Nila Sweeney

 

Market volatility is driving Aussies to take greater stock in cash investments, but should you really be leaving your savings in a term deposit or debenture?
 
The GFC and ongoing sovereign debt crisis in Europe has reduced Aussies’ appetite for risk in 2012. “The persistent volatility in risk assets has fatigued the average investor”, says George Boubouras, Head of investment Strategy at UBS Wealth Management.
 
Instead, people have been allocating a larger share of their savings to liquid investments – think term deposits, savings accounts, cash management trusts, debentures, bank bills and negotiable certificates of deposits. Deposits are guaranteed by law, making cash the safest investment. 
 
For the past several years super funds have placed above-average weightings on cash investments, currently standing at just above 20%. Boubouras says this reflects cautious investor sentiment, conservative household behaviour as well as the country’s ageing population. On the other hand, the outgoing chairman of the Future Fund, David Murray, recently urged super funds to place a greater weighting on cash and reduce their exposure to equities.
 
Superannuation research firm Chant West found that cash produced a 5% one-year return and a 5.4% annual return over the past decade. On the other hand, the return on ASX-listed shares fell 11%. 
 
Combined with previous cuts by the Reserve Bank, next week’s expected drop in the cash rate to 4% will lead to lower returns on term deposits and other liquid assets. 
 
“You can rely on cash if you can’t sleep at night and don’t like volatility, but bear in mind you’ll get a lower return this year. If you want to take on an additional yield in 2012, you might need to ask yourself: ‘how much risk do I need to employ to receive that extra income?’ says Boubouras.
 
In their latest monthly report, UBS recommends conservative and moderate investors allocate 5% of their assets to liquid investments whilst aggressive investors should aim for 2.5%.
 
MLC’s Michael Karagianis, recommends investors ease their grip on cash investments.
 
“It’s not particularly tax-effective for people who aren’t in pension-phase, and for those in pension phase, it’s beginning to really cause them to tighten their belts. So I think people are going to be propelled to look for other investments outside of cash, just to try and supplement that”, he said late last year. 
 
So where else should you be looking at? Depending on your risk tolerance, it’s worth considering equities, corporate bonds and equity income funds.
 
HOSTPLUS is an industry super fund in which most its members come from the hospitality, leisure and tourism sectors. In light of this, Chief Investment Officer, Sam Sicilia, says its default investment option has zero strategic allocation to cash investments. 
 
“We have a relatively young member base who have many years – if not decades – remaining until they retire. We also have strong cash flow, meaning we do not need a strategic allocation to cash”. 
 
However, Sicilia says that for those who have seen negative returns in other asset classes and are on the verge of retiring, cash investments would be a more suitable option. Having said that, he adds retirees still have a few decades ahead of them and could run out of money if they move to cash too soon. 
 
“Cash doesn’t generate the returns that are necessary to see their super account grow until they die”.
 
The total fund value of HOSTPLUS is $9.4 billion, of which $225 million comes from its cash-only investments. So how do HOSTPLUS returns on its default ‘balanced’ option compare with its ‘cash-only’ option? The picture isn’t straightforward. 
 
The five-year return for cash-only was 5.3%, whilst the default plan generated 3.1%. Based on a 10-year return, however, the default option outperformed cash-only, 6.12% to 4.99%.
 
-- By Stephanie Hanna
 
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