Investors are starting to reconsider their fixed income portfolios from both a risk and return perspective as term deposits pose too big a liquidity constraint and may not offer the most attractive returns.
Russell Investments fixed income portfolio manager Clive Smith said the "aggression" with which term deposits had been pursued immediately after the global financial crisis (GFC) would slowly fade out.
"It's fair to say that bank demand for term deposits will start to wane going forward," Smith said.
He said bank funds raised through retail deposits were now back to their historical averages and as loan growth slowed in Australia, banks needed to raise additional funding to grow their loan books.
"It's fair to say we'll continue to see term deposits coming off as they have been over the course of this year, so investors really need to think more in terms of what they really need from their fixed income portfolios, not only [from] a risk perspective but also a return perspective," he said.
"That really opens up the entire range of fixed income securities from actively managed funds to cash management types to potentially some of the more aggressive types of investments such as hybrid debt."
He said as investors were in the early stages of thinking about change, they needed to be reminded of their choices.
"We're starting to see investors think of the return that's available now, given that most of what we saw post-2008 has passed," he said.
"The one thing that investors need to be careful about is assuming that term deposits are a silver bullet and that they will deal with all their issues."
Investors had to also consider that market dynamics had changed since the GFC, he said.
"We still have global volatility but that may be diminishing and given the potential that term deposits may not be providing the same returns going forward as they have been post-GFC, investors need to be thinking of the next stage and where to go to now," he said.
The myths associated with term deposits, such as their liquidity, also need to be dispelled, as most will apply penalties for early withdrawal.
