Asset classes: An introduction17 Sep 2021 3 min read
NGS Super offers a range of investment options for our members, whether you’re in the accumulation phase, transitioning to retirement or receiving an income stream.
Each investment option is broken down into allocations to the various asset classes — you can find those details here.
An asset class is a particular group of assets that have similar characteristics, such as shares, property, fixed interest and cash.
Risk and return
Investments in different asset classes carry different levels of risk and offer different levels of expected returns. NGS constructs each asset class with the aim of generating the optimum risk-adjusted return. This requires careful consideration and understanding of how each asset class responds to differing economic conditions.
Each asset class is broadly classified as being either a growth asset or a defensive asset. In general, asset classes at the higher end of the risk and return spectrum (such as shares) are known as growth assets, while those at the lower end (like cash) are considered defensive assets.
Growth investments can include listed shares, private equity, infrastructure and property investments.
Growth assets often provide most of their returns in the form of ‘capital growth’. For example, a shareholder may receive some income in the form of a dividend on their shares, but most of the return comes from changes in the value of the company’s share price over time. The increase or decrease in the company’s value is the ‘capital growth’ or loss. These returns can be strongly influenced by market fluctuations and tend to vary considerably over shorter time frames.
The frequent change in the value of these assets is often referred to as volatility. It is due to short-term volatility that growth assets are regarded as higher risk investments over shorter timeframes.
Defensive assets — like cash or fixed interest investments — generally have lower investment risk, which means they provide steadier returns than more volatile growth assets. The pay-off for the stability of defensive assets is that returns tend to be lower, over the short and long term.
Although the returns on defensive assets may be low relative to growth assets, their stability means that they can be useful for an investor seeking a steady income stream rather than capital growth. They can also be appropriate for superannuation investments for people approaching retirement, who may have a lower appetite for risk.
Future articles in this series will look more closely at individual asset classes.