Promoted by Cashwerkz.
The devil is in the detail.
The need for capital stable investments, with a known rate of return within a well-balanced fund environment is not new. Whether it be to, manage the liquidity of a portfolio in order to fund investment in other asset classes, to park money temporarily whilst entry points into growth assets are sought (especially where markets are considered fully valued) or per an investment mandate, a percentage of a portfolio needs to be invested in the cash asset class, cash products have long been embraced by Australian investors.
The appetite for cash products has continued to remain strong, with data from APRA showing that there is over $2.2 trillion invested in cash in Australia.
There are three genuine contenders for investors to consider in this space: Exchange-Traded Funds (ETFs), cash or enhanced cash based managed funds and term deposits – each with their own nuances when assessed against metrics such as performance, fees, ease of access / administration and customisation.
Some investors may choose to manage their short to mid-term cash exposure via an ETF. These may be attractive from the standpoint of diversification as a small number of underlying bank exposures can be accessed from the one investment which can be purchased in much the same way as any other share.
However, in exchange for this simplicity, there are trade-offs that investors need to accept.
There’s the additional costs, ETFs still have ongoing expenses applied to them (typically 10bps – 20bps p.a.) as well as a bid / ask spread to consider, alongside the standard purchase / sale brokerage which further reduces returns.
Against this, it is important to note that ETFs do benefit from ASX liquidity (depending on the number of market makers and underlying investor demand), however given the timeframes associated with breaking term deposits and the structure of the actual ETF, it is always prudent to check the product documentation to see what actually would happen should a significant number of investors choose to sell out of their position around the same time.
Summary: These may seem straight forward but look for hidden fees and charges.
These funds are used by investors as a low risk way of placing cash investments. The investments made are generally in short term cash securities resulting in interest which usually reflect short term interest rates. These funds often generate a return based on a reference rate plus a margin, which in a down market can still be attractive.
Cash funds are generally considered to be safe, and they provide easy access to liquidity however, the GFC experience and lessons learnt must be taken into account. Having funds pooled together in a group and managed by an investment manager does come with fees. Even small annual fees can eat up a substantial chunk of the profit. Depending on the fund, fees can vary in their negative impact on returns.
Summary: Liquidity in a pooled investment comes at a price.
Enhanced Cash Funds
In order to generate enhanced returns compared to standard cash funds (and potentially as an alternative to term deposits), some investors may prefer enhanced cash products.
Similar to any cash fund, enhanced cash funds are exposed to credit risk, term risk and liquidity risk. These generally imply the risk of losing capital from the default by security issuers, the changes in interest rates that adversely affect the price of the securities and the inability to convert the securities into cash without any loss of capital. Some of the riskier enhanced cash offerings even have exposure to mortgage backed securities, so even the definition of what belongs in an enhanced cash fund appears well and truly open for interpretation.
It pays to closely check what your underlying exposures are as the risk inherent within the portfolio could be very different to other alternatives.
Similarly, to an EFT, and contributing to the lower returns that have historically characterised this investment class, investors need to be aware of fees eroding an already low return (typically in the 0.2% p.a. range, with a buy/sell spread of ~0.5%). Another key thing to remember is these aren’t tailored to each individual investor. You’re pooled together so your specific investments needs are lost in a group.
Summary: If it seems too good to be true, it probably is.
Of all the cash options, term deposits are the most transparent. What you see is what you get, there are no hidden or additional fees, and the amount, the term and the return is all laid out on the table before you hit the ‘confirm’ button.
The spread of rates can be quite significant. This month alone, term deposit fintech Cashwerkz, saw rates ranging from 2.00% - 2.65% for 3 months, 2.00% - 2.80% for 6 months and 2.15 – 2.90% for 12 months. This is a difference of up to 80bps which investors are missing out on by not switching between banks/term deposits at maturity.
Summary: They’re simple and transparent, but you need to keep on top of the maturity to maximise returns
The development of technology by fintech firms over the past few years is something which managers / superannuation funds can embrace to help achieve greater returns without taking additional risk for their clients when investing in cash products.
By leveraging this technology when implementing a strategy for cash and partnering with fintech companies, the asset owners will be able to have greater visibility of what cash products are available, so they can make an informed decision of where to invest.
This visibility also results in placing funds in products to obtain the greatest return which are in the best interest of the underlying client and beneficiary.
Cashwerkz, a leading-edge fintech company has developed a cash management platform for investment managers and custodians, to maximise earnings on cash allocations, whilst simplifying the administration time to invest, transact and manage cash investments.
Mark Cochrane, Institutional Relationship Manager at Cashwerkz explains “The combination of the ever increased administrative burden and searching and reviewing competitive rates have made it far more difficult for investors to maximise their cash returns. Cashwerkz provides clients with a streamlined digital solution where an investor can instruct to invest in cash products within minutes with one of Cashwerkz partner banks in 3 clicks.”
“Connecting all stakeholders in the investment process for a more streamlined efficient way of investing in cash will help reduce the time to investment. The technology also provides asset owners the tools to ensure they are acting in the best interests of the beneficiaries when choosing a cash product resulting in the greatest return.”
Cashwerkz overarching priority and focus is on making the investor user experience more efficient by providing a platform with the functionality to research and analyse rates, manage the KYC and AML requirements, manage maturities and run detailed reporting all in the one place. One of the significant benefits for investors is the ability to switch banks, at maturity, with the click of a button.
Cashwerkz will never touch, direct or be in control of investor funds – funds are transferred directly from the clients nominated account directly to the bank and then at maturity is returned to the nominated account. There is no cost to the investor to place a cash investment on the platform. Cashwerkz facilitates the application process with the term deposit. With transparency as a high priority, the interest rates displayed on the platform is the rate the investor receives, with no hidden fees or charges.
To find out more about Cashwerkz, click here. https://cashwerkz.com.au/institutional/