What are Asset Classes?

Various Asset Classes Diversification

We are in a vastly different financial environment than we have been for some time. Real rates are positive and increasing so we can now receive great returns without taking on much risk. When risk free rates provide positive real returns, why take on risky assets which mostly have negative expected returns.

Lower risk asset classes can give us fixed returns even in the double digits. Let’s explore these options. First, let’s mention the equity risk premium. That is the spread between risk free yields and equity yields. As the risk free rate rises, let’s say 10 yr Treasury yield, then equity yields such as S&P 500 must also rise to compensate for these higher risk free returns. We need to get a “better value” to take on risk so these yields rise by having valuations and price come down. It is like a “rerate” of these equities as the financial foundation has changed dramatically. Plus we also have earnings challenges with margin compression and as inflation comes down so will revenues that were elevated due to inflation over higher output or volumes. Remember inflation works both ways – expenses and revenues.

So let’s look at fixed income and credit asset classes.

Let’s first start with risk free assets (treasuries):

Treasuries – T-bills for short term alternative cash investments. Less than 1 year. No interest payments.

Treasury Notes, Bonds for longer term plus receive interest.

TIPS principal adjusts every 6 mo for inflation so the stated rate is your real rate.

There are also floating rate treasuries ETF

Some of these are returning about 4% right now.

Some other asset classes:

Fixed income and credit

High credit rating like AAA corporate bonds, CLOs, etc. Traditional bonds pay semi annual interest (you are a creditor!)

Preferred shares pay quarterly dividends.

Buying long term bonds (noncallable) when interest rates are high is another idea.

Baby bonds

Zero coupon are purchased at discount to par and receive no interest but you receive your principal at maturity.

Asset classes:

• CASH

• Commodities – metals, agriculture, fertilizers, crude, etc.

• Fixed income – preferred, bonds, AAA CLOs (secured by company loan) CMOs (secured by mortgage)

• Credit – bonds (zero coupon or traditional semi annual interest bearing)

• Private credit (alternative) small business lending, venture debt, consumer loans

• Equities (you know them!)

• Closed End Funds trading Under NAV, Limited Partnerships, ETFs

• ETNs, Commercial Paper

• REITs (in my opinion, I would avoid commercial real estate REITs as office real estate is severely challenged)

Lots of great ideas & more to come…