusion in the Index.

For more complete information about the Funds, see the prospectus or call 1 (888) 727-6885. Financial Advisors should call 1-855-TV Funds or 1-855-883-8637. Read the prospectus carefully before you invest or send money.

ALPS Distributors, Inc is not affiliated with Guggenheim Investment Management, LLC, Transparent Value Advisors, LLC (“TVA”) and/or Guggenheim Partners, LLC. TVA and ADI are not affiliated with Dow Jones. Transparent Value Funds are distributed by ALPS Distributors, Inc (“ADI”).

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