Glossary of terms

Accumulation Fund – A superannuation fund which generally accepts both employer and personal contributions. These might be regular or lump sum which are then invested into the various asset classes to generate earnings subject to that particular asset class (in contrast to a “Defined Benefit Fund”).

Allocated Pension – Now referred to as an “Account Based Pension” or simply as a “Pension”, is a type of retirement income arrangement under which an individual invests a lump sum and then draws down a regular annual payment. The minimum annual pension payment is currently between 4%–14% per annum depending on the age of the recipient, and the maximum is 100% of the account balance.

All Ordinaries Index – A share price index measuring the market price of the major stocks listed on the Australian Stock Exchange.

Annuity – An arrangement under which periodic payments are made to a person in return for the investment in a lump sum, usually for the purpose of providing retirement income.

APRA – Australian Prudential Regulation Authority

AFSA – Association of Superannuation Funds of Australia

ASIC – Australian Securities and Investment Commission

ASX – Australian Stock Market

ATO – Australian Taxation Office

AWOTE – Average Weekly Ordinary Time Earnings

Bear Market – A bear market is a falling market. A “bear” is a person that is generally pessimistic about the market outlook, anticipates further losses and is motivated to sell.

Bull Market – A bull market is a rising market. A “bull” is a person who buys securities in the expectation that prices will rise and so give him/her an opportunity to resell at a profit.

Complying Funds – A superannuation fund which complies with the operating standards, specified in the SIS Legislation and is thereby eligible to receive concessional taxation treatment.

Concessional Component – Only applies to ETP’s paid prior to 1/7/94 but may appear in superannuation and rollover benefits where component was previously rolled over. Generally relates to certain disablement, redundancy and approved early retirement benefits.

Concessional Contribution – Contributions made by or for an individual that receive concessional tax treatment (previously referred to as taxable/deductible contributions).

Contribution Tax – A tax levied on certain contributions to superannuation funds, currently 15%.

Defined Benefit Fund – A superannuation fund that uses a formula to calculate the retirement benefit based on average salary and years of service or membership in the fund (in contrast to an “Accumulation Fund”).

Diversification – The spreading of investment funds among classes of securities, localities, investment styles and among different fund managers, in order to distribute and control risk. Simply “Don’t put all your eggs in once basket”.

Equity – The interest or value which an owner has in an asset over and above the debt against it. For example, a homeowner has equity in that part of the value of his or her house above the amount borrowed from a lender.

Equities – Another term for shares.

ESP (Eligible Service Period) – The period of time spent in the employment of a certain employer, or in membership of a certain superannuation fund, for the purpose of calculating an Eligible Termination Payment.

ETP (Eligible Termination Payment) – A payment made to an employee upon retirement, resignation, retrenchment or disablement, and capable of being “rolled–over” into appropriate superannuation investment products in order to defer and minimise taxation liability. These do not include annual leave or long service leave.

Growth Portfolio – An investment portfolio which aims to achieve an above average rate of after–tax income and capital growth over the medium to long term, while adopting a medium risk profile.

Income Portfolio – A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.

Non-Concessional Contribution – Personal contributions to a superannuation fund for which a tax deduction has not been claimed. Formerly known as Undeducted Contributions.

Post June 1983 Component (Untaxed) – That portion of a benefit which relates to employment or fund membership after 30 June 1983 which has not been subject to tax on contributions received. The rate of tax depends on age at time benefit is received.

Pre July 1983 Component – That portion of a benefit which relates to employment or fund membership prior to 1 July 1983. This is where 5% of the amount is included as assessable income and taxed at marginal rates.

Preservation – The maintenance of superannuation benefits or eligible termination payments in superannuation or rollover funds until a condition of release is met.

Reasonable Benefit Limits – Formerly used to determine the maximum amount of concessionally taxed benefits a person can receive during his or her lifetime. As a result of the Federal Budget changes introduced 1 July 2007, Reasonable Benefit Limits have been abolished.

Return – The amount of money received annually from an investment usually expressed as a percentage.

Risk – In its simplest sense, “the variability of returns”. Investment with greater inherent risk must promise higher expected yields if investors are to be attracted to them.

Rollover – The transfer of an eligible termination payment into an approved deposit fund, deferred annuity or superannuation fund prior to retirement in order to defer or, if the rollover remains in place until at least minimum retirement age, avoid the requirement to pay lump sum tax.

Salary Sacrifice – The portion of the pre–tax salary of an employee that is given up in exchange for additional contributions by the employer to the employee’s superannuation.

SGC (Superannuation Guarantee Charge) – A charge payable to the government by employers who fail to make their required Superannuation Guarantee contributions to employees. 9% since the 2002 – 2003 Financial Year.

SG (Superannuation Guarantee) – A compulsory minimum contribution for most employees. Serves as a means of setting aside funds during ones working life to provide a retirement income, under a regulatory system which provides certain taxation incentives and prudential controls for the benefit of contributors.

Spouse Contribution – A contribution made on behalf of the spouse. The contributions will be treated as a non–concessional contribution and will be part of the persons preserved benefit.

Transition to Retirement Income Stream – This condition of release allows members who have reached their preservation age, but who do not wish to retire permanently from the workforce to access their superannuation in the form of a non commutable pension.

Glossary of terms used to describe management styles

Active – A style of investment management that seeks to attain returns above a set benchmark through the continual adjustment of asset allocation and stock selection. The weightings of the individual stocks reflect the convictions of the Manager rather than just replicating the relevant index.

Bottom Up – A form of analysis which begins with forecasting returns for individual companies, then moves to industries and finally the economy as a whole.

Business Cycle – Investment decisions are based on the identification and analysis of economic trends and the impact of those trends on the value of investments. The weighting of different types of investments within a portfolio and the nature of specific holdings within an asset class depend upon the current position of the economy within its business cycle.

Contrarian – A style where the manager believes that they can add value by taking a different view to the market consensus.

Enhanced Index – The manager aims to add some value in relation to a particular index through tilting the portfolio (over or underweighting towards certain stock or sectors within the index) and to minimise the risk of underperforming the index through the use of derivatives.

Fundamental – Analysis of individual shares based on factors, which are essential to the performance of the company in question. The company’s financial statements are examined, and economic, political and industrial factors are also taken into account in an attempt to predict earnings and risk. This is then considered in light of current share prices to ascertain a mispricing.

Index – Structuring a portfolio so that it closely replicates a nominated market index e.g. the All Ordinaries Index.

Passive – A style of investment management that can also be described as “buy and hold”, that is the manager tends to maintain a portfolio’s composition and not make judgements concerning ongoing asset allocation and stock selection. This style of management is often associated with an “index” manager, where the portfolio is only changed when the composition of the index changes.

Stock Picker – An investment style where the portfolios are constructed on the basis of the manager’s analysis of individual companies. Consideration may also be given to broader economic issues however the analysis of the individual stocks is the primary factor determining the composition of a portfolio.

Top Down – Analysis which begins with forecasting broad economic trends then assessing the impact on industries and, finally, individual companies.

Thematic – An investment manager who utilises macro economic research and expertise to develop themes to influence its asset allocation decisions. The aim of the thematic managers is to identify those factors in the market, which will have strong influences on companies profitable, and on the market’s perception of relative values.

Value – A management style that utilises different measures, e.g. price/earnings ratio and dividend yield to determine a “fair value” for an individual stock. The manager then buys and sells appropriately as the market value moves below or above that “fair value”.