20 investment terms NFP boards should understand

Guide

Turning jargon into simple terms

As a not-for-profit (NFP) board member, you are responsible for helping the organisation to pursue its purpose. In particular, you need to make key decisions about its financial management and strategic direction. As you make those decisions, it is important to be aware that you have a legal duty to act with what the law terms as ‘reasonable care, skill and diligence’.

When it comes to financial management, this means you need to understand your organisation’s financial position and its investment strategy. Even if you don’t have an accounting or an investment background, you have a legal duty to satisfy yourself that your NFP is being well-run and investment decisions are being made responsibly.

As an important starting point to fulfil that duty, you will need a working knowledge of common investment terms.

Even if you don’t have an accounting or an investment background, you have a legal duty to satisfy yourself that your NFP is being well run and investment decisions are being made responsibly.


Investment terms

TermDefinition
  
Term
1. Asset Consulting
Definition
The process of identifying which asset classes and what proportion of funds should be used in the portfolio construction to best meet the required outcomes (benchmark). Also identifies the likelihood of risk and volatility in the portfolio.
Term
2. Benchmark
Definition
The standard against which a fund’s performance is measured. A benchmark can be an index that matches the fund’s strategic objective or a return outcome – for example CPI + 2%.
Term
3. Index
Definition
A measure of the movement of a specific asset class, that serves as a benchmark for funds investing in those assets. Indices can be broad, like the All Ordinaries Index (Australian equities) or more narrowly focused on specific sectors.
Term
4. Strategic Asset Allocation
Definition
The way an investment portfolio is divided between different asset classes and markets. The proportion of the portfolio in each asset class is determined by a fund’s risk profile and objectives. The aim of strategic asset allocation is to provide the best balance of risk and reward.
Term
5. Investment Policy
Definition
Provides the governance for the investments, including a clear mandate for the Investment Manager to meet the investment objectives. The policy will specify what the NFP’s board expects from its investment portfolio in terms of strategic asset allocation, risk tolerance, liquidity and ethical overlays.
Term
6. Risk
Definition
The possibility of permanent loss in the NFP’s portfolio or of not achieving the required investment outcomes.
Term
7. Volatility
Definition
A measure of the variation in returns from a given asset or market.
Term
8. Liquidity
Definition
How easy it is to quickly turn an asset or security into cash without affecting the asset's price.
Term
9. Diversification
Definition
A diversified portfolio will contain a range of securities spread across a number of different asset classes as well as regions, countries and sectors, with the aim of reducing risk.
Term
10. Fund manager
Definition
Fund managers offer pooled investment products to a range of investors, including superannuation funds, institutions and individuals. The funds are professionally managed to achieve or outperform a particular return (benchmark) for investors.
Term
11. Overweight/Underweight
Definition
The difference in the portfolio holding of a particular asset class or security compared to the portfolio benchmark or index.
Term
12. Active management
Definition
Where a fund manager seeks to enhance returns through effective stock selection, asset allocation and currency selection decisions.
Term
13. Passive management
Definition
Where an investment strategy is designed to track the exact return of an index.
Term
14. Alternative investments
Definition
Investments that do not fall into the traditional categories of bonds, cash, bank deposits and equities. Examples include: commodities, hedge funds and private equity.
Term
15. Ethical Investing
Definition
Also known as sustainable investment and socially responsible investment (SRI). This is an investment process that incorporates environmental and social factors when selecting investments. The board can specify screens: negative (e.g. do not hold tobacco stocks) or positive (e.g. do hold carbon neutral stocks). The portfolio manager will apply these screens when selecting investments.
Term
16. Impact Investing
Definition
Investing specifically for positive social or environmental impact along with a financial return.
Term
17. Cashflows
Definition
The movement and timing of capital in and out of the organisation’s accounts.
Term
18. Spending Policy
Definition
Policy regarding the annual flow of funds from your endowment to your operational budget.
Term
19. Smoothing Policy
Definition
An approach that stabilises cashflows from the endowment over an extended period of time.
Term
20. Franking Credit
Definition
A tax credit from a dividend representing the amount of tax that the underlying company has already paid on that income. For a non-tax paying entity, the refund of these credits can provide a significant uplift to the returns from investing in Australian equities.


We can help your organisation reach full potential and make a difference. Learn about our smart business solutions for not-for-profits, or reach out to a specialist today by contacting notforprofits@macquarie.com. All of our financial recommendations are tailored to your organisation’s specific needs and aspirations.

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