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Further Learning
Important: Please note that we do not provide advice or recommendations. All our content is informational and our prime focus is on the business community.
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Please feel free to share knowledge, as we welcome constructive comments from those who agree or disagree with anything that we cover on this website.
Strategies and Asset Classes
Strategies: One way of describing a strategy is to say that it is a way of doing something or dealing with something.
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In finance, the differences between 'doing' and 'dealing' with something has particular relevance when it is applied to identifying asset classes, which can be defined in a number of ways, some of which we go on to cover later.
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When strategies are applied to the management of investments, in the financial services industry there are two particular terms that are frequently used.
The first is 'investment objective', which could be used as a broad definition for 'doing something'.
The second is 'investment policy', which could be seen as a way of 'dealing with something'.
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For example, the 'doing something' might be a statement about investing in an asset class, such as (1) equities that are listed on a stock exchange or (2) companies that have their business based in a geographical region, or in (3) businesses that gain most of their revenue from one region of the world. The name of the strategy may add some clarification, so, for example, the 'doing something' may include a business area, such as Real Estate or Technology.
Importantly, an investment objective is likely to be maintained for long periods of time. That matters, as an investment objective could be seen as something that is almost set in stone from the perspective of investors, regardless of merit during good, bad, and indifferent times.
Meanwhile, the 'dealing with something' may enable much more flexibility. The Investment Policy is an approach to investing in an asset class that can change occasionally or on a semi-regular basis and also for tactical reasons, perhaps to defend against losses in a falling market.
Some investment approaches are straightforward while others can be complex. We choose not to go into further detail here because such information is available from investment managers. However, prospective investors intending to invest for the longer term might do well to better understand the reasons why an investment policy may have changed in the past, if it ever has.
Risks change as a result of a change in investment policy, and investors would do well to recognise that.
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Risk can be defined in a number of ways:
On the downside, for example, the risk of a permanent loss of capital is perhaps more important than a temporary loss, even in a rising market.
On the upside, for example, the risk of making a nominal profit but securing a return that (1) does not offset inflation and (2) underperforms a benchmark index or peer group.
There is also the risk that a lot of investors may look to sell out at a time when there are few buyers around. If only for that reason, taking an interest in learning more about strategies and asset classes, as well as about the markets, could pay handsome dividends for those seeking attractive capital returns.
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Taxation risks:
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We won't cover 'taxation risks' here because we don't wish to drift into regulated territory. However, we will observe that there are PEP and ISA millionaires in the UK who took advantage of the opportunity to secure tax-efficient gains on the way up who, in a falling market, risk losses in a not-so-tax-efficient manner. As such, financial planning techniques can mitigate or hinder tax efficiency and the associated taxation risks.
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Market risks:
This is another big subject and it is relevant to note that the same strategy can fail for some and succeed for others. As such, consider who bears the risks when the result is an unexpected outcome.
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The start date and the expected investment time horizon are just two of the many influencing factors that should be important to investors. Others include (1) a change in personal circumstances or (2) risks that come about as a result of regulatory changes or (3) a dramatic change in market-related risks, perhaps due to war or political influences. including a change in government policy.
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Asset Classes: An asset class is a group of similar investment vehicles.
Asset classes can be broadly or narrowly defined, in which case they may be identified as sub-asset classes. That division matters, as some asset classes (and sub-asset classes) can be easy to buy but difficult to sell at a good price.
It is relevant to consider the motivations of sellers when buying into an asset class or when choosing to stay invested in an asset class. In addition, before investing in any asset class, consider the likely return prospects, in real terms as well as absolute terms, as well as what might cause the risk of suffering a permanent loss of capital.
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Access to a once in a Lifetime Learning Opportunity
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The old saying 'having skin in the game' is about taking on risk and having goals. Those with few assets don't get many opportunities to invest in their financial education, but the many workers who have been compelled to have a Workplace Pension do have a real-life opportunity, especially younger workers who may not even care about pension planning, but maybe should.
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The 'Five 10ers'
We have created what we call the 'Five 10ers' so those of a similar age group can choose to take an interest in their financial education and learn from others around them.
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The 'Five 10ers' (pronounced as tenners, tenors or £10ers, whichever is preferred) has those no more than a decade away from State Retirement Age in the oldest group and those more than forty years away are in the youngest group, the 'new kids on the block'.
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Default saving for retirement
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Those with Workplace Pensions might want to note what Paul Maynard MP, who was Minister for Pensions from November 2023 to 5 July 2024, highlighted through a ministerial statement made in 2023 that 'many of the nearly 24 million members of Master Trusts have been defaulted into saving for their retirement, and whether they know it or not, they bear the risk of their investments.'
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The term 'Master Trusts' might not sound significant to those who 'have been defaulted into saving for their retirement ', but it is. For that reason, more on the 'Evolving the regulatory approach to Master Trusts' (which we have shortened to 'Evolving Approach) can be found through the external link below.
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Below we provide some background information that we will update periodically, as we listen to those who want to learn more.
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Financial services can be defined in a variety of ways
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We are choosing to only use broad definitions and, to do this, we have adopted a modified version of the State of the Sector styles used in two documents made available by the UK Government. Both are called an 'Annual review of UK financial services', with the first issued in 2022 and the second in the summer of 2023. (External links to both are made available below.)
(The other external links relate to some asset classes that we introduce, in more depth, below.)
Fixed Income
Fixed income is a broad sector that includes:
(1) Government Bonds
(2) Corporate Bonds
(3) Other financial instruments that provide a fixed level of income.
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All the above are debt instruments.
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Fixed income payments may or may not be paid in the form of interest. Some debt instruments are considered to be highly secured while others may offer little or no security at the time of issue or at some later date.
Fixed income investments often have a fixed maturity date, but some don't. Those that don't include a perpetual variety that puts the issuer under no obligation to return capital as long as they continue to make the interest (coupon) payments that are due to the (fixed income) bondholders.
Equities
Equities are shares, and they can be:
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(1 ) Listed Equities (tradeable on stock exchanges)
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(2) Private Equities (privately held)
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They come in many shapes and sizes.
Those that are tradeable on stock exchanges include the shares of mega-cap and large-cap companies, being those with the greatest stock market share-valuation. The shares of small-cap and micro-cap companies are also seen to be tradeable, but quite often it can be difficult or impossible to buy or sell a large position, especially when there is a lack of demand from potential buyers.
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Many investors in private equity look to buy and hold for 5 years or more, so shares can be infrequently bought or sold. The exit strategy for many private equity investors may involve a planned private sale of the business or an IPO (initial public offering) sale, the latter resulting in a stock market listing.
Commercial Property
Commercial property, a form of real estate.
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The commercial property sector includes physical assets including: (1) Offices ; (2) Shops, including retail parks; and (3) Industrial.
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These assets can be held directly or through private equity vehicles, as joint ventures or as club deals.
The way in which an individual commercial property is owned will affect its value in the open market, as will the risk of depreciation (physical and economic) and obsolescence.
Commercial property is typically held either privately or institutionally, mostly through open or close-ended (limited life) funds.
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Many factors need to be considered. For example, (1) Location; (2) the quality of the building and its suitability from a tenant perspective; (3) the creditworthiness and status of the tenant; (4) the length of lease in place and the likely initial and reversionary capitalisation yield after (5) the cost of debt funding.
Infrastructure
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Infrastructure mostly meets one of two needs:
1 ) Demand-driven infrastructure (For example, some physical real estate, such as bridges, for example.)
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(2) Essential infrastructure
Appearances can be deceiving
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Infrastructure is mostly seen to be physical, with effective and reliable non-physical technology often needed during operation.
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Demand-driven infrastructure can play an important role, especially when essential infrastructure fails, which is why we choose to use the two terms.
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Examples of infrastructure include electricity grids and bridges, with 'Net Zero' strategies currently driving much infrastructure development.
Commodities
Commodities are usually considered to be:
(1 ) Hard (pure resources that are mostly mined or extracted)
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(2) Soft (natural resources that are grown and cultivated)
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Commodities that are uniform across producers can be traded on a stock exchange.
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These will typically include commodities in the energy, metals, or agricultural sectors.
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Commodities that are not uniform across producers have other, sometimes very important, purposes.
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Producers and manufacturers have bespoke requirements, as do consumers, for the many commodities that are bought and sold without the need to be traded on stock exchanges.
Other
Other asset classes:
Asset classes can be sliced and diced in various ways, and some don't neatly fit into the five other categorisations.
What is and what isn't an asset class is open to interpretation. (Accept or reject the following.)
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Other assets, physically real or otherwise, can include asset-backed 'financial instruments'.
They may be used to avoid the need for physical custody of an asset by those willing and able to accept any counterparty risks.
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They can be an ingredient in the mix, included to reduce or increase risk. A simple example of this would be a derivative called an 'option' which, when held, could be either 'in' or 'out' of the money.