Glossary Of Terms
- Account-Based Pension
A type of pension purchased with super money on retirement or in transition to retirement. You can choose the amount of pension you receive each year within limits set by law. Your super money is invested and progressively drawn down until the account balance runs out. Account-based pensions were previously known as allocated pensions.
- Accumulation Fund
A superannuation fund where the benefit received by the investor is determined by the contributions that have been invested and the investment earnings, less any fees and taxes.
- All Ordinaries Accumulation Index
A measurement of the average movements in share price of a selection of major Australian companies listed on the Australian Stock Exchange. It is an accumulation index, which means that it assumes that dividends have been reinvested.
A measure of the difference between a fund's actual returns and its expected performance, given its level of risk as measured by beta. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates the fund's underperformance, given the expectations established by the fund's beta. A measure of the difference between a funds actual returns relative to a benchmark, and is often referred to as the excess return.
A regular guaranteed income in eschange of a lump sum investment, usually for the purposes of retirement income. The rate of return is fixed at the beginning and does not change (apart from being indexed by inflation if chosen).
The increase in the value of an asset.
- Asset Allocation
A representation of how a portfolio is invested among the various available asset classes. For example, a balanced fund may have an asset allocation of 30% Australian shares, 25% international shares, 10% property, 20% fixed interest, 10% international fixed interest, 5% cash.
- Asset Classes
The major asset classes are shares, property, fixed interest, alternative investments and cash. All asset classes have different risk and return characteristics.
- Average Market Capitalisation
The average market capitalization of a fund's equity portfolio gives you a measure of the size of the companies in which the fund invests. Market capitalization is calculated by multiplying the number of a company's shares outstanding by its price per share.
- Average Weekly Ordinary Time Earnings (AWOTE)
A measure of wage and salary levels of employees in Australia as measured by the Australian Bureau of Statistics and published monthly. Economists and others use AWOTE as one indicator of economic activity and wage inflation trends. The government uses movements in AWOTE to index certain super thresholds.
- Balanced Fund
Sometimes called a diversified fund, a type of managed fund whose investment strategy is to have some proportion of its investments in all major asset classes, and to create a risk/return balance between different types of investments.
- Bear Market
A market that is decreasing over time. The opposite to a bull market.
A person entitled to, or in receipt of, a benefit. Usually an employee, a super fund member, a related dependant or any financial dependants.
In relation to superannuation, the amount of money you are entitled to receive from your superannuation fund as a lump sum or income stream.
A measure of a fund's sensitivity to market movements. The beta of the market is 1.00 by definition. A beta of 1.10 shows that the fund has performed 10% better than its benchmark index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the fund's excess return is expected to perform 15% worse than the market's excess return during up markets and 15% better during down markets.
- Binding Nomination
In your super fund, you indicate to the trustees your preferred beneficiaries in the event of your death together with the amount and type of payment you desire the recipient to receive. In this instance the Trustee has no choice but to follow your instructions - effectively a Binding Nomination removes the trustees discretion. Binding nominations must be reviewed at least every three (3) years.
- Blue Chip Shares
Shares in well established companies that have historically shown ability to pay dividends in uncertain markets.
An agent who executes an investor's orders to buy or sell securities, or assists individuals in selecting and arranging an insurance policy.
- Bull Market
A market that is increasing over time. The opposite to a bear market.
- Business Expenses Insurance
Insurance that helps you pay your fixed business expenses that continue if you become unable to work and earn your income as a result of sickness or accident.
- Buy/Sell Insurance
Insurance that provides part or all of the funding for the transfer of a business interest from one owner (and their family) who suffers a triggering event (e.g. death, disability or trauma) to the surviving owners.
- Capital Gains Tax
A tax on the gains of an investment, payable only when the investment is sold or disposed of in some other way.
- Capital Gains/Growth
Occur when the market value of an investment increases above what it cost to purchase .
- Compound Interest
Interest calculated on the principal and interest already accrued.
- Concessional Contributions
Contributions to superannuation which are generally made from before-tax money, such as employer contributions including salary sacrifice, and personal contributions for which a personal tax deduction is claimed.
- Consumer Price Index (CPI)
An index measuring the prices of items of goods and services. Allows comparison of the relative cost of living over time, typically known as inflation.
Money deposited into an investment or your superannuation fund by you or on your behalf (excluding rollovers which are not considered to be contributions).
- Contributions Tax
Tax charged on assessable income of superannuation fund. This tax (currently 15%) is applied to assessable contributions, including employer, salary sacrifice and personal deductible contributions and investment earnings.
- Credit Risk
The risk that a borrower can not repay a loan or that a lender can not repay the principal and interest back to the borrower.
- Currency Risk
The risk that the changing value of currency either in Australia or overseas may change the value of any overseas investment.
- Deductible Expenses
Expenses that can be offset against income assessable for tax. Some contributions to superannuation funds may be deductible to individuals.
- Defined Benefit Fund
A superannuation fund which defines the member's retirement benefit as a multiple of their salary. The multiple is usually based on the member's period of service and is not linked to contributions made over the period of employment. The opposite to a defined contribution or accumulation fund.
- Dependant (SIS)
These are the people who can receive a benefit from your super if you die. They include a spouse (including a legal or de facto partner of the opposite sex or same sex), child(including adopted child, stepchild, or spouses child, regardless of age), financial dependant, or interdependant
- Dependant (Tax)
For tax purposes, dependants pay lower rates of tax on super benefits paid to them as a result of someone dying. They include your spouse (including a legal or de facto partner of the opposite sex or same sex), former spouse, child under 18, financial dependant, or interdependant.
Are investment products whose value is based on, or derived from, some other item such as the price of some other asset or a market index.
Income payments from managed investments. Such payments comprise a share of any net income and realised capital gains earned over a financial year. The components which generally make up a distribution are profits from the sale of assets, income and currency gains.
Spreading investments across a number of different assets, asset classes, countries or investment managers to reduce risk and/or volatility.
Payment to shareholders from a company's after-tax earnings.
- Dividend Imputation
A system where tax already paid by a company is credited to individual shareholders when a dividend is paid.
- Dollar Cost Averaging
Is investing a set amount of money, at regular intervals, over a period of time. This means an investor could gain an advantage from rises and falls in the investment price, buying more when the price is low and less when the price is high, and so reducing the risk of loss.
A time measure of a bond's interest-rate sensitivity. It is calculated on the weighted average of the time periods over which a bond's cash flows accrue to the bondholder. A bond with a high duration means the investor would need to wait a long period to receive the coupon payments and principal invested. The higher the duration, the more the fixed income security's price would fall if there is a rise in interest rates, and visa versa. A bond's duration will almost always be shorter than its maturity, with the exception of zero coupon bonds, for which maturity and duration are equal.
- Enduring Guardian
Where permitted under State/Territory law, an enduring guardian can make medical decisions as well as personal or lifestyle decisions on your behalf when you are not capable of doing this yourself. You choose the decision making areas you give to your enduring guardian. These decision making areas are called functions.
- Enduring Power Of Attorney
A person authorised to look after your financial affairs, even after you have lost your mental capacity. An enduring power of attorney is an essential document for all adults and particularly older people. It allows you to plan for the unexpected events such as accidents and/or illness.
- Enduring Power Of Attorney - Medical Treatment
Where permitted under State/Territory Law, allows you to authorise a person to make decisions regarding medical treatment e.g. operations, medicines, drugs etc. This Power of Attorney is typically prepared where the donor wants to express a preference in relation to the administration of medical treatment. It helps you to plan for the future.
- Estate Planning
Estate planning is a process to ensure that when you die, the right funds and assets are passed on to the right people at the right time- via your Will or due to the way you have set up ownership of your assets. It also helps ensure that you have made sufficient provisions to pay for your debts and support your loved ones. Estate planning requires the involvement of skilled legal and financial specialists.
Events not covered by an insurance policy. For example, an income protection policy may not cover self-inflicted injuries.
A person entrusted with the responsibility of ensuring that the wishes of the Willmaker as contained in the Will are carried out. It is an important role and care needs to be exercised when selecting an executor. The executor chosen should be competent, trustworthy and prepared to accept the task. The role is onerous and the executor may need to seek legal assistance (costs are met by the estate). More than one executor may be appointed and provision for a substitute executor should be made. Executors may be independent and/or an interested party. Your executor and at least one beneficiary should know where your original Will is stored.
- Financial Services Guide (FSG)
A guide that contains information about the entity providing financial advice. It generally explains the financial service offered, the fees charged and how the person or company providing the service will deal with complaints.
- Fixed Interest Securities
Include bonds and represent loans to borrowers, which could include governments, banks and companies. In return for the loan, the borrower generally pays a pre-determined rate of interest for an agreed term.
- Franked Dividends
Dividends on shares which include an imputation credit.
A derivative investment in which parties agree on an obligation to buy or sell a specified quantity of an underlying asset at some time in the future, and the price.
- General Power Of Attorney
A person authorised to look after your financial affairs. This authority ceases immediately if you become mentally unable to manage your own affairs. It is sometimes prepared in circumstances where the attorney is to perform a specific function for a limited period. For example, to manage your financial affairs whilst you're overseas.
- Growth Assets
A term given to assets such as shares and property which are expected to provide strong investment returns over the long term.
- Growth Fund
A managed investment which is predominantly invested in growth assets.
- Hedge Fund
A managed investment where the fund manager is authorised to use derivatives and borrowing with the aim of providing a higher return.
Undertaking one investment to protect against the potential loss in another investment. Options and futures are often used to hedge an investment.
- Imputation Credit
Taxation credits which are passed on to shareholders who have received franked dividends from holding shares or managed share investments.
Regular payments from an investment derived from interest on cash or bonds, dividends on shares, rent from properties or income.
- Income Protection Insurance
Insurance which provides a replacement income stream (a percentage of your income) if you become unable to earn your income as a result of sickness or accident.
- Indirect Cost Ratio
An industry-standard measure expressing the management fees and certain other expenses of a managed fund as a proportion of the net asset value of the fund.
- Inflation Risk
The chance that the real purchasing power of your money may not keep pace with inflation.
A contract providing protection against financial loss - an arrangement where an insurance company agrees to pay an amount of money to the insurance policy holder if a defined event occurs (e.g. death), in exchange for an insurance premium being paid.
Someone with whom you live and have a close personal relationship with, where one or each of you provides the other with financial support, domestic support and personal care.
The return earned on money which has been invested or loaned, or the price paid to borrow money.
- Interest Rate Risk
The chance that a change in interest rates will adversely affect you. This can occur by receiving less income from an investment, paying more on borrowings, or in the case of bonds, the value in the investment changing.
Dying without a valid will, in which case assets will be distributed in accordance with a government formula. The rules for intestacy vary from State to State. This may result in your wishes not being met and disputes arising. For this reason it is essential to ensure that your Will is current and up-to-date.
An asset purchased with the intention of producing capital growth, income or both.
- Investment Risk
The variability of returns. Generally, the higher the potential return over time, the higher the level of risk involved.
- Legal Personal Representative
The executor of your will, or the administrator of your estate if you die without a will.
- Legislative Risk
The chance that your strategies or investments could be adversely affected by changes in the current laws and regulations. Tax and changing superannuation rules are some examples. As legislation alters this may impact upon the set strategies achieving the desired outcome.
- Liquidity Risk
The chance that you may not be able to access your money quickly or without cost when you need to.
Your insurance premium depends on a number of factors including age, sex, level of cover and smoking status. In some cases, your health, pastimes and occupation may result in the insurer loading or increasing the premium to reflect any additional risk factors.
Lonsec is a research provider that is 100% owned by its partners and free of any institutional ownership and influence. They provide research on individual managed funds, investment markets and economic reports. Lonsec aims to identify those investment managers that are "best of breed" through a comprehensive, multi-dimensional selection process. Their research process is rigorous involving both qualitative and quantitative analysis. Further information can be found at www.lonsec.com.au
- Lump Sum
A superannuation benefit taken in cash rather than being rolled over to another super fund, pension or annuity.
- Lump Sum Tax
Tax payable on a lump sum benefit payment from a superannuation fund.
- Managed Fund
An investment product where investors pool their money with other investors. These investments are managed by a professional fund manager who makes the investment decisions. Also known as a managed fund, managed investment scheme or unit trust.
- Market Risk
The risk or potential loss on an investment attributable to market specific factors. For instance, a loss on an Australian share portfolio may not be a function of a fund manager?s lack of skill, rather attributable to losses in the All Ordinaries Index.
- Market Timing Risk
The risk an investor takes when trying to buy or sell an investment based on future price expectations. In other words, the risk that the investment will rise in value after being sold, or conversely that it will fall in value after being bought. Anticipating market rises and falls can be extremely difficult because no two economic cycles are the same.
- Maximum Contribution Base
This is the maximum limit on an employee's earnings base for each quarter of a financial year above which their employer is not required to provide superannuation guarantee.
- Mismatch Risk
The possibility that the investment you choose may not be suitable for your needs and circumstances.
- Money Market
A market where short-term securities, such as promissory notes and bills of exchange, are traded. Securities in the money market all have terms of one year or less.
- Net Asset Value
The value of a company's assets less it's liabilities, or in the case of a managed fund or ETF, it it is the total value, net of fees, expenses and liabilities divided by the number of shares or units.
- Non-Binding Nomination
A type of beneficiary nomination made by a super fund member where the member has indicated their preferred beneficiaries in the event of their death and the proportion they are to receive, however the trustees retain ultimate discretion over the amount, type and the recipient of the payment.
- Non-Concessional Contributions
Contributions to superannuation which are generally made from after-tax money, such as personal contributions for which a tax deduction has not been claimed, and spouse contributions.
- Non-Lapsing Nomination
A type of beneficiary nomination made by a super fund member where the member has indicated their preferred beneficiaries in the event of their death and the proportion they are to receive. As long as the nomination is valid at the time of death, the trustee is bound to follow the instruction. These types of nominations do not expire, unless another nomination is made. The nomination becomes invalid if the member has entered into a de facto relationship (or similar relationship) with another person, separated on a permanent basis from their spouse/partner or have had a child with a person other than their spouse/partner since making the nomination in this case, the Trustee will treat the nomination as a Non-Binding Nomination.
A derivative investment giving the holder an option to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.
- Ordinary Time Earnings (OTE)
What you're paid for the usual hours you work, and is used to calculate the minimum employer super contributions you are eligible to receive. It generally includes things like annual leave bonuses, shift loading, allowances and commissions but not overtime.
A regular income stream paid to an individual, either by the government (such as an Age Pension) or from a superannuation fund (e.g. account-based pension).
- Percentage Factor
The age based percentage used to determine the minimum annual payment a member of an account-based pension is required to receive from the pension under superannuation law.
A requirement to retain superannuation benefits within the superannuation environment until a specified condition has been met, the most common being retirement or reaching age 65. A person can retire at any age they like, however they can not access their super until they have met their preservation age, which varies depending on a member's date of birth as shown in the table below).
- Product Disclosure Statement (PDS)
An offer document that sets out information on a product, including the features of the product, fees that apply, the benefits and risks of investing in the product, commissions that may affect returns, information about complaints handling and cooling-off rights, and other information that might reasonably be expected to have a material influence on an investor's decision to invest.
- Property Securities
In a managed investment the term "property" generally refers to investments in property securities - which are units or interests in property trusts listed on the stock exchange. Funds which invest in property securities usually diversify by investing across a range of different property sectors such as commercial, office, industrial, hotel and retail properties. A property securities fund generally invests in property trusts that are listed on the sharemarket, or in property-related companies.
- Realised Capital Gain
When an investment is sold and the proceeds received are higher than the cost to purchase the investment.
- Regular Investment Plan
A regular periodic investment plan whereby the investor makes use of the principle of dollar cost averaging.
Where income from an investment is used to buy more units or shares in the same investment, generally at no fee, increasing the potential to receive higher capital growth and distributions in the future.
- Responsible Entity
The company that operates a managed investmentand is required to meet certain regulatory obligations. The company must be a registered Australian public company and have an Australian Financial Services licence.
- Reversionary Beneficiary Nomination
A type of beneficiary nomination made by a super fund member owning a pension where the member has nominated an eligible dependant to continue to receive the pension payments after their death, rather than a lump sum. Reversionary pension: a pension that continues to be paid to an eligible dependant after the death of the original pension member.
The variability of returns. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time may be.
- Salary Sacrifice
An amount of pre-tax salary that an employee decides to contribute to super or allocate to a fringe benefit instead of taking it as cash salary.
A group of securities with common characteristics, such as resource sector companies or financial companies.
An asset traded on a financial market, such as shares or bonds or an asset pledged to ensure the repayment of a loan.
Represents part ownership in a company. When you buy a share in a company you become a part of the business and share in the future of that business. Also known as an equity.
- SPIN (Superannuation Product Identification Number)
A number used to identify superannuation products within the financial services industry in Australia.
- Spouse Contribution
A contribution made to superannuation on behalf of a spouse. The receiving spouse must be under age 70. The contributing spouse may be entitled to a tax offset.
- Standard Deviation
A statistical measurement of dispersion around an average depicting how widely a fund's returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that are most likely for a given fund. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility or risk.
A person who buys and sells securities on behalf of others in return for brokerage or commission.
- Super Choice
Ability to choose the super fund to which your employer directs your super contributions.
- Super Co-Contribution
If a person has made a personal contribution (non-concessional) to super of $1,000 or more during the year, then an amount of up to $500 may be contributed to their super by the Government. Certain conditions must be met such as having income under a certain threshold and having at least 10% of your total income coming from employment or carrying on a business.
A tax effective means of putting aside money during your working life for use in retirement.
- Superannuation Benefit
Used to describe money that is already in the superannuation environment being paid to the member. Payment can be in the form of a lump sum or as an income stream.
- Superannuation Fund
A concessionally taxed trust run by a trustee or trustee board with the primary purpose of holding superannuation assets for the beneficiaries of the fund (i.e. members and their dependants).
- Superannuation Guarantee (SG)
Contributions an employer makes into your super fund to comply with Superannuation Guarantee (SG) legislation. The compulsory SG contribution rate is currently 9.5% and will increase as follows:
Transferring units between managed investments by selling the units of one managed investment and using the proceeds to buy units in the other. This may trigger a capital gain.
- Tax Rebate/Offset
Now known as tax offsets - an entitlement which reduces the amount of income tax payable.
- Term Life Insurance
Insurance that provides a lump sum payment on your death or terminal illness. It has no surrender or cancellation value. Premiums generally increase with age.
- Testamentary Trust
A trust established by a Will that comes into effect upon the death of the Will maker. The primary purpose of a testamentary trust is to manage estate assets in order to produce income for beneficiaries. The trust is managed by a trustee who has the discretion to control the distribution of capital and income to the beneficiaries, taking into account their other income sources and the prevailing taxation legislation. Testamentary trusts have many benefits including taxation efficiency and asset protection.
- Total & Permanent Disability Insurance
Insurance which provides a lump sum benefit if you are totally and permanently disabled. Generally, this means that you have suffered a disabling injury or illness that prevents you from ever carrying out work for which you are reasonably suited by education, training or experience (or, in some cases, your own occupation) and you are under the regular care and attention of a doctor; or you have suffered permanent loss of certain limbs or eyes or a combination of them.
- Total Return
An investments total gains or losses over a specified period of time. Total return includes both income (in the form of dividends or interest payments) and capital gains or losses (the increase or decrease in the value of a security).
- Transition To Retirement (TTR)
Members who have reached their preservation age but are under age 65 can take all or part of their super benefit in the form of a non commutable account based pension while continuing to work.
- Trauma Insurance
Insurance which provides a lump sum benefit if you suffer certain specified life threatening or debilitating health conditions such as stroke, heart attack or serious illness.
- Trust Deed
For a managed investment, see constitution. For a superannuation fund, a trust deed is a legal document that sets out Trust's constitution, objectives, purpose and also includes the rights, duties and responsibilities of the Trustees and the beneficiaries (ie, member and their dependants).
- Turnover Ratio
A measure of the fund's trading activity, which is calculated by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets. A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In practical terms, the resulting percentage loosely represents the percentage of the portfolio's holdings that have changed over the past year. A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities.
- Unit Price
The price for each unit of a managed investment. This is calculated by dividing the value of the assets of the managed investment by the number of units on issue to investors.
A share of a managed investment or trust, which represents an entitlement to the asset within the fund or trust.
- Unrealised Capital Gain
Occurs when an investment increases in value but is not sold or realised.
- Work Test
To allow you to add more to your super once you have turned 65, you need to have been gainfully employed for at least 40 hours in a period of no more than 30consecutive days in the financial year in which you wish to contribute.
The dividend, or interest rate, on an investment expressed as a percentage of the price.