26 Feb Cashed up and investing in bank deposits isn’t rewarding enough?
For many New Zealanders the perennial favourite places to invest are residential property (own home and rentals), and term deposits. Statistics from the RBNZ show that house-holds collectively invested $174bn in deposits with registered banks as at September 2018.
There were days when you could get double digit returns on 12-month bank term deposits. It’s true, if you wind the clock back to 1991. Even as late as 2008, New Zealand banks were paying more than 8% on deposits fixed for 12 months (source: www.interest.co.nz) although rates have fallen substantially from those levels as the graph below shows. Today, the average return on a 12-month term deposit is only around 3.3%. Welcome to the new normal, an era of persistently low interest rates which is likely to remain for the foreseeable future.
Despite low interest rates, one of the attractions of term deposits to investors is certainty. You put your money in the bank which pays you back your money at the end of the agreed term plus interest. Yes, bank deposits are a safe haven relative to many alternative investments but they are not guaranteed.
Few investors will be aware of the Open Bank Resolution (OBR). In simple words, the OBR is a Reserve Bank policy enacted after the Global Financial Crisis to allow distressed banks to freeze a proportion of cash held on deposit with them, which can then be utilised to resolve the bank’s financial issues. Once the bank’s issues have been resolved, the remaining portion of the frozen deposits would be returned to the deposit holders. (source: https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution). Whilst NZ banks are currently healthy and we aren’t suggesting for a moment that the OBR policy is at risk of being utilised any time soon, the very existence of the policy is in recognition of what could happen in periods of significant financial stress.
Along with low interest rates, other issues with term deposits include:
- lack of a regular cash flow for those term deposits only paying interest on maturity;
- low liquidity – as the name suggests, the term of the investment is fixed. Term deposits can be broken with agreement of the bank but investors typically forego some of the interest as a result;
- lack of diversification across wider investment opportunities.
So with interest rates for term deposits so low and in our view, unlikely to rise substantially any time soon, what are the alternatives for cashed up investors? As mentioned above, residential property is a perennial favourite, but we believe there are a number of headwinds for property investors going forward. Click here to read our blogs on investing in residential property.
Regardless of whether investors are risk averse or happy with accepting the ups and downs of markets in exchange for potentially greater investment returns, we believe in diversifying across a broad range of investments and markets. We primarily do this by selecting what we believe to be high quality investment managers with proven track records based on international research and our own experience. The table below shows the returns for our investment strategies over the last five years to 31 December 2018.
The income/growth split signifies the allocation across defensive assets such as cash and fixed interest investments and higher risk assets such as commercial properties and shares. At one end of the scale, a conservative strategy is designed for investors with a minimum 2 year investment time-frame whereas at the other end of the scale, a very aggressive strategy is aimed at investors with a 10+ year investment time-frame.
|Return over 5 years (pa)*
*Returns are for Saturn Advice model investment strategies and are before the deduction of tax and after the deduction of investment manager fees. Actual returns experienced by investors will vary depending on a number of factors including variations to asset allocation, exchange rates and transaction costs. Past returns do not tell you how investment strategies will perform in the future.
Apart from potentially higher returns compared with term deposits, these investment strategies can provide regular income, can usually be cashed up quickly in normal market conditions and provide an opportunity to invest in hundreds of underlying investments across the world.
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