Accessing My Money
With the exception of your KiwiSaver account, you can withdraw your money at any time without any penalties. It can take 3-4 business days for you to receive it though. Of course, it is recommended that you allow your investment to reach the fund’s minimum investment timeframe to let it achieve what it sets out to do.
Active Fund Management
Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index or target return. The manager uses expertise and research to best determine what they invest into.
Our active approach to investing means we actively select which investments to hold in a fund, as opposed to owning shares or bonds based on their inclusion in an index. We choose investments based on their merits, following our own extensive research. We believe that this allows us to deliver higher returns or lower risk compared to a passive approach. We apply this principle to meet the objectives of all of our funds.
Alpha is used in finance as a measure of performance, indicating when a strategy, or portfolio manager has managed to beat the market return over a period. The additional return an investment makes OVER the return of a benchmark index is the investment’s alpha. i.e. Alpha can be considered the ‘additional value’ a fund manager can add to your investment when comparing a benchmark index return such as the NZX 50 return – in this example it’s the return above what the NZX 50 would have provided.
It is important to consider which index best captures a fund’s objective when determining a fund’s alpha. For our diversified funds such as Active Growth, a single equity index such as the NZX 50 is less appropriate than a blend of indices (called a market index) that represent all the types of investments that fund might make. We publish all our funds returns alongside their respective market indices over different periods so clients can assess our historical alpha generation.
Asset allocation is the process of dividing your investments among different classes of securities, such as cash, shares and bonds. An investment fund’s asset allocation is what drives the fund’s risk rating and investment time frame.
Asset allocation is the process of choosing which types of assets should be included in a fund such that it can meet the fund’s objectives (defined by both risk and reward). This process determines that a conservative fund should have more bonds and fewer shares whilst a growth fund should have more shares and fewer bonds.
An item or group of items owned by an individual or company that can be valued in monetary terms. Property, equipment, inventory, cash accounts, and investments are examples of assets. A typical balance sheet will show assets and liabilities. The vast majority of assets that Milford invest into are financial assets (such as company shares and bonds).
The Australian Securities Exchange (ASX) is Australia’s primary securities exchange. This is the equivalent of the NZX and is where our Australian company share investments are traded.
One of the principal documents used to evaluate the financial health of a business or individual. The balance sheet provides a snapshot of assets, shareholder equity, and liabilities at a given point in time. A balance sheet is sometimes referred to as a statement of net worth.
Base Fund Fee
The annual fee charged in an investment fund. This fee is charged by the manager and will include things like the management fee and any underlying fund charges (and may include usual fund expenses). This fee is charged every year (or part year) you are invested in the fund. It is distinguishable from a performance fee which may only be charged if certain criteria are met by the fund manager.
A term used to describe a market where the prices are falling. Typically for shares, a bear market is one where the prices have fallen by more than 20% from the peak.
Beta is a measure of how much a particular investment moves in relation to a broader market over a particular period. For example, a high growth company’s share price may move much more than the broader sharemarket. This company will have a beta greater than 1. So, if Fisher and Paykel Healthcare shares go up 2% in a day when the NZX50 goes up 1%, for that day the shares in Fisher and Paykel Healthcare are said to have a beta of 2. Beta can also be used to indicate risk, as high beta stocks can deliver more volatility to a portfolio (which may be offset with higher returns).
An investment term derived from poker, blue chip is a company with a reputation for reliability, and consistent profitability. Examples of blue-chip companies include Disney and Coca-Cola. In New Zealand, Auckland International Airport and Contact Energy would be current examples of blue chip companies.
A bond is an investment security. When you buy a bond, you are loaning money to the issuer (usually a government, council, or a company) for a set amount of time. The term is fixed by the issuer and is typically from 0-30yrs. The issuer of the bond uses the money to fund its operations, and the investor receives interest (or a coupon) on the investment. This interest is at a fixed rate while holding the bond and the investor will have their money returned at the end of the fixed period. Bonds can be bought and sold by investors across this period (i.e. the first bond holder can on-sell the bond), and the market value of a bond can change over time. Bonds are also referred to as fixed interest.
Refers to those who build investment portfolios company by company rather than the sectors those companies operate in.
A broker (strictly speaking a ‘sharebroker’) facilitates share market buying and selling, serving as an agent between the share market and investor. A broker can be an individual or a company and must be licensed. An investor entrusts the broker to offer professional investment advice and act in his best interests. Brokers usually earn a commission based on a percentage of the deal’s value, or in some cases, they earn a flat fee based on performance.
A term used to describe a market where the prices are generally increasing over a period of time. Bull markets tend to attract more investors who become attracted by the rising prices and who invest in anticipation of further rises.
The buy-sell spread represents the estimated transaction costs incurred when buying or selling underlying assets in relation to investment options. The buy spread is added to the unit price to obtain the buy price and the sell spread is deducted to obtain the sell price. Buy/sell spreads are used as a way of ensuring (at least in part) that the transaction costs of investors entering or exiting a fund are borne by those investors as opposed to the investors remaining in the fund.
The principal value, in dollars, of your investment is your capital. All durable resources owned by a business or person that can be used to generate revenue are defined as capital. This includes tangible items such as buildings, equipment, land, machinery, stocks, cash, and intangible items such as patents and trademarks. Capital can also refer to a business’ wealth defined by subtracting total liabilities from its total assets.
The difference between the purchase price or cost of an asset and the price it is sold for is capital gain (i.e. the profit). In investing, capital gain relates to the rise in value of an investment for instance, you invested $10,000 in an investment fund and when your balance reached $15,000 you withdrew all your money from that fund – your capital gain was $5,000.
The difference between the cost of an asset and the current value of it is capital growth. For instance, you invest $10,000 in an investment fund and when your balance reaches $15,000 your capital growth will be $5,000. Many people invest for capital growth – which is the increase in value of their investment over time.
Cash funds tend to be the safest form of an investment fund. This type of fund invests in short term securities, like bank call and term deposits. These funds are less risky but their projected returns are often very low as a result. They may not be suitable for long-term investments due to inflation, which erodes the real value of savings over time. For example, if inflation is 2% and a cash fund returns 1% over that period, the purchasing power of the savings in the fund has diminished by 1%.
Cash investments include money in bank accounts, fixed deposits, and term deposits. These investments can provide stable, low-risk income in the form of regular interest payments. For diversified funds, cash holdings help reduce risk of the fund (as they don’t fall in price), as well as providing funds to purchase assets as opportunities arise.
A commodity is a basic good used as an input in the production of goods and services. That means companies use commodities in the manufacturing process to turn them into everyday goods. The most common commodities include copper, crude oil, wheat, coffee beans, and gold.
Compounding is the process of reinvesting interest income/or returns to achieve a greater long run return. For example, if you had $1,000 in an investment that earned 5% interest a year, after one year you would have $1,050. During the second year, you would earn a return on the $50 earned the first year as well as on the original $1,000. Over time, compounding can lead to significant growth in your investments. Compounding can be so material to your investment growth over time that is has been called the ‘eighth wonder of the world’.
A conservative investment fund is when fund managers buy a mix of lower-risk investments that come with generally lower, fixed returns, like bonds and cash. They’ll buy fewer higher-return, more volatile investments like shares and property.
Consumer Price Index (CPI)
The CPI is a measure of inflation for New Zealand households. It records changes in the price of goods and services. Most central banks target a low to moderate CPI in the 2% to 3% range to indicate the economy is in ‘good health’.
Costs and Fees
Any investment product or fund will include costs and fees that are charged to investors. Milford charges a base fund fee that includes most usual fund costs, and in some instances a performance fee. With Milford’s funds, there are no withdrawal or transaction fees, costs or penalties. For more information on the fees and costs applying to Milford’s investment funds please see the Product Disclosure Statement and Investor Guide available at milfordasset.com
The amount a bondholder will receive as interest payments.
The interest rate on a bond, expressed as a percentage of the bond’s face value. Typically, it is expressed on a semi-annual basis. For example, a bond issued with a face value of $1,000 that pays a $25 coupon semi-annually has a coupon rate of 5%.
An evaluation of the credit worthiness of a company or government. It assesses the ability of a company to repay its debt and the likelihood of default.
The value of debt securities (i.e. bonds) may be impacted by the issuer’s ability to pay interest and the principal owed when due. If the issuer’s ability to meet its payment obligations is doubted, the value of the debt security (i.e. company bond) may decrease.
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
A strategy to reduce the impact of currency on investment returns. In New Zealand a currency hedge might be used when investing in overseas markets if it is thought that the value of the New Zealand dollar will strengthen relative to other currencies and thus negatively affect the returns of those investments when converted back to New Zealand dollars.
Where investments are made outside of New Zealand, returns may be affected by movements between the other currencies and the New Zealand dollar.
The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of par ($1,000) that pays eighty dollars ($80) per year would have a current yield of eight percent.
An independent entity (commonly a bank) that holds the assets of a managed investment fund separate from the fund’s Manager. In NZ, the custodian is appointed by the Supervisor but has no supervisory role in relation to the operation of the fund.
Cyclical companies make or sell discretionary items and services that are in demand when the economy is doing well. They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers.
A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards, and swaps.
A direct listing, also known as a direct placement or direct public offering, enables a company to go public without holding an initial public offering (IPO).
A distribution represents your share of the income earned by the investments held by that investment fund. It pools together the income or dividends from the underlying holdings and pays them out as distribution to the fund unitholders. The distribution can generally be taken as a cash payment or reinvested into the fund on your behalf (i.e. extra units purchased).
The risk of an investment fund is spread out by investing in a wide range of ‘assets’ (such as company shares, listed property, bonds and cash) across different industries and geographic regions. So, as economic and market cycles go through their different stages, some investments in the fund may perform poorly, while others will thrive. This means overall, the return generated by your investment fund will be ‘smoother’ as the underlying individual asset returns go up and down over time.
Dividend refers to a distribution of a company’s earnings to its shareholders. It is usually paid in cash, but may be applied to the purchase of additional shares. Stable and steadily increasing dividends indicate a healthy operation, which in turn attracts more investors. Dividends are usually paid quarterly or semi-annually. You may be able to choose to have your dividends automatically reinvested – to buy more shares or more units in a given investment fund – or have them paid out to you as income.
Dividends received from companies held in an investment fund will form part of the fund’s overall return.
The rate of investment return received by way of dividends. The yield is calculated by dividing the annual dividend (cents per share) by the market price of the share (cents).
By investing equal amounts of money at regular intervals regardless of whether share prices are moving up or down, you may be able to reduce your average overall share cost. Under this method, you acquire more shares in periods of lower prices although fewer shares in periods of higher prices
Dow Jones Index
Among all the indexes used to measure stock performance, on the New York Stock Exchange, the Dow Jones Index is perhaps the best known. Named for its creator, Charles H. Dow, the Dow, also known as the Dow Jones Industrial Average (DJIA), indexes 30 companies in the technology, financial, transportation, communications, healthcare, food & beverage, transportation, and consumer sectors.
Simply put, earnings are the net profit of a business. It is derived by subtracting the total operating expenses, taxes, and the cost of sales from total revenues. Earnings are an important indicator of a company’s profitability and stock value.
Earnings Per Share (EPS)
EPS is one way to measure a company’s profitability and future growth potential. EPS is typically calculated by subtracting dividends from the company’s net income and dividing that by the total shares outstanding in any given period.
EBIT refers to Earnings Before Interest and Taxes. EBIT usually shows up just before “net income” on a company’s income statement. Often referred to as “operating earnings,” the formula excludes taxes and interest payments to calculate a company’s profitability.
Short for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is an alternative formula used to assess a company’s financial performance. Discretionary factors such as capital structure and debt financing are removed from the calculation, focusing on the performance of the company’s core operations.
Environmental, Social, Governance (ESG)
Environmental, social, and governance criteria are a set of standards for a company’s operations that investors use to support consideration of potential investments. This lens can also be referred to as sustainable investing, which can include not just what the company does, but how they operate also – i.e. are the business practices sustainable in terms of their impact on the environment or how they treat their employees?
Equity means ownership. It is the value of your assets (property, possessions, money and other). An equity security refers to a share, representing an ownership interest in a corporation.
The financial risk of holding equity in a particular investment (e.g. shares in a company). If the company becomes insolvent, the shareholders may lose all their equity (i.e. investment).
This describes a stock that is trading without the value of the next dividend payment (which may yet to be paid). Investors who buy the stock ex-div will not be entitled to that dividend. The stock price typically falls by the amount of the dividend on the day that it ‘goes ex’.
Exchange Traded Fund (ETF)
An ETF is a fund that holds a wide group of securities that track an underlying index. ETFs contain assets like stocks and bonds, and can be traded daily at prices that change based on demand and supply. An ETF fund can generally be expected to perform in line with the underlying index it tracks.
This is the expected, future, return of a particular asset or investment (including fund). It is based on several assumptions, including the historical returns for that particular asset. Expected returns are not forecasts and expected returns come alongside expected volatility (or risk). Short term returns may deviate significantly from expected returns, hence the provision of minimum recommended investment timeframes.
An abbreviation for the five large US tech companies that have been popular with investors: Facebook, Amazon, Apple, Netflix, and Google. There are other variations that include slightly different groups of stocks.
Also known as the par value or principal is the amount of money a holder will get back once a bond matures.
Investment fees are fees charged to use financial products, such as management fees, broker fees and trading fees.
Fixed interest securities, also known as bonds, are a form of borrowing that governments and companies may use as an alternative way to raise funds. In return for a principal amount invested, the issuer of the security undertakes to pay a specified (fixed) amount of interest to the investor for a specified time plus repayment of the principal at maturity.
The process of estimating a companies future sales. Accurate sales forecasts enable companies to make informed business decisions and predict short-term and long-term performance. Companies can base their forecasts on past sales data, industry-wide comparisons, and other external factors such as economic trends.
The Fund’s objective is what the fund is trying to achieve. Different funds have different objectives, with different returns and risk profiles. For example, a lower risk fund that seeks to generate a positive though moderate return over three years will most likely hold a lot of fixed interest investments (known as bonds). The return for this fund is expected to be lower than a higher risk fund, which might have an objective to beat the New Zealand share market over a rolling eight-year period for example. A higher risk fund will likely invest in a higher proportion of shares and should provide a higher return over time. The offset is a higher risk fund will likely experience greater volatility (price swings) than a lower risk fund.
Fund of Funds
An investment fund that invests in other funds to help investors achieve greater diversification.
Futures are derivative financial contracts that bind the parties to buy or sell an asset at a predetermined future date and price. The buyer must purchase, or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Futures are used by investors as an efficient way to increase or reduce exposure to a particular underlying asset.
Global Financial Crisis (GFC)
The Global Financial Crisis that emerged in late 2007/ early 2008. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930’s.
Gross Domestic Product (GDP)
The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
Businesses that are in a growth period of their development. They are usually able to consistently grow their earnings and will typically reinvest capital to grow their business instead of paying dividends to investors. Growth companies share prices can offer strong returns but also tend to come with a higher level of risk as their share prices can fall sharply if growth disappoints investor expectations.
A growth fund seeks to grow your capital and invests in companies that the portfolio manager believes have strong prospects for future growth but are potentially higher risk.
The halo effect is a phenomenon whereby consumers perceive the products or services from a certain company to be better than they really are. For instance, if you really like a company, you may think they are a good company regardless of their underlying practices or financials.
A hard asset is a physical, or tangible, asset such as a building or piece of machinery. It is the opposite of an intangible asset.
A vehicle for investing, similar to an investment fund, but riskier or more complex. Typically available in the USA, hedge fund access is typically restricted to sophisticated investors with higher income levels because of the risk and expensive management fees. Hedge funds are typically established as a limited liability company or a limited partnership and are managed by licensed investment advisors.
Hedging against investment risk means strategically using financial instruments or market strategies to offset the risk of any adverse price movements. For instance, currency hedging may be used to protect the fund against currency movements.
High Water Mark
The restriction placed on payment of a performance fee by including a provision in the performance fee calculation that no performance fee is paid if the Manager is recovering any losses that may have been incurred by the Fund in a previous period. A high water mark may be the highest unit price an investment fund achieved over a certain period. The performance fee is then only payable if the current unit price exceeds that previous mark f.
High Yield Bonds
High-yield bonds are corporate debt securities issued by companies whose financial health is perceived to be low. As a result, these bonds pay higher levels of interest (yield) to compensate investors for the increased risk of default (i.e. that the company becomes insolvent, and investors may not recoup all their capital). In some instances, they are colloquially referred to as ‘junk bonds.
An index fund attempts to replicate a particular financial index (such as the NZX50). Indices measure the ups and downs of stock and bond markets, reflecting market prices and the number of shares outstanding for the companies that compose the index. An individual cannot invest directly in an index.
Individual companies are generally classified into an industry based on their largest sources of revenue. Examples of industries can be technology, B2B software companies, logistics, payments, etc
An industry trend is a general, identifiable direction or course within an industry sector. A trend can refer to prices, costs, sales, marketing methods, popularity, or consumer habits.
A measure of how the aggregate price of goods and services in an economy is changing over time.
It is also referred to as a rising cost of living. Steady inflation of 2-3% is generally considered a feature of a healthy economy. Inflation above or below this range can indicate boom or bust periods in an economic cycle.
Inflation is frequently measured by the percentage change of the Consumer Price Index (CPI*). Central banks typically target inflation as a core part of their mandates.
Initial Public Offering (IPO)
An IPO is the process of a company offering its shares to the public for investment and having those shares trade on a publicly available stock exchange. An IPO is one way for a company to raise capital quickly (as people purchase shares in that company for the first time). Employees and investors who already held stock benefit from the ability to trade their shares on the market.
The cost of borrowing money or earnings received from lending money. For example, banks pay interest to savings accounts and certificates of deposit holders. Lenders or bond holders receive interest from borrowers. The interest rate can fluctuate depending on multiple factors.
An investment fund is a type of financial vehicle made up of a pool of money from many investors. The fund then invests in securities like stocks, bonds and other assets. Investment funds are operated by professional fund managers who allocate the fund’s assets to various investments and attempt to produce capital gains or income for the fund’s investors according to the funds objectives.
Unlike term deposits, investment fund returns are variable, rather than fixed. This means you cannot know what the return will be before you invest and returns can be negative as well as positive, particularly over shorter time periods. However, your fund will be designed to achieve certain objectives. By understanding those objectives, you can get an idea of what your returns may be.
With an investment fund, your money is not locked in for a pre-determined period -you can generally access it at any time. However, to get the expected return on your investment, each fund does have a minimum recommended time frame attached to it.
There are a wide variety of markets in which one can invest money. The main markets are stocks (shares or equities), bonds, forex (currency), options and derivatives, and physical assets. Furthermore, within each of these types of markets, there can be even more specialist markets.
Investment Return Risk
Past performance is no guarantee of future performance. There is a risk that a fund may underperform compared with its investment objective or with the market.
Investment Time Horizon
An investment time horizon, or just time horizon, is the period of time you expect to hold an investment until you need the money back. Time horizons are largely dictated by investment goals and strategies. Your investment time horizon is the projected length of time your money will be invested.
IndexIndex refers to a benchmark used to measure the health and performance of a particular securities market. The NZX 50 is an example of an index (it is the largest 50 companies on the New Zealand stock exhange). Index Fund refers to an investment vehicle through which a pool of investors’ money can be used to purchase stocks and other securities that reflect a certain Index. The Vanguard 500 Index Fund is an example of an index fund that tracks the S&P 500 index (the 500 largest US companies).
When you commit money to an investment fund, you need to be clear on how long you intend to stay invested in that fund. When will you need or want your money back? Milford encourages our clients to stay invested for a minimum timeframe, depending on the type of fund. If your timeframe is shorter than this, then an investment fund may not be the right option for you.
Joint Venture (JV)
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.
In a JV, each of the participants is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.
See high-yield bonds
KiwiSaver is a voluntary savings scheme set up by the government to help New Zealanders to save for their retirement. You can choose to contribute 3%, 4%, 6%, 8% or 10% of your gross (before tax) wage or salary to your KiwiSaver account. You can also contribute one off lump sums whenever you like. Your employer has to contribute as well – at least 3% of your gross salary. You generally cannot touch your KiwiSaver account until the age of 65 or if you are purchasing your first home.
Know Your Client (KYC)
The Know Your Client or Know Your Customer requirement is a standard in the investment industry that ensures investment advisers know detailed information about their clients’ risk tolerance, investment knowledge, and financial position. KYC also provides necessary information for investment businesses to determine the legitimacy of their clients and the source of their investment funds. KYC protects businesses, clients and advisers. KYC compliance typically involves requirements and policies such as risk management, customer acceptance policies, and transaction monitoring.
The largest stocks in a particular countries stock market are called large cap (short for large capitalisation). As larger companies they tend to be well established and therefore are generally safer than smaller cap company shares, though returns tend to be smaller.
Leverage results from using borrowed capital as a funding source when investing to generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.
Leverage can also refer to the amount of debt a firm uses to finance assets.
There are a wide variety of markets in which one can invest money. The main markets are stocks (shares or equities), bonds, forex (currency), options and derivatives, and physical assets. Furthermore, within each of these types of markets, there can be even more specialist markets.
Some investments may not be easily converted into cash with little or no loss of capital and minimum delay, because of insufficient availability of buyers, suspension of trading, fund outflows, or market disruptions. Shares of small companies in particular may be less liquid. Certain funds may hold unlisted securities that are less liquid than listed securities in the expectation that returns may be higher.
Listed companies are companies that are included and tradable on a stock exchange . Companies tend to prefer to be listed on the major exchanges, such as the NZX or ASX since they provide the most liquidity and visibility for the company’s stock.
Stands for London Stock Exchange, the third-largest exchange in the world. More than 3,000 companies from across China, Europe, Africa, Asia, and Latin America are represented on the LSE.
Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies.
Managed Fund/Managed Investment Scheme
A term used to describe investment vehicles where your money is pooled with that of other investors and invested in various investments. The fund is then managed by a professional manager for the benefit of the fund’s investors.
A management fee is charged by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise for selecting stocks and managing the portfolio. It can also include other items such as expenses and the administration costs of the fund. In New Zealand this is also referred to as the base fee.
Market Capitalisation / Market Cap
Market capitalisation, or market cap, is the market value of a publicly traded company’s outstanding shares. Market capitalisation is equal to the share price multiplied by the number of shares outstanding.
Market risk is the possibility that an individual investment will experience losses due to factors that affect the overall performance of investments in the financial markets (such as interest rates, political events and shocks to investor sentiment/confidence).
Market value is the price a buyer is willing to pay, and a seller is willing to accept at any given moment for a particular security. Since market values are constantly changing, the current market value may be more or less than the price of your original investment.
A designation given to the biggest global listed company shares, with market capitalization exceeding US$200 billion. Mega cap stocks are also known as blue-chip stocks. They generally enjoy the best price stability due to their popularity with mutual and hedge funds.
Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
Companies whose sharemarket value is between US$2 billion and $10 billion are referred to as Mid-Cap companies. These companies have not yet made it to the big leagues, but they have established a foothold in their industry and exhibit growth potential. Mid-cap stocks fall between large-cap and small-cap.
The competitive advantage one company has over other companies in the same industry. The wider the moat, the larger and more sustainable the competitive advantage. A company with a wide moat possesses characteristics that act as barriers against other companies wanting to enter the industry.
A moderate fund seeks to target a balance between shares and fixed income assets which is usually around 40% in shares and 60% in fixed income assets. Long run returns are typically lower therefore than a Growth or Balanced Fund (which will usually hold a higher percentage of shares) as there is reduced risk.
These invest across a range of different asset types (which can hold a mix of shares, bonds, and cash) to create well-diversified funds. These funds should provide a smoother return and reduced volatility compared to single asset funds. These funds are often named after a particular risk category (e.g. Growth) indicating how the fund is expected to perform over time.
Mutual funds pool investors’ money into a single fund. A professional fund manager is retained to manage the portfolio, making purchasing decisions based on the type of fund, such as a growth stock mutual fund. It is one of the most popular vehicles for investing because it doesn’t require a lot of money to get involved.
* A mutual fund is available in American markets (the equivalent would be an investment or managed fund in New Zealand markets).
Launched in 1971, the National Association of Securities Dealers Automated Quotations (NASDAQ) has become one of the best known and second-largest stock exchange in the world. It was the disrupter of its day, creating the first electronic stock market, consolidating trading activities that previously took place informally.
Short for net income. NI reveals if the company’s revenue exceeds its expenses, making it potentially a good investment. Also known as net profit or net earnings, NI is what remains from total earnings after subtracting all costs of sale, taxes, interest, and operating expenses.
Short for net operating income. NOI is calculated by taking gross income and subtracting total operating expenses. NOI is a more reliable indicator of a company’s potential profits or losses. Loans, income taxes, and non-operating income, such as interest revenue, are not included when calculating NOI.
Not for Profit
Not-for-profit organisations are types of organisations that do not earn profits for their owners. Generally, all of the money earned by or donated to a not-for-profit organisation is used in pursuing the organisation’s objectives while covering only essential operating expenses.
Typically, organisations in the nonprofit sector are tax-exempt charities or other types of public service organisations, and as such, they are not required to pay most taxes.
Short for New York Stock Exchange. The NYSE holds the distinction of being the largest and most prestigious stock exchange in the world. Founded in 1792, it was the first to use an electronic system to buy and sell stocks. Today, it hosts more than 70 of the world’s most significant corporations and 82% of the S&P 500.
The New Zealand Stock Exchange (NZX) is the national stock exchange for New Zealand.
The purpose of the NZX is to provide a marketplace where the exchange’s listed equities and funds can be traded. The NZX provides a platform for the buying and selling of liquid investments, offering investors access to market information and real-time stock quotes.
Official Cash Rate (OCR)
The interest rate set by the Reserve Bank of New Zealand to meet its inflation target of 1% – 3% on average over the medium term. The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation.
Short for over-the-counter. Securities traded directly between the buyer and seller, without the use of a formal securities exchange is known as OTC. Over-the-counter securities are not listed on the stock market and trades are handled through emails, telephone, or digital platforms.
Refers to price-to-earnings ratio. The P/E ratio is formulated by taking the stock price and dividing it by the company’s annual earnings per share. It can also be calculated using the average stock price over a specific time period. A higher P/E ratio indicates the stock is more expensive relative to what it earns. If the P/E is lower, it indicates the stock is less expensive.
Passive Fund Managers
Passive Fund Managers structure their portfolio to replicate or mirror a market index (for example, the NZ share market). This investment strategy generally comes at a cheaper cost than active management. The idea is that the investment will therefore follow (both up and down) the movement of the market it’s invested in. This investment approach is based on the belief that it is too difficult for a fund manager to consistently outperform the share market, so you focus instead on minimising fees and simply taking what the market will give you.
Performance Fees / Performance –Based Fees
A performance fee is a payment made to an investment manager for generating positive returns over a certain hurdle or rate of return. This is as opposed to a management fee, which is charged without regard to returns. A performance fee can be calculated many ways and should be clearly outlined in the Product Disclosure Statement or offer document.
Portfolio investment entity (PIE) funds provide some individual and trustee investors with a benefit over holding assets (or investments) directly. This is because PIE funds will pay tax on behalf of such investors at their prescribed investor rate (PIR) rather than at their personal income tax rate with the highest or default PIR capped at 28%. All KiwiSaver investment funds are PIE funds, and all Milford investment funds are PIE funds.
The income attributed to a person from the PIEs in which that person has invested.
A prescribed investor rate (PIR) is the rate used to calculate how much tax you’ll pay on your portfolio investment entity (PIE) taxable income. Depending on your circumstances, individual investors may choose a PIR of: 10.5% 17.5% or 28%. You should check your Milford KiwiSaver Plan Member Guide or Milford Investment Funds Investor Guide for assistance with calculating your PIR rate.
A collection of investments all owned by the same individual, fund or organisation such as shares, bonds, cash, currencies, real estate, etc., mixed between low-risk and high-risk, and designed to meet the investing needs of the individual, fund or organisation.
A kind of stock that does not grant voting rights and pays dividends according to a set schedule. It’s known as a hybrid between a bond and common stock (share) and is preferred by investors seeking a consistent income from their investment.
In general, principal refers to the amount of your original investment.
Private Equity Fund
Private equity funds are managed investment schemes that invest primarily in private (unlisted) companies. Typically, the fund will be structured as a limited partnership that raises capital from institutional and sophisticated investors, which will be used to buy a stake in one or more unlisted companies. These funds have a longer-term time horizon of about 10 years and are considerably less liquid than managed funds or listed securities.
Product Disclosure Statement (PDS)
A Product Disclosure Statement is a required regulatory document that provides you with essential information about a particular investment product. It will outline the nature of the financial product, how it works, investment options, risks of investing and fees and taxes involved.
What’s left from income after all expenses have been deducted is known as profit. There are several types of profit, such as operating profit, gross profit, and net profit. Each one is calculated a little differently.
Quantitative Easing (QE)
Quantitative easing (QE) is a form of monetary policy in which a central bank purchases longer-term securities from the open market to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy and serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. It is usually unconventional; however, we have seen it a lot since the GFC.
When there is a decline in gross domestic product for at least two quarters, economists will announce that the country has entered a recession. Consumers will likely experience an increase in unemployment, engage in less spending as confidence in the economy decreases, and observe a general downturn in production and sales.
A return, in its simplest terms, is the money made or lost on an investment over some period of time. There are two ways to get returns from managed funds- either through the unit price increasing, and/or the fund paying out distributions.
Risk is the chance that your investment could decline in value. If you are prepared to accept greater risk, you have the chance of getting higher returns or profit on your money. Low-risk investments, while generally safer, do not usually produce as high a return. Generally, the longer you intend to hold your investment, the higher risk you can tolerate.
Risk Indicator / Risk Rating
Managed funds in New Zealand must have a standard risk indicator (defined by regulation). The risk indicator is designed to help investors understand the uncertainties both for loss and growth that may affect their investment.
Stands for Return on Investment and measures the profit or loss generated from an investment. A high ROI indicates a high return relative to the investment.
Short for Return on Invested Capital. ROIC is a way to calculate profitability or return on investment. The formula used is net operating profit (after taxes) divided by invested capital. Invested capital is the amount spent to purchase shares in the company.
One of the best-known stock market indexes in the world. Launched in 1957, the S&P 500 comprises the 500 largest US companies.. Companies included in the index are selected based on industry, liquidity, and size.
A way of organising the economy and providing an easier way for investors to measure performance. Economists have created four sectors in the economy, within which are housed industries. For example, within the Tertiary Sector are the financial, retail, and entertainment industries. The Secondary Sector houses all industries involved in producing finished goods, such as manufacturing and construction.
Securities are tradable financial instruments used to meet the needs of companies to raise capital, and to enable investors to generate a return. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.
A sell-off occurs when a large volume of securities are sold in a short period of time, causing the price of a security to fall quickly. Broader causes, such as macroeconomic concerns or natural disasters, can trigger sell-offs.
The price of a single share of a company’s stock.
A shareholder is the owner of shares in a company. Companies are owned by their shareholders. Shareholders will bear any gains and losses in the value of the company’s shares and will receive dividend payments (if the company decides to pay one). Generally, shares offer higher rates of return than bonds, but they also come with higher risk as returns are not guaranteed and shareholders rank last for payment should the company fail. The term ‘equities’ or having ‘equity’ in a company is often used interchangeably with having ‘shares’ in a company.
A share is a unit of equity ownership in a or company.
These funds often focus on a single asset class and may be used to provide a greater concentration in a particular sector to supplement someone’s overall investment strategy for example. These funds are often named after the asset class where they are invested, for example, NZ Equities.
Short for Statement of Investment Policy and Objectives. The 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.
Small Cap Companies
The market capitalisation (share price x number of shares in the company) of the company. Small cap companies have traditionally been identified as those with a market cap of less than $1 Billion although this can vary by market.
Short for State Owned Enterprises. These are typically former government departments or agencies that have been corporatised.
Taking risks without strong evidence to support the decision, especially with respect to trying to predict the future, in the hope of making quick, large gains.
Sometimes called “equity” or “shares”. Stock represents part ownership in a company. Stock prices fluctuate in line with the fortunes of the company concerned or the overall market. When an investor purchases stock in a company, he or she gains equity in that company and is entitled to a percentage of the company’s profits. These investors are called stockholders or shareholders. Stocks are traded on a stock exchange.
The independent supervisor of a NZ managed investment scheme. The supervisor’s role is to supervise the performance by the Manager of its functions and its issuer obligations and to act on behalf of the investors in relation to the scheme. The supervisor monitors the financial position of the Manager and the Scheme to ascertain that it is adequate.
‘Sustainable Investing’ recognises that investment decisions involve more than just looking at financial disclosures. It incorporates environmental, social and governance (ESG) considerations when analysing potential investments and assesses the practices of business in relation to how sustainable they are longer term.
Switching funds is when you change your investment or KiwiSaver Plan fund to another fund managed by the same manager (i.e. Milford). You are free to switch at no charge between Milford funds as often as you like.
A term deposit involves depositing money with a bank for a fixed period of time. In this case, you are lending money to the bank, which will then pay you interest in return. Your money is locked in for the term you have signed up for, which can be anything from months to years. The interest rate received is usually lower than can be obtained from other forms of investment security. This is because the risk of the bank not being able to repay your money is considered very low. Although you do earn a return on your money from the interest, placing money in a term deposit is generally considered “saving” rather than “investing”.
An investment time horizon, or just time horizon, is the period of time an investor expects to hold an investment until they need the money back.
Investors who construct investment portfolios by looking at the “big picture” in the economy and financial world and identifying sectors which are more favourable to invest in given macro conditions. This contrasts with “bottom-up” investors.
The total amount earned from an investment over a given period of time, typically a year. Total return includes dividends, interest, change in asset value, and capital gains earned during the 12-month period. It is usually expressed as a percentage of the price of the investment at the start of the period.
Transferring schemes is when you change your KiwiSaver scheme to a scheme that is managed by a different manager (e.g. transferring from X Manager’s KiwiSaver scheme to the Milford Kiwisaver Plan)
A trust deed s a legal document that creates and governs a trust. The document will specify who the settlor, trustees and beneficiaries are, detail what the trust property is, and will outline the rights and obligations of the trustees. Managed investment funds (including KiwiSaver) are also constituted under trust deeds.
Someone who owns (or holds) units in a unit trust or investment fund. The investments made by individual investors in a fund are divided into units. Each unit is of equal value and confers an equal interest in the fund.
Unit Prices for unit trusts or investment funds are calculated by taking the total market value of the fund’s investments and any other assets held, deducting the fund’s liabilities and dividing the net figure by the number of units on issue.
Also called investment funds, where multiple unitholders own shares in pooled assets. The unit trust is managed by an appointed Manager and (in NZ) supervised by an independent Supervisor. KiwiSaver schemes are forms of unit trusts.
Companies that are not listed on a public stock exchange. They are still privately owned and do not have to adhere to the rules and regulations applying to listed companies. It can be more difficult to buy and sell shares in unlisted companies, thus they are considered less liquid than listed companies.
The process of determining the value of an asset or company. There are many techniques for valuation, and it is often partially objective and partially subjective. Businesses frequently conduct a valuation before pursuing mergers or acquisitions.
An investment strategy that focuses on long-term investment in stocks that are perceived to be undervalued based on a particular metric such as price to earnings ratio. The current market price is given less weight. Value investing assesses a company’s position in the marketplace, operational efficiency, and cash flow to determine if it’s a good investment purchase. One of the most famous investors on the planet, billionaire Warren Buffett, is frequently described as a ‘value investor.’
A type of non-debt financing typically used by small companies that are just getting going. In exchange for funding, investors receive an ownership stake in the company. Venture Capital is most often used to help technology companies scale up.
Dubbed the “fear index”, the CBOE Volatility Index (VIX) is a measure of investors estimates of market volatility over the next 30 days. It is calculated in real-time by the Chicago Board Options Exchange (CBOE) based on pricing of short-term options on the S&P 500 stock index.
A measure of how much movement (up or down) an investment (asset) exhibits over a period of time. Certain assets are naturally more volatile than others. For example, shares tend to be more volatile than bonds.
There are a wide variety of markets in which one can invest money. The main markets are stocks (shares or equities), bonds, forex (currency), options and derivatives, and physical assets. Furthermore, within each of these types of markets, there can be even more specialist markets.
Is the name used to describe not just the street itself, but the surroundings in New York City where much of the United States’ financial industry is concentrated. The name “Wall Street” is also used frequently used to describe the US financial services industry, generally.
Wealth management services are offered to individuals generally with a high net worth and a higher level of funds to invest than smaller investors. Wealth management services focus on providing investment advice and placement of those clients’ investments.
What about the tax on my returns?
Milford’s investment funds are portfolio investment entities (or PlEs) for tax purposes. They have a lower tax rate compared to that of direct holdings (when you buy shares on your own). Investment funds also reduce your tax administration as your tax liability is accounted for within the fund and paid on your behalf at the end of the tax year. For further information on tax, see the Milford Investments Funds Investor Guide at milfordasset.com
Where is my money held?
Your investments are held securely and are kept separate to Milford’s corporate money. Milford’s fund investments are held by a Custodian appointed by a licensed Supervisor to ensure security. Both the Supervisor and the Custodian are independent of Milford and are externally audited . Milford cannot use your money for any purpose other than the investment you choose.
XD is a symbol to indicate that a security is trading ex-dividend. The ex-dividend date is the day on which all shares bought and sold no longer come attached with the right to receive the most recently declared dividend.
Is the percentage of return you receive on your capital investment based on the amount that you invest or on the current market value of your investments. Yield is stated as an annual percentage, calculated based on the purchase price of the security. Generally, one takes the dividends or interest received over a period of time and divides it by the original amount invested. Alternatively, the current price might be used. Knowing dividend yield is an important factor to consider before investing in stocks.
A yield curve plots interest rates that can be earned over different periods of time. Yield curves tend to be upward sloping, meaning that investors can achieve higher interest rates for investing over a longer period of time.
It’s very important to think about your goals. What are you trying to achieve with your investment? A few common ones are saving for a first home, saving for retirement or your child’s education. For those who are already retired, your goal could be to generate an income to help fund your lifestyle.
Your Risk Tolerance
Once you know your goal and your timeframe, the next thing worth considering is your tolerance for risk. This is often referred to as your ‘risk profile’. As you’ll see throughout this document, investment funds go up and down in value. So, you don’t want to be in a fund that’s taking on more risk than you’re comfortable with, especially in the short term. Our quick on-line tool can help you identify your risk profile milfordasset.com/tools-guides.
Once you know your goal, you should have a good idea of your investment timeframe. This is the amount of time you plan to keep your money in an investment fund before making withdrawals. For those saving for retirement, you will generally have a longer timeframe. For those already in retirement or those with short term goals, you will generally have a shorter investment timeframe.
Short for year-over-year. It is a way of analysing performance by comparing financial data in one period to the same period the previous year. The period can be a quarter or a month. YOY is a useful way to measure true growth because it eliminates seasonal fluctuations.
Short for year-to-date. This is an accounting period used to analyse trends in the market. The portion covered starts at the beginning of that year and concludes on the date the report is prepared. YTD can be the company’s fiscal year, the calendar year, or some other preferred period.
Zero-rate PIEs invest most of their funds in non-New Zealand based investments. These PIEs only have a minimal amount of funds in New Zealand. A zero-rate PIE applies 0% PIR to all income attributed to Notified Foreign Investors (NFIs)
Investments held by companies, incorporated societies or charities in PIE funds usually have a PIR of 0%.