(03) 9020 2905PORTFOLIO POINT: Cash is fighting back as an asset class. What sort of strategy do you have for your SMSF’s cash holdings?
There’s no need to give an SMSF trustee a briefing on volatility. Any trustee with just three years’ experience knows the equity market highs (2007), lows (2008) and rebounds (2009).
Property too has had its ups and downs. Commercial property fell harder and has recovered stronger. Residential investment property has, unusually, followed equity markets, with a high in 2007, falls through to early 2009 and a massive rebound to new highs through to a few months ago.
And then there’s the volality of cash. Yes, I’m serious! For the asset class that it is, cash has had a relatively volatile period in the last three years. With very little correlation to shares in recent years.
Interest rates were high and rising in early 2008, as equities and property were taking a dive. They stayed stubbornly high through until September of 2008, when the Reserve Bank started its ferocious cutting campaign – a result that saw returns fall by more than half.
At least the returns were still positive.
And about a year after they started cutting, they started raising them again. It was the first time interest rates got lifted three months’ running. Then, after a two month break, the RBA repeated the feat by going again in March, April and May this year.
For a short period in 2008, you could lock in term deposits for cash at well above 8%. If you did lock away large portions of cash, you’d have looked like a genius. Not only would you have saved yourself from falls of as much as 55% in equities – more in property – but you might have stayed positive.
Last year, who’d have bothered with cash? Interest rates were miniscule. They barely kept up with inflation. Take tax into account and they probably didn’t. The action was happening everywhere else. Everywhere else, even fixed interest for a period.
But now, at the half-way point of 2010, your SMSF cash holdings are important again. So, what sort of returns are you getting from you cash?
Classic investment theory says that “balanced” investors should have about 40% of their investments sitting in defensive, income assets – cash and fixed interest.
Cash can be more than just one strategy. With cash’s relevance returning, here’s a few things to consider for your DIY fund. It can make sense to have as many as three accounts for your cash. Let’s have a look.
Basic cash account
Investing in cash, by definition, means you’re not chasing big returns. But that doesn’t mean that you should be receiving nothing.
I’ve banged on about this many times before. And I’ll do it again. Most brand-new trustees, who’ve just signed up for a SMSF, tend to walk into the local branch of the bank they’ve always used and ask the local staff for a bank account for their SMSF.
When that happens, the major banks will sign you up for a business bank account. It will probably come with fees of between $4 and $20 a month, will pay 0% or a fraction of 1% in interest, and will charge you if you exceed certain transaction limits.
Base bank accounts that pay interest, don’t charge monthly fees and don’t penalise excess transactions do exist. For years, the most popular was the now (nearly dead) Macquarie Cash Management Trust – for more than two decades the largest managed fund in Australia. (The CMT was killed by the government’s bank guarantee and is being wound up.)
The CMT has been replaced by the Cash Management Account (CMA). It’s not the only one in the game, but it is the most popular. It’s the style that’s important. Returns will be close to the RBA’s cash rate (currently 4.5%) and has no account fees (except to buy a cheque book).
If you’ve got $50,000 in cash in your super fund, an account like this will make you $2250 a year – enough to pay your accounting and audit bills.
This account should allow you to do everything. You should be able to do direct debits, Bpay and be the base for your online trading account.
High interest online accounts
But how much cash do you need instant access to anyway? The industry that pulled banks into line was the branchless online banks, led by ING Direct and followed by the likes of BankWest and Rabo Bank.
The issue here is whether or not the account needs to be linked to another institution. If it doesn’t require a link to another account, then your online savings account could actually be your main account.
According to www.infochoice.com.au, there are six accounts currently offering 6.2% per annum or more.
Pretty much all of your money that you don’t need instant access to can be held here. As I reported recently, the average SMSF is approaching $1 million. If 15% is being held in cash, then there is plenty of scope to be holding $50,000 here.
Term deposits
You want something a little bit extra when you lock up your cash for an extended period. And Australian SMSF trustees have swung towards term deposits in recent months. Fear of equity market volatility has caused SMSF holdings to lift their cash holdings from an average of 8% to 14% in recent times.
Currently, if you want more than the 6.4% available at call, you’ve got to be prepared to lock your money up for two years or more. If you will put it away from reach for three years, you can earn as much as 7.25%.
The only question is: How long do you want to lock your money away?
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With all three types of accounts, loyalty to a particular brand of cash – ie, your favourite bank – will cost you thousands of dollars a year. Being ruthless can pay big dividends.
Most people spend hours choosing stocks in which to invest. Research on cash takes a fraction of the time, with a fraction of the risk of major underperfomance. Higher earning rates for your SMSF’s cash is essentially lying there on the floor. All you’ve got to do is jump on the internet. Cannex and infochoice.com are good places to start.
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The elevation of Julia Gillard to prime minister has, of course, a flow on for superannuation policy. The increasing likelihood that some lesser deal will be struck on the Resources Super Profits Tax means that an increase in the Superannuation Guarantee levy from 9% to 12% is less likely. Not impossible, because it is, actually, largely business that will fund it. Just less likely.
More importantly – but far too early for the question to be put to the new regime – is will the Gillard Government also soften on the issue of limits for concessional contributions?
If the Labor Party – that is, wider than the Gang of Four – believes that the tumble in popularity was just about a new mining tax, or the failure of the pink batts, schools building and carbon credit schemes, then they might want to consider a few other things as they rethink everything in the leadup to the next election.
There are a lot of people thinking about their future. And for those approaching retirement, superannuation and getting money into that system is high on the list of priorities.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.