Absolute Return Strategies
Absolute Return Strategies are an actively managed asset class that aims to deliver positive returns and preserve capital in a variety of investment markets without following traditional benchmarks. This doesn’t mean that they will always do so, as it is not possible to guarantee positive returns in any market. The term "Absolute Return" refers to the goal that these strategies will be positive regardless of how general markets are performing.
While Absolute Return Strategies are a relatively new asset class for super funds in Australia, they have been in existence for many years overseas. They have been one of the fastest growing investmentroducts over the past decade and now have more than $500 billion in assets under management around the world.
Common characteristics of Absolute Return Strategies generally include:
- A low net exposure to general market movements
- Flexibility to use non-traditional investment techniques
- Borrowing to enhance investment positions and potential returns
Account Balance
The member's accrued benefit in the Fund. This generally represents accumulated employer and member contributions, transfers and interest, less contribution tax, surcharge tax, administration fees and insurance premiums.
Active hedge
Currency managers can change the percentage of the hedged currency with the aim of producing additional returns for members.
Active Management
Active investment managers try to outperform the market by researching, monitoring and selecting investments they believe will enable them to achieve better returns than the market.
Administration Fee
The fee charged by a super fund against a member's account, contributions or balance to cover administration costs. HESTA administration fee is only $1.25 each week. This fee is used to administer your account and the overall management of the Fund and to provide communication and educational material to members. If your account balance is under $1,000, the administration fee will generally not exceed the interest credited to your account in any one year. However, taxes and insurance charges still apply and, in times of low or negative investment returns, a fee of up to $10 per annum may be charged.
Annuity/Pension
A series of payments made at regular intervals, generally purchased from an insurance company or super fund with a lump sum (super or otherwise). There are many types of annuities and pensions.
Approved Deposit Fund
A type of fund into which Eligible Termination Payments can be rolled over by an individual where he or she can continue to receive concessional taxation treatment until reaching 65 years of age. Approved Deposit Funds (ADFs) are regulated under the Superannuation Industry Supervision (SIS) Legislation and can only be offered by Approved Trustees.
Asset Class
A group of similar assets. Some main asset classes are shares, fixed interest, property and cash. Each asset class has a different level of expected risk and return.
Assets
For investment purposes, an asset is something that can be sold or held for future benefit.
Australian Prudential Regulation Authority (APRA)
APRA is the prudential regulator of banks, insurance companies and superannuation funds, credit unions and building societies.
Award Superannuation
Members' superannuation entitlements as set by Federal or State Industrial Awards or Certified Agreements. Sometimes these entitlements differ from entitlements members have under the minimum requirements set by the Superannuation Guarantee.
Benchmark
Used to assess the risk and performance of investment portfolios and usually represents the broad market for an asset class and the minimum performance standard expected from managers in an asset class.
Beneficiary
The person or persons, usually the members dependant/s, who are eligible to receive a super benefit if the member dies.
Benefit
The dollar amount of a member's entitlement in the Fund, including, in the event of death or disability, any insured amount or entitlement payable. A benefit payment can generally only be made when the member leaves the Fund and in circumstances allowed by Federal Government legislation.
Benefit Payment Fee
A fee charged against a member's account to cover costs of processing a benefit payment. HESTA does not charge any benefit payment fees.
Call Option
An option which gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price).
Capital Guaranteed
Refers to an investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital. The nature of the guarantee varies in format but is, typically, a 'promise to pay' by the life insurance company itself; i.e. there is no external guarantor. Interest earnings are not generally guaranteed in advance.
Capital Protected
Refers to a type of investment portfolio which is managed in such a way as to reduce or eliminate the risk of capital losses, usually through the use of quantitative techniques such as protection overlays.
Capital Stable
A term usually describing unitised investment vehicles which have a high fixed interest and/or cash component. This creates a relatively stable unit price compared with balanced funds, which typically have a higher exposure to share markets. A capital stable fund aims to provide a moderate level of income plus some capital growth. Capital stable funds should be distinguished from capital guaranteed funds, which offer a promised return (usually retrospective) to the investor, and also from capital protected funds, which aim to produce a certain minimum return while allowing a controlled participation in the expected higher gains from growth assets.
Cash
Cash is an investment in term deposits or bank bills for short periods of time (less than 12 months). This investment class is one of the most stable, because the returns are among the most predictable, but over the long term it can be expected to earn a lower rate of return.
Choice of Fund
The new choice of fund legislation means that from 1 July 2005, certain employees will be able to choose which super fund their compulsory employer contributions (Super Guarantee 'SG' contributions) are paid into.
Co-Contribution
The Government co-contribution commenced on 1 July 2003 and replaced the tax offset for personal superannuation contributions. Further changes came into effect on 1 July 2004. The Government will now put in $1.50 for every $1 you put into your superannuation as a personal contribution, up to a maximum of $1,500 a year (for $1,000 of contributions). The $1,500 maximum co-contribution is available for incomes up to $28,000, reducing by 5 cents for each dollar of income up to $58,000. This means that a person earning $27,000 who contributes $300 will get a $450 co-contribution, or $1,500 if they contribute $1,000. The Australian Tax Office (ATO) is responsible for administering the co-contributions scheme.
Commodities
Commodities, such as oil, copper, wheat and coal include many of the basic goods we consume or use to manufacture other goods. HESTA invests in commodities through fund manager products.
Complying Fund
A superannuation fund which complies with the operational standards specified in the Federal Government's Superannuation Industry Supervision (SIS) Act and Regulations, therefore qualifying for concessional tax treatment.
Compound Interest
Compound Interest is interest paid on both the principal and the interest previously earned.
Contribution Fee
This can be the fee on each amount contributed to your investment. HESTA does not charge any contribution fees.
Contribution Tax
Government legislation requires payment of 15% tax on Employer Contributions and on contributions by self-employed persons claiming a tax deduction.
Contributions
An amount of money placed into a fund. In relation to superannuation funds, contributions may be made by either employers or employees, or both.
Crediting Rate
The rate of interest paid to super fund members on their account balance, usually expressed as a percentage per annum. The crediting rate in any given year may be different from the earning rate if reserves are held. Negative crediting rates may apply in adverse investment periods.
Currency Hedging
International investments are vulnerable to changes in the value of the Australian dollar. Currency hedging involves locking in the price for a future purchase or sale of currency to help avoid the effect of these currency fluctuations. While a currency hedge can decrease potential loss, it can also reduce potential profits.
Death Benefit
The amount payable to a member's estate, dependants or other beneficiaries in the event of the member's death.
Death Insurance (Death Cover)
Insurance providing for payment of a sum (additional to account balance) to the estate, dependants or other beneficiaries of a member upon his or her death.
Deferred Annuity
A type of annuity, or retirement income, which begins payment of income at a future date. Eligible termination payments can be 'rolled-over' into deferred annuity funds. The fund then provides a pension which is required to begin on or before the purchaser's 65th birthday.
Dependant
The spouse (including de facto spouse) or child of the member, or any person with whom the member has "interdependency relationship" within the meaning or section IOA of the SIS Act, or any other person who is financially dependent (either partially or totally) on the member.
Derivatives
Derivatives are often purchased as a form of investment insurance, and include futures and options, forward rate agreements, swaps, and warrants.
Diversification
In simple terms - not having all your eggs in one basket. Diversifying investments across asset classes can help to reduce risk and balance returns. This is because asset classes perform differently at different times, so if one class is performing poorly it can be balanced by another that is performing well.
Dividends
The amount of a company's after tax earnings which are paid to shareholders.
Earning Rate
The rate of return to a super fund (or any other investor) on money it invests. This is usually expressed as a percentage per annum.
Electronic Data Transfer (EDT)
Means of sending contribution data in electronic rather than paper form.
Electronic Funds Transfer (EFT)
Means of making a contribution payment in electronic form rather than by cheque.
Eligible Rollover Fund
A super fund which is eligible to receive benefits automatically transferred from other super funds, generally for members that have very low account balances which have been inactive for a substantial period of time, or when the member cannot be located.
Eligible Termination Payment
A payment made to an employee upon retirement, resignation, retrenchment or disablement, which can be 'rolled over' or transferred into a complying super fund or an approved deposit fund.
Employer Contributions
Superannuation contributions made to a member's super account by their employer.
Equity
a) A synonym for a share (as distinct from fixed interest) investment.
b) The interest or value which an owner has in an asset over and above the debt against it. For example, a home-owner has equity in that part of the value of his or her house above the amount borrowed from a lender.
Financial Futures
Futures contracts concerned with transactions of financial instruments, as distinct from physical commodities. The essential value of financial futures is that they allow investors to hedge, or protect, against adverse movements in interest rates or share prices. Financial futures can also be used by speculators who, while having no involvement as buyers or sellers in the underlying securities, can trade in futures as a means of profiting from expected price movements. Financial futures available in Australia include bank bill futures, Share Price Index (SPI) Futures and Commonwealth bond futures.
Fixed Interest
Referring to interest income which remains constant, such as income derived from bonds, annuities and preference shares. Any debt security which has a known and legally set flow of income is known as a fixed interest security.
Forward Rate Agreement (FRA)
A contract for borrowing or lending at a stated interest rate over a stated time period that begins at some time in the future. FRAs are used by parties wishing to protect themselves against future interest rate movements.
Futures Contract
An agreement to buy or sell a specified quantity and quality of an underlying asset, such as bank bills or gold, at a particular time in the future and at a price agreed when the contract was executed.
Futures Option
An option (either put or call) on a futures contract, traded at the futures exchange.
Gross
The total, before deductions have been taken away.
Growth Assets
A general term for assets such as shares and property, which provide investment returns (comprising both capital growth and income), which outperform inflation. Growth assets are expected to provide higher returns compared to "defensive assets" such as fixed interest or cash investments.
Hedging
The practice of undertaking one investment activity in order to protect against loss in another, for example, selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits. Typical hedges include currency forwards and share and bond futures.
Inactive Member
A fund member who is not currently receiving any contributions or rollovers to their account.
Income Protection (IP) Benefit
The amount payable to an insured member as an income stream in the event of disablement as defined by the insurance policy.
Income Protection (IP) Insurance
Insurance arrangement whereby the member may be paid a benefit in the event of becoming disabled. Different super funds have different arrangements which may cover Total and Permanent Disability or Temporary Total Disablement, either as a lump-sum or regular income payments. Many give members the option of different levels of cover.
Industry Super Plan (ISP)
A super plan that requires an employer to agree to the terms of the Fund's rules and Trust Deed. The employer becomes a Participating Employer whose employees can then become members of the Fund. The employer then contributes to the members' super accounts.
Industry Superannuation Fund
A multi-employer super fund, which will normally cover employees in a particular industry or group of industries, or in a particular geographic area. Because of their scope, industry funds tend to have large memberships. Their economies of scale and the fact that they are "not-for-profit" and generally do not pay any commissions to agents, make them extremely effective in keeping down costs to members. These funds usually have Trustee Boards with equal representation for employers and employees.
Infrastructure
Infrastructure includes roads, airports, power stations and other key community projects. Investment in infrastructure can take many forms including a loan to government, direct equity in a development or purchase, or a loan to a participant in a development. Infrastructure is generally a moderate risk investment that may produce strong returns, however the risk and return characteristics of individual investments depends on the nature of the investment.
Insurance Premiums
The sum of money paid periodically to purchase and maintain insurance cover.
Interdependent Relationship
The definition of who is eligible to receive tax-free superannuation death benefits has been expanded to include an "interdependency relationship". This is defined as a close personal relationship between two people who live together, where one or both provides the other with financial support, and one or each provides the other with domestic support and personal care.
This means that same-sex partners, siblings and adult children caring for elderly parents may be eligible. The definition also includes a person with a physical, intellectual or psychiatric disability who may live in an institution but is still interdependent with the deceased on the other criteria and also persons who were temporarily living apart.
The change does not apply to deaths prior to 1 July 2004.
For a full description of interdependency relationship please see HESTA's Product Disclosure Statement.
Interest Rate
The return on money invested, usually expressed as a percentage per annum.
Investment Choice
When a super fund offers members a choice of investment options in which to invest their super.
Investment Management Fee
The fee charged by an investment manager for its services. The fee is normally charged as a percentage of the funds invested, and may be performance-based. The fees are deducted from the HESTA's earnings before determination of the Fund's earning rate.
Investment Manager
A company appointed by a Fund to manage the investment of all or part of the Fund's assets. It is common for Funds to appoint a range of investment managers who have specialist expertise in particular areas of investment.
Lump Sum
A benefit payable as a single payment rather than as a pension or annuity.
Master Fund or Trust
A fund which allows a large number of unconnected companies and/or individuals to operate through the same Trust Deed. They are generally operated by banks, life insurance companies and specialist superannuation administrators and typically operate to generate a profit to pay external shareholders.
Member After-Tax Contributions
Superannuation contributions paid by a member from their after-tax income. These are usually arranged as payroll deductions, but may also be paid by cheque or direct debit from the member's bank account. They may enable the member to qualify for a co-contribution.
Member Benefit Protection
Member Benefit Protection applies to super fund members with an account balance of less than $1,000 that contains Superannuation Guarantee or Award contributions. Fees charged to the account generally will not be more than the investment earnings on the account in any given year. Insurance premiums and taxation charges still apply, and during periods of poor investment returns a fee of up to $10.00 may apply.
Member Contributions
Contributions made by members to their account. These are additional to any Employer Contributions and are often called voluntary contributions or Member After-Tax Contributions. (Members can also arrange additional employer contributions through Salary Sacrifice - these are classified as employer contributions).
Non Preserved Amount
That part of a member's benefit which is not subject to preservation.
Option Strategy
The implementation of a market strategy through the use of option derivatives.
Options
An agreement which conveys the right to the holder to buy (receive) or sell (deliver) a specific security at a stipulated price and within a stated period of time. If the option is not exercised during that time, the money paid for it (but no more than that amount) is forfeited.
Ordinary Shares
Securities which represent an ownership interest in a company. If the company has also issued preference shares, both have ownership rights. The preference shareholder normally is limited to a fixed dividend, but has prior claim on dividends and in the event of liquidation, assets. Ordinary shareholders assume control and may gain the greater reward in the form of dividends and capital appreciation. If the company is wound up, the ordinary shareholders generally rank behind secured creditors, including debenture holders, in the liquidation process.
Ordinary Time Earnings
Earnings which are the results of an employee's ordinary hours of work. These generally do not include overtime earnings, and may be used as the basis for calculating employer obligations for Super Guarantee contributions (unless an Award or Agreement specifies an alternate basis).
Outperformance
Achievement of a higher investment return than a benchmark or other measure against which that return is being compared. For example, an equity fund would be said to have outperformed the All Ordinaries Index if the fund achieved a 5% return against a 3% return by the Index over the same period.
Partially Disabled / Partial Disability
Under HESTA's current Income Protection and Death Insurance 'Partially disabled' 'Partial disability' means all the following applies:
(a) you have been totally disabled:
- for a period during which a total disablity benefit has been paid or
- for at least 7 days out of 12 consecutive days during the waiting period
(b) then you return to work, or are capable or returning to your usual occupation, but only in a limited capacity; and
(c) the salary you are earning, or capable of earning, is less than your pre-disability salary due to the injury or illness causing total disablity; or
(d) you return to work in another occupation and earn less income that your pre-disability salary due to the injury or illness causing total disability or partial disability.
Participating Employer
An Employer who has agreed to the terms of a Fund's governing rules and Trust Deed for the enrolment of its employees as Fund members.
Passive Management
When investments are managed with the objective of achieving returns that are very close to a market index (for example the Australian All Ordinaries Index).
Pension/Annuity
A series of payments made at regular intervals, generally purchased from an insurance company or super fund with a lump sum (super or otherwise). There are many types of annuities and pensions.
Personal Super Plan (PSP)
A super plan that does not require a Participating Employer. The member is able to move freely between employers using the one super account.
Portability
A feature that allows a member to stay with the same super fund when they change employers and doesn't require the member to complete application forms again.
Portfolio
A range of investments across a group of asset classes, managed together as a 'portfolio' to achieve a single performance objective.
Preservation
There is a legal requirement that most superannuation benefits must be retained in a superannuation fund until the member reaches preservation age and retires. Preserved amounts may be released in exceptional circumstances, including compassionate grounds, invalidity and severe financial hardship. The age at which members can otherwise access preserved benefits depends on when they were born.
Preservation Age
The age at which the member can access preserved benefits, provided they have permanently retired from the workforce. Your preservation age depends on when you were born.
Preservation Age
Date of birth Preservation Age
Before 1 July 1960 55 years
1 July 1960 - 30 June 1961 56 years
1 July 1961 - 30 June 1962 57 years
1 July 1962 - 30 June 1963 58 years
1 July 1963 - 30 July 1964 59 years
On or after 1 July 1964 60 years
Preserved Amount
That part of a member's benefit which must generally be kept in a super account until his or her genuine retirement after reaching preservation age.
Private Equity
Private Equity mainly involves investment in unlisted companies. Private Equity investment funds can be used to expand or develop the businesses. With appropriate care and thorough research, this can provide high returns. However, there is a correspondingly high level of risk.
Property
Property investments include office buildings, factories and shopping centres. Property not only generates rental income but can also increase (or decrease) in value over time. It normally generates better returns than cash or fixed interest, however property can be a more volatile investment and is normally considered a moderate to high risk investment.
Put Option
A put option giving its purchaser the right, without the obligation, to sell an asset at a specificed price (the exercise price) at any time between the purchase of the option and its expiration date.
Reasonable Benefit Limit (RBL)
The maximum level of superannuation benefit an individual can receive over a lifetime on a concessionally taxed basis. The limit for lump sum benefits is $619,223*, or $1,238.440* if at least half the benefit is taken as a complying pension. (* These figures for 2004/2005 are indexed annually.)
Reserves
Part of a Fund's assets used to minimise year-to-year variation in the return to members' accounts. For example, in a year of good returns, a Fund might put some of the fund's earnings into reserves and declare a lower crediting rate, while in a year of poor returns, the reserves might be drawn upon to increase the crediting rate to members.
Retirement Savings Account (RSA)
A form of superannuation account introduced in 1997 in accordance with Federal Government policy. Most RSAs are offered by banks and life offices, and are mainly designed for employees who only have very small super contributions or work infrequently. RSAs are required to be capital guaranteed, and are therefore likely to provide lower long-term returns to members than other funds. RSAs are not subject to the same reporting and regulatory requirements as super funds.
Risk & Return
When an investment is described as low risk it means returns are expected to vary within a fairly small range. High-risk investments are harder to predict - the returns may rise and fall significantly. As a general rule the higher the expected return (the amount of money received back from that investment), the higher the risk (the chance that the investment may not perform as expected).
Rollover
The transfer of a benefit or eligible termination payment into a superannuation fund, an approved deposit fund or deferred annuity.
Salary Sacrifice
An arrangement between an employer and an employee where the employee's gross salary is reduced by a certain amount, and the employer's contributions to the superannuation fund for that employee are increased by the same amount. Salary sacrifice arrangements are classified by the Tax Office as Employer Contributions.
Shares
Shares, also known as equities, give you ownership of part of a company. They provide the opportunity for returns as dividends, along with the potential for profit (or loss) through changes in their price on the share market. Over the long-term, shares are expected to provide higher returns than cash, fixed interest or property, but with an associated higher risk, which may result in negative returns from time to time. Investment in shares can be diversified across industries and markets. Australian Shares constitute only around 2% of the world share market and as such there is a fairly high risk that they may not reflect the global economy. International Shares can either come from very established markets or from those in emerging markets. This refers to developing economies, where there may be an opportunity for higher returns than developed markets, subject to an associated greater risk.
SIS Act (Superannuation Industry (Supervision) Act 1993)
Federal Government legislation which governs the operation of all complying superannuation funds in Australia.
Socially Responsible Investment (SRI)
Choosing an investment to achieve social as well as financial returns. Socially Responsible Investing generally involves using a 'screen' to exclude or include companies based on the social objective.
Spouse Contributions
Super contributions paid by tax payers to an account for their spouse. In some circumstances a tax offset (rebate) is allowed on the contributions paid.
Strategic Hedge
A set percentage of the currency exposure will be hedged.
Superannuation
A means of setting aside funds during working life for use in retirement.
Superannuation Complaints Tribunal (SCT)
A tribunal established by the Federal Government to deal with certain complaints concerning decisions of super fund trustees. The Tribunal requires matters to be fully addressed through the super fund's internal dispute resolution procedure before it can consider a complaint.
Superannuation Guarantee (SG)
Employers in Australia are required by the Superannuation Guarantee legislation to make contributions to a complying superannuation fund for most employees. The amount contributed is equal to a percentage of an employee's salary, generally based on ordinary time earnings. The earnings base used for these calculations may also be stipulated under an Award. The minimum contribution under the Superannuation Guarantee is 9% of an employee's earnings base. Employers must generally pay SG contributions for employees who earn $450 or more in a calendar month. SG contributions are not required for employees who: earn less than $450 per month; are age 70 or over; are under age 18 and working 30 hours or less per week.
Employers in Australia are required by the Superannuation Guarantee (SG) legislation to make contributions to a complying superannuation fund for most employees. The amount contributed by employers is equal to 9% of an employee's earnings base, generally based on ordinary time earnings. However, the earnings base used for these calculations may be stipulated under the Award that is effective in your workplace.
Financial penalties (including payment of outstanding contributions) are payable to the Australian Tax Office if SG amounts are not paid to a complying super fund by relevant dates. Super Funds may require a more regular payment under the Trust Deed of the Fund. The SG incorporates any amounts contributed by employers under an Industrial Award or Workplace Agreement.
Surcharge Tax
A Federal Government surcharge tax is payable on deductible contributions made by or on behalf of fund members if their adjusted annual income (including employer superannuation contributions) was more than the amount for the applicable financial year. This tax no longer applies from 1 July 2005.
Swap
An interest rate, currency or equity exchange transaction involving two or more parties. In the case of an interest rate swap, one party is obliged to pay a fixed interest rate to the other party in return for a floating interest rate. In the case of a currency swap, one party is obliged to make payments in another specified currency. In practice with an interest rate swap only the net flow resulting from the exchange takes place; that is, the net payment will flow one way or the other in a given interest period depending on the level of the floating rate. For a currency swap the net exchange is settled in one of the specified currencies. Where both floating rate and currency elements exist in combination, the transaction is generally described as a currency and interest rate swap. Equity swaps can involve a variety of different transactions, e.g. swapping the return in one market for that of another.
Temporary Total Disablement
A condition for which some super funds provide insurance cover. The definition varies between Funds and it is important that members read the information provided by their Fund or the insurer. Benefits are usually payable each month, subject to a maximum percentage of the member's pre-disability income.
Total and Permanent Disablement (TPD)
A condition for which many super funds provide insurance cover. The definition varies between Funds and it is important that members read the information provided by their Fund or the insurer. Benefits may be payable either as a lump-sum or as an ongoing income each month.
Trust Deed
The legal document which sets out the rules governing the operation of a super fund.
Trustee(s)
The persons or corporate body which has legal responsibility for the running of a super fund in accordance with the requirements of the Trust Deed, general duties imposed by law and applicable legislation.
Vesting
Reaching the point at which a member becomes legally entitled to all or part of a benefit.
Warrant
A certificate giving the holder the right to purchase shares of stock at a stipulated price within a specified time span, or in some cases, other securities as an added purchase inducement. Warrants may be traded separately after issue. They are similar to call options.
Will
A Will is a legal document directing to whom and in what manner you wish your assets to be distributed upon your death and appointing someone to look after these affairs. If you die without leaving a Will you are said to die "intestate". Your assets will be divided according to state legislation and may not be in accordance with your wishes.