Diana Clement 's Opinion

Your Money and careers writer for the NZ Herald

Diana Clement: Concept of cash broader than the folding stuff

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Term deposits, bonds, subordinated notes, cash Pie accounts and bank bills among array of cash vehicles

Cash deposits have come a long way since piggy banks. Photo / Thinkstock
Cash deposits have come a long way since piggy banks. Photo / Thinkstock

Cash is the stuff we piled under the mattress or in the piggy bank in days gone by. That is if the squire paid lowly peasants like us enough.

In the 21st century, the concept of cash is much broader than the folding stuff. Most people think of cash investments as bank deposits in savings accounts.

There is much more to cash investing than just choosing the right savings account or term deposit.

Most people understand the concept of cash in the bank. Even then it needs some explanation. Not everyone views cash as the same thing, says AMP Capital's head of fixed income, Grant Hassell. For some people cash is a liquid investment that can be withdrawn whenever you need it.

Others consider it to be an investment of the sort that the capital remains the same, but may be locked up for a period of time. That includes term deposits and finance company debentures.

There are other cash investments that the average Joe Bloggs knows little about - although they might be under the hood of his KiwiSaver fund. That includes investments with names like "subordinated notes" and "bank bills" and others. More about that later.

At the simplest end of the scale bank deposits and term deposits are the most common cash investments. Savers deposit money into the ASB or Westpac and get a return of x per cent. Bank accounts are getting more complex, however, as the banks come up with new-fangled products to grab a greater share of savers' money.

One example is Kiwibank's Notice Saver account that pays more than the equivalent term deposit because your money stays invested until you give the requisite notice - 90 days, say - to make a withdrawal. Kiwibank pays slightly more than the equivalent 90-day interest. You still have access to your money in 90 days, but you may leave it there for years.

Sometimes these new-fangled accounts have tricky rules that mean the customer doesn't always get the return they're expecting. I don't mean to pick on Kiwibank because all the banks do similar things but its business online call account offers a reasonably decent 3.15 per cent on the surface.

If, however, you make a single withdrawal in a month the interest rate drops to 2.40 per cent. That means savers don't often get the headline rate. What business doesn't have to make withdrawals?

This is a common approach with "bonus saver" type accounts, of which the Kiwibank account is one. A similar Online Bonus Saver account at Westpac requires customers to make one deposit a month and no withdrawals to get the 4 per cent advertised rate. Break the rules and you get 0.10 per cent.

Another flavour of bank account that customers often fail to understand is the cash Pie account. Cash Pies aren't actually that hard to get your head around. They're regular bank accounts that are taxed at a favourable rate.

For example, the RaboDirect Cash Advantage Fund - a Pie - pays 3.30 per cent interest but is taxed at a lower rate than regular accounts. A 30 per cent taxpayer therefore gets an effective rate of 3.44 per cent and a 33 per cent taxpayer gets 3.60 per cent. The amount of money in an investor's pocket is more because the Government takes less tax.

The call centre staff at RaboDirect - and I'm sure other banks - have to educate customers from the ground up about cash Pies and bonus saver-style accounts such as Premium Saver, which require savers to increase their balance by $50 a month to get a juicy interest rate.

I should note that building societies and credit unions offer similar accounts. Some investors also hold cash management accounts with their stock broker. These accounts are used to hold money earmarked to buy investments such as shares and to receive dividends. They're not meant for long-term savings and are unlikely to be competitive with the banks.

When I checked this week Craigs Investment Partners was paying between 2.20 per cent and 3 per cent on New Zealand dollar deposits, which wasn't bad, but nor was it headline-grabbing.

Moving on from banks, there are other cash-like investments that pay a fixed return and the capital value is fixed or relatively fixed. These investments usually have higher returns than cash in the bank but come with added risk.

Bonds (also called debt securities or stock - just to confuse) are perhaps the most popular cash-like investments. Instead of depositing money with a bank, you lend it to the Government or a company.

In return they're paid a coupon rate, which is similar to an interest rate. To exit the investment you need to either wait until it matures at a fixed date or sell it through the NZX or other stock market.

Bonds are issued by the Government or the company concerned. They can be resold on the NZX Debt Market (NZDX) at nzx.com/markets/nzdx/bonds. The yield is typically higher than a term deposit.

Should a bank fail, however, savers are more likely to get their money back than someone who had a bond with the bank.

The lower the credit rating of the Government or company, the higher the coupon rate. The New Zealand Government and local authorities offer bonds with relatively low coupon rates. They're not as likely to go bankrupt as some companies, which offer what's called "corporate bonds". They're issued by companies such as Z Energy, TrustPower and Infratil.

Even less well known are "notes" - capital, unsecured or subordinated notes. These are similar to bonds in that they are provided by companies such as NZ Post and Nufarm in New Zealand. But they have a higher rate of return with less security.

The big difference is where they rank should the company providing them crash and burn. Someone with cash invested in bonds will be paid out ahead of the holders of capital notes, but both rank higher than ordinary shareholders.

There are still more cash-like investments. Companies such as AMP Capital provide managed cash funds, which are similar to Conservative KiwiSaver funds. Units in these funds can be bought and sold any weekday, so they're as liquid (easily accessible) as on-call bank accounts, but they return a higher rate.

AMP Capital's NZ Cash Fund, for example, is returning 3.25 per cent, minus fees. That's more than many investors would get in an on-call account with their bank.

The aim of the AMP Capital fund is to provide a return above the ANZ NZ 90-Day Bank Bill Gross Return Index. The $3.3 billion fund is invested in relatively simple, but complex-sounding, investments: bank bills, floating rate notes and short-term deposits and securities.

Instead of depositing money in a bank account as you or I do, AMP Capital fund gets a better rate by lending wholesale money to the bank. This is what's called a bank bill.

It also buys floating rate notes, a type of bond, from banks and other issuers and then has term deposits as anyone else would. Most of these investments can be sold to third parties should the fund need its money.

Although cash funds and conservative KiwiSaver funds contain largely cash-like investments, they also use other products to reduce interest rate and currency risks.

The Milford Conservative Fund, for example, can short-sell securities, use leverage, use derivate products and active currency management to ensure consistent returns.

Cash and cash-like doesn't always mean super-safe. Just look at the finance companies.

Investors in those assumed their capital was safe - whereas they turned out to be a highly risky investment. Even corporate bonds, which are loans to businesses, can lose all their value if the company fails.

And large companies in New Zealand have done just that in the past.

- NZ Herald

Diana Clement

Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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