Where are you parking your cash?

Smurf1976 said:

Small banks have an aspect that if they did fail then government could actually afford to make good on the deposit guarantee.

If someone like Mystate goes broke well then that's a minor adjustment to the federal budget to pay out the depositors. If CBA, NAB etc went bust then in practice it's going to be rather hard for government to come up with the money at least in a prompt manner.

Also companies like BHP aren't going to become worthless in a hurry. Even in a major crash their value isn't going to zero at least not overnight. You might find you can't sell the shares or at least not for a decent price but there's still a real business there, there's still real physical assets that can't possibly simply disappear into thin air (unlike financial companies where that is indeed possible), and your share of it will have value at some point.

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Very good points smurf. There is always risk the Government may not do a full rescue and everyone including the small depositors have to take a hit on their savings in an financial Armageddon scenario.

I've got a small position in BHP publicly displayed in my Speculative Stock Portfolio. May add to it privately or to it's smaller diversified cousin South32 Ltd (S32), if I feel the economy is headed south, as you said that is a genuine business of selling raw materials to manufacturers who need them.

Although I like also buying basket ETF's that include good companies like BHP, one of the draw backs is you end up with the good and the bad all mixed in and when the economy and share market is doing well. In other words the good, the bad and the ugly all get to dance along while the music lasts (from a musical chairs point of view).

Interesting and very relevant thread MovingAverage.

In an Australian context, as Dona Ferentes has said already, anything with an interest rate with a "+" in front, or "capital guaranteed" or similar.

Otherwise put it onto the market (Direct /ETF / Managed Fund /Superann /listed or unlisted Property) and above all, be nimble.

In 2020, a horrible interest rate market for low risk investors such as retirees

not sure if my answer's totally relevant to the question, as i don't actively seek to maintain a cash component, but i keep the bulk of my cash (when i actually have any cash above and beyond the next few months' living expenses) in an NAB high interest account

at 1.25% it's not the best rate in town, and certainly it can't match any of those honeymoon rates or rates that you only get if you meet some kind of condition (like depositing X amount per month) which tend to start with a 2

but the interest rate is only a secondary consideration for me, if it's decent enough relative to the RBA cash rate, it's good enough. i generally aim to be fully invested almost all the time, with a floating 0-10% cash weighting to allow for limited market timing/buying on dips. so instant availability for trading is more important, and this account lets me do an instant transfer to NABtrade if i want to buy something, so i don't risk missing the dip whilst waiting for the transfer to arrive

As I have mentioned a few times.

Rate setter is a great place to park funds, they have and you can earn up to 8% depending on the time frame.

monthly deposits start at around 3%.

Use my referral code when you loan $1000 and you will get a $100 bonus, and I will receive $50.

Use this link https://mbsy.co/ratesetter/49795346

Dona Ferentes said:

Seems to me the responses are usually well meaning but could be more focused if initial outline of aims, timeline, attitude to risk, amount of the stake, etc are mentioned.

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That's a reasonable point, but I had assumed (probably incorrectly) that my aims, timeline etc were clear from my OP - "cash in a term deposit for 6-12 months". Meaning, relatively short term, low risk but an interest rate that is a bit more competitive compared to a standard saving/transaction account. I already have a reasonable amount tied up in equities, but always keep a cash component and it is this I'm looking at.

I could be wrong, but I think if your money is held in a major financial institution then the Government may step into bailing them out in collapse scenario as they don't want the four pillars to tumble. So in that case the Government may print the required money to shore up those banks and in the process may protect the smallish depositors who have up to 250k.

Is the bank guarantee of $250K per bank account (eg: $1M invested in 4 x $250K accts – you are guaranteed your $1M) or $250K is all you are guaranteed regardless of how much you have (eg: $1M invested in 4 x $250K accts – you are guaranteed $250K but lose $750K).

I have heard and read conflicting views.

If CBA, NAB etc went bust then in practice it's going to be rather hard for government to come up with the money at least in a prompt manner.

Also companies like BHP aren't going to become worthless in a hurry. Even in a major crash their value isn't going to zero at least not overnight. You might find you can't sell the shares or at least not for a decent price but there's still a real business there, there's still real physical assets that can't possibly simply disappear into thin air (unlike financial companies where that is indeed possible), and your share of it will have value at some point.

If the major banks happen to bust, where is BHP going to get its funding for new projects? Money becomes more expensive and a crash will be as devastating as the one last century.

Fingers crossed that doesn’t eventuate…

trading_rookie said:

I could be wrong, but I think if your money is held in a major financial institution then the Government may step into bailing them out in collapse scenario as they don't want the four pillars to tumble. So in that case the Government may print the required money to shore up those banks and in the process may protect the smallish depositors who have up to 250k.

Is the bank guarantee of $250K per bank account (eg: $1M invested in 4 x $250K accts – you are guaranteed your $1M) or $250K is all you are guaranteed regardless of how much you have (eg: $1M invested in 4 x $250K accts – you are guaranteed $250K but lose $750K).

I have heard and read conflicting views.

If CBA, NAB etc went bust then in practice it's going to be rather hard for government to come up with the money at least in a prompt manner.

Also companies like BHP aren't going to become worthless in a hurry. Even in a major crash their value isn't going to zero at least not overnight. You might find you can't sell the shares or at least not for a decent price but there's still a real business there, there's still real physical assets that can't possibly simply disappear into thin air (unlike financial companies where that is indeed possible), and your share of it will have value at some point.

If the major banks happen to bust, where is BHP going to get its funding for new projects? Money becomes more expensive and a crash will be as devastating as the one last century.

Fingers crossed that doesn’t eventuate…

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OK a couple of points to add for the above questions. Again only as far as I know, so don't hold me accountable:

The bank guarantee is per bank account held in a person's name. So in theory it is possible to have multiple accounts across different banks that could still be protected up to the 250k in each as guaranteed currently (was only guaranteed up to 100k per account till not so long ago, but have increased the amount probably to encourage savers to ensure there is sufficient bank savings from depositors. Note: Banks actually need money held as deposits before they can lend out, it's called 'Fractional Lending').

It's highly unlikely that any of the four banks are allowed to go bust as the 2nd highlighted/bold paragraph suggests. I have seen how protective the Government is of the banks are when the GFC hit, they banned the shorting of the Aussie banks to prevent them getting into any financial trouble and provided plenty of liquidity and stimulus as required so the banks don't freeze up. So to answer your question, BHP will probably not have trouble funding it's future projects as long as their balance sheet is credit worthy.

What is more probable is to have the loan defaults increase due to a sluggish economy sometime in the future where a portion of the bank's loan book may become worthless (in default). If the bank's reserves are insufficient to cover these bad debts, only then there is a likelihood that the bank may need to shave off a % from the savings deposits to repair the write-down. This is where the Government guarantee would likely to come into play. So in this situation, the Government can lend the money to the bank(s) by running the RBA printing press day and night till the required sum to cover the bad debts are printed. Hence avoiding the % cut to the savings accounts or people's bank deposits, ensuring the promise of the Government guarantee to the smaller depositors is kept. The guarantee may not apply in theory the larger deposits and millionaire bank accounts, so they may still get a % taken out of their accounts to help the Government with the bank bailout.

Once again this is my best guess based on what has happened in the past especially based on the bailouts that happened in the US during the GFC. Past events does not guarantee how the future scenarios will play out. Hopefully my few cents worth will get people thinking to plan for the future.

If economic circumstances are such that any of the big four banks go bust then you will probably need to be more worried about your neighbourhood turning to cannibalism than your bank balance.

For safe savings (ADI's), UBank 2.1%, ING Savings Maximiser 1.95% and RAMS 2%. All online savings accounts with a few simple hoops to jump through but you will get these amounts.

One that hasn't been mentioned is the Australian Enhanced Income Fund "AYF". Distributions every 3 Months and a fairly stable stock price. I've held this one in my portfolio for many years.

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"Over 3 years the Fund’s rolling annual net return, which excludes the benefit of franking but is net of all fees, for the period ending 31 December was 5.02%."
More info here: https://www.eiml.com.au/listed.php/53/212
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And as mentioned, everyday ETF's are paying between 4 to 6% in distributions.

RateSetter between 3 to 8% depending on the term, this is not an ADI.

*~* Side note*~*
Does anyone ever get the feeling that we are being lured into more risky investments and then once set the markets will just collapse/drop 50% or more and wipe out half our assets? I know I do so I am playing it very cautiously. >Probably to my detriment.<

Bill M said:

For safe savings (ADI's), UBank 2.1%, ING Savings Maximiser 1.95% and RAMS 2%. All online savings accounts with a few simple hoops to jump through but you will get these amounts.

One that hasn't been mentioned is the Australian Enhanced Income Fund "AYF". Distributions every 3 Months and a fairly stable stock price. I've held this one in my portfolio for many years.

---
"Over 3 years the Fund’s rolling annual net return, which excludes the benefit of franking but is net of all fees, for the period ending 31 December was 5.02%."
More info here: https://www.eiml.com.au/listed.php/53/212
---

And as mentioned, everyday ETF's are paying between 4 to 6% in distributions.

RateSetter between 3 to 8% depending on the term, this is not an ADI.

*~* Side note*~*
Does anyone ever get the feeling that we are being lured into more risky investments and then once set the markets will just collapse/drop 50% or more and wipe out half our assets? I know I do so I am playing it very cautiously. >Probably to my detriment.<

Click to expand...

It could be, everyone knows we need a reset at some stage
And central banks can not possibly be so dumb so there must be a goal somewhere

Nulla Nulla's A-REIT thread has some useful info, note the ROE and Distributions columns. A low interest rate environment enhances the appeal of this category:
https://www.aussiestockforums.com/threads/a-reit-valuation-model.19776/page-27

Bill M said:

For safe savings (ADI's), UBank 2.1%, ING Savings Maximiser 1.95% and RAMS 2%. All online savings accounts with a few simple hoops to jump through but you will get these amounts.

One that hasn't been mentioned is the Australian Enhanced Income Fund "AYF". Distributions every 3 Months and a fairly stable stock price. I've held this one in my portfolio for many years.

---
"Over 3 years the Fund’s rolling annual net return, which excludes the benefit of franking but is net of all fees, for the period ending 31 December was 5.02%."
More info here: https://www.eiml.com.au/listed.php/53/212
---

And as mentioned, everyday ETF's are paying between 4 to 6% in distributions.

RateSetter between 3 to 8% depending on the term, this is not an ADI.

*~* Side note*~*
Does anyone ever get the feeling that we are being lured into more risky investments and then once set the markets will just collapse/drop 50% or more and wipe out half our assets? I know I do so I am playing it very cautiously. >Probably to my detriment.<

Click to expand...

I am not sure if we are being “lured”, But I think the world is awash with “safe capital”, mainly from central banks and pension funds, and that has squashed returns, so much so that the only way to actually make some money is to move up The capital structure in securities that have some risk.

However, I do think this has a massive benefit in that those of us who take the marginally higher risk are being compensated very well for it, so I don’t think a crash is imminent.

A crash will happen when the opposite situation occurs, eg risk assets are over priced compared to safe ones.

At the moment this isn’t true, risk assets are cheap and safe assets are expensive.

Bill M said:

One that hasn't been mentioned is the Australian Enhanced Income Fund "AYF". Distributions every 3 Months and a fairly stable stock price. I've held this one in my portfolio for many years.

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Looks interesting, thanks Bill. What is the management fee charged by the Fund manager for this product, I couldn't find it. Also I couldn't find if they offer a DRP for the distributions.

aus_trader said:

What is the management fee charged by the Fund manager for this product, I couldn't find it. Also I couldn't find if they offer a DRP for the distributions.

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as both AYF and the Elstree fund consist of a "portfolio of up to 35 ASX listed debt equity hybrid securities", you need to be aware these carry risk. Most hybrids are designed to support bank capitalisation levels and carry a conversion clause if certain percentages are triggered IE when a bank is in strife, or the market is on the nose in a big way, then the debt assumed in a hybrid can be converted to underpin equity levels. Risk-adjusted Capital, CET1, Basel III, Basel IV, etc. This will be done at the worst time and will destroy invested capital. During and after the GFC, when hybrid terms were more generous, conversion didn't occur. This won't be the case next time around.

On the other side, pricing of listed debt received a big boost recently:

In Sept 2019, S&P upgraded Australia’s “economic risk score”, which it downgraded in May 2017 on housing bubble fears. This has the consequence of reducing the risk weightings S&P assumes when estimating the major banks’ “risk-adjusted capital” (RAC) ratios, which in turn boosts them above a critical 10 per cent threshold. APRA’s boss Wayne Byres had previously stated that securing RAC ratios over 10 per cent was a valuable goal for the big banks, because it would lift their stand-alone credit profiles (SACPs) from “a-” to “a”.

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The higher SACP automatically raises the credit ratings on the major banks’ hybrids and subordinated bonds by one notch (hybrids go to BBB- while sub debt jumps to BBB+). It also reduces the government support assumption underpinning the majors’ AA- senior bond ratings from three notches to two, which is positive for these assets.

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Just be aware of what you're getting into.

aus_trader said:

Looks interesting, thanks Bill. What is the management fee charged by the Fund manager for this product, I couldn't find it. Also I couldn't find if they offer a DRP for the distributions.

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The management fee is a bit on the high side. From it's last available PDS dated in 2013 it states:

:Management Costs 1.35%* For every $50,000 you have in the fund you will be charged approximately $675 each year:

On the same PDS there is a DRP election on the application form, so there is one. I do not use it though, cheers.

Dona Ferentes said:

as both AYF and the Elstree fund consist of a "portfolio of up to 35 ASX listed debt equity hybrid securities", you need to be aware these carry risk. Most hybrids are designed to support bank capitalisation levels and carry a conversion clause if certain percentages are triggered IE when a bank is in strife, or the market is on the nose in a big way, then the debt assumed in a hybrid can be converted to underpin equity levels. Risk-adjusted Capital, CET1, Basel III, Basel IV, etc. This will be done at the worst time and will destroy invested capital. During and after the GFC, when hybrid terms were more generous, conversion didn't occur. This won't be the case next time around.

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That's all true but to put things in context it is important to know that most hybrids/capital notes/preference shares rank higher than ordinary shareholders. So in other words if a company that issues the hybrid goes under, then the hybrid owner is more likely to get some money back. But in reality probably both the hybrid and the ordinary shareholder will lose all their money should the parent company collapse.

not true, Bill. It's all about capital structure. First equity is wiped out (completely) then hybrids (partially or completely) then subordinated debt (partially and then completely) the higher rated but unsecured debt all way up to secured (in worst case scenario)

RISK = REWARD

PS if you are mentioning funds, the Macquarie Income Opportunities Fund will give a similar return with a 0.49%pa management fee

Dona Ferentes said:

First equity is wiped out (completely) then hybrids (partially or completely) then subordinated debt (partially and then completely) the higher rated but unsecured debt all way up to secured (in worst case scenario)

RISK = REWARD

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That is what I said, the hybrid is ranked higher than the ordinary stock holder which is what you are saying too. But in reality both will get wiped out in a collapse. I fully understand the RISK = REWARD.
Also I understand that if a a bank experiences financial difficulty, hybrids can be converted into bank shares, which may be worth less than your initial investment, or written off completely, meaning you could lose all your capital. I am willing to take this risk. Essentially not all of AYF's holdings are going to blow up at once, there are quite a few non bank holdings in there too. There are risks in all investments.

MovingAverage said:

Spoke to a few banks today about parking a chunk of cash in a 6-12 mth term deposit...how bloody depressing. Curious to hear what opinions you might be considering for your cash in relation to chasing a “reasonable” interest rate?

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St George has an account they call 'Incentive Saver' where they pay just over 2% if you keep money in there for 1 month and make a deposit of at least $50.. To get the 2% I think you need to have $250k in there.


-Frank

Value Collector said:

A crash will happen when the opposite situation occurs, eg risk assets are over priced compared to safe ones.

At the moment this isn’t true, risk assets are cheap and safe assets are expensive.

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An interesting perspective.

Not sure if I agree, disagree or neutral, will have to think about it, but an interesting perspective on it.