Flight to safety spurs innovation

The role of cash in super has changed in the past few years. Cash portfolios have moved from the sidelines to play a more important role in investment strategies. And with increasing demand for cash investments, financial institutions have started to innovate in what has been a staid segment of the consumer finance market.

It used to be that if you had money in cash you were "parking" it while you waited for more worthwhile opportunities, or you needed liquidity, or you were a risk-averse investor.

Investors with a lot of cash would be warned that their returns would not be enough to maintain the value of their capital after inflation had eaten it away.

A lot of that thinking changed during the global financial crisis, when equity, property and fixed-interest markets were hit with extreme volatility. In some markets, those volatile conditions continue.

At the same time as cash was playing a useful role as a safe haven, return from savings accounts, term deposits and other cash investments started to pick up. With their access to wholesale funding markets restricted, banks and other deposit-taking institutions placed a higher value on deposits and started to compete more aggressively for them.

In the past, investors in cash accounts or term deposits could expect a return that was below the Reserve Bank's official cash rate but not today. With the cash rate at 4.75 per cent, investors can easily find savings accounts and term deposits paying more than 6 per cent.

CASH RETURNS

According to superannuation research centre SuperRatings, the median return for cash options in super funds during the year to June 30 was 4.3 per cent. Cash provides a very consistent return and the cash funds in the SuperRatings survey have produced a median return of 4.6 per cent a year over the five years to June 30.

The top-performing fund is the MAP Cash Pool, with a return of 5.8 per cent over the past year, followed by Hostplus Cash, with a return of 5.1 per cent. The cash options in AustSafe Super, Vision Super and Cbus all returned 5 per cent.

When considering cash returns, it is worth keeping in mind the volatility of the asset and the inflation rate.

According to Russell Investments, the average risk of cash over the 30 years to 2010 was 4.2 per cent a year. The average risk of Australian shares over the same period was 23.6 per cent (risk is calculated as standard deviation, which is the amount returns will deviate from the median in any given year).

According to Russell, the average inflation rate over the 10 years to 2010 was 2.9 per cent a year. The after-tax returns from cash held in super funds came out ahead of inflation by about 1 per cent a year. Now that investors and super fund trustees are more attuned to shopping for high rates and good deals, the market is responding by developing some new product types.

NEW PRODUCTS

Investec has launched a savings account called the Liberty Notice Account, which is a hybrid that has elements of an at-call account and a term deposit. There is no maturity date but depositors must give 32 days' notice for a withdrawal.

The rate, which is currently 5.9 per cent, is reset weekly. Investec has given a commitment that the rate will always be at least 1 per cent above the official cash rate (currently 4.75 per cent).

Investec started offering the product to its established customers late last year and has also offered it through fixed-interest brokers. The bank plans to offer it more widely later this year.

Colonial First State has also used this combination of a floating interest rate structure with a fixed term in a hybrid term deposit it launched in April.

FirstRate Investment Deposit has a rate that is reset as the Reserve Bank changes rates, paying 1 per cent above the cash rate.

The FirstRate Investment Deposit matures in April 2017. Colonial has a liquidity facility for investors who want to get their money out early but there may be a cost. The current product disclosure statement is open for 12 months Colonial expects to launch a new six-year term when the current PDS matures.

Colonial's general manager of funding, Graham Hand, says: "Because the rate on this product moves as the cash rate moves, it will play the role of an inflation hedge in portfolios."

Earlier this year ING Direct added a "pick a date" option to its term deposit range. Investors can choose any maturity date beyond a minimum term of 30 days and within a maximum of one year. ING Direct head of deposits, Brett Morgan, says: "Investors can be constrained by the terms placed on them by their provider. "This allows them to tailor their terms to meet specific requirements."

Key points

- Thinking on cash has changed: it now plays a more important role in investment strategies.

- Cash beats inflation: during the past decade, cash options in super funds have produced returns of 1 per cent or more above inflation.

- Cash returns are consistent: according to SuperRatings, the average return of cash options in super funds has been a steady 4.6 per cent a year during the past five years.