When cash moved to 1.75% a bell would have rung in the land of term deposits. We have been encouraging clients to consider what a balanced portfolio looks like in the world of lower for longer.
Cash and term deposits have a role in all portfolios. We are moving into different cash cycles globally, in America the emphasis is for higher rates and here in Australia we are experiencing downward pressure on rates. That combination could see increased volatility throughout 2016.
As customers review portfolios we have encouraged clients to consider the fact that too many clients have taken a barbell approach to investing. Many self-directed investors have become disgruntled with the volatility in equities and have moved to an increased allocation in cash while holding equities which they hope will provide consistent dividends.
The investment strategy could be summarised as follows:
Cash for safety
Equities for dividends
Property for growth
No risk if possible
There is an alternative; it all depends on the capital stack. A capital stack is the manner in which a company arranges their borrowings. Companies can pledge to redeem borrowings on a priority basis, term deposits are an example, if a bank was to be wound up deposit holders would be some of the first to be repaid.
The following is an example of a NAB capital stack.
For investors who are considering an investment strategy focus may not need to be only on the absolute return but the balance and expected volatility of the portfolio.
For customers who are prepared to be risk on and ready to absorb volatility then buy equities but for the investors who wants a more stable less volatile experience it might make sense to move up the capital stack.
The NAB subordinate bond in the above chart assumes an expected cash rate for the duration of the bond; if those expectations are accurate then the NAB subordinate bond is expected to provide a much higher yield than the one year term deposit.
The key to investing is education, is lending NAB money at the subordinate level worth exploring? Achieving better outcomes in conservative assets requires understanding risk reward analysis; a starting point could be assessing the subordinate debt of the major banks.
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The National Australia Bank Limited Financial Services Guide can be found at: http://www.nab.com.au/personal/help-and-guidance/financial-services-guide