Article

Asset classes 101

Super and investments 101 | Date Posted: 3 December 2019

 

“In investing, what is comfortable is rarely profitable.” - Robert Arnott, US entrepreneur, investor and writer

A diversified investment option invests in a range of asset classes that are expected to grow over the long term; but are likely to perform differently from each other as the economy changes. This has the effect of smoothing the short-term returns of the fund.

Super funds generally offer a choice of investment options. Some members will choose one or more options that invest in a single asset class, but most will be invested in a diversified option.

Diversified options can invest in very different asset mixes, but most will have at least some exposure to the following groups of assets.

Shares

Shares represent ownership in a company, giving you the right to share in the company’s future financial performance, whether good or bad. As a shareholder you can benefit in two ways.

Firstly, a profitable company is likely to pay out some of its earnings each year to its shareholders as a cash dividend. Secondly, if the share market’s expectations of the future earnings of the company grow more positive, the company’s share price may well increase in value.

However, neither of these are guaranteed and hence share prices tend to be quite volatile.

Bonds

Bonds are traded securities issued by companies, governments and others in order to raise debt finance. For example, bonds may be issued by a mining company to develop a new mine or a state government to build new roads or upgrade port facilities.

The bond issuer promises to make regular interest payments and repay the principal of the bond by a certain date.

Bond investors are paid a regular income (known as a coupon). Unlike shares, the coupon payment is (usually) fixed and the original investment is repaid on a fixed date in the future, for example in 10 years’ time.

Hence, the market value of bonds tends to be less volatile than shares.

Commercial property

Property includes office buildings, retail malls, medical facilities, industrial premises, hotels and apartment blocks. Property, or real estate investing can help grow your super investments through rental income and/or capital gains.

Property usually offers risk and returns that are higher than bonds, but lower than equities.

Infrastructure

Infrastructure is another mid-risk asset, comprising essential public assets such as roads, railways, airports, sea ports, water facilities, power lines, pipelines, telecommunications and data centres.

Investors may for example finance the construction of a rail link to a mine, as returns are predictable given the lack of competition.

Infrastructure assets are intended to deliver secure cash flows, sometimes with earnings growth potential.

Alternative funds

Alternative investments refer to funds that invest in non-conventional assets such as private equity, private credit, currencies, commodities or hedge funds. The latter may invest in equities, adopting strategies that deliver positive returns regardless of the share market’s direction.

Cash

When talking about cash in investments, we’re referring to short term interest-bearing investments, such as bank bills, term deposits and cash management accounts. 

Investment managers can hold cash in term deposits and bank accounts as a defensive asset and to help manage their portfolio.

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