Asset class

• What kind of asset they are
• The amount by which they are expected to increase in value.

So when thinking about investing money, it is important for you to consider the assets and asset classes in which you should invest.

The main asset classes are:

• Shares
• Property
• Infrastructure
• Private equity
• Fixed interest
• Cash
• Hedge funds.

Each asset class is then classified as:

• High or low growth/return
• High or low risk.

When evaluating an asset class/es it is important to establish the expected growth/return and the potential risk before making a decision.

Highs and lows of asset class returns

The graph below shows the highest and lowest annual returns to 30 June each year, achieved for each of the four main asset classes over the 20 years to 30 June 2008.

The graph does not include returns for the asset classes infrastructure and development capital, as they have been only recently defined as separate asset classes.

Shares

Investments in shares – known also as equities – are investments in companies. When an individual invests in shares, they become known as a shareholder.

A shareholder has some ownership in the company and its profits, and their shares can produce benefits through:

• Dividends paid when the company makes a profit
• An increase in the share price of the company, so that a profit is made when the shares are sold.

Investment features

• Generally classified as a high growth asset
• Typically earn higher investment returns over the longer term
• Experience short-term volatility based on the ups and downs of the stock market and company performance
• Best for long-term investment.

Historical performance

The graph below shows the value of $10,000 invested in Australian and international shares from June 1975 to June 2005.

Expected rate of growth

High growth over the longer term. The average annual return after inflation over the 10-year period since 1996 was 12.01% for Australian shares, and 6.63% p.a for international shares. The average inflation rate during this period was 2.6%. Historically, shares are expected to have a higher growth/return over the long term than most other asset classes.

Level of risk

There is high volatility in the share market from year to year. Shareholders should be prepared to experience the highs and lows, including the possibility of negative returns in some years, to gain the higher returns that are generally produced over a longer period.

Property

Property can earn money for its owners through:

• Rental income
• Increase in value and potential sale price.

Investment features

• Generally classified as a growth asset
• Typically earns medium to high investment returns over the longer term
• Experiences a medium to high degree of volatility on a year-to-year basis
• Best for long-term investment.

Historical performance

The following graph shows the value of $4,000 invested in property from January 1980 to January 2005, using a blended benchmark.

Source: JANA Investment Advisers

Expected rate of growth

Medium to high. The average annual return for property investments before tax and after inflation over the 10-year period since 1995 was 7.3% p.a. The average inflation rate during this period was 2.5%.

Level of risk

There is medium to high volatility in the property market from year to year, including the possibility of negative returns in some years. Property investors should be prepared for a long-term investment to gain the higher returns that are generally produced over the longer term.

Fixed interest

Fixed-interest investments – also known bonds and debt securities – are usually loans to government organisations or major companies, which are "fixed" to be repaid at an agreed time.

There are different types of fixed-interest bonds, including:

• Commonwealth, State and overseas government bonds issued by government authorities
• Corporate bonds issued by companies
• Structured bonds, such as those issued to finance infrastructure projects like roads or syndicated loans
• Inflation-linked bonds, usually issued by government, where the interest is based on the inflation rate.

Fixed-interest investments produce returns for investors through:

• Interest
• Changes in the value of bonds.

Investment features

• Generally classified as a low-growth asset class
• Generally able to be converted back into cash much faster than most other investment forms
• Typically earn medium investment returns over the longer term
• Experience medium risk.

Historical performance

The graph below shows the value of $10,000 invested in fixed interest from June 1975 to June 2005*

Expected rate of growth

Fixed-interest investments are expected to have medium growth over the long term and a positive rate of interest is likely to be credited in around six out of seven years.

The average annual return for fixed interest investments was 7.9% p.a. before inflation over the 10-year period since 1996. The average inflation rate during this period was 2.6%.

Generally fixed-interest is seen as a form of secure income flow and capital value with opportunity for capital gains when interest rates fall.

Level of risk

There is a medium degree of risk, but fixed-interest investments are still subject to volatility from year to year.

Cash

Cash is money invested in term deposit and bank bills for short periods of time. The interest plus the initial invested amount provides the return on the investment.

Cash produces returns for investors through:

• Interest payments.

Investment features

• Generally classified as a low-growth asset
• Typically earns low investment returns over the longer term
• Experiences low risk with generally little volatility
• Best for investment security.

Historical performance

The graph below shows the value of $10,000 invested in cash from June 1975 to June 2005*.

Source: JANA Investment Advisers

Expected rate of growth

Low growth rate over the longer term. The average annual return was 5.69% p.a. after inflation over the 10-year period since 1996. The average inflation rate during this period was 2.6%. Cash is expected to have low growth over the longer term and a positive rate of interest is likely to be credited every year.

Level of risk

There is a low degree of risk, and it is not expected to be subject to high volatility from year to year.

Infrastructure

The infrastructure asset class can earn money for investors through:

• Income
• Increase in value and potential sale price.

Investment features

• Generally unlisted investments in regulated industries
• Typically earns medium investment returns over the longer term
• Experiences a lower degree of volatility on a year-to-year basis than shares
• Best for long-term investment.

Expected rate of growth

Medium over longer term with an expected ongoing performance of 10% p.a*. Historically, infrastructure is expected to have medium growth/returns over the long term compared with traditional asset classes, such as shares.

Level of risk

There is medium volatility in the infrastructure market from year to year. Investors should be prepared for a long-term investment in order to gain the consistent returns that are generally produced over the longer term.

Private Equity

Private equity is generally investment through unlisted trusts in unlisted companies at various stages of development – early stage, development or buy-out, for example – and across a wide range of industry sectors.

Typically these companies either have a product or idea they are taking to market, or are existing businesses seeking growth and restructure.

Private Equity can earn money for investors through:

• Dividends paid to shareholders
• Increase in business value
• Capital gains on sale of business.

Investment features

• Generally classified as a growth asset
• Typically earns medium to high investment returns over the longer term
• Experiences medium to high degree of volatility on a year-to-year basis
• Best for long-term investment.

Expected rate of growth

Medium to high over longer term. Typically, investors expect private equity should provide, over the longer term, returns of around 5% above those of listed markets.

Historically, private equity is expected to have medium to higher growth/returns over the long term than other asset classes.

Level of risk

There is high volatility in the private equity market from year to year. Investors should be prepared for a long-term investment in order to gain the higher returns that are generally produced over the longer term.

A considerable amount in the risk of private equity market is from the difficulty in liquidating the assets in an unlisted company and the risky nature of the businesses invested in – particularly in their early stages.