As at the end of May this year Kiwis had more than $215 billion sitting around in bank deposits, according to Reserve Bank of New Zealand (RBNZ) statistics.
That huge wad of cash – split between about $137 billion in term deposits and the remainder ‘on call’ – represents New Zealander’s single largest financial asset. Interest-bearing bank deposits, in fact, dwarf both the $40 billion plus KiwiSaver (which itself has about 10 per cent invested in cash) and the roughly $35 billion retail managed funds markets combined.
Yet in spite of its dominant place in the average New Zealand financial portfolio, most retail investors – as the bank deposit statistics reveal – take a blasé approach to cash management.
Cash-at-bank may have the aura of security that many investors crave, but in the current era of record low interest rates that safety comes at a high price.
Today, banks offer investors the choice of cut-rate on-call accounts – some fetching as little as 0.1 per cent – or the ability to squeeze out returns slightly above 3 per cent for locking in term deposits over three to nine months. Even over longer periods the returns aren’t much to write home about with the best high street bank offer for a five-year term deposit currently sitting at 4.3 per cent.
But retail investors don’t necessarily have to sacrifice liquidity to eke out higher returns on their cash holdings.
An increasing number of retail clients have realised the benefits of investing in cash managed funds – an approach favoured by institutional investors looking to maximise returns on their liquid assets.
These funds invest in diversified portfolios of cash and short-term securities, including deposits with banks. Using their wholesale clout, cash funds can offer returns more akin to term deposits, with the additional benefit that you are not locked in for months.
Products such as the Nikko Asset Management NZ Cash Fund and the AMP Capital NZ Cash Fund – both now available via InvestNow – are typically open to retail clients with at least $2,000 to invest.
But through InvestNow a retail client can place as little as $250 in these cash funds, and also withdraw their money in three business days if they need to, and – unlike term deposits – don’t incur any penalties or costs for this.
And while cash managed funds don’t offer investors the psychological anchor of a fixed rate (à la term deposits), they are designed to extract the best returns available in a fluctuating market for short-term money.
So how do cash funds differ from cash at the bank?
AMP Capital NZ head of fixed income, Vicky Hyde-Smith, says cash funds invest in a broader range of underlying securities than the single bank exposure provided by retail term deposits.
Hyde-Smith says both large wholesale investors like KiwiSaver and corporate superannuation schemes, as well as ‘mum-and-dad’ investors use the AMP Capital NZ Cash Fund, which since establishment in May 1995 has grown to $4.6 billion, the largest of its type in the country.
“The Fund’s objective is to outperform the Bloomberg NZ Bond Bank Bill Index [the standard cash return benchmark in NZ], and does this by strategically investing in a diverse portfolio of bank deposits, short-dated securities, and floating rate notes in the wholesale money market,” she says.
Taking the PIE impact into consideration.
In addition to offering access to a diversified mix of securities, up-to-date returns, and almost on-call liquidity, as portfolio investment entities (PIEs) cash funds also provide tax efficiency.
For someone on the top income tax rate of 33%, investing in cash through a PIE and getting taxed at 28% can have a meaningful benefit. In this case, 3% from a cash PIE that is taxed at 28%, is more like getting 3.22% from a bank deposit that is taxed at 33%.
Paying less tax is an obvious, simple and effective way to boost your return.
And InvestNow is eating its own cash PIE cooking.
InvestNow holds relatively high levels of cash on our parent company’s balance sheet, and use PIE cash funds to provide us with higher returns, without the hassle of managing term deposits. Also, we can readily access this money as needed on short notice.
Retail term deposits are unlikely to lose their number one status in the Reserve Bank statistics any time soon, but it’s clear, too, that savvy investors are actively managing their cash investments, ensuring their money is working as hard as it can.