An ‘asset class’ is a category of assets or investments, such as equities or bonds. Normally assets in the same class have similar characteristics. They can, however, have very different returns or risks. The value of the investments in all asset classes can go up as well as down in value. The following asset classes make up the investment options for the RSP.
Equities - Long term investments representing the ownership of companies via stocks and shares. The return on equities comes from growth in the value of the shares, plus any income from dividends. For overseas equities, changes in the foreign currency exchange rates could also significantly affect returns.
Bonds - Fixed interest securities or index-linked investments in the form of government bonds (UK government bonds are called Gilts) or corporate bonds (those issued by companies). These investments are essentially loans, often over a set period paying a rate of interest which is fixed or linked to inflation or an index.
The return is a combination of any interest received and any change in the bond’s value. For overseas bonds, changes in the foreign currency exchange rates could also significantly affect returns.
Diversified asset funds - Diversified asset funds invest in a wider range of asset classes than traditional managed funds do. Typically, they will aim for some sort of targeted return over a particular period of time; for example, a return above inflation or interest rates, and will often significantly vary the types of assets they invest in based on market conditions. However, the strategies used to try to achieve these aims may vary widely from manager to manager.
Multi-Asset - Funds that invest in a mix of equities, bonds, gilts, cash and alternative investments like property or commodities. The actual weighting of these assets will depend on a number of factors, for example current economic conditions for a Diversified Growth Fund, or ethical criteria for socially responsible investments. Given the diversity of asset classes, a multi-asset fund potentially offers less volatility than a fund of pure equities, but may reduce the potential for higher returns.
Property - May include direct investments in land and buildings, as well as indirect investments such as shares in property companies. Commercial property may take the form of offices, shopping centres, retail warehouse parks and industrial estates. The values of different types of property do not necessarily move in line with each other.
The return from direct investments is a combination of rental income and changes in property values. Over the long term, property's average risk and return have been higher than bonds, but lower than equities.
Money market instruments (including cash) - May include deposits with banks and building societies, as well as governments and large corporations. They also include other investments that can have more risk and return than standard bank deposits. There are circumstances where money market instruments can fall in value.
The return comes from any interest received and any change in the value of the instrument.