Asset Classes in Australia

Asset Classes in Australia

An asset class in Australia is a group of investments that all have a similar theme, which might mean they are part of the same industry, abide by the same laws or operate similarly in the market. Assets are classified as either defensive or growth.

Growth Assets

These include shares, property and alternative investments, with inherently greater risk attached, but also inherently greater potential returns. Most of the money made from growth assets is from buying into a business or other entity that increases in value as time goes by, so companies grow, property becomes more valuable, and so on, making your original investment larger. This increase in value is called capital growth, but should your investment become less valuable – always possible – it is called capital loss. 

Prices always fluctuate in the market, so watching as your growth assets flutter up and down might make you nervous, but can also be very rewarding. In some cases a carefully-chosen longer-term investment needs to be left alone for a while to do its thing.

There are a handful of growth asset classes.

1. Equities or stocks, represent you having partial ownership of a company by being a shareholder. Returns come from increases or decreases in the value of the company, represented by each share and from company profits. These profits can be distributed via dividends.

Shares have the greatest earning potential of any investment, with its value more likely to fluctuate in the short-term. Shares are considered high risk.

2. Alternative investments are usually unlisted companies (not listed on the stock exchange, the ASX) and include companies that build airports and roads (infrastructure) and other private investments. Returns work the same as for shares – income and share price – but alternative investments are considered somewhat safer than shares (medium to high risk), due to their nature.

Roads and airports are heavily invested in but are often contracted by governments and private contractors, meaning the project is likely to be stable, completed, maintained and functioning for its lifespan, and far less likely to fail, like a company might.

3. Property investments come in several forms: industrial, commercial or residential, and unlisted and listed property funds. Income is derived from rent and returns are gained by increases in value, and in listed property, movements in the value of the underlying asset result in returns. This type of investment is considered medium risk.

Unlisted property is typically a high-rise downtown office block or industrial real estate focused on returns from rent and capital growth. The investment doesn’t trade on the stock market, and is therefore independently valued. Listed property includes property trusts, listed on the ASX, with prices based on market movements.

Defensive Assets

Defensive assets are usually cash or fixed interest, and are less risky. This means they offer lower returns, but your initial investment tends to be far safer. You will usually get some form of income from a defensive asset, slight as it might be.

There are two kinds of defensive asset classes. 

1. Fixed-interest assets are bonds or debentures. Fixed-interest assets are actually loans: you, as an investor, loan money to a corporation or government with interest payable – to you, as your returns. You can also attract returns from an increase or decrease in the value of the asset with changing interest rates. These offer lower returns than any growth asset, and tend to provide better returns than cash over the long term.

2. Cash, cash equivalents or ‘money market instruments’ means cash in banks and short-term money-market securities. Returns from these investments come from interest paid on the initial investment and increases and decreases in the underlying investment due to changes in interest rates. It is hard to lose money on these investments, but not impossible, with generally pretty steady – but low – returns, with fluctuations only due to changing interest rates.