Correction Lifts Lid On Cash

Sydney Morning Herald

Wednesday January 30, 2008

By Lesley Parker

Online savings accounts and term deposits are providing a safe haven for wary investors.

Cash is king again. Investors spooked by the share market correction are heading for the exits but advisers warn that some forms of cash are safer than others.

Transaction accounts paying minimal interest - as little as 0.01 per cent - just don't cut it when it comes to five- or six-figure sums, so investors-in-waiting are turning to higher-interest online savings accounts, term deposits and cash management accounts.

Some may be tempted by products offering even higher rates but advisers are cautioning people to tread carefully, with some cash-style investments carrying hidden risks.

Advisers also see little point in parking money in financial products where management fees eat into a yield not much better than the official cash rate.

Fortunately, it's possible to earn relatively high interest in the safe haven of a bank account with a major lender, Cannex financial analyst Jeremy Ooi says.

"You'd expect to get at least 7 per cent. And it's one of the safest avenues you can consider," Ooi says.

A decade ago, cash management trusts were the flavour of the month but these days you'll earn just as much in a bank account with fewer restrictions and lower fees.

Ooi says banks have invented some interesting products in recent times, citing Suncorp's e-Options online bank account. This internet and phone banking product operates something like a "split" home loan, allowing you to slice your savings into portions on any mix you choose of variable and fixed rates of interest.

Suncorp is paying 6.6 per cent on sums in the variable portion, and fixed rates in steps up to 7.5 per cent on term deposits of 12 months.

For instance, a balance of $60,000 might be divided into $45,000 on a six-month term, earning 7.23 per cent while you wait for the market to settle down, $10,000 set aside on a four-month term at 7.1 per cent for any earlier opportunities that might arise, with $5000 at call on the variable rate. You can apply up to 15 different fixed rates at any one time and there's no minimum deposit.

Financial planner Suzanne Haddan of BFG Financial Services says anyone without the stomach for share market volatility probably took funds off the table some time ago but in her experience clients certainly aren't putting new money into shares at the moment.

"Where we have money that's short term - that clients have allocated for property or share investments but aren't ready to act yet - we've been quite keen on online savings accounts," Haddan says.

"We don't need a transaction-based account because we're just parking money and you can get 7 per cent-plus at call."

That's quite separate to the allocation to cash or short-term investments that she recommends as part of an overall portfolio, with an investment horizon of at least three years.

Term deposits are also a valid option, especially if you're leaving the money alone for 12 to 18 months, she says. Remember that you lose access to the money, or at least face penalties if you withdraw the money early.

Don't settle for the advertised rates on term deposits, she says - shop around for special deals and haggle.

"Don't just stick to the standard six- or 12-month terms, look for specials with your institution. It might be seven months or nine months and you might get 7.5 per cent instead of 7 per cent."

Haddan says she also uses cash management trusts - managed funds that pool investors' money and place it in cash or "cash equivalent" investments such as bank bills and floating-rate notes.

However, people need to be aware that it is possible for trusts' balances to fluctuate, she says. You also have to pay management fees, eroding the yield. The trust, or fund, might return 6 per cent - less than the Reserve Bank's official cash rate - and have a management expense ratio of 1.1 per cent.

These trusts and cash management accounts, though sometimes confused, are different facilities. The former are transaction accounts offered by banks and aimed at depositors with larger balances. They tend to require a minimum initial deposit - $10,000, say - and that you maintain a minimum balance (perhaps $1000). They're often used as share-trading accounts.

Haddan warns that caution is needed when tempting offers are found outside the mainstream financial institutions.

"If someone is offering you 9 per cent guaranteed, how are they doing that when your bank is only offering 7 per cent? They're doing something high-risk, aren't they?" she says.

Investments described as "cash-enhanced" are likely to have a broader investment strategy, taking on higher risk in the hope of achieving higher yields.

Fund researcher Morningstar says in a paper on fixed-interest - or income - funds that managers are "pushing higher-risk, higher-yielding strategies" to retail investors, "although many investors arguably do not realise the level of risk they're taking on".

Income is supposedly a "defensive" asset class, yet many higher-yielding funds have come unstuck in the credit crunch that began last year.

"Investors need to be aware of the inherent volatility of any strategy offering greater returns than cash," the paper says. "Fixed interest is not the vanilla asset class it once was."

Haddan says: "If you want absolute safety you stay with your term deposits and your savings accounts with the authorised deposit-taking institutions."

The sorts of yields available from assets such as 90-day bank bills - which you can buy through a broker or bank if you've got at least $100,000 - aren't worth the added risk, she says.

"They're only just over 7 per cent themselves - and if I'm not getting the extra return, I like to keep it simple: something easy to understand, fixed rates, something that won't fluctuate.

"You're doing quite well with online bank accounts, so why step outside?"

No matter which option you choose, Haddan suggests using more than one financial institution if the sum is substantial.

"I like spreading money," she says. "If you had $250,000, I'd divide that among two or three institutions."

© 2008 Sydney Morning Herald

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