Glossary
Absolute return measures the gain or loss experienced by an asset or portfolio independent of any benchmark or other comparative measure.
Active management is a fund management style which attempts to exceed the returns of a benchmark Index by using manager expertise to select and invest in securities that are expected to outperform the benchmark index.
Active ownership is exercising rights as a shareholder. This is often done as voting at shareholder meetings and engaging with company boards.
Alternative assets (alternatives) include assets that are expected to generate returns that are different to shares and bonds and, therefore, can offer increased diversification to an investment portfolio.
Alpha is the return a security or fund has generated above a given benchmark. Alpha is sometimes called excess return or abnormal return.
Asset allocation is a description of how a portfolio is invested across various asset classes. For example, a fund may have an asset allocation of 5% to domestic shares, 50% to international shares, 10% to property, 15% to domestic fixed interest, 15% to international fixed interest, and 5% to cash.
Asset classes are different categories of assets in which a portfolio may be invested. The major asset classes include shares, real assets, fixed interest, cash, and alternative assets. These asset classes can be broken down further to include New Zealand or overseas shares, New Zealand or overseas government bonds, direct (unlisted) or listed property investments. All asset classes have different risk and return characteristics.
Basis point is 0.01 of one percent. There are 100 basis points to one percent. For example, a fund manager fee of 40 basis points per annum of assets under management is equal to 0.4%. For a fund size of $100m, 40 basis points would equal $400,000. Basis points are often abbreviated as bp.
Bear market is a market going through a downward price trend dominated by pessimism on the part of market participants. It is the opposite of a bull market.
Behavioural bias describes decision making imperfections that cause investors and other agents to make suboptimal decisions.
Benchmark is a measure against which the performance of a security, fund, or investment manager can be measured. Generally, broad market stock and bond indexes are used for this purpose
Benchmark portfolio means a list of market indices weighted by the relevant portfolio’s benchmark asset allocation and is used to measure the performance of that portfolio.
Beta is a measure used to determine the volatility of an asset or portfolio in relation to the overall market. The overall market has a beta of 1.0. Individual shares are ranked according to how much they deviate from the market. A share with a beta greater than 1.0 is more volatile than the market overall.
Bonds are borrowing instruments and incorporate the undertaking to investors to pay fixed sums of money (coupons and face value) at pre-determined dates in the future. They are also known as fixed interest or fixed income securities. Bonds are generally issued by governments, banks and companies. Buying bonds constitutes a lending to the organisation selling them.
Bull market is a market going through an upward price trend dominated by optimism on the part of market participants. It is the opposite of a bear market.
Carbon footprint is a quantification of the amount of greenhouse gases (including carbon dioxide and methane) released into the atmosphere as a result of the activities of a particular individual, organisation, or community. The carbon footprint of a portfolio of securities can be derived from the carbon footprint of the issuing entities whose securities are held in that portfolio.
Cash normally describes money but can also be used to describe a financial product which usually comprises low-risk, low-return, short-term fixed income securities.
Cash flows are the distribution of tangible cash. Dividends, coupons and rent are examples of cash inflows to investors, while reinvestments are examples of cash outflows.
Collateralised commodity futures (CCFs) refer to futures contracts on commodities products in which the buyers and sellers of the futures contracts make an additional investment in another asset with a value equal to the futures price.
Commodities are tangible, basic goods used for production or consumption. Ownership of commodities is traded on exchanges. Commodities are also often used as investments. Examples include gold, cotton, coffee, oil, and metals.
Commodity futures are futures contracts on commodities products.
Correlation is a measure of a (linear) relationship and shows to what extent the movement in one variable can be used to (linearly) estimate the movement in another. Correlation is often referred to in the context of security returns and diversification.
Coupons are the regular interest payments associated with a bond or similar debt security. The total interest payment is given by the coupon rate (expressed as a percentage) multiplied by the face value of the bond.
Currency risk is the possibility of losing money due to unfavourable moves in exchange rates. Firms and individuals that operate in overseas markets, and portfolios holding securities in non-local currencies, are exposed to currency risk.
Custodian is an entity which holds assets on behalf of investors. It does not own the assets. It keeps custody assets of an entity for purposes of safekeeping. The custodian may collect income from the assets on behalf of the investors and report on their value to investors.
Derivatives are contracts between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and shares.
Diversifiable risk is that portion of total risk that can be reduced by diversification in the portfolio. Diversifiable risk is generally assumed to be unrewarded because it is easily removed.
Diversification is the process of adding securities to a portfolio to reduce total risk. As securities often do not move perfectly with each other, combining multiple, imperfectly-correlated securities means that the total volatility of a portfolio can be reduced.
Dividend is a payment to shareholders in a company which can come from that company’s after-tax earnings or reserves. A dividend normally represents a portion of a company’s profit paid to shareholders.
Dividend yield is the dividend payment divided by share price. For example, a stock selling for $2 per share that has paid an annual dividend of $0.10 per share has a dividend yield of 5%.
Duration is an umbrella term that refers to a range of maturity-based measures used to analyse the characteristics of fixed income product (bonds). Duration measures estimate the sensitivity of fixed income products to changes in interest rates.
Dynamic asset allocation (DAA) means adjusting the strategic asset allocation to asset classes to reflect a range of factors primarily for risk control, capital preservation, and incremental value add. This is also known as a tactical asset allocation.
Efficient market is a market in which all publicly-available information is taken into account in securities’ prices. An efficient market suggests that the only driver of higher expected returns is higher risk.
Engagement the practice of shareholders entering into discussions with company management in order to change or influence the way in which that company is run.
Equity represents the value that would be returned to a company’s shareholders if all of its assets were liquidated and all of the company's debts were paid off.
Environmental, social & governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Exchange traded funds (ETFs) are funds that has invested in a portfolio of securities and are traded on a public stock exchange. The value of a Unit in an ETF is usually proportionally equal to the individual securities into which the fund has invested.
Exclusions are those securities of a company that will not be purchased for a portfolio as the company’s business activities are deemed by an investor to be unethical, harmful to society, or in breach of laws or regulations. The act of excluding a security may be referred to as (negative) screening.
Expected returns are the returns an investor assumes that their investment will generate based on analysis and modelling of past, current and future variables.
Face value (or par value, or principal) is the term used to describe the nominal value of a security. For bonds this is the amount that the bondholder will receive at the maturity of the bond. For shares this is the value per share from the issuer.
Financial Markets Authority (FMA) is the New Zealand government agency responsible for enforcing securities, financial reporting, and company law as they apply to financial services and securities markets. The FMA is the regulator with oversight over PSS.
Foreign exchange hedging is hedging that serves to remove some or all of the impact of the rise or fall in the value of the New Zealand dollar on the value of an overseas investment (e.g. if the New Zealand dollar rises in value, then overseas investments in New Zealand dollar terms will reduce in value if not hedged).
Fund is a type of financial vehicle made up of a pool of money collected from numerous individual investors to collectively purchase securities, or other asset types, while each investor retains ownership and control of their own units in the fund.
Fund updates let investors know important information about their managed fund, such as how it is performing, what it is costing them, and what their fund is investing in. By law, they must follow a standard format designed to make it easy to compare funds and be understood by non-expert investors. Their content is prescribed by the FMA.
Futures contract is a legally binding agreement to trade certain securities or commodities at a given future date, for a given price.
Gearing (or leverage) is the process where a company or fund borrows money in order to increase the amount of money working for the benefit of shareholders or investors. The effect of gearing is to amplify any profits or investment gains (or losses) made by the company or fund.
Growth assets are those securities (most often including shares and property) that are expected to provide strong investment returns over the long term. The majority of their return is expected to come from capital gains rather than dividends.
Hedge funds are a type of actively managed fund that may focus on high risk, high return investments and investing strategies. Instruments and asset classes used may be less normal and leverage may be taken to increase returns. Traditionally hedge funds were market neutral such that their Portfolios were ‘hedged’ against market movements.
Hedging generally refers to the process of protecting investments against, or reducing the chance of, a loss. Hedging can involve various financial instruments and techniques.
Imputation is a mechanism that a company can use to pass on credits for income tax paid to shareholders when paying dividends. These imputation credits can offset the amount of income tax New Zealand resident shareholders would otherwise be liable to pay on the dividend income received.
Income assets is the term given to securities that often include bonds and cash products. Income assets are expected to provide reliable cash flows and returns to investors but lower long-term returns compared to growth assets. They are termed ‘income’ assets as the majority of their return is expected to come from coupon payments rather than capital gains.
Index is a basket of securities which is created based on a set of rules. These rules are often put in place to allow the index to represent a particular market or sector. Indices allow for investors to quickly determine how a market as a whole has performed.
Inflation is a measure of the average increase in domestic price levels. It is often measured as the change (increase) in price of a basket of goods and services consumed. Deflation is a measure of the fall in that price.
Information ratio is a measure of portfolio returns minus benchmark returns divided by tracking error. The information ratio measures active management efficiency. A higher information ratio suggests that the fund manager is able to generate greater alpha per measure of benchmark relative risk.
Investment manager, also referred to as fund manager, is a party responsible for buying and selling securities in a portfolio or fund.
Investment risk is the probability or likelihood of occurrence of losses relative to the expected returns on any particular investment. The thumb rule is the higher the risk, the higher the return.
Liquidity risk refers to the marketability of an investment and the extent to which an investment can be bought or sold readily and without requiring excessive price change to complete the purchase or sale.
Managed investment scheme is a collective investment arrangement where investors' money is pooled and invested in a range of assets. Each investor owns a portion of (or units in) the scheme.
Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets.
Market value is the price an asset fetches in the market. Market values are dynamic in nature because they depend on an assortment of factors which impact on demand and supply and, ultimately, on price.
Maturity is the period during over which the owner of a bond will receive interest payments on the investment. When the bond reaches maturity (and if the issuer does not default), the owner is repaid its face value.
Multi-asset fund is a type of managed fund that invests in more than one asset class.
Nominal return is the return (gain or loss) received before taking account of factors such as taxes, fees and inflation.
Options are a form of derivative financial instrument in which two parties contractually agree to transact on a specified asset at a specified price (exercise price) before, or at, a future date. The purchaser of the option has the right to either buy (call option) or sell (put option) the specified asset at the exercise price but is not obligated to do so.
Other material information (OMI) document provides investors with information in addition to that provided in the PDS to help decide whether to invest in a financial product. Provision of this document to investors is prescribed by the FMA.
Passive management is a fund management style where the fund manager aims to match closely the returns produced by a particular index.
Portfolio is the term used to describe the aggregate of an investor’s ownership of financial securities (and asset classes). Portfolios can be compared by the securities or assets classes in them, along with the weights given to each.
Portfolio objective identifies the type of return a portfolio aims to achieve for investors over a specified time period. These can be stated in relation to a relevant index such as CPI. These objectives should not be treated as a forecast, indicator or guarantee of any future returns or performance for that Portfolio.
Portfolio investment entity (PIE) is an investment entity into which investor contributions are made and from which returns are taxed at the investor’s prescribed investor rate (PIR).
Private equity is an investment in the shares of companies which are not publicly traded (i.e., not listed on a stock exchange).
Prescribed investor rate (PIR) is the tax rate at which an investor’s investments in a portfolio investment entity (PIE) are taxed. The rates range from 10.5% to 28%, depends on the investor’s taxable income (including PIE income), and is assessed every 2 years.
Product disclosure statement provides investors with essential information to help decide whether to invest in a financial product. Its content is prescribed and monitored by the FMA.
Real assets include listed property, listed infrastructure, unlisted property, unlisted infrastructure and natural resources. These assets are expected to generate returns that are different from shares and, therefore, offer increased diversification.
Required returns are the returns an investor needs to compensate them for the risk being taken.
Responsible investment is a broad-based approach to investing which factors in people, society and the environment, along with financial performance, when making and managing investments. The term is often used interchangeably with socially responsible investment, sustainable investment, and ethical investment
Returns are the total change in the value of an investment portfolio, usually expressed as a percentage. Returns can comprise of income and/or capital gains.
Risk is the variability (or volatility) of returns. Generally speaking, the higher the level of risk an investor is required to bear, the higher the required return.
Risk-free rate is the return that is required for investing in an asset which has no risk. However, the risk-free rate is a theoretical concept only since technically all investments carry some form of risk. In practice, a common proxy for the risk-free rate is the interest rate paid on a relevant government bond.
Risk premium is the additional return required in addition to the risk-free rate as compensation for investing in a risky security. The riskier a security, the greater the risk premium.
Shares are an investment that represents part ownership of a company. Also known as stocks or equities. Shareholders have a right to vote at the company's meetings and to receive part of the company's profits (after the holders of various other types of securities have been paid). Shareholders of a company also have claim to a proportion of its assets after its debts have been repaid in the event of liquidation.
Sharpe ratio is the measure of expected returns minus the risk-free rate divided by volatility. The Sharpe ratio is a measure of portfolio efficiency calculated as expected returns per quantum of risk. A higher Sharpe ratio indicates greater portfolio efficiency.
Single-asset fund is a portfolio that invests in just one asset class or sector.
Strategic asset allocation details the long-term percentage target holding of each asset class for a portfolio or fund.
Systematic risk is the portion of total risk that cannot be reduced by diversification of the portfolio. Also referred to as market risk or beta risk. The greater the systematic risk of a security (or asset class), the higher the return required by investors.
Statement of investment policy and objectives (SIPO) is a document that sets out the investment governance and management framework, philosophy, strategies and objectives of a managed investment scheme and its investment funds or portfolios.
Tracking error is the difference in returns of a portfolio or fund and the index it was designed to track (or, in the case of active management, outperform). Tracking error is a measure of how closely the benchmark index is followed.
Trust deed is the formal agreement between the trustee and the manager of the trust’s assets that outlines their respective powers, requirements and responsibilities in respect of the governance.
Trustee is a person or firm that holds and administers property or assets for the benefit of a third party.
Unit is the term used to describe a holding in a fund.
Unlisted investments are investments into companies or assets that are not traded on the share market or public exchange. Examples include unlisted property and unlisted infrastructure.
Venture capital is a type of private equity that generally focus on providing funding to start-up companies and small businesses.
Volatility is a measure of the risk of an investment. It is calculated as the standard deviation of returns around their average.
Yield is a bond’s coupon payment divided by the current market price of the bond expressed as a percentage. Also known as current yield.
Yield to maturity is a figure that shows the compound return you get on a bond. It takes into account what you paid for the bond and the level of coupon payments you will receive through until the maturity of the bond assuming the issuer does not default. Yields have a negative relationship with bond prices - as yields fall, bond prices rise and vice versa.