Asset Classes

What Should You Know?

• Cash-based holdings, kept as units in pension plans or investment bonds, should also form a significant part of an investment portfolio.
• Cash returns can be improved by committing some of your savings to fixed-term deposit accounts, usually for 6 months or a year, with periods of 5 years sometimes available. It is important to remember that a higher return is bought at the expense of liquidity.
• UK residents can pay up to £20,000 per annum into a cash ISA, which would benefit from tax-free interest. From April 2027, under-65s can pay up to £12,000 into a cash ISA.
• Maintaining an adequate cash reserve (at least three months’ salary held in an instant-access cash account) is advised for unforeseen events.

What Should You Know?

• Gilts: Considered the safest form of bond, these can be purchased individually, but it is more common for investors to hold them via a fund. In return for the loan, which is repayable after a stated period, the lender receives income in the form of interest; the interest paid on a gilt is called the coupon. Thus, government bonds will deliver to the investor a steady fixed level of regular income irrespective of the performance of the stock market. The relationship between the prices of gilts and their yield is inverse.
• Corporate Bonds: Paid at a fixed rate typically over a term of 7-10 years, corporate bonds operate similarly to gilts and may be sold on the market. Interest can be taken until the investor redeems the bond for the original purchase price, but because they are issued by institutions and companies, you are dependent on the issuer remaining solvent.

What Should You Know?

• If you own your own home, then a large proportion of your wealth will already be tied up in property. If planning to invest in property, this should be considered; however, most available property funds are focused on commercial property, which can present a qualitatively different type of risk to residential property.
• There are two ways to invest in commercial property: either buy an actual building or invest in a commercial property fund.
• This asset class and the property sector in general took a knock during Covid-19, when many commercial properties, such as offices, closed.
• Buy-to-Let is an attractive option for deriving ongoing income from an asset that should, over time, rise in value. However, being a landlord is not a risk-free occupation.

What Should You Know?

• Widely considered the best-performing asset class over the long term, shares deliver higher returns than commercial property, cash investments, and bonds.
• They have also experienced higher volatility than bonds, property, and cash, and, on occasion, the conventional view that equities can outperform all other classes is unfounded, particularly when an equity-related investment has to deliver a return on a given day.
• Equity portfolios deliver not only growth but also income through dividend payments; however, if a company collapses, ordinary shareholders will be last in line when liquidation proceeds are distributed.

What Should You Know?

• Fund managers will invest in public services and assets that people rely on (e.g., roads, rail, civil engineering, water and sewage, and electricity), as investing in infrastructure aims to deliver long-term financial benefits from these large-scale projects. The idea here is that public dependence will translate into stable, consistent returns for investors.
• Shares are often purchased in individual companies that participate in projects, meaning that infrastructure assets may be regarded as a specialised form of equity investment.
• Capital is always at risk as neither returns nor fixed income can be guaranteed.

What Should You Know?

• Returns above the original investment may be paid as income or at the end of the fixed period or as a combination of the two.
• Structured products are rarely risk-free, and income paid during the term may be subject to income tax at the client’s prevailing rate unless the payment is deemed a return of capital.
• They may be a suitable option for a client requiring income above what conventional deposits can provide, but if a higher income potential is guaranteed, it must be stressed that capital is at risk.
• Structured products are commonly linked to the performance of a recognised market index, such as the FTSE 100, S&P 500, Euro Stoxx 50 or a basket of indices. The return will usually depend on whether the relevant index is above, below or within a specified level at set observation dates or at maturity.
• Some structured products are designed with defensive features, such as conditional capital protection or defined barriers. These may allow a return to be paid even if the underlying index has fallen within agreed limits, but protection is usually conditional and capital can still be lost if the terms are breached or the issuer defaults.
• Because structured products are complex and depend on the financial strength of the issuing institution, they should generally represent only a limited proportion of a diversified portfolio and be used alongside, rather than instead of, more traditional asset classes.