Asset Classes Explained

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

Asset classes are groups of securities, with varying degrees of risk. Some of the main asset classes include:

Equities
Bonds (also referred to as fixed income)
Cash

Each asset class has different investment characteristics, for example, the level of risk; the potential for delivering positive and negative returns; and expected performance in different market conditions.

Publicly traded equities

Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company, and are traded on recognized stock markets. When you invest in equities, you buy one or more shares in a company, and become a shareholder. Unless you have a very large shareholding you will not typically be able to influence how the company is run, although all shareholders are normally invited to attend and vote on resolutions at a company’s Annual General Meeting.

Equities have the potential to make you money in two ways. You can receive capital growth through increases in the share price, and/or you can receive income in the form of dividends – these enable shareholders to share in the success and profitability of a company and are paid in proportion to the size of your shareholding, normally twice a year. There is no guarantee that dividends will be paid and there is also a risk that the share price will fall below the level at which you invested. Accordingly, the entire value of an investment in equities is at risk.

Bonds

When you purchase a bond, you are lending money to the issuer of the bond and become a bondholder. That issuer could be a corporation, a government or another entity. Bonds provide a regular stream of income (known as a ‘coupon’, which is normally a ﬁxed amount paid at regular intervals) over a speciﬁc period of time, and promise to return investors the value of the bond on a set date in the future (known as the ‘maturity date’). Important to rememmber – bonds will only return investors’ capital if the bond was bought it at or below par. If the buyer paid $101 for a $100 bond, his capital will not be returned in full.

Historically, bonds have tended to offer stable returns than equities and are perceived to carry lower risk, although they have delivered lower returns than equities over the long term. There is always a risk that the issuer will be unable to fulfil their obligation to pay coupons to bondholders, or repay the value of the bond on the maturity date. This is known as a default. These events have been rare historically, but they do occur; most frequently for bonds issued by corporations rather than governments. The value of bond investments tends to sensitive to changes in interest rates and the value of an investment can, therefore, vary over time. In the case of a default, there is no assurance that the issuer will be able to repay bondholders, so investments in bonds should never be considered ‘risk free’.

Cash

A cash fund typically invests in cash, money markets and other short-term securities, and aims to achieve better rates of return than are typically available from bank deposit accounts. Because they invest in capital markets, cash funds do carry some risk. The value of an investment – and any income derived from it – can go down as well as up and investors may not get back the amount they invested.

A cash investment tends to be seen as a lower risk, lower return option than bonds or equities. It can be a useful tool for risk‑averse investors, or as a temporary home for money in between longer‑term investments. Cash funds aim to achieve a competitive rate of interest, whilst maintaining security and liquidity for investors. They generally offer modest rates of return, which potentially make them less suitable for investors seeking long-term capital growth.

As well as the different asset classes available, there are also different styles of investing:

Multi-asset

Multi-asset funds typically invest across a number of different asset types, including equities, bonds, cash and, potentially, alternative investments such as property and infrastructure. This provides a greater degree of diversification than is possible when investing in a single asset class.

Diversifying across a broad range of investment strategies, styles, sectors and regions can help cushion the occasional shocks that come with investing in a single asset class. It also enhances the potential for investing in better performing asset classes, while spreading the risk of investing in lower performing asset classes. However, you should remember that diversification does not fully protect you from market risk.

Absolute return

In recent years, many investors have turned to absolute return funds. This is a style of investing that aims to generate positive returns in all market conditions. Absolute return funds use investment techniques that can profit from both the ups and downs in share prices and other capital markets. For many, absolute return investing has come to be seen as an integral part of their portfolio. Please note that there are no guarantees an absolute return fund will achieve its investment objectives.