A

Accumulation funds

Also called a defined contribution fund or allocated fund. It is a fund in which the benefit a member receives is the total of their contributions plus interest earned on those contributions, minus expenses and tax. It works in a similar way to a savings account.

Active style management

An investment management style where the manager uses their skills in selecting and trading a portfolio of shares or bonds, seeking better performance than the index against which they are measured.

Managers will vary their strategy depending on current market conditions. The investments are reviewed on a regular basis so that the manager is in a position to benefit from movements in the market or from growth in individual assets. There are two major components of active management: asset allocation and stock selection.
Compare with: passive style management

ACTU

The Australian Council of Trade Unions.

Administration fee

The fee charged by a fund against a member's account to cover administration costs. Most industry funds charge a low flat fee, expressed as an amount per week, which often reduces when the member is no longer receiving employer contributions.

Allocated pension

A type of retirement income arrangement under which an individual invests a lump sum and then draws down a regular pension to a value that takes account of expected cashflow needs and life expectancy.

Alternative assets

Mainly development capital investments, which are typically investments in unlisted companies. These companies may be new companies or companies that are expanding. Because these development capital investments are growing companies and are not yet listed on the stock exchange, they may take longer to sell than ordinary shares. Alternative assets may also include investments that are not measured against an index such as the Australian Stock Exchange, for example hedge funds.

Annuity

An arrangement whereby payments are made to a person at regular intervals in return for the investment of a lump sum.
See also: pension; allocated pension; deferred annuity

Asset backing

The value of a company's assets that underpin its issued stocks. Some companies may have a strong asset backing even if the dividends they pay on stocks are relatively low.

Asset class

Refers to a category of financial assets; for example, shares, property, bonds and cash.

Assets

The financial resources in which a fund invests on behalf of its members. Among other things, these may include shares, property, cash or bonds.

Assets under management

Investment managers and superannuation funds both use the term 'assets under management', which refers to the assets in all classes that are managed.

ATO

The Australian Taxation Office.

Australian Prudential Regulation Authority (APRA)

The Federal Government body responsible for the regulation and monitoring of the insurance and superannuation industries.

Average price

The mean, or average price, obtained in the purchase of a large number of shares or units.

Award

An agreement between employers and employees - usually in a particular industry - that has been ratified by a State or Commonwealth Industrial Tribunal. The award will set out salary levels and terms and conditions of employment.

Award superannuation

Superannuation entitlements that are determined by a Federal or State industrial award. In some cases these entitlements may provide entitlements to employees which are additional to the minimum requirement of the Superannuation Guarantee.

B

Balanced fund

An investment portfolio that spreads its holdings over a range of high-growth and lower-growth asset classes. An average balanced fund is often used as a benchmark for funds to compare their investment performance.

Basis point

The measurement of fluctuation in the value of an investment, equal to 1/100th of one per cent.

Bear market

A market in which prices decline sharply in light of widespread pessimism about economic conditions. The opposite of a 'bull market' (see below), and generally shorter in duration.

Benchmark

Usually represents the minimum performance objective for an investment portfolio.

Benchmark allocation

The 'benchmark allocation' is the amount normally invested in an asset class and is usually expressed as a percentage or a range of the total assets of the investment plan.

Beneficiary

The person/s a member has nominated to receive their superannuation benefits in the event of the member's death. The person/s must be either a related dependant or a financial dependant.

A related dependant is a spouse (including de facto spouse), children (including stepchildren or adopted children, and any children not yet born. A financial dependant is anyone who receives regular financial assistance from the member and who was wholly or partially dependent on the member at the time of the member's death.

It is important to note that a fund will consider a member's preferred beneficiary/ies but will take into account all relevant circumstances at the time. This means it may not pay a member's benefits strictly in accordance with the information the member has provided.

Benefit

The amount of a member's entitlement in a fund, or, in the event of the member's death, the amount to which other beneficiaries are entitled. Other than in cases of death or disablement, most benefits are only payable on termination, and may be subject to preservation.

Benefit payment fee

A fee charged against a member's account to cover the costs of processing a benefit payment. Most industry funds have very low flat fees.

'Best of sector' approach

An approach to investing that considers companies in all industries but selects only those companies that have achieved superior performance in their sector compared with other companies in their sector within a given 'screen'. Types of screens include negative screens and positive screens.
See also: screening

Blue chip

A term referring to the shares of a leading company that is known for excellent management and a strong financial structure. The term has become a generic one used to refer to quality stocks.

Bonds

A debt security issued by corporations, governments or their agencies, in return for cash from lenders or investors.

Bonus shares

Shares issued by a corporation to its existing shareholders on a pro-rata entitlement basis.

Books closing date

The date a share registry is closed off after the declaration of a dividend so that the amount to be paid to each shareholder can be determined.

Book value

The price paid for a security, as opposed to its current worth or market value.

Bottom-up analysis

Analysis of a security commencing with forecasting returns for individual companies, then moving up to industries and finally to the whole economy.
Compare with: top-down analysis

Brokerage

A fee charged by a broker for the execution of a transaction; usually expressed as a percentage of the total value of the transaction.

Bull market

A market in which prices rise in light of widespread optimism about economic conditions.

Buy-back

In relation to derivative markets, an offsetting purchase to 'cover' or liquidate a short sale.

Buy/sell differential

The difference between the buying and selling price of a stock.

C

Capital

The wealth of an individual or company that can generate an income. Capital can be held in the form of cash or securities such as shares or property. Also refers to funding for investment in capital assets or to operate a business.

Capital gain/loss

The difference between the purchase and sale price of a capital asset, such as stocks.

Capital Gains Tax

A tax on the increase in the capital value of investments, payable when the capital gain is realised (i.e. when the investment is sold). Capital Gains Tax is indexed so that increases in value due to inflation are not taxed as well.

Capital growth

Occurs when the sale price of an investment exceeds its original price.

Capital guarantee

An investment product that provides a full or partial guarantee that the original amount invested (the capital) will be returned to members; that is, it won't be reduced due to poor investment returns.

Capital movement

Refers to the rise and fall of the value of shares.
See also: capital growth

Cash

Currency of a country or one of the lower-growth asset classes invested in as part of a typical diversified investment portfolio.

Closing price

The price at which the final transaction in a stock took place on a particular business day.

CMSF

Conference of Major Superannuation Funds.

Co-Contribution

Under the Federal Government Co-Contribution Scheme if a member earns less than $40,000 p.a. the Government will match a payment made by a member of up to $1,000 providing that they meet certain eligibility criteria and also make a personal contribution to their superannuation account. The amount the Government contributes will be dependent on the amount that the member contributes and what they earn.

Collective or managed investments

A type of investment vehicle that pools the assets of multiple investors into a single vehicle with a common investment objective and strategy.

Complying fund

A superannuation fund that complies with the operational standards specified in the SIS Regulations.

Compound interest

Interest that is calculated on the balance of your account, which includes the interest earned previously.
Compare with: simple interest

Contribution

A contribution is the money deposited into a superannuation account by either an employer or a member and does not refer to rollover or transfer amounts.

Contribution tax
See: Superannuation Concessional Rate.

Core portfolio

A portfolio of investments comprising the bulk of a fund's assets, which is invested in a controlled fashion in order to secure the funds liabilities with a reasonable degree of confidence.

CPI

The Consumer Price Index (CPI) is an index used to measure the prices of a select group of goods and services that typify those bought by ordinary Australian households. This index is used to measure inflation.

Crediting rate

The rate of interest paid to members on their account balance, usually expressed as a percentage per annum.

Cum dividend

The opposite of 'ex-dividend' (see below). Refers to a share or unit which is trading in such a way that buyers, rather than sellers, qualify to receive the next dividend payment. The payment amount is usually reflected in the price of the share or unit in question.

Cum rights

The opposite of 'ex-rights' (see below). A share that is trading in such a way that buyers receive the right to a new issue, usually resulting in a higher price.

Currency overlay or management

An investment management technique aimed at protecting an investor's overseas currency exposure, by adjusting the exposure frequently. This is designed to minimise losses when the currency loses value, but maximise growth when the currency value increases.

Custodian

An organisation that safeguards and maintains assets on behalf of other people. Unlike a trustee which 'owns' the assets, a custodian is solely responsible for holding assets on behalf of others.

D

Death benefit

The amount payable to a member's beneficiaries and/or dependants in the event of the member's death.

Death insurance (death cover)

An insurance arrangement whereby the member's beneficiaries and/or dependants receive an insured amount in the event of the member's death. Many funds offer a range of choices as to the level of cover, often expressed as the amount of cover per unit of insurance. It is common for the amount of cover per unit to decline as a member's age increases, as a result of the increased risk of death as a person ages. In many cases, insurance cover ceases shortly after an employer ceases contributions on behalf of a member. Insurance premiums are usually deducted from the member's account.

Default

A standard selection for those who do not exercise choice on investments.

Deferred annuity

A type of retirement income that begins payment of income at a future date.

Dependant

A dependant can be either a related or a financial dependant.

A related dependant is a spouse (including de facto spouse), children (including adult children), stepchildren or adopted children, and any children not yet born. A financial dependant is anyone who was wholly or partially financially dependent on the member at the time of death. A financial dependant is someone who receives any financial assistance from the member on a regular basis, even if it is only small, such as help with bills or buying food.
See also: beneficiary

Development capital

Usually refers to investments in relatively small, unlisted companies that have an established track record in their field of business, and that require this new funding to finance their expansion.
See also: venture capital

Direct property

Investments held directly in real estate, as opposed to investing in property through a property trust.

Disablement insurance

An insurance arrangement whereby the member may be paid a benefit in the event of becoming disabled. Different funds have different arrangements which may cover total and permanent disablement (TPD) or temporary disablement, and many give members the option of choosing their levels of cover. In many cases, insurance cover ceases shortly after an employer ceases contributions on behalf of a member. Insurance premiums are usually deducted from the member's account.
See also: total and permanent disablement

Dividends

The amount a company pays out to its shareholders from its after-tax earnings. For individual shareholders, the payout is in proportion to the number of shares held. When company profits are down, the company may decide to pay a reduced dividend, or no dividend at all.

Dividend imputation

A system whereby tax paid at the company level is credited to individual shareholders. The amount of dividend imputation is determined by assessing shareholders' total dividend and the imputation credit (see below), and then allowing them to claim a tax rebate equal to the imputation credit.

Dividend yield

The return on share investment, calculated by dividing the dividend rate (in cents per share) by the current share price and expressed as a percentage.

E

Earning rate

The rate of return to the fund on the monies invested by the fund, usually expressed as a percentage per annum. Note that this may vary from the funds crediting rate.

Earnings per share

A measure of a company's performance, calculated by dividing the company's net operating profit after tax by the number of shares on issue. What the investor actually receives is known as 'dividends per share', which is the proportion of earnings actually paid to shareholders.

EBIT

Abbreviation for 'earnings before interest and tax'; one of the key measures used by investment analysts to assess corporate performance.

Eligible employee

An eligible employee is anyone who receives payment in the form of salary or wages in return for their labour or services.

Under the Superannuation Guarantee legislation employers do not have to make superannuation contributions for the following: employees paid less than $450 in a calendar month; employees aged 70 years and over; employees under age 18 working 30 hours or less per week; non-resident employees paid for work done outside Australia; resident employees paid by non-resident employers for work done outside Australia; some foreign executives who hold certain visas or entry permits under the Migration Regulations 1993 and 1994; employees paid to do work of a domestic or private nature for no more than 30 hours a week; employees who receive payments under the Community Development Employment Program; members of the Army Reserve; employees electing not to receive Superannuation Guarantee support because their accumulated superannuation benefits exceed the pension Reasonable Benefit Limit.

Please note that many employees are also covered by industrial awards or agreements which do not allow all of the above-mentioned exemptions. In those situations superannuation contributions will still be required in accordance with that industrial instruments' requirements.

Eligible rollover fund (ERF)

A fund that is eligible to receive benefits automatically rolled over from other funds. Most industry superannuation funds have procedures in place to automatically transfer to an ERF member accounts with very low account balances where a member has been inactive for a substantial period of time or when the member cannot be traced. This is designed to protect low balance accounts from fee erosion.

Eligible Termination Payment (ETP)

Any lump sum payment from a superannuation fund, an employer on termination of employment, or a rollover fund, such as an approved deposit fund (ADF). If the recipient is under age 65, the ETP can be paid into a superannuation fund, an ADF or a deferred annuity, which may defer and/or minimise tax liability.

Employer contributions

The amount of money contributed by a person's employer to a superannuation fund on their behalf. Employer contributions are subject to tax (currently 15% for most employees).

Employee contributions

An employee contribution is money contributed by the member from their after-tax salary and is not taxed when deposited into the superannuation account provided the employee has not claimed a tax deduction for the contribution. Such amounts contributed from 1 July 1999 are preserved.

Employer-sponsored fund

A superannuation fund where a number of employers participate by making contributions on behalf of their employees.

Employment agreement

An agreement between employers and employees that sets out salary levels and terms and conditions of employment.

Equities

Another name for stocks or shares.
See also: stocks

Ex-dividend

The opposite of 'cum dividend'. A term meaning 'without dividend'. Refers to a share price quoted on the basis that the seller, not the buyer, is entitled to the current dividend on the share.

Expected rate of return

The weighted average of all possible returns on an asset or portfolio. The weights represent the probabilities that the outcomes will occur.

Ex-rights

A term meaning 'without rights'; denotes a share price which is quoted on the basis that the seller, not the buyer, is entitled to the current rights offer on the share.

F

Financial hardship

The financial hardship provisions are requirements of the Federal Government, with which the Fund must comply.

Fixed interest

Interest income that remains constant, such as income derived from bonds, annuities and preference shares.

Floating notes

Long-term debt securities whose interest rates are adjusted periodically in line with a benchmark rate.

Franked dividends

Dividends on stocks with imputation credits attached (see below). A company can declare that a percentage (up to 100%) of a dividend is franked, depending on the amount of tax the company has already paid. If a company pays the full tax rate of 30% (2003/2004), the dividends are 'fully franked'.

Fundamental analysis

Analysis of investments based on factors such as sales, earnings and assets that are fundamental to the investment.

G

Gross domestic product (GDP)

A measurement (in dollars) of the goods produced and services provided within an economy over a 12-month period. It excludes income earned outside the country.

Growth

Refers to the returns from investments that exceed inflation.

Growth assets

A general term for assets such as shares and property that provide investment returns that outperform inflation.

Growth investing

Investing for capital gain through company earnings.
See also: capital gain

Growth investor

An investor who seeks capital gain from expected further growth in company earnings.

H

Hedging

The practice of undertaking an investment activity in order to protect against losses in another activity. While hedges reduces potential losses, they can also reduce potential profits. Typical hedges include currency forwards and share and bond futures.

Holding period

The length of time over which a stock is held.

I

Imputation credit

Tax credits that are passed on to shareholders who have receive franked dividends (see above) in relation to their shareholdings.

Inactive member

An employer-sponsored member of a fund who has not received any employer contributions to his or her account for an extended period of time (a minimum of 15 months).

Index fund

An index fund is a portfolio of securities structured in such a way that its value will closely follow a nominated market index. There are three main methods in use: 1) replication, which involves buying every security in the index in the correct proportion; 2) stratified sampling, which selects a sample of stocks according to simple criteria, such as size and industry grouping, to achieve an approximate tracking at a lower administrative cost; and 3) optimised sampling, which uses a statistical risk-matching process to design a sample of stocks for any particular desired level of tracking accuracy. Index funds can be designed for shares (domestic or overseas), bonds or property trusts.

Index style management
See also: passive style management

Industrial shares

Shares of companies that produce or sell goods or services, as distinct from resource or mining companies. Industrials make up about two-thirds of the Australian sharemarket by market capitalisation.

Industry superannuation fund (industry fund)

A multi-employer superannuation fund, which will normally cover employees in a particular industry or group of industries, or in a particular geographical area. Many industry funds have large memberships. Their economies of scale, and the fact that they are 'not-for-profit' and do not pay any fees or commissions to agents, make them extremely effective in keeping down costs to members. These funds have trustee boards with equal representation for employers and employees, and have been a very effective vehicle for the implementation of universal superannuation for Australian workers.

Inflation

An increase in the prices of goods and services in the economy. It is typically measured by examining a basket of goods and services, e.g. by the Consumer Price Index.

Information ratio

Used to measure a manager's performance in terms of both risk (i.e. volatility) and return, relative to a benchmark or other measure, e.g. the inflation rate.

Initial public offering (IPO)

The first sale of a company's shares to the public.

Insider trading

The illegal practice of trading in stocks on the basis of 'inside' or secret information which is not available to the general public.

Intraday suspension

Where trading on a listed ASX stock is suspended, then resumes, within the same business day.

Insurance premiums

The sum of money paid to purchase insurance against death or disablement. The premium is normally deducted from the member's account, although in some cases the employer makes a direct payment for their employees' insurance premiums, and no charge is made against the member's account.

Interest rate

The return on money invested, usually expressed as a percentage per annum.

Internal rate of return

The rate of discount that needs to be applied to make the net present value of an investment equal to the price paid.

Investment choice

An arrangement whereby members of a fund are offered a choice of investment options within the fund. The choices generally give members a range of options in terms of risk and expected return. In most cases, there is a default option which applies to those members who do not decide to make a choice or who are not eligible to make a choice.

Investment management fee

The fees charged by an investment manager for their services. The fee is normally charged as a percentage of the funds invested, and is often passed on to members as a cost taken out before rates are declared.

Investment manager

An organisation appointed by a fund to manage the investment of part of the fund's assets. It is common for funds to appoint a range of investment managers, who may have specialist expertise in particular areas of investment. Appointing a range of investment managers also has the advantage of spreading risk.

Investment vehicle

An asset such as stocks, bonds, mutual funds, options, futures or a property trust which is invested in with the aim of achieving a financial return.

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