Take a hike: different routes for different rates
Article written by InvestNow – 30th March 2023
Short-term interest rates have gone from next to zero to 4% plus in next to no time over the last 18 months.
The pace of rate hikes has been the fastest in decades even if the cruising speed remains well below historical highs.
From August 2021, for instance, the Reserve Bank of NZ (RBNZ) has juiced up the official cash rate from 0.25% – where it had been idling since March the previous year – to the current reading of 4.75%.
Elsewhere, the US Federal Reserve only put its foot down last March but zoomed from a standing start to a 4.75 to 5.00% target rate over the course of just 12 months.
The G-force shock of rapid rate increases has stunned some debt-holders, shaken asset markets and strained the global financial system.
But while the NZ media tends to focus almost exclusively on the negative impact on mortgage-holders, the upside of higher rates for savers is often glossed over.
For the first time in many years, Kiwis can earn gross returns of 5% or more just for parking in cash.
Of course, the nominally higher rates for on-call bank accounts or term deposits (TDs) still lag inflation (currently running at 7.2% in NZ, according to the RBNZ) but cash, if not king, has at least moved on from peasant status.
And investors now have more choices in managing their cash exposures, each with a slightly different risk-return dynamic from slow-and-steady bank accounts and TDs to higher-octane managed funds.
Familiar vehicles: the comfort of TDs
New Zealanders have long favoured term deposits as cash-stash vehicles, attracted by the appeal of simple savings products backed by reputable banks offering a fixed rate of return over a well-defined period.
That Kiwi TD enthusiasm waned somewhat post March 2020 when the OCR slumped from the already super low 1% to 0.25% as the central bank moved to ease COVID economic fears.
RBNZ statistics show NZ household exposure to term deposits dropped from a peak of above $100 billion early in 2020 to just over $80 billion by September 2021 – a level last plumbed in December 2016.
Rising rates, though, have pushed household TD levels above previous recent highs to hit almost $107 billion by the end of January this year.
According to media enterprise and data supplier, Interest, many banks are offering TD rates of 5% or more over period ranging from six months to five years (although advertised returns are flat across the time-span).
Mike Heath, InvestNow general manager, says the platform had seen increased flows to its suite of term deposits from six NZ-registered banks as interest rates have picked up.
“It’s not surprising that investors are turning to TDs with rates above 5 per cent,” Heath said. “And InvestNow members appreciate the ability to select the best rate available from a panel of banks without having to sign up with each institution.”
Despite the familiarity and perceived safety of bank term deposits, they are not the only cash management vehicles offering investors a lift through the rising rate environment.
Retail investors now have broader access to cash managed funds, which were originally built with institutional investors in mind.
Cash with a tax-tuned engine
Traditional TDs have a couple of disadvantages for investors, especially those on higher tax rates.
For instance, the bank-based products are clearly locked away for a certain period of time (with significant break fees attached).
TDs are also taxed at an investor’s marginal rate, which now tops out at 39%.
Some banks have grafted on a portfolio investment entity (PIE) overlay to certain term deposits and on-call accounts, which reduces the highest tax rate to 28%.
Yet the TD and on-call PIEs have not proven that popular to date (relative to broader term deposit holdings) and bring a measure of operational complexity to the bank.
Institutional investors in NZ take a different approach to managing cash assets in a tax-effective PIE wrapper.
Fund managers have many reasons to hold cash – liquidity or as part of a flexible asset allocation strategy, for example – and are rewarded for running the asset class efficiently.
Unlike single-bank cash TD PIEs, however, fund managers invest across a wider range of underlying securities.
Investors in managed cash PIE funds garner the tax benefit (for those on marginal rates of 30% or more) as well as daily liquidity not available in traditional TDs.
Importantly, cash PIE funds carry different risks than TDs as returns are not set at a fixed rate and depend on the manager skill in selecting underlying assets.
Cash funds do, nonetheless, follow strict mandates with yields usually in line with the broader asset class.
“For example, the current gross annual yield on the investments in the Mercer Macquarie Cash Fund on InvestNow sits at around 5.28 per cent – or 5 per cent after fees,” Heath says. “If interest rates didn’t change for the next year this would roughly equate to the return that investors in this fund would get.”
The Mercer Macquarie and Milford managed cash PIE funds available on InvestNow currently manage $337 million and $474 million, respectively, indicating the strong demand for the asset class.
Both funds invest into highly liquid short-term cash or cash-like assets including short term debt securities offered by banks. Investors also enjoy liquidity, as they can sell out of these funds based on normal redemption terms. Mercer and Milford are also managed investment scheme managers regulated by the Financial Markets Authority.
Experts are divided about whether the hiking cycle is nearing the end and where rates may finally settle but for investors the cash management equation definitely has more interesting solutions.
“A better nominal cash yield is the positive flipside of rising interest rates,” Heath says. “But investors should seek independent financial advice about the most suitable way to access the higher cash returns on offer based on their own personal circumstances.”
Take a hike: different routes for different rates
Article written by InvestNow – 30th March 2023
Short-term interest rates have gone from next to zero to 4% plus in next to no time over the last 18 months.
The pace of rate hikes has been the fastest in decades even if the cruising speed remains well below historical highs.
From August 2021, for instance, the Reserve Bank of NZ (RBNZ) has juiced up the official cash rate from 0.25% – where it had been idling since March the previous year – to the current reading of 4.75%.
Elsewhere, the US Federal Reserve only put its foot down last March but zoomed from a standing start to a 4.75 to 5.00% target rate over the course of just 12 months.
The G-force shock of rapid rate increases has stunned some debt-holders, shaken asset markets and strained the global financial system.
But while the NZ media tends to focus almost exclusively on the negative impact on mortgage-holders, the upside of higher rates for savers is often glossed over.
For the first time in many years, Kiwis can earn gross returns of 5% or more just for parking in cash.
Of course, the nominally higher rates for on-call bank accounts or term deposits (TDs) still lag inflation (currently running at 7.2% in NZ, according to the RBNZ) but cash, if not king, has at least moved on from peasant status.
And investors now have more choices in managing their cash exposures, each with a slightly different risk-return dynamic from slow-and-steady bank accounts and TDs to higher-octane managed funds.
Familiar vehicles: the comfort of TDs
New Zealanders have long favoured term deposits as cash-stash vehicles, attracted by the appeal of simple savings products backed by reputable banks offering a fixed rate of return over a well-defined period.
That Kiwi TD enthusiasm waned somewhat post March 2020 when the OCR slumped from the already super low 1% to 0.25% as the central bank moved to ease COVID economic fears.
RBNZ statistics show NZ household exposure to term deposits dropped from a peak of above $100 billion early in 2020 to just over $80 billion by September 2021 – a level last plumbed in December 2016.
Rising rates, though, have pushed household TD levels above previous recent highs to hit almost $107 billion by the end of January this year.
According to media enterprise and data supplier, Interest, many banks are offering TD rates of 5% or more over period ranging from six months to five years (although advertised returns are flat across the time-span).
Mike Heath, InvestNow general manager, says the platform had seen increased flows to its suite of term deposits from six NZ-registered banks as interest rates have picked up.
“It’s not surprising that investors are turning to TDs with rates above 5 per cent,” Heath said. “And InvestNow members appreciate the ability to select the best rate available from a panel of banks without having to sign up with each institution.”
Despite the familiarity and perceived safety of bank term deposits, they are not the only cash management vehicles offering investors a lift through the rising rate environment.
Retail investors now have broader access to cash managed funds, which were originally built with institutional investors in mind.
Cash with a tax-tuned engine
Traditional TDs have a couple of disadvantages for investors, especially those on higher tax rates.
For instance, the bank-based products are clearly locked away for a certain period of time (with significant break fees attached).
TDs are also taxed at an investor’s marginal rate, which now tops out at 39%.
Some banks have grafted on a portfolio investment entity (PIE) overlay to certain term deposits and on-call accounts, which reduces the highest tax rate to 28%.
Yet the TD and on-call PIEs have not proven that popular to date (relative to broader term deposit holdings) and bring a measure of operational complexity to the bank.
Institutional investors in NZ take a different approach to managing cash assets in a tax-effective PIE wrapper.
Fund managers have many reasons to hold cash – liquidity or as part of a flexible asset allocation strategy, for example – and are rewarded for running the asset class efficiently.
Unlike single-bank cash TD PIEs, however, fund managers invest across a wider range of underlying securities.
Investors in managed cash PIE funds garner the tax benefit (for those on marginal rates of 30% or more) as well as daily liquidity not available in traditional TDs.
Importantly, cash PIE funds carry different risks than TDs as returns are not set at a fixed rate and depend on the manager skill in selecting underlying assets.
Cash funds do, nonetheless, follow strict mandates with yields usually in line with the broader asset class.
“For example, the current gross annual yield on the investments in the Mercer Macquarie Cash Fund on InvestNow sits at around 5.28 per cent – or 5 per cent after fees,” Heath says. “If interest rates didn’t change for the next year this would roughly equate to the return that investors in this fund would get.”
The Mercer Macquarie and Milford managed cash PIE funds available on InvestNow currently manage $337 million and $474 million, respectively, indicating the strong demand for the asset class.
Both funds invest into highly liquid short-term cash or cash-like assets including short term debt securities offered by banks. Investors also enjoy liquidity, as they can sell out of these funds based on normal redemption terms. Mercer and Milford are also managed investment scheme managers regulated by the Financial Markets Authority.
Experts are divided about whether the hiking cycle is nearing the end and where rates may finally settle but for investors the cash management equation definitely has more interesting solutions.
“A better nominal cash yield is the positive flipside of rising interest rates,” Heath says. “But investors should seek independent financial advice about the most suitable way to access the higher cash returns on offer based on their own personal circumstances.”
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