So cash is certainly king as far as the wrap reflects. Macquarie’s Doug Webber believes the old adage that “cash is king” is pretty close to the mark right now. “A lot of people are sitting on the sidelines to see how long it plays out. Some are saying every day is closer to the end, but there is still a very high demand for cash and cash-like products.
Macquarie cash management trust (CMT) has seen no significant net flows, but the competitive term deposits we have launched are selling like hot cakes,” he says. Peter Shepherd, head of distribution for Macquarie Adviser Services, says Macquarie has just under $1 billion in term deposits from independent financial advisers (IFAs) and that the absolute increase in cash has flowed into a number of different products, including the CMT, the term deposit, and Cash XL, which is a separate no- frills cash enhanced online product, launched in May, which has about $500 million.
The Macquarie CMT, which has about 9000 active users, is used primarily as a cash hub, or cashflow tool, rather than an investment per se. The term deposit and XL are used as the investments. The Cash XL product is differentiated from other online accounts because it was designed for financial planners, giving them visibility of clients’ accounts, the same way the CMT does.
“Financial planners know what is in the account and what the activity is and this is an important tool for financial planners to have full information,” Shepherd says. “Planners use the CMT for their own business, and also to recommend to clients as a cash hub. [It’s] used a lot for self managed super funds to manage cash flows daily. With functionality the main difference between CMT and the other cash investments, the rate is not the dominant issue.”
But for the term deposit, and online products such as Cash XL, which has a rate of 7.75 per cent, it is all about the rate. According to Peter Arnold, financial analyst at Cannex, in the past six months to a year there have been some very high rates on three-month to one year term deposits.
“The days of only the two to five-year terms having high rates are gone; now it is much shorter terms. But recently, with the RBA cuts, we have seen a lot of the term deposits come down. If mortgage rates come down, then deposit rates come down too – they run hand-in-hand.
The last couple of interest rate decreases have seen some of the highest rates in term deposits – but there is no guarantee that will stay around.” Arnold says assessing term deposits is not too complicated, with the main concern being the rate, but also when the interest is paid, and whether the product is compounding or not (although most are not).
“A lot of institutions offer special rates for certain terms, so clients have to be realistic about when they need their money back,” he says. “Also, when the term deposit comes up for maturity, make sure you are on the ball, because if you are not then you might get locked in again, but in what might be a wildly fluctuating rate after the initial term expires.”
“With the RBA rate drop of 1 per cent there are many term deposit rates coming down significantly. This makes the point of making sure you don’t get locked into a lower rate when it is time to rollover even more important.”
WHAT IS CASH?
Cash sits within the defensive allocation of a diversified portfolio and has a key role of providing income, while being lowly correlated to other assets. But Peter Sumner, portfolio manager, debt, MLC Investment Management, which has about $7 billion across its cash products, says there is cash and then there is cash.
When MLC talks about cash it means pure cash or bank bills and high-quality, mortgage-backed securities. Of the seven Horizon multi-manager funds, only Horizon one and two have any cash in them, with the other products, with longer time horizons, not needing the qualities of that asset class.
“We have only pure cash, bank bills and high-quality, mortgage-backed securities; it is pristine, pure cash – not cash enhanced or CDOs [collateralised debt obligations], greenfields or second-hand loans,” he says.
“What has been highlighted is that people found they thought they were in cash but had aggressive equity-like exposures – so they were cash by name but not by nature.”
In the low interest rate environment of the past few years, high-yielding products have been in hot demand. But that has also blown up in the faces of a lot of investors when transparency of the underlying assets was minimal.
“In the past three years we have seen some of the higher-yielding cash-like products flop, such as with Grange Securities’ CDOs, CLOs [collateralised loan obligations] and hedge funds, because they are trying to harness the behaviours of the asset class we need in these types of times. In a low interest rate environment everyone wants high yield products, but you can’t turn lead into gold,” he says.
“People have learnt their lesson; the question we are getting now is, what is in your cash fund?”
While it is still often appropriate to have higher-yielding, riskier assets within a portfolio, MLC’s argument is they need to be allocated appropriately for the right time horizon to allow the value to come through. For example, with credit exposures, a higher risk tolerance and longer time horizon are needed.
