Understanding Asset Classes in CircleBlack

CircleBlack has four broad asset classes and fourteen detailed asset classes. 

Broad Asset Classes

1. Stocks
2. Bonds
3. Cash
4. Alternatives

Detailed Asset Classes

1. Stocks
   1. US Stocks – Shares of stock listed on public stock exchanges that are issued by companies based in the United States, or funds that hold these stocks.
   2. Developed Stocks – Shares of stock listed on public stock exchanges that are issued by companies based in developed countries outside the United States, or funds that hold these stocks.
   3. Emerging Stocks – Shares of stock listed on public stock exchanges that are issued by companies based in emerging markets, or funds that hold these stocks.
2. Bonds
   1. Investment Grade Bonds – Bonds issued by US-based entities with an “investment grade” credit rating (meaning BBB or above), or funds that hold these bonds.
   2. High Yield Bonds – Bonds issued by US-based entities with a credit rating below “investment grade” (meaning below BBB), or funds that hold these bonds.
   3. Developed Bonds – Bonds issued by governments or companies in developed countries outside the United States, or funds that hold these bonds.
   4. Emerging Bonds – Bonds issued by governments or companies in emerging markets, or funds that hold these bonds.
3. Cash
   1. Cash – Holdings of US dollar currency, including bank accounts and money market funds.
4. Alternatives
   1. Managed Alternatives – Funds (such as hedge funds) that use complex, non-traditional investment strategies such as short-selling or heavy use of derivatives
   2. Commodities – Basic resources (such as gold, copper, and oil) and agricultural products (such as wheat and cattle), or funds that hold these types of resources
   3. Derivatives – Financial products, such as options, futures, and swaps, whose prices are based off the changes in some other value.
   4. Private Equity – Ownership stakes in companies not listed on public stock exchanges, or funds that hold these kinds of ownership stakes such as leveraged buyout funds and venture capital funds.
   5. Private Real Estate – Direct ownership stakes in physical real estate such as a house or office building, or private funds that hold these kinds of investments.
   6. Hard Assets – Investments in physical objects other than real estate and commodities, such as art, wine, and cars.
   7. Intangible Assets - An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, cryptocurrency , franchises, trademarks as well as software.

Additional Asset Class Details

While the asset class classifications of investments such as stocks and bonds are straightforward, the classifications of funds are more involved. Each fund is assigned asset classes based on a combination of the fund’s “investment mandate” and information about the fund’s underlying holdings.

If a fund has a clear mandate in a specific asset class, the fund will be assigned to that asset class even if not all of its current holdings are within that asset class. For example, a mutual fund whose mandate is to invest in US Stocks will be classified as 100% US Stocks even if currently the fund’s underlying holdings are 98% in US Stocks and 2% in Cash.

If a fund has a mandate that spans multiple asset classes, the fund’s holdings will be used to help determine the breakdown of those asset classes in the fund’s classification.

Funds that don’t have a clear mandate in one or more asset classes are assigned to the Managed Alternatives asset class as their risk and return characteristics as likely more similar to hedge funds than traditional long-only funds, even if they are not structured as hedge funds.

While CircleBlack’s asset class classifications are generally highly consistent with classification frameworks used throughout the investment management industry, there are some types of investments on which opinions about the proper classification often differ among industry practitioners. Here are CircleBlack’s classification rules for some of those investments:

• All types of structured products are classified as Derivatives
• Real Estate Investment Trusts are considered stocks (and are therefore classified as US Stocks asset class if they are domiciled in the US)
• Master Limited Partnerships as classified as US Stocks
• Preferred stocks are classified as High Yield Bonds
• Convertible bonds are classified as High Yield Bonds
• Stable value funds are classified as Investment Grade Bonds
• Any fund that uses substantial leverage as part of its investment strategy, including leveraged/inverse funds that explicitly seek to return a multiple of an index’s performance, are classified as Managed Alternatives