Whilst many investors choose to invest their cash in term deposits and online savers, in the current environment chasing higher returns could lead to an unpleasant surprise.
Yesterday, the Reserve Bank of Australia (RBA) lowered official interest rates. The dilemma for investors holding cash in online savers and term deposits, is where to now?
- Term deposit rates are at historical lows
- Chasing yield can be higher risk than it appears
- There is a low cost, highly diversified and liquid alternative.
Investors are being flooded by a wave of securities known as “hybrids”. These are instruments that combine the qualities of debt and equity and which offer an additional return over plain cash. So far, so good?
In 2011, ASIC advised “hybrid securities should not be confused with government bonds or ‘vanilla’ corporate debt…In some cases investors are taking on equity–like risks but only receiving bond–like returns”.¹
So if hybrid’s are equity like, then why not just buy the equity, after all bank shares are yielding of 5-6% fully franked. And this seems to be what many investors are doing. Buying Australia’s biggest companies for their yield and ignoring the risk of capital volatility.
The measure of success for a low risk rate of return is not a higher risk share-market alternative but an investment with an equivalent level of risk.
So what do you want from the Cash and Term Deposits part of your portfolio?
Our Approach to Fixed Interest
At WARR HUNT, we believe fixed interest should be defensive to dampen the volatility of equity investments. Our approach is guided by decades of academic research, with a proven track record that has survived the GFC:
Our strategies invest in transparent, high credit quality securities through dozens of underlying issuers. And, unlike term deposits, remain highly liquid and accessible.
To learn more about WARR HUNT’s different approach to investing in Fixed Interest and Equity please contact us