CMTs lose some gloss

PORTFOLIO POINT: When banks don’t even know who of their own to trust, how is a SMSF trustees supposed to know where to put their cash?

Expect swift action this week by providers ofAustralia’s major cash management trusts to cut risk in their portfolios and stop a significant outflow of funds.

When the Federal Government announced over the weekend that they would guarantee various aspects ofAustralia’s banking system, left outside the guarantee were CMTs, which have become an extremely popular asset class for self managed super funds.

To be as accurate as possible: While cash management trusts themselves are not covered, it is likely that a good portion of the investments themselves (if not the whole lot) are completely covered by the government’s guarantee because they are invested in government guaranteed investments, such as bank accounts.

Up to half ofAustralia’s super funds use a CMT from one of the major providers as their “bank account”. But it is important to understand that while a CMT might look like a bank account, smell like a bank account and act like a bank account, they most certainly are not bank accounts and are therefore not covered directly by the government’s guarantee.

Cash management trusts are an investment in cash predominantly, with the potential for some fixed interest securities. A manager is hired to direct investors’ cash in those investments. (CMTs are distinct from cash management accounts, CMAs, which do fall under the Federal Government’s guarantee.)

The largest CMT inAustraliais run by Macquarie Bank. Macquarie claims its CMT acts as the cash account for approximately one-third of all super funds inAustralia(although it is used by other investors and businesses also). It isAustralia’s largest individual managed fund, holding about $16 billion of investors’ cash.

Macquarie’s CMT is just one of a large number of CMTs available. Commonwealth Bank (and Colonial First State), Goldman Sachs JBWere, Adelaide Bank, UBS, AXA, BT are among the big names that offer CMTs that will also fall outside of the government’s direct guarantee, but that may have investments in guaranteed products. There are several dozen offered by various providers. (For an extensive list can be seen at, under ‘investments’.)

Following the weekend’s announcement about the protection of bank accounts, CMT providers have moved to further protect their investors’ cash.

AsMacquarie’s CMT is the largest – and it’s likely that approximately one third of readers’ are using it as their base fund – let’s deal with that.

Prior to the government’s weekend announcement,Macquariesaid approximately 90% of its money was sitting in what are now government-guaranteed investments. They were held by Australian banks or Australian-based subsidiaries of foreign banks.

The remaining 10% was held with foreign-owned banks with local branches inAustraliathat would have been subject to the regulatory authority of APRA anyway. So, it’s not like this remaining 10% was sitting in particularly high-risk investments. But, it was sitting outside of the types of accounts that attract the government guarantee.

Macquarie– to quell investors’ concerns, which I’ll discuss further down – took the decision to remove “all” remaining risk from its portfolio, or at least all the risk it could remove, with its switch in investments.

Investor concern has been considerable. In Macquarie’s most recent product disclosure statement, datedSeptember 19, 2008, the CMT was listed as having had a balance of $17.82 billion as at March 31 this year, “more than $17 billion” as at July 31 and $15.96 billion at the end of last week. That’s a total drop of more than 10.4% since March and, more stunningly, 6.1% since the end of July.

This in a climate where SMSFs have been increasing their cash holdings (see column of two weeks’ ago).

JohnStewart, the National Australia Bank chief executive who has had his Australian Bankers Association chief hat on this week, has talked of a flight to perceived security witnessed by the major banks. The major banks had seen significant inflows into their deposit accounts and they know that it has come from smaller banks and non-banks.

The government’s move to guarantee all depositors funds should stem, or at least slow, those losses.

ForMacquarie, it is the second crisis it has had to deal with in regards to its CMT within the last six weeks.

In mid-September, when Macquarie looked to be in a fatal downward spiral after being targeted by shorters and hedge funds (just before the equities shorting ban was put in place), anecdotal evidence from trustees and advisers suggests that Macquarie’s CMT had seen a transfer of cash out of the fund back to the Big Four banks (ANZ, Commonwealth, National Australia Bank and Westpac).

Despite what Macquarie had been saying officially,Macquarie’s relative security (to those of its larger peers) had caused some investors’ serious concern and possibly a small run on funds.

So, if the “security” of returns is increased across the board in regards to CMT investments, what, if any, are the likely downsides?

Returns are likely to suffer within CMTs that change their investment strategies. You can’t reduce risk in a portfolio without reducing the returns on offer. If money is pumped (or dumped) from one asset class to another, investment theory suggests that those dumped asset prices will initially fall in value, or have to offer a higher yield.

If there is a large movement of funds to “safer”, government-backed investments, then those investments will not have to offer the same rates of return that have been offered in the past. This would be, effectively, a premium for “safety” being paid by investors.

(This would add downward pressure to the rates of return for cash across the board anyway. It would only add strength to the arguments in my column last week about the likely reduction in returns on cash because of the outlook for cash and the RBA’s interest rate policies.)

It will now be important to be aware of this change in your CMT’s investment strategy. Lower Reserve Bank interest rates have a near immediate impact on the return for CMTs anyway. But if the CMTs start offloading “non-guaranteed” investments, then returns are likely to fall further anyway.

Keep an eye on your mail around this issue. And when the dust settles, check to see exactly what your CMT is invested in.

Bruce Brammall is a senior financial adviser with Stantins Financial Services.


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