Mercer Oneview Ireland

The Main Investment Asset Classes

When investing, it is very important to choose investment assets that suit your risk profile. High risk equities in any great proportion will not suit a low risk investor. Capital protected investments are unlikely to be of much use to an investor targeting high growth who can tolerate high risk.

It is important to remember the role of diversification in controlling risk. In general, medium risk and even high risk investors should not invest wholly in any one asset class.

Below is an overview of the main investment asset classes.

The Main Asset Classes

Cash Deposits

Includes current accounts, bank deposits and Irish State Savings products. Cash tends to produce the lowest returns of all the asset classes over the long term: at present Mercer considers 0-1% per annum net of DIRT to be a reasonable expectation, though certain deposit facilities may produce more. Cash is the asset class least exposed to capital risk because its nominal value never falls. However it is badly exposed to inflation risk: there were several periods of the twentieth century where the real value of cash plummeted downwards as prices rose.

Cash deposits

Irish State Saving Products

Fixed Income

Fixed income securities are loans to either Eurozone Governments (‘gilts’ or ‘government bonds’) or to large companies (‘corporate bonds’). These holdings are considered low risk because Eurozone governments are considered highly unlikely to default on loans, as are those companies considered to issue ‘investment grade’ corporate bonds. This asset class usually delivers a low but fairly steady rate of return – over the long term Mercer considers 1-2% per annum after charges to be a reasonable expectation. Capital risk is generally low for gilts but inflation risk is higher for this asset class than for any other.

Government Bonds

Corporate Bonds

Capital Protected Funds

Capital Protected Funds tend to combine other asset classes, such as gilts and equities, but carry a guarantee that after a particular period of time the capital value cannot have fallen. The rates of return they deliver will vary considerably depending on market conditions: at present Mercer considers 1-2% per annum after charges to be a reasonable expectation. Guaranteed funds carry little capital risk if held to maturity but inflation can pose a problem if markets fail to perform.

Capital Protected Funds

Commercial Property

Commercial Property aims to derive returns both from the rent paid by its corporate tenants and from rising capital values. So far as the rate of return goes, Mercer would consider 4-5% per annum after charges to be a reasonable expectation. Commercial property carries a low-medium level of capital risk but is strongly resistant to inflation because property prices tend to rise when prices in general rise.

Commercial Property

Equities

Equities (also referred to as stocks or shares) historically have delivered higher rates of return than any other asset class over the long term: at present Mercer considers 5-6% per annum after charges to be a reasonable expectation. However equities are also liable to fluctuate in value over the short term and consequently, when many are held in funds, they are considered to carry a medium-high level of capital risk. When individual equities are held, for example 2,000 shares in a single company, they are considered to be high risk. Equities are however strongly resistant to inflation because as prices rise in general companies will normally increase the prices of the goods and services they supply.

Investing in equities

Alternatives

The term ‘Alternative’ is used by us to apply to those asset classes held by investors who wish to diversify without compromising on returns. Some, though not all, Alternative asset classes can carry high levels of capital risk. However, their performance tends not to correlate significantly either with that of equities and property. This lack of correlation tends to reduce the overall volatility of a portfolio. Alternatives thus play a very useful part in diversifying medium risk and high risk portfolios.

Alternative Asset Classes

Emerging Market Equities

Investing in Commodities

 

  • The information contained in this website is for information purposes only. It should not be taken in any way as advice. It should not be relied upon as an offer to purchase or sell any of the products that are discussed.
  • The value of investments can go down as well as up.
  • Investments or products mentioned on this site may or may not be suitable for you.
  • Before investing or purchasing any product you should always seek independent financial advice. Mercer can provide independent financial advice if required.

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