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A superannuation fund in which the benefits received by members are determined by adding investment earnings to the contributions made by them or on their behalf (as distinct from a Defined Benefits Fund, in which the benefit payable is fixed in relation to salary at or near retirement). Also known as a Defined Contribution Fund.
Is an approach to investment management where the manager changes its strategy depending on forecasting, current or expected market conditions and company valuations. The approach assumes that markets don’t work and that investment returns in excess of the market can be achieved through stock selection and market timing.Although gross performance returns can be attractive, the high cost of this approach through transaction costs, taxes, and the employment of research departments, typically provides the investor with a significantly lower net performance return.
Alternative investment options
Investments whose characteristics are outside of the traditional asset classes.Examples of alternative investments include direct property, private equity, venture capital, infrastructure, commodities, options and financial derivatives.
A portfolio which is significantly different from the index (or its benchmark) and which is designed to provide above-average returns by taking above-average risk. Typically, such portfolios have a relatively high exposure to equity investments.
A type of retirement income arrangement under which an individual invests a lump sum and then draws down an annual pension to a value he/she sees fit, taking account of his/her own expected cash flow needs and life expectancy. If the drawdown is greater than investment earnings, then part of the initial capital sum is used to make up the difference. Unlike a traditional pension or annuity, an allocated pension can therefore provide the retiree with continual access to the capital sum invested, and allows any balance to be passed on to beneficiaries upon the death of the individual concerned.
All Ordinaries Index
A share price index measuring the market prices of the major stocks listed on the Australian Stock Exchange. The index is calculated continuously, and expressed as a number which allows overall market fluctuations to be quickly gauged.
Paying off an interest bearing liability by gradual reduction through a series of installments comprising both principal and interest components, as opposed to paying it off by a single lump-sum payment. A technique for gradually extinguishing a liability or capital expenditure over a period of time (eg. as in typical home mortgate). (See also Credit Foncier Loan).
The mix of assets, such as shares, property, bonds and cash that you have in an investment portfolio. The mix of assets aims to optimise the trade-off between risk and return based on an individual’s situation, objectives and risk preferences.
Asset class A type of asset that has distinctive features such as its expected return and volatility. The main asset classes include shares, property securities, emerging markets, bonds and cash.
Investment Philosophy The investment philosophy espoused by Stewart Partners. It assumes that markets reflect all available information in the prices of securities. Using financial science, investment portfolios are constructed to capture specific dimensions of risk in line with the investor’s risk preferences. This is a non-forecasting approach.Portfolio design controls costs that can be controlled, such as taxes and transaction costs. Please see Our Investment Philosophy for a detailed overview.
The Australian Securities and Investment Commission (ASIC) was set up in 1989 to administer the Corporations Act in Australia, which is the principal legislation regulating companies (and other entities).
An investment portfolio which diversifies its holdings over a range of asset classes which typically include shares, fixed interest, property, overseas securities and cash.
This statement gives a summary of a business’ (or individuals) financial position as at a particular point in time. It shows the assets and liabilities of the business together with the value of owner’s equity in the business.
Also known as Bills of Exchange, they are issued and/or endorsed (accepted) by banks and promise to pay a certain sum of money in say 90 days time if a business requires it. The underlying risk of the bank bill is therefore equivalent to the credit rating of the bank that has issued/endorsed the bill.
A standard for comparison. For example, the performance of a portfolio of Australian Listed Property Trusts may be compared against the ASX 300 Property Trust Accumulation Index.
A debt security issued by such entities as corporations, governments or their agencies (eg. statutory authorities). A bond holder is a creditor of the issuer and not a shareholder.
An irregular but recurring period of indeterminate scope and origin embracing expansion, prosperity, recession, and recovery.
Budgets are quantitative forecasts that help guide the use of financial inputs and outgoings. They perform an important planning function as they set the desired financial targets and needs which can then be measured against actual performance over a period of time.
Capital Gains Tax
A tax on the increase in the capital value of investments, payable when the capital gain is realised.
Cash and short-term securities
Includes exposure to debt securities and debt obligations with market values that have a low sensitivity to changes in interest rates.These exposures include cash, deposits, bank bills, promissory notes, commercial paper, and debt assets whose price is linked to short-term interest rates, such as mortgage backed securities, floating rate notes, and asset backed securities.
Cash Flow Budget
Cash flow budgets guide the business (or individual) with regard to the amount of money coming into and going out of the account over a period of time.
A superannuation fund which complies with the operational standards specified in the SIS Regulations and is thereby eligible to receive concessional taxation treatment.
Consumer Price Index (CPI)
CPI is a measure of the price of goods and services and allows comparison of the relative cost of living over time. It is used as a measure of inflation.
The 15% tax levied on certain contributions to superannuation funds.
Correlation refers to the relationship between two variables.Each Asset Class has a low correlation to one another, which means that a change in value of one Asset Class has no direct bearing on other Asset Classes. Including assets in an investment portfolio that have a low correlation to one another increases the diversification of the portfolio.
Estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.The highest rating is usually AAA, and the lowest is D. For a company or asset to have an ‘investment grade’ credit rating, it must be rated BBB or above. A credit rating of BB or lower is called ‘sub-investment grade’ or ‘junk’.At present, the Australian Federal Government has a credit rating of AAA, and the ‘Big Four’ Australian banks are AA.
The extent to which a company's total assets are financed with borrowed funds (ie. borrowings divided by total assets). An important financial statistic.
Expenses which can be offset against taxation liabilities. Certain contributions to superannuation funds, for example, are tax deductible up to prescribed limits.
Assets such as cash and fixed interest. Over the long-term, defensive assets are expected to grow at a slower rate than growth assets but will experience less volatility over the long-term.
A financial instrument whose characteristics and value depend upon the characteristics and value of an underlying asset, typically a commodity, bond, share or currency. Examples of derivatives include futures and options. Advanced investors sometimes purchase or sell derivatives to manage the risk associated with the underlying asset, to protect against fluctuations in value, or to profit from periods of inactivity or decline. These techniques can be quite complicated and quite risky.
Investments held directly in real estate as opposed to indirect property investments such as units in a property trust.
A portfolio strategy to reduce exposure to risk by combining a variety of investments, such as shares, bonds, and property, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio for a given level of expected rate of return.
Markets in countries with broadly similar characteristics, such as a relatively undeveloped economy, immature legal system, high government presence in the market or an uncertain regulatory framework. Examples include Russia, Brazil, China, India, South Korea and Thailand.Research shows Emerging Markets have a low correlation with developed markets such as US, UK and Australia but higher risk profile.
A measure of what the market believes a company’s ongoing operations are worth. It is calculated as a company’s Market Capitalisation plus Net Debt. Net Debt is defined as Debt plus Preference Shares less Cash.
Equity Risk Premium
The extra return that a particular stock or the stockmarket overall must provide over the Risk Free Rate (RFR) to compensate investors for the inherent risks involved in investing in the stockmarket. The RFR is generally the current yield from US Treasury Bills, which are regarded as being a risk free asset.
An investment approach that takes into account ethical considerations as well as the financial return potential on particular investments. An ethical investment policy might include, for example, a decision to avoid certain industries or to positively favour investing in other industries seen as more ethical or socially responsible.Whilst the gross returns of ethical investment funds can be attractive, the net returns are often negatively impacted by the high cost of administering and managing the underlying assets in accordance with the fund’s investments criteria.
Exchange Traded Fund
An ETF is an investment fund, traded on an exchange like a share, each unit is invested in a basket of securities or other assets and seeks to copy the performance of a specified index such as the ASX 200.
An ETC (Exchange Traded Commodity) is available for a range of commodities such as precious metals, oil and agriculture.
Income which remains constant and does not fluctuate, such as income derived from bonds, annuities and preference shares. Any debt security which has a fixed flow of income is known as a fixed interest security.
A level of indebtedness. Gearing increases the exposure to investment markets by borrowing against the equity held in a pool of assets.If investment returns are positive, gearing can increase the rate of return. If investment returns are negative, gearing exacerbates the loss for the investor.
Assets such as property and shares. Historically, these assets have produced higher returns over the long-term than defensive assets but can also demonstrate greater volatility in the short-term.
A speculative fund, usually used by wealthy individuals and institutions, which employ aggressive investment strategies such as short selling, leverage, swaps, arbitrage, and derivatives to generate returns. Many funds also invest in traditional assets like shares and debt. Investors in hedge funds typically pay high management fees compared to more traditional managed funds, and also performance fees (usually 20%) if the fund exceeds a particular benchmark rate of return.
An investment made to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.For most investors, hedging is typically employed to reduce currency risk.
Taxation credits which are passed onto shareholders who have received franked dividends in relation to their shareholdings.
An index or combination of indices is used by an investment manager as a yardstick to assess the risk and performance of a portfolio.Index Management is similar to Stewart Partners’ Asset Class approach, but has the following key differences:
Assumes markets work with no liquidity cost
Allows commercial benchmarks to dictate strategy
Accepts high transaction costs and turnover in favour of index ‘tracking’
The returns generated by an index asset allocation (see definition above).
The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index (CPI). As the cost of goods and services increase, the value of a dollar is going to fall because a person won’t be able to purchase as much with that dollar as they previously could.In Australia, the Reserve Banks adjusts interest rates to try and achieve annual inflation in the range of 2% to 3%.
Sometimes referred to as a separate asset class, it comprises physical assets that provides services necessary for an economy to function. This includes airport, sea ports, roads, power grids, communications, sewers and water supply.Over the long term, the investment returns of Infrastructure assets is likely to align closely with the rate of inflation.
Investment Policy Statement
A formal description of the investment philosophy that will be employed by an investment vehicle.
In Australia: any stock listed in the Top 100 shares by market capitalisation on the stock exchange.
Internationally: the eligible universe includes all large companies in developed markets – this captures 85% to 90% of the market capitalisation of a country.
Qualitative filters are applied to all investments. This strategy filters out companies under takeover, in the process of merging, or that have qualified accounts.
A measure of market value of an organisation, it is the sum of the total amount of various securities issued by a corporation, multiplied by the price of those securities.
Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities.
The return on an investment unadjusted for inflation.
Comprises equity securities (shares) in operating businesses that are not publicly traded on a stock exchange. There is a wide array of examples of private equity transaction, but may include leveraged buy outs (management uses debt and private equity to purchase the company from the existing owners), venture capital and purchasing distressed assets in the hope of rejuvenating the business and then selling it at a profit (e.g. buy out of Myer department stores from Coles Myer).
Investing in property securities as an asset class is different to buying a house or home unit. Listed property trusts own a range of properties such as commercial, residential and industrial properties. Property trusts primarily earn rental income.Like listed shares, listed property trusts are traded frequently, and as such their prices will rise and fall. This volatility will be reflected in the unit price of a trust that has exposure to these assets.
The actual return on an investment after taking into account the effects of inflation, i.e. after deducting inflation from the actual return.
The portion of pre-tax salary of an employee that is given up in exchange for additional contributions by the employer to the employee’s superannuation.
Separately Managed Account
A Separately Managed Account (SMA).is a customised share portfolio where the assets are owned by the investor. They have the benefits of portfolio diversification, as in a managed fund, and also the benefits of direct ownership of the shares.
SMA generally have a responsible entity in the background with custodial and administrative responsibilities.
Shares (equities) represent a part ownership in a company. The investment return depends on the market value of the share and any dividends it pays. Because share prices can rise and fall suddenly in response to many factors including company profits, market sentiment, industry issues, and economic trends, shares are typically more volatile than cash and short-term securities, bonds and property.In addition returns on global shares may be impacted by currency movements if a hedging strategy is not employed.
Process whereby a person borrows a security from another party and sells it, with the understanding that at some point in the future the security must be bought back and returned to the owner.This strategy is typically employed in a situation where the person expects the price of the borrowed security to fall, as the profit is the difference between the price at which the stock was sold and the cost to buy it back.If however the price of the security increases, the potential losses of employing a short selling strategy are very significant.
In Australia: any stock listed outside the Top 100 shares by market capitalisation on the stock exchange.
Internationally: any stock that represents approximately the smallest 10% to 15% by market capitalisation of eligible countries to invest in.
Typically the size of a holding in a company will be in similar proportion to their market capitalisation within each country.
A statistical measure of the historical volatility of a security or portfolio.For example, the Dimensional Emerging Markets Trust had an annualised return of 15.51% over the period January 1988 to March 2009 and an annualised standard deviation of 21.46%.Statistics use the normal distribution methodology to calculate volatility. This approach assumes that:
68% of returns are within one standard deviation of the mean;
95% of returns are within two standard deviation of the mean; and
99.7% of all returns are within three standard deviation of the mean.
Based on this, 68% of the annual returns of the Dimensional Emerging Markets Trust are between -5.95% and +36.97%.
Similarly, 95% of returns are between -27.41% and +58.43%.
Please note that an annualised standard deviation of 21.46% is extremely high. Most high quality fixed interest securities typically have a standard deviation of one.
When a value, or riskier, company goes to the bank to borrow money, it often has to pay a higher interest rate than a growth company. Its higher cost of capital equates to a higher return for the bank.The same principle applies in the share market where companies compete for equity capital. Because the value company is perceived as riskier, it has to offer shareholders a higher expected return.Stewart Partners defines Value stocks based on a company’s book to market ratio.The higher the ratio of book value to market value, for instance, the more value-like a stock is judged to be. Often these companies have steady earning streams, but may be out of favour in the current economic conditions.In Australia, the eligible universe for stocks to be included in a value portfolio includes all Australian listed securities with a market capitalisation of greater than $50 million. Within this universe it invests in those 30% of stocks (by number) with the highest book-to-market ratio (BtM). To avoid an unintentional small cap bias, the book-to market criteria is determined by using approximately the top 85 large cap stocks only. All eligible small cap stocks with a BtM that meet this standard are eligible for inclusion in the strategy.Internationally, the eligible universe includes companies that meet the international large company definition.
A form of finance provided to new or expanding businesses to help them develop new products or attempt new ventures that are largely untried in the market place.
The extent of fluctuation in investment returns. The higher the volatility, the less certain an investor is of return and hence volatility is one measure of risk.Volatility is calculated as the annualised standard deviation of daily change in a price.
The return on an investment expressed as a percentage. Alternatively, the profit or income that an investment or property will return; the money derived from any given business venture, usually expressed as an annual percentage of the initial investment. Straight yield (or running yield) relates cash flow to price paid and does not take into account any gain or loss principal.