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Asset Classes

Bonds

A bond is a debt security – a security that represents a loan to a third party. When an investor buys a bond when it is first issued, they are lending money to a government, corporation, or other entity known as the issuer. In return, the issuer promises to pay a specified interest rate over the life of the bond and to repay the principal on a specified maturity date. Governments issue bonds to borrow money to meet their net cash needs, that is, to cover the gap between the taxes they receive and the amounts required for government spending.

 

  • Principal (or face value) is the amount of money that the issuer has borrowed and promises to repay. This is often referred to as the nominal amount of the bond.

  • The coupon is the promised interest payment to the bondholder (the lender). This can be paid annually or twice a year.

  • The maturity date (or repayment date) is the date on which the borrower promised to repay principal to the bondholder.

  • Yield-to-maturity is an investor's total return if they buy the bond at any given time and then hold it to maturity. This therefore takes into account any capital gains or losses and therefore the yield to maturity will vary with the price of the bond.

 

The types of bonds that an investor can choose from include government bonds, corporate bonds, Eurobonds, and mortgage and asset-backed securities.

 

The other main type are bonds, in which there are no periodic interest payments and instead the investor only receives a payment at maturity (the final maturity payment) that represents the principal amount and an amount representing an increase if the bond was issued at a discount. These are known as zero coupon bonds (ZCBs) and are sold at a significant discount to their face value, ie the face value of the bond.

Property

As an asset class, real estate combined with low volatility and a reliable income stream can offer positive real returns over the long term.

The advantages are:

 

  • absolute returns, especially against inflation

  • portfolio diversification

  • relatively low correlation to bonds and stocks (supply diversification)

 

 

Real estate as an asset class is characterized by its unique selling points:

 

  • Each individual property is unique in terms of location, structure and design.

  • The valuation is subjective as real estate is not traded on a central marketplace and no continuous and reliable price data is available.

  • It is subject to complex legal considerations and high transaction costs when transferring.

  • It is very illiquid as it cannot be traded immediately.

  • Since real estate can only be acquired in discrete units, diversification is difficult.

  • The supply of land is limited and its availability may be further restricted by laws and local planning regulations. Therefore, the price is mainly determined by changes in demand.

Real estate funds

The increasing popularity of real estate investing over the past decade has made this mainstream asset class an essential part of many investment portfolios.

 

There are a number of ways individuals can invest in real estate, including:

  • Building a portfolio of directly owned real estate

  • Investments in listed real estate companies or Real Estate Investment Trusts (REITs)

  • Investments in real estate funds and similar vehicles.

 

REITs (Real Estate Investment Trusts)

REITs are well established in the US, Australia, Canada, France, Japan, Singapore and Hong Kong. The success of the REIT model in Japan has prompted many Asian countries to adopt the same legislative model, while in Europe the success of the French REIT model has enacted similar legislation in the UK and Germany.

 

Simply put, a REIT is a company that owns and operates income-producing real estate, which can be either commercial or residential. The difference from a public company that holds a real estate portfolio is that the REIT is not taxable on income or gains from the real estate portfolio and instead distributes it as income, with the tax liability accruing to the shareholder. This avoids the problem of double taxation. This is usually subject to the requirements that the REIT provides for the qualification requirements.

 

In some countries, REITs are required by law to maintain a dividend payout ratio of at least 90%, making them a favorite for income investors. REITs can deduct those dividends and avoid most or all tax liabilities, although investors still pay income tax on the payouts they receive. Many REITs have dividend reinvestment plans (DRIPs) that allow returns to compound over time.

 

 

Stocks

Historically, stocks have produced superior returns relative to other asset classes and have outperformed other asset classes for long periods of time. However, these returns come at a price, as stock markets can be highly volatile and the risk associated with owning stocks is significantly higher than other asset classes.

 

Stocks carry all the risk and reward of investing in a company. When a company is doing well, its shareholders are doing well. However, when the company performs poorly in terms of profitability, shareholders suffer from the percentage drop in the asset class's price.

 

Shareholders can receive annual dividends when declared by the company. As a provider of venture capital to the company, it is the shareholders who vote 'yes' or 'no' to every decision made by the company's management at company meetings.

 

When the company dissolves (often referred to as liquidation), shareholders are paid after everyone else. If there is nothing left, the common shareholders get nothing. If there's a lot of money left, it all belongs to the common shareholders.

Type of stocks

Stocks can be broadly divided into two categories, namely common stocks and preferred stocks (or preferred stocks). They are known by different titles from country to country, but although the titles differ, they retain the same basic characteristics. The differences lie in the amount of income generated and the voting rights of the two unit classes.

Common stocks

Common stock represents a pro rata interest in the ownership of the company. They usually carry voting rights and carry dividend rights. Each common share represents a shareholder's right to vote at general meetings of the company. Each ordinary share is assigned exactly one vote, multiple voting rights are prohibited under the German Stock Corporation Act. The economics ministers of the federal states can permit exceptions to this insofar as this is necessary to safeguard overriding macroeconomic interests.

 

Preffered stocks

In addition to common stock, some companies may issue preferred stock or preferred stock.

The terms on which preferred stock is issued vary from company to company, but typically has a higher claim on a company's assets and earnings than common stock or common stock. They generally register a dividend that must be paid before any dividends on common stock or common shares, and the holders are entitled to be paid before the common stockholders in the event of liquidation.

 

Usually preferred stocks are:

 

  • without voting rights, except in certain special circumstances, e.g. B. if their dividends have not been paid

  • pay a fixed dividend each year, the amount of which is determined when it is first issued

  • Priority over ordinary shares for redemption upon liquidation of the Company up to a capped redemption amount.

 

As a result, preferred stocks are less risky than common stocks, but also potentially less profitable. Holders typically do not have voting rights in company affairs, but are entitled to an annual fixed dividend so long as the company believes it is making a sufficient profit. Such dividends must be paid before any dividends are paid to common shareholders; hence the term "preference". Preferred shares are normally only entitled to a fixed dividend rate based on the par value of the shares, so a 6% preferred share of €1 would pay a net annual dividend of €0.06 per share. The dividend is only payable if the company makes a sufficient profit and the Board of Directors declares payment of the dividend.

Dividends

In many countries, companies aim to steadily increase their dividends whenever possible. A drop in dividend payments can result in a very negative reaction from shareholders. Some companies have historically retained their earnings, thereby increasing the absolute value of share prices compared to those companies that have historically paid the majority of earnings/profits in the form of dividends.

 

When a company experiences declining earnings but either maintains or increases its dividends, the dividends are not fully covered by the earnings earned and are known as uncovered dividends.

 

Corporations pay dividends out of their earnings, which are technically called distributable reserves. These are the after-tax profits made over the life of a company, beyond dividends paid.   -> more

Commodities

Commodities offer diversification opportunities due to their low correlation with traditional asset classes (equities and bonds). Commodities can play an important diversifying role within a portfolio. Within the broader commodities asset class, there is room for further diversification. Top-level categories include food, energy, precious metals, and base metals. Also, many subcategories are in competition with each other or have different demand and supply drivers. In the energy sector, for example, the gas market and the oil market are currently characterized by very different dynamics.

 

Investors should focus on the supply and demand conditions for commodities. Geopolitics remains a fundamental driver of commodity prices.

Base and precious metals

Numerous metals are produced around the world and then refined for use in a wide variety of products and processes.

 

As with all other commodity prices, metal prices are influenced by supply and demand. Factors affecting supply include the availability of raw materials and the cost of extraction and production. A producer measures extraction costs by the price of a metal. If the marginal cost of mining rises above the current price of a metal, production will cease. This follows the rationale of economics that in order to contribute to the other costs incurred and potentially make a profit, marginal cost must be below price. Such costs can be affected by political instability and environmental laws.

 

The demand comes from the underlying users of the commodity, for example the growing demand for metals in rapidly industrializing economies including China and India. It also comes from investors like hedge funds, who might buy metal futures or include commodities in certain funds in anticipation of excessive demand. Producers use the market to secure their production. Traditionally, the price of precious metals such as gold rises in times of crisis - it is seen as a safe haven.

Finally, metals used in packaging, for example, are impacted by the cost of alternatives such as glass and plastic, as well as consumer/government concerns about sustainable resources and recycling.

Energy market

The energy market is important and includes the market for oil (and other oil-based products such as petroleum), natural gas and coal. Like the market for any other product, the price influences can be summarized as supply and demand factors. Supply is limited, and countries with excess oil and gas reserves can export to countries where oil and gas are insufficient to meet their needs. Prices could be raised by producers restricting supply, such as the activities of major oil producers in OPEC.

 

Demand for oil and gas is ultimately driven by consumption, which in turn depends on energy demand (e.g. from manufacturing and transport). Prices can react strongly to political crises, especially in major oil-producing regions of the world such as the Middle East. Since the level of demand is directly determined by the growth of the consuming economies, economic forecasts and economic data also affect energy prices.

 

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