Investors show increased interest in cash plus strategies

With the cut in interest rates, investors are looking to cash or enhanced cash funds in order to achieve better returns while maintaining capital preservation.

Rates were cut by the Reserve Bank of Australia (RBA) at the start of this month from 1.5 per cent to 1.25 per cent, the first cut in almost three years. As a result, investors were exploring alternative ways to increase returns without sacrificing the safety of cash.

According to FE Analytics, there were 57 funds in the ACS Cash-Australian Dollar sector and a further 39 in the ACS Cash Enhanced-Australian Dollar sector. Both of these sectors had beaten the RBA’s cash rate over one year to 18 June, returning an average of 1.38 per cent and 2.14 per cent respectively.

However, investors needed to be careful when selecting a fund as individual performance in the sector varied widely as funds had different risk profiles.

The best fund in the ACS Cash Enhanced sector, the Yarra Enhanced Income fund, returned 7.1 per cent but the worst one, OnePath OneAnswer Investment Portfolio Optimix Enhanced Cash Trust, lost 0.06 per cent.

In the Cash sector, which targeted lower returns than the Enhanced one, the Trilogy Enhanced Cash fund returned 4.1 per cent but the Commonwealth Easy Saver Plus - Guaranteed Cash fund returned 0.38 per cent.

Factors to look for in a cash fund included holding selective securities issued by major banks and financial institutions and having a strong focus in its mandate for capital preservation.

This was reflected in Yarra’s fund holdings where it held 36 per cent of its fund in banks and a further 10 per cent in diversified financials.

Interest in these types of funds was expected to grow further in the coming months as the RBA considers a second rate cut which could bring rates down to less than one per cent.

Matthew Lemke, portfolio manager at Prime Value Asset Management, said: “The significance for investors is Australian interest rates will stay lower for far longer than anyone expected. Investors will be under even more pressure to find ways to replace lost income from cash holdings.

“Investors all have one thing in common: a desire to avoid going backwards in traditional cash investments without taking on too much risk, and a desire for a liquid vehicle without costly ‘break’ provisions.”

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