Cash

I started a thread about Cash in the NZX forum and some folks replied thanks. But a thread on cash should really belong in the DX forum. So feel free to talk about the subject of cash in general ITT
I've now written my essay on the subject and in fact the easiest way to present that to you is to paste it directly in here so I've done that - feel free to read or not
I'ts still a draft so any constructive criticisms will be listened to.


Q. Individuals can generally access the money markets only through such entities such as cash management (trust) accounts or money market funds. Outline briefly how cash management accounts operate, their advantages and disadvantages.
This brief will discuss the nature of cash management accounts and using some examples question why individuals would or would not choose to use them.
Cash management is a valid portion of any investment portfolio - indeed any financial entity - whether that be an individual, a corporate or a hedge fund. Cash may well often be considered a ‘parking space’ for funds due to the low returns (which are often marginally positive in real terms) but nevertheless there is generally a requirement to have some liquid funds available whether that is part of the overall asset allocation strategy, to meet expenses, or to take advantage of investment opportunities as they present themselves. And of course during market downturns and periods of negative sentiment cash can be considered ‘king’. It should never be forgotten that when other assets are falling, cash in relative terms is rising. In this situation the purchasing power of cash is increasing and so it is in effect in a bull market of its own.
And it follows that if there will always be some cash holdings it makes sense to maximise the return on them even if that return is usually low
I say usually because there have been times such as the second half of the 1980’s when overnight cash rates were consistently in the high teens and often over 20%. The RBNZ historical interest rates spreadsheet http://www.rbnz.govt.nz/statistics/exandint/b2/hb2.xls tells us that on the weekend of the 8th March the overnight cash rate was 265%!! Some might call this tight monetary policy, others may call it a ‘cash squeeze’.
To maximise returns a retail investor may choose to use a cash management account such as offered by the Public Trust, AMP, Sovereign, MacQuarie, or other financial institutions. Indeed most retail financial intermediaries will offer some form of cash deposit account even where this is not a primary business driver as it will retain funds under their control, giving clear visibility of the client’s liquidity and of course assist them in obtaining prompt payment for other investments the client may make. Stockbrokers for instance have generally offered cash management facilities as an ancillary function that facilitates their main business2
2 While it is not within the scope of this brief it should be mentioned that over the last few years the RBNZ under the instruction of the government has increased its regulations and supervisory role with regard to Non-Bank Deposit Takers causing some to withdraw from this market

Cash management accounts operate under a mutual fund or a unit trust concept pooling the funds of a large number of retail investors and using those funds in the wholesale market where economies of scale may provide higher rates of return which they can then pass on or use to derive revenue or reduce fees. Even with cash funds however they will employ some maturity transformation (invest in longer maturity securities) where that will increase the overall return - although clearly with all the deposited funds being on call this could present a liquidity risk that would need to be managed carefully. For instance according to its most recent fact statement Perpetual Trust Cash Management Fund has 13% of its assets in mortgages. Just as with commercial bank deposits the risk of all investors wishing to withdraw their funds at the same time would be low, and so it makes sense to transform a small percentage to increase returns.
The question is “what factors will induce a retail investor to use a specific cash management account above others, and why not simply avail themselves of any normal trading (commercial) banks cash deposit facility”?
The main factors entering into such a decision would be :
v ease of use - both transactional and informational
§ how easy is it to move funds in and out
§ how easy is it to obtain a current balance, produce statements, get tax information
§ minimum deposit balance restrictions

v security
§ Ratings
§ Government guarantees

v return
§ Interest (pure rates of return)
§ fees - entrance, exit, MER,
§ PIE – reduced tax for some investors

Different investors will place different values on these factors and some will place one of these much higher in their scale of priority. For example security might be paramount for some on the basis that cash should be risk free and returns unimportant, but for our purposes lets consider all of these factors and compare them to other cash holding options in the retail market. I will especially use Rabo Banks NZ online only cash account as a comparison as I use this facility myself and it would appear to be the current market leader in terms of these factors
Ease of Use
Access
Most cash management trusts do not provide direct access to funds. For instance the Public Trust offering will provide phone call balances and transfers to a nominated account. Perpetual offer an online portal but only if you have your entire portfolio through their Financial Planning Services division. Of course nowadays all commercial banks offer internet access , automated bill payment facilities, multiple sub a/c’s etc. Rabobank offer internet access (no physical branches) and sub accounts but can only transfer to a single nominated account (no bill payments).
Minimum Balance
Perpetual Trust and Public Trust have a minimum balance requirement of $500, and AMP requires $1000. While it’s used to be understandable for efficiency purposes to keep minimum balances up this really is less of a factor in the electronic age and these particular fund again compare unfavourably with other offerings some of which have no minimum balance (or tiered rates of return). Rabo requires no minimum balance and there is no tiering meaning that all balances receive the highest available cash rate
Security
Ratings
Most banking on call offerings are considered by investors to be secure with the main trading banks all being rated AA except for Kiwi Bank with an AA- and TSB with a BB. Only the real outlier NBDT’s (Non-Bank Deposit Takers) such as building societies or credit unions descend to BB ratings. Brokers offerings and Cash Management Trusts considered in this review are generally unrated though this will become mandatory as part of the new regulations. While it is likely that all Cash Management trusts could be considered relatively secure as investments and of a safe-haven nature it is difficult to compare any of them in this respect with RaboBank which is rated as AAA and one of the top 10 safest banks in the world.
Government guarantees
The Public Trust Cash Management Fund is NZ government guaranteed and this is likely to allay fears for investors but so are the main trading banks and also Rabo. With this guarantee likely to be discontinued it would not be prudent to include this as a factor for any long term choice.
Return
Interest (pure rates of return)
Investors using cash as a deliberate choice in their permanent asset allocation strategy are likely to be more concerned with return whereas some others may not consider return as important on the basis that the money is only temporarily on hold, but what is remarkable about this aspect of the review is the spread of results among offerings. While it is to be expected that cash accounts offering chequeing features will not offer competitive returns even when one moves into pure cash management we are currently seeing returns almost as low as 1% p.a for some of the providers mentioned in this brief. The table below (see attachment is taken from the Fundsource website as at 31 May 2010. Note that Perpetual even with 13% of its assets in ‘risky’ mortgages is still only paying 1.35%.

Fees
Incredibly, a number of Cash Management accounts actually charge entrance/exit/management fees. Perpetual has a %1 management fee as does AMP who also cream up to %5 as an exit fee.
Rabobanks current cash interest rate is 3.65% per annum compounding monthly and this return can be even higher than that for top tax-rate payers through the use of PIE features. There are no fees either transaction or account based.
Summary
On the basis of this quick review it is difficult to understand why any serious cash investor would consider any of the Cash Management Accounts I have covered in this brief. On every single factor RaboBank is superior. It is noticeable that other commercial banks are starting to offer similar type accounts now where only internet access is offered and high fees are charged on non electronic transactions thus enabling them to become more competitive with higher interest rates.

CASH what a bad investment-one of the better ones-AMP 7yr return 4.38% ---I'm happy paying more that for capital to invest in the sharemarket couple years ago I was paying 9% to invest with think today I'm round 6% the boring savers to get rich would think I'm mad till I show them my last years 135% return
Cash is for the poor minded

JB - I agree with you in the long term.

But holding excess cash at and during the end of a 50 year credit expansion? I have no regrets!

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Originally Posted by peat

I started a thread about Cash in the NZX forum and some folks replied thanks. But a thread on cash should really belong in the DX forum.

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Most welcome in the NZDX forum, and glad you got chased over here as I would not be likely to have seen it in the NZX mad-house.

Thanks,

Alan.

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Originally Posted by JBmurc

CASH what a bad investment-one of the better ones-AMP 7yr return 4.38% ---I'm happy paying more that for capital to invest in the sharemarket couple years ago I was paying 9% to invest with think today I'm round 6% the boring savers to get rich would think I'm mad till I show them my last years 135% return
Cash is for the poor minded

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you'll note that I didnt particularly argue the case of cash I simply established where best to hold it. Think of the chart of cash as an inverse to what ever other security you might have invested in - if you do this there will be periods where cash is providing superior returns.
Anyway - its an assignment so it simply had to be done.

Peat. Great work again.My wife and I both have cash management accounts with Craigs.Aussie and NZ.It is really great having the Aussie one to pay in my Aussie divie cheques.Clear funds within a few days.Westpac did not want to process the last large Aussie cheque I received.If they had of I would have had to wait weeks for clear funds.The other great advantage is for taking up share issues.The Aussies close these off really quickly and you can miss out.Used to be a rush to the bank to get an Aussie cheque then hope that it arrived before closing date.Now I just post the paper work into Craigs who take it up for me with funds coming out of cash management.
I did receive a letter from Craigs today saying they will be making some changes to cash management accounts,but gave no details.
We were last time I checked receiving a higher interest rate than Westpac were giving us.
Even if I received no interest on the Aussie cash management account I would not mind because it keeps me away from the hopeless staff at Westpac.

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Originally Posted by Stranger_Danger

JB - I agree with you in the long term.

But holding excess cash at and during the end of a 50 year credit expansion? I have no regrets!

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no that's right cash is great to have at the right time to have just not an investment I like on a longer term basis

Craigs NZ cash management is also Govt guaranteed.

its a bull market - yay cash.

Hi Peat,

Good post. However, I hope you don't mind some comment on what I would consider 'selective enhancements' around the edges.

EDIT: Just noticed your original post is seven years old! No wonder bits of it seemed out of date! Please accept my 'corrections' in that light!

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Originally Posted by peat

It's still a draft so any constructive criticisms will be listened to.

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And of course during market downturns and periods of negative sentiment cash can be considered ‘king’. It should never be forgotten that when other assets are falling, cash in relative terms is rising. In this situation the purchasing power of cash is increasing and so it is in effect in a bull market of its own.

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I get your point, But to describe cash as being in a bull market because other assets are falling in value is I think going too far. A bull market should reflect an actual increase in asset value (more cash dollars in the bank, in the case of cash). A falling stock market does not cause your cash balance to increase. Interest payments over time will cause a bull market in cash - not the behaviour of the stock market

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Ratings
Most banking on call offerings are considered by investors to be secure with the main trading banks all being rated AA except for Kiwi Bank with an AA- and TSB with a BB. Only the real outlier NBDT’s (Non-Bank Deposit Takers) such as building societies or credit unions descend to BB ratings.

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Your bank credit ratings seem to be a bit at odds with the current RBNZ website information

https://www.rbnz.govt.nz/regulation-...credit-ratings

The main trading banks seem to be below what you say at AA-, with Kiwibank being A+. TSB seems to be above what you say (A-), but it is only rated by Fitch.

I looked up some recent ratings by Fitch

https://nzcubaywide.co.nz/assets/Upl...ember-2017.pdf

I find this confusing. Fitch are issuing IDRs (issuer Default Ratings) , but they are different for long term local currency and long term overseas currency (for Kiwibank at least)! There are separate short term ratings too, which may be relevant if you are talking about cash (although history has shown that most cash accounts are in fact rolled over and are not called in each day).

Southland Building Society seem to be rated BBB, which is above your norm of no more than BB for Building Societies. However, they are listed as a 'bank' by RBNZ and I think trade as 'SBS Bank' which may explain the confusion.

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it is difficult to compare any of them in this respect with RaboBank which is rated as AAA and one of the top 10 safest banks in the world.

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That may be so. But NZ investors do not get to invest with the Rabobank parent, The RBNZ rating for the local branch of Rabobank is only 'A'.

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Government guarantees
The Public Trust Cash Management Fund is NZ government guaranteed and this is likely to allay fears for investors but so are the main trading banks and also Rabo. With this guarantee likely to be discontinued it would not be prudent to include this as a factor for any long term choice.

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Has not the government guarantee gone already? I had a letter from Kiwibank a few months ago in relation to my own accounts to this effect,

SNOOPY

PS Only just noticed that I was 'correcting' a seven year old post (doh!)! Nevertheless, I hope my updates are useful!

yes its a great update thanks Snoopy. A few of the main points were clearly out of date especially regarding Rabobank, which is now a local bank standing on its own strength. So it has fallen to about the same rating level as the Aussie cartel.
I still use their cash facilities however they are not much if any higher returning than others , as per discussion recently in the Air NZ thread (of all places)
As I mentioned there the Govt Guarantee is gone and now replaced by Open Bank Resolution process. (Remember CYprus)


Re cash being a bull then yes its all a bit arguable when the number stays the same, but if you see that same number of currency units as being able to purchase more of the other asset classes then it has appreciated in value in those terms. It depends what you reference wealth in and I will concede that for most people this is the currency, as compared to say the number of shares one owns.

But remember when people used to refer to wealth in terms of income eg 'Mr Smith has three thousand pounds a year'.

Hi Pete,
I hope you can come along to the Auckland meeting. It would be great to meet you. If the markets keep tanking I think the hot topic of conversation will be capital preservation is a bear market. Cash could be the #1 performing asset class for a few months...

Yes it will probably be my last opportunity so I will make it along
thanks for the special invite Beagle.