Low interest rates drive a change in traditional saving

A low interest rate market drives a change in traditional saving behaviour

Investors in their droves are seeking alternative fixed interest solutions as stubbornly-low bank term deposit rates continue to bite, according to Mike Heath, General Manager of online investment platform, InvestNow.

Heath says InvestNow, which recently hit $75 million under management, has experienced the trend away from term deposits within its rapidly-growing member base. “We are seeing increasing interest in the managed cash funds we offer on InvestNow, from investors who would normally commit their short-term investments to bank deposits,” Heath says.

“If you think about it, it makes perfect sense. Like a traditional bank deposit, there is no fee to operate an InvestNow account. The cash funds themselves are liquid and open ended, meaning customers can redeem units and receive their cash in 2-3 days which, when coupled with the prospect of earning higher yields for their short-term investments, is compelling for investors.”

He said term deposits remain a core component of New Zealanders’ investment portfolios but the InvestNow trend shows many want smarter ways to manage their cash.

As at the end of May this year Kiwis had more than $223 billion sitting in bank deposits, according to Reserve Bank of New Zealand (RBNZ) statistics.

That $223 billion of bank deposits – split between about $143 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,” Heath says. “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, he says.

Investing in cash managed funds is an approach traditionally favoured by institutional investors. However, as the InvestNow trends indicate many savvy Kiwis are realising the same benefits of investing in cash managed funds – an approach to make their hardearned cash work even harder for them.

“These funds invest in diversified portfolios of cash and short-term securities, including deposits with banks,” Heath says. “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,” Heath says.

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.

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,” Heath says. “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, he says.

“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,” Heath says. “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.

InvestNow launched in March 2017, and now has over $75m being directly managed by clients using the online investment service – catering to individuals, joint accounts, children accounts, NZ companies and NZ Family Trusts. InvestNow offers 40 funds from some of the biggest and most widely respected funds managers from New Zealand and globally.

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