Cash In On The Chaos
Newcastle Herald
Monday October 6, 2008
DURING these times of economic uncertainty, our attention is turned to the role of cash in the investment portfolio.
When the major asset classes of equities and property continue to generate a disappointing return, it's important that the exposure to cash be considered from a tactical perspective and not only as a balancing item when managing investment portfolios.World news headlines are focusing on recession and slowing economic growth in the US. The large fall in US housing prices and the flow-on of the difficult credit environment has had a significant negative effect on the US financial system, creating uncertainty in the equities and property markets and leading to negative returns. There is no reason to depart from your long-term strategy by selling quality equity and property investments, but you may find that you have more cash in your portfolio than normal. Returns for cash investors in Australia have been favourable recently, as underlying cash rates have remained high compared with the US. The Australian economy has performed well largely as a result of the strong commodities boom. Consequently, the Reserve Bank of Australia has been raising interest rates as the US was reducing theirs. This has led to an increased margin for cash investors, as the official cash rate is 7 per cent per annum (US Fed Funds rate 1.5 per cent per annum) and compares well with other alternatives at this time.Investors seeking to maximise cash returns in this environment need to consider a number of factors, including the cash vehicle invested in and the quality of its credit backing. A wide range of cash investments is available and the provider's credit rating is important to consider in this environment. The higher the rating, generally the safer the investment. Rabo Bank has the highest Standard & Poor's credit rating, AAA, in Australia. The major banks are rated AA. Another way to access competitive cash returns is via other institutions or banks that invest in quality/rated cash securities. Institutions such as Perpetual (via a managed fund), ING Direct, Bankwest and Macquarie bank all offer very competitive rates on their cash deposits. One of the reasons attractive rates are available is due largely to the very difficult global credit environment. Banks and institutions now have to pay increased margins to access funds from the wholesale money market and the availability of this funding is being rationed.Banks therefore, are seeking alternative ways to access funding and so are offering competitive rates on cash deposits from investors in the retail market. Cash investing should largely be seen as tactical and used in times leading up to slow-to-negative growth. Investors should move the cash back into growth investments before markets show signs of recovery. Philip Smith is a senior adviser and an owner of Hunter Financial Planning
© 2008 Newcastle Herald
