Glossary
| A | B | C | D | E | F | G | H | I | J | K | L | M |
| N | O | P | Q | R | S | T | U | V | W | X | Y | Z |
A
AAA
The top credit rating accorded by rating agencies such as the US’ Moody’s Investors Service and Standard & Poor’s.
Annuity
A form of life insurance which operates to provide income. The person who takes out the annuity pays the life office a lump sum and in return receives a series of payments.
Asset allocation
The process of allocating the total investment between the different asset sectors such as shares, bonds (also known as fixed interest investments), property, cash (also known as short dated fixed interest) and overseas investments. Asset allocation can also be referred to as the split between asset sectors.
Asset class or sector
Refers to a grouping of securities with broad characteristics in common. Sectors include New Zealand shares, international shares, private capital, property investments, New Zealand fixed interest, global fixed interest and cash.
Asset mix
The percentage of an investment held in each asset sector. Investment analysis shows the asset mix is a major factor in investment performance. An example of an asset mix is as follows:- New Zealand shares 15%, global shares 35%, property 10%, fixed interest 35% and cash 5%. Asset mixes are applicable to both the total fund and individual products.
B
Balanced fund
A fund or portfolio which invests in all major asset classes ie. cash, fixed interest, property and shares, domestically and internationally. It provides long term capital growth and a reasonable level of income.
Basis point
One hundredth of 1 per cent: 100 basis points equals 1 per cent.
Bear market
A market which is likely to fall; a situation where a dealer is more likely to sell an asset, even to the extent of selling assets which the dealer does not have. The bear hopes to close his short position by buying at a lower price than the assets he has contracted to deliver. The difference between the purchase price and the original sale price represents the successful bear's profit. Assets can be in the form of stock, currency or commodities.
Benchmark
The long-term "neutral" asset mix within the limits (maximum and minimum) of the strategy range of a particular asset class. A benchmark provides a standard for measuring the individual fund manager's investment performance. It is used by investors to determine the investment option best suited to their profile. The benchmark index is the generally accepted market index, which is used to assess performance.
Beta
A measure of the price volatility of a security or portfolio, compared with the market as a whole.
Bond
A debt security issued by entities, such as corporations, governments or their agencies (eg. statutory authorities). A bond holder is a creditor of the issuer and not a shareholder.
Book value
The value of an asset as recorded in the books of account of an organisation.
Buy-ins
A management buy-in (MBI) uses a leveraged buy out organised by new managers or a management team external to the business to buy into a company.
Buy-outs
There are two major types of buy-outs, leveraged buy-outs (LBOs) and management buy outs (MBOs). Both are organised by the existing management of the company. An MBO involves the acquisition of a product or business from either a public or private entity through the assistance of a venture capital or private equity firm. Financing is usually through the provision of equity. An LBO involves the acquisition of a product or business from either a public or private entity using a significant amount of debt and little or no equity (usually a ratio of 90% debt and 10% equity). In other words, the purchaser uses borrowed money for the acquisition, using the company’s assets as collateral for the loan.
C
Call
When a company makes a call on shares it asks the holders of partly paid shares to contribute more money. A call in futures trading refers to a ‘margin call’. Funds can be placed on the money market ‘at call’ which means they have not been lodged for a fixed term.
Call option
The right, but not the obligation, to buy a financial instrument, such as a share or a commodity during a given period.
Called capital
Used in private equity circles, this refers to the amount of committed capital an investor has actually transferred to a fund. Also known as the cumulative takedown amount. Capital is called upon when the manager is ready to make an investment.
Capital
The value of an investment in a house or business represented by total assets less total liabilities.
Capital Asset Pricing Model (CAPM)
A model that shows the relationship between expected risk and expected return on an investment, based on the accepted theory that the higher the risk associated with an investment, the higher the required return.
Capital growth fund
An investment fund which invests principally in assets most likely to increase in value, such as shares.
Capital stable fund
A fund with conservative investment policy concentrating on fixed interest or short term investments.
Convertible notes
Securities that are convertible into the ordinary shares of a company at a pre set price or ratio at specified times. Convertible notes are attractive to some investors because they display certain properties of bonds and shares.
Corporate bonds
Security issued by a company in which the company acknowledges that a stated sum is owed and will be repaid at a certain date. A corporate bond, like a government-issued bond, usually pays a stipulated amount of interest throughout its life to the holder.
Coupon rate
The annualised value of a bond’s regular interest rate repayments expressed as a percentage of a bond’s par value.
CPI
Consumer Price Index. A measurement taken quarterly of movements in the prices of a fixed list of goods and services.
Credit crunch
A period when there is a sharp reduction in the availability of finance from banks and other financial institutions, particularly from small businesses. This usually occurs during a recession or tough economic times.
Credit downgrade or upgrade
A change to a company’s credit rating. An upgrade reflects a perceived heightened ability to meet debt obligations. A downgrade reflects a deterioration in the company’s perceived ability to repay debt.
Credit rating
Rating applied to a company’s debt or debt security that indicates the company’s relative creditworthiness. The most well-known ratings are issued by US ratings companies Moody’s Investors Services or Standard & Poor’s. Debt issuers pay these companies to rate their debt to make it easier to attract investors.
D
Debt security
A financial security that represents borrowings that must be repaid by the issuer.
Default
Failure to meet a debt obligation.
Deferred annuity
A type of annuity that pays an income starting from a future age or date.
Derivative
Financial tool which enables investors to obtain returns from an investment in a market or a particular security without physically purchasing that security. They generally require a small deposit, can usually be bought or sold more quickly than physical securities and are generally much cheaper to transact. Derivatives can be used as a risk management tool or to speculate. They provide key benefits in that they improve liquidity and reduce transaction costs.
Direct investment
Taking a stake in a company or joint venture which brings a say in how the operation is run, although it does not necessarily give a controlling interest.
Diversification
The process whereby funds are spread among classes of securities and geographical localities in order to distribute and control risk. As a result, the return on the portfolio as a whole varies less than the return on smaller lots of individual stocks.
Dividend
The distribution part of the earnings of a company to its shareholders.
Draw downs
Payments to private equity managers by investors in order to finance investments. Funds are drawn down from investors on a deal-by-deal basis.
Due Diligence
Detailed research of a business, its management team and other factors to ensure the accuracy, soundness and completeness of its operations. A critical step in the investment selection process.
Duration
A measure of the asset's or portfolio's sensitivity to interest rate changes. As an indicator of risk, duration is useful for two reasons. First it provides a means of assessing the degree of mismatch between the assets and the benchmark or liabilities of a portfolio. Second, it provides an indication of portfolio volatility or risk.
E
Earning rate
Interest or growth rate earned on amounts held in the investment (usually expressed as a percentage of each year).
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortisation. This is an accounting measure of operational earnings that provides a more accurate view of the performance of a company’s core business versus the net earnings of a company. It is often used to compare firms with different levels of indebtedness.
Emerging Markets
A term used to define less developed economies. Characteristics which define emerging markets include: GNP (gross national product) per capita is substantially below the average for developed economies (as benchmarked by the World Bank), markets are highly regulated, there are restrictions on foreign investments and investment risk is perceived to be higher than for developed markets. Emerging markets are attractive due to the potentially high growth rates resulting from economic reform. Examples of some emerging market countries are Brazil, Argentina, Chile, Venezuela, Poland, Czechoslovakia, Russia, Hungary, Greece, South Africa, Turkey, Egypt, Israel, Indonesia, Korea, Malaysia, Taiwan, China and Philippines.
Enterprise Value (EV)
A measure of a company's value, calculated by market capitalisation plus debt and preferred shares minus cash and cash equivalents. It is the theoretical takeover price that a buyer would pay for a company less the cash.
Enterprise Multiple (EV/EBITDA)
A ratio used to determine the value of a company. The enterprise-multiple takes debt into account something which other multiples like the P/E ratio do not include. Enterprise Multiple = Enterprise Value/EBITDA. A company with a low enterprise multiple can be viewed as undervalued and therefore a good takeover candidate.
Equities
See shares.
F
Fair Dividend Rate (FDR)
Under the FDR method, the fund pays tax on 5% of the opening market value of the overseas shares subject to FDR. This calculation is performed on a daily basis. The FDR method ignores returns from realised and unrealised gains or dividends for the purposes of calculating taxable income.
Fixed interest
Interest paid on investments such as bonds and debentures, paid at a predetermined and unchanging rate for a specified period.
Float
A float is to take a company public by issuing shares to investors outside the company. Once a company is floated its price is quoted on a recognised stock exchange, where ownership can be traded. See also Initial Public Offering.
Floating rate
An interest rate set so many basis points above an agreed market-related benchmark (such as the UBS Warburg Bank Bill Index in Australia).
Floating rate note
A security whose yield is periodically reset to a reference index rate to reflect changes in interest rates.
Future
A derivative, an obligation to make or take delivery of a specified quantity and quality of an underlying asset at a particular time in the future and at a price agreed when the contract was executed.
FX, FOREX
An abbreviation for “Foreign Exchange”.
G
G3
Group of Three. The three largest western industrialised economies - the USA, Germany and Japan.
G7
Group of Seven. The seven leading industrial nations outside the communist block - USA, Japan, Germany, France, UK, Italy and Canada.
GDP
Gross Domestic Product. A measurement in dollar terms of aggregate goods and services produced within a particular economy over a year and excluding income earned outside the country. Considered one of the main yardsticks of the health and vitality of the particular economy.
GNP
Gross National Product. The GDP with the addition of interests, profit and dividends received from abroad. The GNP better reflects the welfare of the population in monetary terms, although it is not as accurate as a guide to the productive performance of the economy as the GDP.
Growth investments
These investments generally include New Zealand and global shares, private capital and property investments. These assets are expected to experience capital growth and a degree of risk is involved. See also interest bearing investments.
H
Hedging
Taking steps to protect against, or at least reduce, a risk; a form of insurance. The term is common in futures and foreign exchange markets where traders use facilities available to protect themselves against future price or exchange rate variations.
Hurdle rate
The expected rate of return on a potential investment that an investment manager demands before committing his money.
I
Indexing
An investment management strategy in which, the investor aims to match the performance of a market as a whole, rather than selecting particular stocks or assets.
Individually Managed Portfolio (IMP)
For large investments, AMP Capital Investors can create an IMP tailored specifically to an investor's requirements across all asset classes.
Inflation
A persistent rise in the level of prices and wages within an economy. See CPI.
Inflation indexed securities
Those securities where either part of all of the return is adjusted by an indexation factor reflecting changes in a price or wage series at the economy-wide level.
Infrastructure
A term use to define projects or businesses that support the community. These include transport links (eg. toll roads, railways, bridges), transport nodes (eg. airports, shipping ports, bus terminals), essential service delivery (eg. electricity, gas, water, telecommunications) and community amenities (eg. hospitals, housing, education, prisons).
The first fund-raising from the general public. It generally results in a listing on a stock exchange.
Interest bearing investments
These investments generally include New Zealand, global and short dated (or "cash") fixed interest investments.
Internal Rate of Return (IRR)
The return from an investment, calculated to show the rate at which the present value of future cashflows from an investment is equal to the cost of the investment.
J
K
KiwiSaver
A voluntary, work-based savings scheme. It is a Government initiative that is designed to increase the level of savings by New Zealanders and support them in their retirement. Enrolment in KiwiSaver will be automatic for those starting a new job (with some exceptions), although employees will have the chance to opt out.
L
LLC (Limited Liability Company)
A limited liability company is an alternative structure to a limited partnership (the structure most commonly used by private equity funds). It is often described as a hybrid between a corporation and a partnership because it offers limited liability (like a corporation) and single taxation on income (like a partnership).
Limited Partnership (LP)
Most private equity firms structure their funds as limited partnerships. Investors represent the limited partners and private equity managers the general partners. Australian private equity funds are often structured as unit trusts.
Listed asset
A company that is publicly owned and listed on a recognised exchange.
Listed debt
Debt traded on an active exchange. Listed debt can include corporate bonds and hybrids.
Listed PIE
Is a company listed on a recognised New Zealand exchange that has elected to be a PIE. This is a special tax entity and as such the Listed PIE is taxed as a company, the key difference being that any unimputed distribution is non taxable to the investor.
Liquidity
The capacity to be converted easily and with minimum loss into cash.
Listed property
Constitutes shares in property companies or units in property trusts listed on the New Zealand Stock Exchange. Examples are the AMP NZ Office Trust and Property for Industry.
Lock-up
A provision in the underwriting agreement between an investment bank and existing shareholders that prohibits corporate insiders and private equity investors from selling at the time of the offering.
Long term investment
An investment which generally matures in more than five years.
M
Macro
Usually in reference to economics. The study of economic aggregates and their relationships to, for example, money, employment, interest rates, government spending, investment and consumption.
Managed fund
Arrangement which usually involves the pooling of the contributions of investors in a particular fund. This is managed by an external manager and management charges, and benefits are paid. Income earned is generally credited to the fund.
Management Buy-Out (MBO)
See Buy-outs.
Management Buy-In (MBI)
See Buy-ins.
Master trust
A superannuation vehicle which enables a number of companies or individuals to combine their superannuation business under a common trust deed.
Medium term investment
An investment which generally matures between two and five years.
MSCI Gross Index ($NZ)
The Morgan Stanley Capital International Index in New Zealand dollars. It measures the way international shares values have changed ($NZ) and includes reinvestment of dividends. This index is a market proxy for global share portfolios.
N
Net Asset Value (NAV)
The value of a fund’s holdings, which may be calculated using a variety of valuation rules.
O
OECD
Organisation for Economic Cooperation and Development. Formed in 1961 to promote cooperation among industrialised member countries on economic and social policies. The 25 members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, UK and USA.
Option
A derivative; contract giving the holder the right but not the obligation to buy or sell an underlying asset at a specified price during a given period of time.
P
Portfolio Investment Entity (PIE)
PIEs are a special tax investment entity which a managed fund can elect to become. It means income from the funds flow through the PIE and the ultimate investor is taxed on their share of the taxable income taxed at their prescribed investor rate (PIR).
Portfolio
The list of holdings in securities owned by an investor or institution.
Prescribed Investor Rate (PIR)
Investors in portfolio investment entities must elect their PIR and notify the Fund. The prescribed investor rate depends upon various factors including the level of taxable income, residence and type of entity but is either 0%, 12.5%, 21% or 30% (from 1 October 2010 these will be 0%, 10.5%, 17.5% and 28%).
Privatisation
Involves a private enterprise or syndicate purchasing a government asset or service.
Property
Refers to direct property investment, which covers a wide range of real assets including office (commercial), retail (shopping centres), industrial, hotel and leisure as well as residential properties.
Put option
The right, but not the obligation, to sell a financial instrument or a commodity within a specified period.
Q
Quant
A specialist usually working in portfolio management or bond research who develops systems that map past movements in financial markets with a view to predicting future equity, commodity and currency values.
Quartile
Investment surveys rank investment managers according to the investment performance of their products. Managers in the top quarter of those participating in the survey are said to be "top quartile performers". Similarly, an investment manger's performance may fall in the second, third or fourth quartile, or by simply "above average" (quarters one and two combined).
R
Real return
The rate of return on an investment in excess of inflation.
Recapitalisation
The restructuring of a company’s balance sheet by either increasing or decreasing the amount of corporate debt. The aim is to alter the capital structure of a company in order to improve its profitability. This strategy is considered to be a form of financial engineering.
Resource
Any physical item produced for trade purposes. Examples include coal, gold, aluminium and oil.
Return Multiple
A common measurement used in the private equity market is the amount realised for the investment divided by the original cost of the investment, otherwise known as realisation ratio or return multiple. The measurement does not take into consideration the time value of money.
Risk
In investment terms risk is a measure of volatility. Volatility is a measure of the variability of returns and is the standard deviation of investment returns over a specific period of time. The higher the standard deviation, the higher the level of risk associated with that investment.
Running yield
The interest rate on an investment expressed as a percentage of the capital invested, thus showing the actual cashflow of the amount paid for the investment.
S
Secured Debt
Debt which, in the event of default, has first claim on specified assets.
Securities
Written undertakings securing repayment of money. They are typically negotiable instruments such as bonds, bills of exchange, promissory notes or shares which establish ownership and payment rights between parties.
Seed capital
See Start-up capital.
Shares
Also known as equities. A person who buys a portion of a company's capital becomes a shareholder in that company's assets and as such receives a share of the company's profits in the form of an annual dividend. There are different types of shares, for example ordinary, preference, cumulative preference and participating preference shares.
Short term investment
An investment which generally matures in less than two years.
Socially Responsible Investment (SRI)
An innovative form of investing because it focuses on investing in companies that will form part of a socially and environmentally sustainable world. SRI aims to achieve more than financial returns. Its non-financial aims include issues such as attempting to boost working conditions and helping the environment.
Start-up capital
Financing provided to companies which have not yet fully established commercial operations and may also involve continued research and product development. Essentially it is money provided to companies to develop a concept.
Strategic ranges
The minimum and maximum weighting allowed within each asset sector.
Superannuation
A pension or payment to a person retiring from full-time work on reaching a legislated age. The term also refers to the accumulating contributions by employers and employees to a superannuation fund.
Surplus
The excess of the fund value over the liabilities in a superannuation plan.
Swap
On debt markets, when one party pays a fixed interest rate to another in return for a floating rate.
Swap curve
A visual representation showing the fixed interest rates at which the bonds of the best-rated companies can be swapped for floating money-market rates.
Swap rates
The fixed interest rates traders will pay to receive a floating money-market rate. The gap between those rates and government bond yields are know as swap spreads and gauge risk appetite.
SWBI ($NZ Hedged)
The Salomon Brothers World Bond Index hedged to New Zealand dollars. It is a market proxy for global bond portfolios. All income is reinvested.
T
Trust
An arrangement enabling an asset to be held by a person or persons (the trustees) for the benefit of some other person or persons (the beneficiaries).
Trust deed
The formal legal document which sets out the rules governing how a fund operates.
Trustee
An individual or company with the duty to ensure that the rules of the trust deed are adhered to. Trustees are normally responsible for the running of superannuation plans and are bound by the trust and the relevant legislation.
U
Underwriter
A firm which buys an issue of securities from a company and resells it to investors.
Under/outperformance
The measure of performance against an index, competitor or any other benchmark.
Under/overweight
Underweight is less than the benchmark holding in an asset class; overweight is greater than the benchmark holding.
Unit price
Value of investment units which change daily according to fluctuations in the market. Prices are either allocation or issue (buy in at) or release or redemption (sell at).
Unlisted asset
A company that is privately owned and not listed on the stock exchange. Unlike a listed company that is publicly owned and listed on a recognised exchange.
Unlisted debt
Debt that is not traded in an active market such as the stock or bond market. Typically the term unlisted debt market refers to the private structured debt market. This type of debt implies complex legal arrangements between share holders, borrowers and lenders.
V
Volatility
A measure of the variability of returns. It is often taken as a proxy for investment risk.
Venture capital
A term used interchangeably with private equity. AMP Capital defines Venture Capital as finance provided by one or more private investors to help the development of a relatively young business. American venture capital houses tend to refer to venture capital as investment in technology related businesses.
W
Weighting
Percentage or proportion of the portfolio invested in each asset class.
Withholding tax
Tax levied on interest dividends paid offshore.
X
Y
Yield
The return on an investment expressed as a percentage (calculated by dividing the income from an asset by its current market price).