Asset Classes you or your fund can invest in
A stock or equity represents a share of ownership in a company. It can be listed on the stock exchange or not.
The value of a company’s equity depends on many factors, and rises or falls over time as reflected in the share price, producing gains or losses for shareholders. In addition, companies may pay dividends to shareholders, which represent a portion of the annual profit of the company. Dividends are generally paid every six months and can represent a steady income source for investors.
Equities have historically produced the highest returns for investors over time, but they are considered the riskiest asset class because share prices are subject to large movements in the stock market on a daily basis.
Therefore, the investor can experience large gains or losses. This is referred to as “volatility”, or the degree of movement over time.
The higher the volatility of a stock, the higher its risk.
Volatility (and risk) decreases over longer investment periods, however – the longer you stay invested in equities, the less risky they are, since the chance of loss is reduced over time.
Listed property funds invest in property companies on a stock market, its gives investors exposure to various types of property assets including industrial, office, commercial and residential properties.
Because it is an equity, a share in a listed property company offers returns through the rise or fall in its share price over time, resulting in capital gains or losses. Additionally, it offers income in the form of regular shareholder distributions of the rental income the companies earn (often linked to inflation). This provides a key difference to other equities, where the dividends are typically not as reliable over time. This difference generally makes listed property stocks less risky than other equities, since their distributions are likely to be steadier. This gives listed property the characteristics of both equities and bonds. Listed property values generally behave differently to other equities in similar market conditions, making it a good diversifier.
A Real Estate Investment Trust (REIT) is a type of listed property company that is governed by strict regulations in terms of its structure and operations. South Africa’s
REIT regulations are very similar to those in other countries, helping underpin investor confidence. For example, REITs are required to pay out at least 75% of their distributable profits to shareholders.
Bonds are a form of loan a company or government needs to pay back to investors.
Since investors buy bonds that are issued by the company (a corporate bond) or government (a government bond), bondholders are effectively lending money to that entity in return for regular interest payments and a final repayment after a certain period of time (typically one year or more).
Investors earn interest as a regular income, and are repaid their initial investment amount when the term of the bond ends. Generally, bonds are considered to be less risky assets than equities. This is because companies are required to repay their bondholders before making any payments to shareholders, should they experience financial difficulties. Additionally, bond prices and yields historically have not fluctuated as much as equities, making them less volatile investments.
Cash and equivalent assets comprise a range of securities that basically take the form of short-term loans which earn regular interest, usually with a repayment period of less than one year.
Cash can be made out of various types of money market instruments like certificates of deposit, bankers’ assurances, promissory notes and company commercial paper.
Given their shorter maturity period than bonds, the interest rate paid – and therefore the return to investors – is generally lower than bonds. However, they are also lower risk than bonds because of their shorter repayment period. These are generally considered to be the lowest risk type of investment made by unit trusts other than actual cash (bank note) holdings. However, there is still a chance that they can lose value in a financial crisis should banks or other issuers not be able to fully repay debts.
Offshore Investment Classes
Equities, property, bonds and cash outside South Africa are considered to be offshore assets.
Because they are valued in foreign currency, they carry an additional currency risk which can impact the value of the investment negatively (should the rand gain value or appreciate against the investment currency) or positively (should the rand lose value or depreciate against the investment currency).
The South African government limits the extent to which retirement funds can invest in offshore assets. Under Regulation 28 of the Pension Funds Act, retirement funds are allowed to invest up to a maximum of 30% of the value of their assets offshore (plus an additional 10% in Africa). Individuals are also limited as to the total they are allowed to take overseas.