Invest
3 ‘red flags’ for cash fund investors
As rates continue to fall, investors tempted to move their “rainy day funds” into cash strategies offering higher yields are being warned to look at the underlying assets.
3 ‘red flags’ for cash fund investors
As rates continue to fall, investors tempted to move their “rainy day funds” into cash strategies offering higher yields are being warned to look at the underlying assets.
The warning comes to investors as a lesson learned from the global financial crisis when “cash funds” were frozen and ultimately closed, with investors in many cases losing their capital.
Director of listed products at Pinnacle Investment Management Chris Meyer has given investors three potential red flags to watch out for.
Term deposits - While investors can get a few extra basis points of yield, caution should be taken when locking away funds for a predetermined amount of time.
“They are also a major liquidity trap. In order for a fund to exit a term deposit before maturity, they will be forced to pay an exit fee and, like retail investors, will be required to give a period of notice,” Mr Meyer explained.
Credit quality and duration - Worse than major weighting in term deposits during a downturn is a term deposit in a low-quality institution.
“Low-quality institutions (think Lehman Brothers) may offer slightly higher returns for investment managers, but investors face the very real risk of losing it all if issuers fail,” Mr Meyer continued.
Long-duration instruments in cash fund portfolios should also be considered as another red flag, the investment manager warned.
Transparency - A lack of transparency is probably the biggest and most identifiable cash fund red flag.
“Investors should be asking their cash managers what they’re holding in their portfolios. If this information isn’t easy to obtain, then you should be asking, ‘Is my manager hiding something?’” Mr Meyer said.
What should investors do?
Investors looking to maintain their funds while increasing their cash yields should look at quality cash funds or cash ETFs.
“Investors should ensure their cash is working hard at times of the market cycle when they want or need to hold cash. Just as importantly, they should be confident that cash can be easily and quickly redeployed when required, regardless of any global economic events.”
“If you value your capital, risk and liquidity must not be overlooked when selecting a cash fund,” Mr Meyer concluded.
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