Glossary

Maastricht Treaty
A treaty signed in 1992 by members of the European Community (EC), under which the European Union (EU) was formed. The treaty calls for the establishment of European Monetary Union (EMU) by 1999 and for common policies on foreign affairs, security, justice, transport and the environment. At the time of going to print (April 1996), none of the 12 EU countries had yet met the five economic 'convergence' targets, including common GDP-deficit ratios, that have been set for 1997 as a foundation for EMU. The EU comprises Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom.

Macro Economics
Economic analysis concerning broad trends and influences on the economy, such as the interaction of fiscal and monetary policies, GDP, balance of payments, etc; as opposed to micro economics, which focuses on individual units such as companies and markets to assess their influence on the economy.

Making a Market
A dealer is said to be making a market in a given security when he or she is prepared to buy or sell at the bid and offer prices that he or she quotes. The market is maintained when he or she continues to quote bids and offerings over a period of time. Such a dealer is referred to as a market maker.

Management Agreement
An agreement between an investor and an investment manager stating the terms and conditions applying to management of the stated assets. (See also Mandate).

Management Buy-in (MBI)
The purchase of a business by an external management team. MBIs are riskier than management buy-outs, because the new management team is not as familiar with the business, but are still attractive to institutional or professional development capital investors because the new management team has a personal financial interest in the company's profitability.

Management Buy-out (MBO)
The purchase of a business by its management team, normally with the financial assistance of an institutional investor. MBOs are often targeted as suitable investments by development capital practitioners. (See also Leveraged Buy-out).

Management Expense Ratio (MER)
A ratio expressing the management, trustee and certain other expenses of a collective investment fund as a proportion of the net asset value of the fund.

Mandate
The agreed objectives given by an investor to his or her investment manager, often including a benchmark portfolio, guidelines as to maximum and minimum sector exposures, and prohibited investments. A mandate is usually set out as part of the Management Agreement between a fund manager and its client.

Margin
a) A deposit lodged with an exchange or clearing house as collateral to cover adverse movements in market prices of an open position; or b) In foreign currency markets, the difference between the buying and selling rates of a foreign exchange quotation. (See also Spread).

Marginal Tax Rate
The rate of tax payable on the top proportion of income derived by a person. In Australia at the time of going to print (April 1996), the highest marginal rate of income tax was 47% for income over $50,000, plus the Medicare Levy.

Margin Call
A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimum level to cover an adverse movement in price in the futures market.

Marked to Market Value
The valuation or quotation of an instrument or contract in relation to current market rates.

Marketable Parcel
The minimum number of shares of a stock that can be traded.

Marketable Securities
Securities for which there is always a ready market available, such as active, listed shares. (See also Liquid Asset).

Market Capitalisation
The sum of the total amount of various securities issued by a corporation, multiplied by the current market price of those securities. It is a measure of a company's capitalisation in strictly market price terms, as opposed to the price those securities could fetch off market.

Market Cycle
A business cycle concerned specifically with rises and falls in market activity, as measured by an index. Market cycles generally correspond to the economic clock, with periods of heavy purchasing indicating growth, and periods of heavy selling indicating recession.

Market Excess Return
The percentage excess that a particular security is forecast to earn over a risk-free (ie. Treasury Note) rate of return.

Market-linked
A term used to describe pooled investment schemes which are valued by reference to current movements in markets, rather than on the basis used by capital guaranteed funds.

Market Maker
See Making a Market.

Market-on-close
A stock or options market order to be filled at the current market price as close as possible to the close of that day's trading.

Market Order
An immediate order to buy or sell a security at the most advantageous price available after the order reaches the trading floor.

Market Price
With reference to a security, the last reported price at which the security sold. Alternatively, the highest price which a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept.

Market Risk
Risk that relates to the market as a whole and therefore cannot be diversified away simply by holding a greater variety of securities. (See also Systematic Risk).

Market Timing
The purchase or sale of securities on the basis of shorter-term price patterns and temporary market opportunities as well as judgements of underlying value. An extremely difficult thing to get right consistently.

Market Value
The current value of an item or security, as opposed to its book value. (See also Mark to Market).

Market Value Added
The increase in the market value of an item or security over a certain time period.

Mark to Market
To make an accounting adjustment to reflect unrealised gains and losses on book values of a particular investment at the end of a period.

Master Custodian
See Custodian.

Master Fund
An investment vehicle that enables individual investors or small superannuation funds to channel money into one or more underlying investments most commonly wholesale or retail pooled funds operated by professional investment managers. Master funds can generally be categorised into three distinct types: a) discretionary funds, where the individual investor selects the underlying investment product(s) from a list drawn up by the master fund manager; b) fund of funds, where the investor selects a general risk profile (eg. growth, capital stable) but the master fund manager selects the underlying investments from among a range of products managed by external managers; and c) feeder funds, which operate similarly to fund of funds arrangements, but with the master fund manager also being responsible for managing the underlying investments. Master funds which are structured as prescribed interests are commonly referred to as Master Trusts. However, the term master fund encompasses the broader scope of the industry including products offered by life insurance companies.

Master Trust
See Master Fund.

Matching
The arrangement of assets, and the return from those assets, to meet future liabilities and obligations.

Maturity
The date on which a loan, bond, mortgage or other debt or security is due to be repaid.

Maturity Date
The date upon which the issuer of a bond repays principal to the bond's holder.

Maturity Structure
In relation to a fixed interest portfolio, the positioning along the yield curve. It is measured in years to maturity of the relevant bonds held.

Maximum Deductible Contribution
The maximum amount a person is permitted to pay into a superannuation scheme from his or her personal income. This contribution is indexed annually to average weekly ordinary time earnings (AWOTE).

MBI
Abbreviation for Management Buy-in.

MBO
Abbreviation for Management Buy-out.

Mean
Another term for `average' (ie. a statistical indicator of a central tendency, giving a value around which the observations in a given sample tend to cluster). It does not, however, lead a life of its own. The statement that the average number of children in an Australian family is 2.3 does not imply that there is even a single family with 2.3 children. An aspect of central tendency is that the mean is always between the extreme values. (See also Median).

Mean Reversion
The principle that over a period of time, the market price of a security (eg. the credit spread relative to an underlying bond) will revert back to its mean level. At any point in time the bond can be referred to as cheap, expensive or fair value relative to that mean level.

Means Test
An evaluation undertaken by the Government to assess if a person is eligible for social security payments, such as the age pension. The test assesses income and assets with the lower being the basis for determining the social security payment.

Median
The value (rate of return, market sensitivity, etc.) that exceeds one-half of the values in the sample and is exceeded by the other half. The median is always the middle value, as distinct from the mean, which represents the average value. For example, if five items cost $20, $80, $100, $300 and $500 respectively, the median value would be $100, whereas the mean or average would be $200.

Member Choice
A facility made available to the members of a superannuation fund allowing them to decide the proportion of funds to be allocated between high and low risk investment strategies, sectors and/or managers. Typically, a fund with a member choice facility will allow members the opportunity to switch between investment options at certain intervals.

Memorandum of Association
A document stating the basis upon which a company is created and established. The document includes the company's name, address, initial objectives, capital, basis and extent of external dealings and initial objectives. (See also Articles of Association).

MER
Abbreviation for Management Expense Ratio.

Merchant Bank
A financial institution that specialises in the structuring and arranging of various financial transactions for companies and projects.

Merger
A form of corporate restructuring in which two companies combine into one. Unlike takeovers, mergers are usually negotiated by the management of the two companies concerned.

Mezzanine Finance
A form of unsecured debt finance provided by merchant banks and development capital fund managers to companies which are in a growth phase, but may not have access to equity capital or are unwilling to dilute their existing shareholdings. Alternatively, traditional bank finance may not be available. (See also Subordinated Debt).

Micro Economics
Economic analysis dealing with individual companies or markets and their impact on the economy, as opposed to macro economics which focuses on broader influences and trends.

Mispriced Security
A security which is trading at a price which is substantially different (higher or lower) from its intrinsic value.

Modern Portfolio Theory (MPT)
The theoretical constructs that enable investment managers to classify, estimate and control the sources of risk and return. In popular usage, the term encompasses all notions of modern investment, as well as portfolio theory. The end objective is to select optimal combinations of assets to produce the highest returns for a given level of risk, or the least risk for a given level of return.

Modified Duration
The level of interest rate sensitivity resulting from small changes in the yield to maturity of a bond. Modified duration is measured as the interest rate sensitivity of the bond as a percentage of the bond's price; in other words it is the present value of the duration.

Momentum
The tendency of an asset price to keep moving in the same direction, either upwards or downwards.

Monetary Policy
Reserve Bank actions to influence the availability and cost of money. In tandem with fiscal policy, monetary policy is one of the chief arms of Government economic policy. Tight monetary policy usually means higher interest rates as the scarcity of money prevails, whereas loose monetary policy is the reverse.

Money Market
The market for trade in short-term securities such as Bills of Exchange, Promissory Notes and Government and Semi-Government bonds. Participants in the money market include banks and other financial institutions, life offices, sharebrokers, superannuation funds and Government authorities. (See also Capital Market).

Money Market Account
A type of bank account which earns an interest rate comparable to that obtained in the money market. Banks normally require minimum account balances to be maintained and impose minimum withdrawal conditions on this type of account.

Money Market Fund
A unit trust or mutual fund which invests solely in money market (short-term) securities.

Money Supply
A measure of the amount of cash held by members of the public and in bank deposits. (See also Broad Money).

Money Weighted Rate of Return
A return on an investment portfolio calculated by reference to the amount and the timing of cash flows during a given time period. This rate is an effective measure of the fund's rate of growth, giving full weight to the impact of cash flows on fund assets. It is the internal rate of return (IRR) of the cash flows. (See also Time Weighted Rate of Return).

Monopoly
The control of an area of activity by a single individual or company.

Moody's
A United States corporate credit ratings agency, which also operates in Australia and internationally. (See also Australian Ratings, Standard & Poors).

Morgan Stanley Capital International Index
See MSCI Index.

Mortgage
A form of security for a loan, in which a specific item of property is pledged by the borrower (mortgagor) to the lender (mortgagee).

Mortgage-backed Certificates
Securities backed by mortgages which have been pooled together and securitised to create marketable securities. Mortgage securities are a relatively recent innovation designed to facilitate a secondary market and to provide liquidity to otherwise relatively-illiquid investments in mortgages by financial institutions. (See also AUSSIE MAC, Securitisation).

Mortgage Insurance (MGI)
Some lenders may provide up to 95% of funds for a loan if you agree to take out mortgage insurance (MGI). This figure is a one off payment usually made at the time of settlement. The figure is not easy to calculate being based on variables such as the loan amount, the value of your property and the exact LVR (i.e. the figure between 80% & 95%).

This payment allows the lender to recoup the unpaid principal in the event of default and the borrowers debt is transferred to the Mortgage Insurer.

Mortgage Offset
Offset accounts can help reduce your tax bill by offsetting taxable income from deposit accounts against interest paid in after tax dollars on mortgage repayments. However, not all offset accounts are equal, with many not paying the same interest as you are charged on your mortgage.

MPT
Abbreviation for Modern Portfolio Theory.

MSCI Index
Abbreviation for Morgan Stanley Capital International Index, a series of country indexes of equity prices. The MSCI World Index is one standard for comparisons of international equity performance, although there are others, including the Frank Russell and Financial Times indices.

Municipal Bond
The term used in the United States for a bond issued by a local government authority, usually with concessional taxation treatment, to pay for essential community infrastructure projects and services. The nearest equivalent to the municipal bond market in Australia is infrastructure bonds, which also offer investors tax concessions for investments in projects intended to benefit the broader community.

Multinational
A company whose business operations and investments extend across a number of countries. Occasionally called a Transnational Corporation.

Mutual Fund
An American term for certain forms of collective investments. Mutual funds are similar to Australian unit trusts in that individual investors are entitled to an interest in a portfolio of securities, but different in the sense that they are offered through a corporate legal structure rather than through a trust arrangement.

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