Updated on 23 July 2024
5 minute read
Defensive assets are characterised by lower long-term returns but with lower volatility, delivering a more stable return pattern. Defensive assets typically produce their strongest performance when growth assets such as shares are struggling. Cash and term deposits are examples of defensive assets.
Cash is any type of fixed interest investment that has a very short repayment period. It includes short-term deposits with financial institutions, bank bills, short-term government securities and other short-term funding investments. Cash carries the lowest level of risk of short-term loss but usually earns a lower rate of return over the long term and may not keep up with inflation.
Term deposits are fixed-term investments where funds are deposited into an account with a financial institution. Term deposit investments usually carry short-term maturities ranging from one month to a few years and will have varying levels of required minimum deposits. Term deposits are not marked-to-market and therefore do not lose value as interest rates change. Instead, term deposits accrue interest daily based upon the agreed rate at purchase.
Our Cash option is able to invest in the full range of cash investments outlined above and aims to achieve a yield above the official cash rate set by the Reserve Bank of Australia (RBA).
Currently, 90% of our Cash option is invested in at call interest-bearing accounts with a range of authorised deposit-taking institutions:
~40% invested with National Australia Bank (NAB)
~40% invested with Commonwealth Bank of Australia (CBA)
~10% with Members Equity Bank (ME)
Changes in the official cash rate flow immediately to these at call investments, which means the future returns in the Cash option automatically move in line with interest rate changes. The remaining 10% of the Cash option is invested in longer-dated term deposits with a range of other banks. This allows us to access higher interest rates and boost the option’s future returns without compromising the liquidity of the option.
Our Cash option is very competitive in the market,1 and we’re always looking for opportunities to maximise returns. We design the option to consistently return 0.6% – 0.7% above the RBA cash rate. As at May 2024, the current RBA cash rate is 4.35% pa, with the at call investment return approximately 0.65% p.a. over the official RBA cash rate. This means, with the current official cash rate at 4.35% p.a., the Cash option aims to yield 5.0% p.a or better.
It’s always possible to achieve a better rate for a specific term deposit but this does involve locking money away for a fixed period and a fixed interest rate. Should rates rise in the meantime, you potentially miss out on a higher return. While the term deposit generally cannot be accessed before maturity, funds invested in the Cash option can be moved at any time. Deciding when it’s best to lock in a fixed interest rate through a term deposit or to leave money in a Cash option is very difficult: you need to correctly predict the path of the RBA cash rate over 12 months.
1 The Super Savings Cash option was ranked 4th over a 10 year rolling period in the Super Ratings SR50 Cash Index May 2024.
We are often asked why the past performance from our Cash option differs from the RBA’s current interest rate or the term deposit rates offered by the major banks. It’s important to remember the past performance of the Cash option doesn’t reflect today’s interest rates: it reflects the interest rates that were on offer over the past performance period. The chart below compares the one-year performance of ART’s Cash option for Retirement Income accounts (i.e. zero tax, but net of investment fees) with the one-year term deposit rate that was on offer at the start of that performance period (e.g. we compare the one-year return to end May 2024 with the deposit rate as at end May 2023).
Source: ART, RBA, Refinitiv. Past performance is not a reliable indication of future performance. Cash return is based on an ART Retirement Income account which is tax free but net of investment fees.
The future performance of the option will be determined by the rates on offer today and in the future. Regardless of what happens to interest rates, we’ll continue to manage the Cash option with a view to achieve a higher rate than the RBA’s cash rate target.
Tax and fees: Tax and fees should be considered for both cash and term deposits.
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