Advantages of diversification through different investment classes

Investors all have their own ideas on how they would like to invest their money. Investing in investment classes with differing levels of opportunities and risks takes these wishes into account. Put simply, an investment class (also known as an asset class) is a group of comparable securities. Different classes of investment assets–such as fixed-interest investments (bonds)–are viewed collectively in groups due to their financial structure. In normal market phases, the correlation between the different investment classes is usually low. This property is an important characteristic in the field of investing. Consequently, investment classes in a portfolio are frequently mixed in order to spread and diversify the portfolio risk. This approach is based on the assumption that every investment class has different risk and return characteristics that do not develop identically in a particular market environment. Diversification can reduce the risk and simultaneously enhance the probability that the desired minimum return is achieved. Alternatively, it can be used to achieve the highest return at a specified risk. You can read more on the topic of asset allocation in this blog article: https://lunis.de/volatilitaet/

Historically the three most important investment classes were (and are) equities, bonds and cash equivalents or money market instruments (overnight funds, fixed-term deposits). Investment experts now also include so-called alternative investments, depending on their orientation, such as real estate, commodities, private equity investments, other financial derivatives, hedge funds, collector’s pieces and cryptocurrencies in the mix of investment classes. Hence, investment assets include both tangible as well as intangible instruments that investors buy and sell in order to achieve increased yields in either the short or long term.
Some assets are difficult to classify. For example, futures trading can be allocated both to stocks as well as to bonds or futures transactions. Physical assets, such as gold and silver, are generally considered commodities, but are also frequently traded in the form of certificates, which in turn are treated as financial derivatives. The wide variety of investments also makes allocation complicated. For example, exchange-traded funds (ETFs) are traded on the stock market, just like stocks. Assets can also be categorized by location. In market analyses, investments in domestic securities, foreign investments and investments in emerging markets are often viewed as different categories of assets.
We are over- or underweight in the individual asset classes, depending on our market expectations, in order to improve the risk/return profile of the portfolio and in this way to improve diversification. We examine this in detail in our capital markets commentary (Q2) . Below, you can find a short overview of the most important investment classes, as we see it:

Currently, we are underweight in the equities investment class, since we regard the risk/return profile to be more negative than in normal market phases and are continuing to concentrate in the short term on companies whose future profit development we consider to be reliable due to stable growth. After the end of the current bear market (sustained falling prices), which we expect in the mid term, we see the greatest opportunities for increasing equity ratio in the sectors industry, cyclical consumer goods and information technology. Furthermore, we are increasing the share of Chinese equities, with a focus on thematic investment.
Credit risks are rising in the bond space. This is primarily due to the restrictive attitudes of the central banks and the increasing pricing-in of a recession that has already occurred or is looming. We do expect higher risk premiums in corporate bonds, but do not anticipate a sudden jump in loan defaults in the next twelve months. Consequently, we are increasing the quality of the bond portfolio and improving liquidity, but remain underweight in the bond segment. We are especially cautious when it comes to maturities and prefer short-term bonds, which offer higher rates and are less volatile.
Commodities tend to demonstrate low performance after a peak in inflation. especially when a recession is looming. Gold is currently weighed down by the rising, high real interest rates. Nevertheless, in our view, it offers hedging and diversification advantages in the portfolio context for three reasons: due to the strong demand by consumers and central banks, ongoing geopolitical tensions and the prevailing uncertainty with regard to world growth and high inflation.
Due to the great uncertainty in the capital markets, we are relying on being overweight in our liquidity ratio to minimize risk, since in our view this currently has a risk/return ratio superior to stocks and bonds.
If you would like more information or have questions about these or other asset classes, our portfolio manager, Saliou Amann, saliou.amann@lunis.de, would be pleased to provide you with information, obligation-free.