Investors Find Fine Print Means Even Cash Isn't Safe
Newcastle Herald
Thursday April 17, 2008
THAT "safe" cash investment fund may be deceiving.
Cash has always been regarded as a haven in troubled times but concern is growing about the disguised risk in some supposedly "safe" cash-based investment funds.Investors are being urged to make sure they know exactly what they're investing in when it comes to new-style "enhanced cash" products.Such funds are sold as a way to achieve above-average cash returns perhaps 50 basis points or even a full percentage point above prevailing yields."They do that by investing in cash but with a 'kicker' in there," says Phillip Gray, a spokesman for fund researcher Morningstar. That kicker may be, for example, some reasonably high-quality corporate bonds. "So the risk profile is a little higher than with cash, because you're starting to get a credit-quality exposure."Credit risk is the possibility that a company might default on its debt. It's not a risk you used to find with the plain vanilla cash products that were the norm just a few years ago.Today there are 47 cash-enhanced trusts on Morningstar's database, with total assets of $11.2 billion. That compares with 70 ordinary cash trusts with total assets of $53.5 billion. In other words, cash-enhanced trusts make up 40 per cent of all cash trusts and account for 17 per cent of total assets.The sorts of risks potentially involved in cash-enhanced funds were highlighted in Australia last month, when fund manager Perpetual revealed that net losses from its Exact Market Cash Fund now stood at $19.4 million.The fund had invested in complex collateralised debt obligations linked to US subprime mortgages, along with Australian residential mortgage-backed securities.Perpetual said $3.5 million of the losses from the fund were subprime-related and not likely to be recovered.Fortunately for investors in the fund, Perpetual had offered a guaranteed return of 6.5 per cent and so is obliged to make up the difference between that rate and the return it is actually achieving said at the time to be about 5.75 per cent.The losses disclosed by Perpetual, a listed company, will instead go to its bottom line, making them an issue for investors in the company itself.Troubled funds management group MFS has just announced its intention to wind up its cash-enhanced fund, saying that "lack of critical mass in funds invested and the withdrawal of major investments" means the fund is unlikely to be sustainable. SMH
© 2008 Newcastle Herald
