An asset class is really just a type of investment. The main asset classes that people refer to are cash, fixed interest, property and shares. By investing in more than one asset class you can diversify your investments and reduce your risk. Once the overall investment objective & risk profile has been determined the approach used to determine the suggested allocation of a portfolio between the various asset classes is essentially a “top down” approach using “tactical asset allocation”.
The overall investment philosophy is that asset allocation is the most important factor in overall portfolio performance and that the global and individual country macro economic environment, (economic growth, money supply growth, inflation, unemployment, interest rates, current account etc), determines the relative attractiveness of the various asset classes at any particular time. This analysis of macro economic factors and the resulting asset allocation can be applied on a global basis. This would result in a portfolio allocation within each asset class but also within each economic region. It is important that this process of macro economic evaluation and asset allocation needs to be reviewed on a continual basis. The asset allocation within the overall portfolio may need to be adjusted as the macro economic environment changes, altering the relative attractiveness of the various asset classes