Asset classes are generally classified into two groups, growth or defensive assets. Understand the difference and learn how we determine our investment strategy and approach.
Understanding asset classes
Asset classes are generally classified into two groups – growth or defensive assets – which have different risk and return characteristics.
Growth investments include Australian and overseas shares, property and some forms of alternative investments. They are primarily expected to provide capital growth over the long-term, although they may also provide income from dividends and rents. They tend to be higher-risk investments (i.e. more volatile than defensive investments), but they offer the potential to produce higher long-term returns.
Defensive investments primarily include fixed interest investments, cash and term deposits, short term securities and some alternative investments. Some provide an income stream with the right to repayment of capital on maturity. They tend to be lower-risk investments that historically have produced lower long-term returns.
Australian shares represent ownership of companies that are publicly listed on the Australian Stock Exchange. BHP Billiton, National Australia Bank and Woolworths are all familiar examples of companies listed on the Australian Stock Exchange. Investment returns from shares can come from increases in share value over time or from dividends, which are company profits distributed to shareholders.
These are shares in overseas publicly listed companies. Australian companies make up as little as two per cent of the value of the world’s listed shares, so investing in overseas companies has the potential to open up more investment opportunities. The performance of overseas shares is also influenced by factors such as the economy of a particular country and the relative value of the Australian dollar to overseas currencies.
Many superannuation funds invest in properties such as office buildings and shopping centres. This may be direct investment by purchasing a property outright, or by purchasing units in a trust that invests in a variety of properties. Property investment returns come from rent and/or increases in property values over time.
Infrastructure investments provide capital to develop or maintain assets that are essential services or facilities such as transportation, communication, sewage, and power services. Infrastructure investments are typically capital intensive and characterized by stable, predictable cash flows over a long-time frame, provide a level of inflation protection with revenue directly or indirectly linked to inflation and economic growth. These types of investments can improve living standards as well as a country’s economic development.
Private markets investments provide capital for private companies that are not listed or publicly traded. Private markets investments require a commitment to specialist fund managers that drive value in their portfolio of companies through sophisticated governance and financial and operational management
These investments include Government bonds, corporate bonds, bank bills, money market securities, term deposits with banks or debentures. They are investments that offer a fixed return for an agreed period of time. These investments can also be bought or sold before the end of the fixed period of time.
These investments include bank bills and other debt securities which are made on very short terms – usually less than 12 months – and for an agreed return.
Credit investments covers a broad range of debt instruments. Credit investments are typically corporate loans, infrastructure debt, real estate debt and include mortgage-backed and asset-backed securities. Credit ratings are typically assigned to debt instruments/securities and can either be investment grade or sub-investment grade rated.
These investments include cash, bank deposits, bank bills, commercial paper and floating-rate notes. Enhanced Cash is very liquid, but includes slightly more credit risk than cash in the expectation of a slightly higher return.
Investment management structure
legalsuper has engaged investment advisors to assist in determining our investment strategy and approach. The role of investment advisors is to provide the Investment Committee and the Board of legalsuper with advice and guidance on investment issues including:
- asset allocation
- portfolio construction
- investment policy implementation
- investment manager research
- alternative investments
- transition management
- investment risk management; and
- capital markets research.