ABC of useful terms
An 'active' manager aims to add value by securities selection decisions (i.e. buying or selling assets in a portfolio in order to outperform the index for a particular asset class). For example, an active NZ shares manager might buy or sell different NZ shares to try and outperform the NZX 50. Active fund managers usually have teams that analyse all the available information and use complicated forecasting techniques to get the best performance for the funds they manage. Opposite of a passive manager.
An 'active' manager seeks to add value by actively seeking stocks that will provide a superior return.
A portfolio designed to provide above-average returns by taking above-average risks. Typically an aggressive portfolio has a relatively high proportion of its assets invested in growth assets (e.g. shares).
All shares, bonds, cash etc owned by the scheme.
The mix of asset classes in an investment portfolio.
Broad category of assets of a similar type. Major asset classes include shares, property, fixed interest and cash. Each asset class typically has its own risk, return and liquidity characteristics meaning the mix of asset classes within a portfolio impacts the risk and return profile of a portfolio.
Authorised Financial Adviser (AFA)
The only people authorised by the Financial Markets Authority (FMA) to provide advice about products with more of an investment focus such as shares, managed funds (including superannuation schemes) and KiwiSaver. All AFAs are required to comply with a Code of Professional Conduct and meet minimum standards for competence, knowledge and skills, client care, ethical behaviour and ongoing professional training.
A balanced fund aims to achieve both capital growth and income and generally contains a fairly even split (generally 50%/50% or 60%/40%) between growth assets (such as shares and property) and defensive assets (such as cash and fixed interest).
Period of sustained share market decline. Opposite of a bull market.
Benchmark asset allocation
The benchmark is the long-term target mix of investments. Over shorter periods the actual mix may vary from this benchmark but will stay within set ranges.
A person who has a beneficial interest in the scheme. For example, members or (depending on the provisions of the scheme's trust deed) their dependants.
The term usually refers to shares in large, well-established companies that have performed well over a long period and have a consistent record of paying dividends.
A bond is a security issued by a government or company to raise money. The purchaser of the bond effectively lends money to the government or company issuing the bond and receives interest at a fixed rate until a specific date (maturity), when the investor receives back the amount of the original loan. The price of bonds fluctuates as interest rates move. If rates rise, bond prices fall. If rates fall, bond prices rise.
A prolonged period of growth through rising share prices. Opposite of a bear market.
The difference between the entry price and exit price of units. This difference represents an allowance for costs, expenses, commissions, brokerage and other fees which would be incurred in buying and selling part or all of the underlying investments of each investment option, and is commonly referred to as the buy/sell spread or buy/sell margin.
The money you initially put into an investment. (For example, if you invest $100 in a bank term deposit this is your capital amount on which you get paid interest.)
Increase in the capital or market value of an investment, as opposed to income which may be received from the investment from time to time.
Any financial market upon which securities are traded, including the range of publicly-traded securities, such as shares, fixed interest and short-term securities.
Cash includes short-term (less than one year) interest bearing investments, and are quickly convertible to cash (e.g Treasury Bills).
A commodity is any raw material, such as oil, gold and cattle, traded on an exchange or in the cash market. The main commodity groupings are energy (oil, gas etc), agriculture (wheat, corn, soya beans, coffee, sugar, cotton etc), industrial metals (aluminium, copper, zinc etc), precious metals (gold, silver etc) and livestock (live cattle, lean hogs etc). Returns from commodities are independent of shares and fixed interest returns. Therefore, adding broad commodity exposure can help diversify a portfolio, lowering risk and potentially boosting return.
Complying superannuation fund
A registered superannuation scheme, or a section within a registered superannuation scheme, that has been approved by the Financial Markets Authority as having met certain criteria similar to KiwiSaver.
Interest paid on interest. For example, a $100 investment that earns 5% generates $5 per year. With compounding, it would generate $5 the first year, making a new basis of $105; then $5.25 the next year, for a basis of $110.25; $5.51 the next year and so on. In a managed fund, reinvesting dividends and capital gains takes advantage of the power of compounding.
A cautious approach to investing that takes only prudent risks with the aim of achieving a reasonable return.
Consumer Price Index (CPI)
Used to measure the rate of increase in inflation. In New Zealand, the CPI is based on a selection of household goods and services.
The money paid by you and/or your employer into your superannuation scheme.
The risk that funds invested overseas lose value as a result of movements in New Zealand's or international exchange rates (e.g. a rising New Zealand dollar).
A type of fixed interest security at a fixed rate of interest and for a fixed term, usually one to five years. The debenture is secured by a trust deed over an asset, or assets, of a company.
Investments used when trying to protect the investment from the chance of a negative return. Defensive assets tend to produce lower but more stable long-term returns than growth investments. Defensive investments include fixed interest and cash (also referred to as income assets).
Spreading investments among many different assets, asset classes, investment managers or countries to reduce risk. The theory is that if one asset is performing poorly, another may compensate by performing well.
A payment from a company's profits to its shareholders in proportion to the number of shares the shareholder owns (typically a payment of cash).
The rise and fall of the economy, from a peak, or boom, to a trough and back to a peak. The length and duration of each phase is not predictable.
The emerging markets comprise financial markets within developing economies (i.e. those nations whose economies are considered to be developing - or emerging from underdevelopment - as defined by The World Bank). Usually include most or all of Africa, Eastern Europe, Latin America, Russia, the Middle East and Asia (excluding Japan).
Employer Superannuation Contribution Tax (ESCT)
Tax deducted from your employer's contributions on your behalf before they are paid into your scheme account.
Enduring power of attorney (EPA)
An EPA is a document where you appoint another person to act for you if you become mentally incapable.There are two different types of EPA: one for personal care, which concerns decisions such as how you should be looked after if you are unable to do it yourself and the other for property which is about how you would like your property and finances managed.
Another name for ordinary shares, representing part-ownership in a company.
Everything you own at the time of your death.
The overall process of working out beforehand how your assets are to be distributed on your death.
Expected rate of return
The rate of return expected on an asset or a portfolio. Typically, higher expected returns involve higher risk.
Financial Markets Authority (FMA)
The Financial Markets Authority regulates New Zealand's financial markets. Its role is to oversee securities, financial reporting, and company law as they apply to financial services and securities markets.
First home grant
This grant is administered by Housing New Zealand available to home buyers who have been contributing to a complying superannuation fund or KiwiSaver scheme for three or more years and meet certain other criteria. Visit http://www.kiwisaver.govt.nz/new/benefits/home-sub/ for further details.
Also referred to as bonds. Securities or investments in which the timing and amount of interest during ownership is fixed at the time of issue. Generally refers to any type of bond investment.
Float (or Initial Public Offer “IPO”)
The process of publicly offering shares to investors and listing on the sharemarket. A float may involve the issue of new shares to raise more capital for the company or the sale of shares owned by existing shareholders wishing to liquidate part or all of their shareholding. Float and “IPO” are terms often used interchangeably.
An agreement or contract that obligates a buyer to purchase and a seller to sell a specified quantity of an underlying asset at a future date and at a price agreed when the contract was executed.
Fixed interest investments excluding treasury bonds (and other government debt).
Government credit ratings
Government credit ratings take into account three main elements. These are public debt as a percentage of gross domestic product, the budget deficit (the amount government spending exceeds income) and debt affordability (interest costs as a percentage of revenue).
Bonds issued by a government.
The return on an investment before any taxes or fees have been deducted.
Growth investments generally include shares, property and real and alternative assets (such as roads, bridges, etc) which historically have tended to provide higher returns over the long term but experience more volatility (ups and downs or 'risk') in the short term.
A strategy used to offset investment risk. Often used as a defensive strategy in portfolios investing in overseas investments to reduce the negative effects of unfavourable moves in currency exchange rates.
The actual yield (return) of an investment over a given period, measured from the beginning of the period.
When a New Zealand company pays a dividend it may attach imputation credits to this dividend reflecting the tax the company has already paid on earnings (to the extent imputation credits are available).
Dividends in the case of shares and interest payments on fixed interest (bonds).
A benchmark return used to measure performance. For example, the NZX 50 is often used to measure the performance of New Zealand shares.
The rate at which the prices of goods and services increase over time, often equated with loss of purchasing power.
Inflation-linked bonds (ILBs)
Securities designed to help protect investors from inflation. Primarily issued by governments, ILBs are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation.
The risk that money invested may not maintain its purchasing power due to inflation.
Initial Public Offering (IPO)
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
Refers to the mix of asset classes allocated to an investment option. Each investment option has a potentially different mix according to its investment strategy and aims.
Guide to expected long-term returns, generally expressed as a return above the expected rate of inflation.
Profit or loss on your investment - usually expressed as a percentage.
See 'asset class'.
All members joining a superannuation scheme must be given a copy of the investment statement before they join. By law, the investment statement must include the answers to set questions so that a prospective investor can easily compare different investments.
There are no terms starting with the letter 'J'.
There are no terms starting with the letter 'K'.
Legislative or regulatory risk
The risk that changes to legislation and regulations could affect the effectiveness of an investment.
Level of risk
The likelihood of an investment producing a negative return.
A financial obligation being a debt or a promise to pay money (or moneys worth) for something in the future.
The degree to which an asset is easily turned into cash. Government bonds are an example of a very 'liquid' investment, because they can usually be sold at a moment's notice. Investment in unlisted property, on the other hand, has low liquidity, as it takes time to sell a property and receive payment and has substantially higher transaction costs.
The risk that an investment cannot be redeemed at a chosen time.
Includes investments in the infrastructure asset class listed on an exchange. Infrastructure typically includes assets such as roads, airports, ports, rail, utilities (generation and distribution of electricity, gas and water) energy (oil and gas pipelines, storage of oil, chemicals, biofuels etc) and communications (broadcast/mobile towers or satellites).
Listed property trust
A collective investment vehicle which owns a portfolio of real property (typically considered too large in value for normal investors), thus providing for a wider spread of ownership (by being broken down into units smaller in value). Listed property trusts are quoted on the stock exchange, and their prices fluctuate with supply and demand, as with equity investments. Unlisted property trusts are transacted directly with the trust's manager, who fixes the prices in relation to the established asset backing of the trust, with adjustments for expenses.
Balances in a KiwiSaver scheme or in locked-in accounts in a complying superannuation fund which must generally remain in a complying superannuation fund or KiwiSaver scheme until the member: - reaches New Zealand Superannuation age (currently 65 years); and - completes five years' membership of a KiwiSaver scheme or complying superannuation fund.
Long-term investment strategy
A strategy that looks past the day-to-day fluctuations of the investment markets and responds to fundamental changes in the financial markets or the economy. In investment terms, long-term generally means between 10-15 years.
Pooled fund which invests across a wide range of asset classes. Managed fund is a broad term which includes superannuation schemes, unit trusts, group investment funds (GIFs) and some life insurance. They combine money from many investors who seek a higher return by having professional managers buy, sell and hold shares within a portfolio of investments.
The risk that a particular fund manager will underperform.
Marginal tax rate
The rate of tax on which the last dollar of income is taxed (also the highest rate at which a person's income is taxed). Tax rates increase in a graduated scale, with the rate of income tax paid increasing as income exceeds certain amounts, called "tax brackets".
A business cycle concerned specifically with rises and falls in market activity, as measured by an index. Market cycles generally correspond to the economic clock, with periods of heavy purchasing indicating growth, and periods of heavy selling indicating recession.
The risk that investments in an entire asset class will lose value based on the daily fluctuations of the market (i.e. through movements in currencies or interest rates). It is the level of risk in the market that cannot be eliminated by diversification.)
The feeling of the investment community regarding the expected movement of the share market.
A (potentially dangerous) strategy of buying or selling investments in anticipation of changes in market or economic conditions.
Member tax credit
A contribution from the Crown matching your contributions to your KiwiSaver scheme of complying superannuation scheme at a rate of 50 cents for each dollar contributed up to a maximum of $521 a year.
Member tax credit year
1 July to 30 June in the following year.
New Zealand Superannuation
The pension currently paid by the government to all eligible New Zealanders aged 65 or over. To be eligible for NZ Super you also need to be a legal resident of New Zealand, having lived here for at least 10 years since you turned 20. Five of those years have to be since you turned 50.
The people or person nominated by a member to receive his or her benefit in the event that the member dies before his or her benefit from the scheme has been paid. Generally the trustee(s) will take any nomination(s) into account but may instead pay the benefit to any person who was dependent on the member immediately before the member's death. Refer to your scheme's investment statement for further details.
NZX 50 Index
The 50 largest companies listed on the New Zealand Stock Exchange measured by market capitalisation.
Official Cash Rate (OCR)
The interest rate the Reserve Bank charges on money it lends to NZ banks. Changes in the OCR can affect how much you pay on your mortgage and how much you earn on your savings.
A passive manager invests assets with the aim of replicating a specific index or benchmark (such as the NZX 50 in the case of a New Zealand shares manager). The strategy does not attempt to use active management to generate returns (opposite to an active manager).
An income paid at regular intervals to a retired person, by a government or through an employer superannuation scheme.
Per annum (p.a.)
PIE (Portfolio Investment Entity)
Types of savings or investment funds that have special tax advantages in that the income attributed to a member is taxed at the member's prescribed investor rate (PIR).
PIR (Prescribed Investor Rate)
Tax paid on income attributable to a member contributing to a PIE. The tax rate may be 10.5%, 17.5% or 28% and is calculated on the member's taxable income and PIE income over the last two tax years.
The risk that changes in current domestic and international policies may impact on investments.
A group of investments.
Price to earnings ratio (P/E ratio)
A method of valuing shares, calculated by dividing the closing price of a company's shares by its annual earnings per share.
Part of the economy owned by private individuals, companies or organisations.
Selling securities after they have risen in value to realise a gain.
Property investments can be 'direct' for example in office buildings, and shopping centres or 'listed' which is generally in the form of units in property trusts.
Legal document that contains detailed information about an investment including what the money will be used for, details about the people involved in the investment, important commitments the company has, and its most recent financial information. Under current legislation most employer-sponsored superannuation schemes do not have to issue a prospectus.
That part of the economy with public (government) ownership.
A measure of money's value in terms of what it can buy. Purchasing power is affected over time by inflation. Also called "buying power".
There are no terms starting with the letter 'Q.'
Includes investments in property, natural resources and infrastructure.
The return on an investment less the rate of inflation. If an investor earns a 10% return during a year when inflation is 4%, the real return is 6%.
Profit or loss on your investment - usually expressed as a percentage. A higher return usually means a higher risk.
A decline in general business activity measured as two or more consecutive quarters of negative GDP growth in an economy.
The chance that you might not get some or all of your investment back or the likelihood that returns will be lower than expected (e.g. interest or dividends or capital growth). Risk is also about volatility - the possibility that the value of your investment will go up and down.
The level of risk you are prepared to have in relation to your investments. Knowing your risk profile helps you choose investments that are right for you.
Sector specialist investment approach
Specialist managers are appointed to manage assets in each asset class or sector within the investment option.
A general term applied to all shares, debentures, notes and bonds.
When an investor sells a security that he or she does not yet own, but believes will fall in price so that it can be bought back later at a lower price.
Also known as equities or stocks, shares are issued by companies as a way to raise money. In return, investors become part owners of the company and are generally entitled to a portion of the profits (dividends). Investment returns will depend on how the company performs over time and on economic factors.
Socially responsible investment (SRI)
Involves making an investment decision based on principles of social responsibility in addition to the usual investment criteria. SRI considerations can include labour standards, environmental issues and social and ethical issues.
A bond issued by a national government within a given country and denominated in a foreign currency. May also be issued in the government's own currency.
The market place where shares are traded in companies that are listed. Currently, New Zealand's only registered exchange is NZX Ltd.
For an individual, the period between 1 April of one year and 31 March of the following year.
The amount of income on which tax is calculated.
In respect of superannuation scheme's, the Trust deed is a legal document setting out the rules for the establishment and operation of a superannuation scheme.
The people or corporate body appointed to run a scheme in accordance with the requirements of the trust deed. The trustee of a scheme must comply with certain legislative duties and has a fiduciary duty to the members of the fund.
A unit price is calculated by dividing the value of the underlying assets of an investment option by the number of units issued. Unit prices move up and down each day in line with the movement in the value of the underlying assets. As such, investment earnings (positive or negative) are reflected in the movement of unit prices.
The assets of each investment option are divided into units of equal value.
A type of managed fund.
Fluctuations in an investment's value through time.
A Will is a legal document in which the person who has made the Will sets out who will receive his/her assets on death.
There are no terms starting with the letter 'X.'
Return on an investment compared to either the original investment or the market value of the investment.
A graphic depiction of interest rates over various periods.
There are no terms starting with the letter 'Z.'