Cash is king

Cash is known as the King because it is liquid. Liquidity is a valuable commodity when investing. There are two important points to understand about liquidity as it impacts how quickly you can access your money and the value of your investments:

1. A liquid investment can be readily acquired and converted to cash, so cash in your wallet is the most liquid investment of all. Cash deposited with your bank can be accessed immediately, though you may have to wait or incur a cost if it's locked up in a term deposit. This leads to the second point.
2. Liquid investments can generally be bought or sold at prices close to their fair value without a significant premium or discount. For example, if you needed to liquidate a property, it may have to be sold at a discount to fair value if proceeds are required quickly.

Cash, therefore, is the King because it’s readily available for use and it retains its value.

Cash’s kryptonite

The problem with cash is inflation. Inflation erodes its value. What I could buy with $100 a few years ago, I can no longer buy for $100; it may now cost $120.

What this means is that hiding a $100 note under your mattress is not a sound investment, because it will be worth less and less as time goes on.

Investors will therefore seek investments that outpace the rate of inflation. But it is also important that they can easily access a part of their portfolio quickly, should the need arise. Therefore, they will have, as a part of their portfolio, a holding in what are called “cash-like” investments.

Cash and cash like investments retain their value, while providing investors with a yield (that is, hopefully, more than the inflation rate). Sometimes, illiquidity can be a reward for investors. A 12-month term deposit is likely to pay a higher yield than a 3-month term deposit or an at-call account.

But bank accounts and term deposits are not the only ‘cash-like’ investments available to investors. The King has an entire court.

The Court of Cash Investments

Bank accounts and term deposits – These are deposits with banks, and rates vary based on the investment amount and duration, with higher rates generally available for larger, longer terms.

Australian Government Treasury Notes - Treasury Notes are short-term securities issued by the Australian Government. Terms are less than twelve months.

Negotiable Certificates of Deposits (NCDs) – These are short-term securities issued by financial institutions such as banks. They are often issued in large denominations ($1 million or more), so are bought most often by institutional investors. NCDs generally offer higher interest rates than Australian Government Treasury Notes.

Commercial paper – These are unsecured (that is, not backed by any collateral, so are riskier) short-term debts issued by corporations. As they are unsecured, you would expect that these would pay a higher interest rate than other cash-like instruments.

Floating rate note (FRN) credit securities – These are a type of bond issued by financial institutions and corporates that have a coupon (interest rate) that is variable, or floating rate, which means it tracks short-term interest rates. There are different types of these. Usually, FRNs are only offered to institutional investors; they are traded off-market and often require a large minimum investment size.

Bringing The Court together

Managing cash is more than managing term deposits when they reach their maturity date. Different banks offer different rates, and different short-term securities offer different terms. Staying on top of all these is more than a full-time job, especially if you are aiming to ensure a rate of return for your cash beyond the rate of inflation. Access is not easy; many cash-like instruments are only available to institutional investors.

This is where ETFs can come to the fore. ETFs allow investors to access difficult-to-access assets and opportunities. Cash and some of the securities considered cash-like are one such opportunity.

This week, VanEck will launch its Active Cash Plus ETF (MONY). MONY will be a diversified portfolio selected from the Court of Cash Instruments above. It will be professionally managed to maximise the risk-adjusted return across different instruments, issuers and individual securities.

MONY will be a portfolio of high-quality, highly liquid Australian dollar cash and short-term money market and credit securities issued by investment-grade entities. It will aim to pay income monthly.

We think an active cash allocation can be the King, but it’s important to include the Court.

If you want to learn more about our new ETF, join our webinar on Thursday the 12th of February. Register HERE.

Key Risks: An investment in MONY carries risks associated with: interest rate movements, issuer default, credit ratings, subordinated debt, bond markets generally, securitisation market, issuer concentration, fund operations and liquidity. Your investment in the Fund is not protected by any government guarantee. See the PDS and TMD for more details.

MONY is likely to be appropriate for a consumer who is seeking capital preservation and a regular income distribution, is intending to use the product as a standalone solution, major, core, minor or satellite allocation within a portfolio, has no investment timeframe and has a low risk/return profile show less