The Reserve Bank of Australia is navigating a complex balancing act: inflation remains above target, growth is beginning to moderate, and global uncertainty—particularly geopolitical tensions—continues to cloud the outlook.
In an investment environment defined by persistent inflation, elevated interest rates and growing geopolitical uncertainty, the role of cash is being reassessed.
Once considered “dead money” in a low-rate world, cash is once again offering a compelling combination of yield, liquidity and flexibility. For investors navigating volatility across equities and fixed income markets, that shift is proving increasingly difficult to ignore.
In the latest episode of Relative Return, Olivia Grace Curran speaks with Ben Samuel, Senior Portfolio Manager, and Kai Van Tang, Head of Credit Research at First Sentier Investors, to explore whether cash has re-emerged as a core portfolio allocation—and what that means in practice.
Transcript
0:05 – Olivia Grace-Curran
Hello and welcome to the latest edition of Relative Return.
I'm your host, Olivia Grace Curran, senior wealth journalist at Investor Daily.
Well, with interest rates higher for longer, inflation proving sticky and geopolitical tensions adding fresh uncertainty, investors are being forced to rethink where they park capital.
0:26
For years, cash was dismissed as dead money, but today it's offering yield, liquidity and importantly, optionality.
So, the question is, is cash finally back as a core portfolio allocation?
To discuss, I'm joined by Ben Samuel, senior portfolio manager, and Ky Van Tang, head of credit Research at First Sentier Investors.
It's great to have you both in the studio.
0:54 – Ben Samuel & Ky Van Tang
Thank you.
0:56 – Olivia Grace-Curran
For those who may not be as familiar, would you be able to please give us a sense of the business, your team and how you approach managing cash and income strategies?
1:07 - Ben Samuel
Sure.
1:08
First Sentier Investors is a large global asset manager with a range of different investment strategies.
1:16
Our team, in particular the short term investments team focus on what we would call cash and defensive income strategies.
1:23
So that's on the most conservative end, very liquid, very low risk income generating strategies through to still relatively low risk strategies, but strategies which might be a little bit more focused on income, slightly less liquid, etcetera.
1:37
But that whole sort of part of the market is really our speciality.
1:42
We are the largest cash manager in Australia and our focus really is on using our scale and footprint and the relationship we that we have particularly with financial organisations in Australia to generate better returns for cash than for our clients and what they'd otherwise be able to get themselves.
2:02 – Olivia Grace-Curran
And when it comes to managing cash portfolios specifically, what's the edge and what are you doing differently versus a more passive or benchmark aware approach?
2:14 – Ben Samuel
So a passive approach in cash would be something like cash in a bank account or the main index.
2:21
The Osborne Bank Bill Index is effectively a collection of short dated securities issued by the four major banks in Australia.
2:29
And so a passive approach is just having a collection of those rolling that most other managers, if they're looking to get returns, they get that in one of two ways.
2:39
One is by taking a little bit more credit risk.
2:41
So rather than buying a major bank security, they might buy a regional Australian bank or a foreign bank or something like that or even a corporate and they might get a little bit of extra return, maybe 20 basis points, 30 basis points if they're lucky for doing so.
2:54
The other way they do that is by reducing liquidity.
2:58
So that could be alongside in like investing in those other sorts of securities I mentioned they also are a little less liquid, but also things like turn deposits, etcetera.
3:06
Institutional investors can hold those.
3:08
And so giving up a bit of credit, giving up a little bit of liquidity and eking out a little bit of performance that way.
3:12
That's common.
3:13
We are a little bit unique given our scale and our footprint where we focus on a narrow set of deep and more meaningful relationships.
3:26
In cash in particular, scale is an advantage in in other asset classes that's often not the case.
3:32
So say small cap equities for example, if a manager gets to a certain size, it can become difficult for them to implement their strategy to have the right level of liquidity to manage that strategy appropriately.
3:44
So you know they might get to a certain size and then start raising fees so that they can sort of cut the amount of funds that they're managing to deal with that problem in cash.
3:54
That's not really an issue that the market is so deep and so liquid that sort of getting larger doesn't really impair us on the liquidity side, but what it does give us is pricing power.
4:03
So rather than focus on the strategies I mentioned before in terms of lower rated institutions or less liquid paper etcetera, we still focus on major banks mostly in Australia and the majority of our cash funds are primarily invested in major bank securities.
4:21
And effectively we use our scale to achieve better rates and margins on the same types of products that everyday investors or our competitors might invest in.
4:31
So still sort of bank deposits or turn deposits or short dated paper etcetera.
4:36
But because we bring scale stability of funding and these are funding relationships we've had for decades in many examples, that's something that often these issuers are willing to pay a premium for.
4:50
And so that's what we focus on in terms of generating returns.
4:54 – Olivia Grace-Curran
And so let's now zoom out to the macro picture.
The Reserve Bank is walking a pretty fine line right now balancing inflation that's still above target against signs of slowing growth.
How do you see that trade off playing out?
5:09 – Ben Samuel
There are definitely in a bit of a pickle and if we take a step back, obviously the war at the moment is very topical and it's having a big influence on this discussion.
5:19
But even pre-war, the RBA was in a situation where inflation's too high, growth is too strong, unemployment's too low, and monetary policy was too easy or not tight enough.
5:33
I think they had a cash rate where they're asking questions themselves of whether or not the cash rate's restrictive or neutral at all.
5:40
They're not quite sure where it is, but certainly they already knew ahead of the war they need to start tightening policy.
5:45
And so we'd already seen them begin that process before the war, and they've continued that.
5:49
The market's currently pricing sort of two to three more hikes ahead.
5:54
The war does complicate things and it complicates it on both sides of the mandate for them.
5:59
I think obviously on the inflation side, that's pretty clear.
6:02
It's going to increase inflationary pressure.
6:05
There's the obvious impact on petrol prices.
6:07
But then I think the problem for us now, because we're sort of five years into an inflationary cycle at this point.
6:13
I think early COVID when we started seeing inflation, companies weren't used to raising prices.
6:19
And so there was a little bit of a behaviour sort of shift that's happened over time where you know, that the pass through of prices through the economy might have been a little bit slower just given we'd we'd gone, we'd come from an environment which is low inflation.
6:31
All of a sudden we've had this shock in COVID and it for that behavioural aspect of price setting to change, it takes a little bit of time.
6:37
We don't have that now.
6:38
I think companies are well practised in raising prices and I think we'll see fairly broad increases in pricing.
6:47
We've got CPI print due as we speak.
6:51
That's something that the RBA will be looking at, at their coming meetings.
6:55
But certainly on the inflation side, the war is going to complicate the picture and add pressure for quite some time, even if it's resolved quickly.
7:03
But then also on the growth side, and this is something that the RBA will also look at, well, it does add risks.
7:09
I think people will be more cautious and concerned about elevated oil prices, obviously about increasing rates as well.
7:17
And so that's something that they need to weigh up.
7:20
Either way though, on balance, I think we're looking at a period ahead where rates will need to be high.
7:26
They will likely to be high for quite some time.
7:28
And I think they'll also be an element of once bitten, twice shy for the RBA where they ease policy too soon, a year or so ago.
7:38
And I think they will take their time in the next cycle when, when they're able to reduce rates, they won't be as quick to rush to that decision.
7:50 – Ky Van Tang
And I think just internally, like we've been talking a lot about, you know, is the current market pricing in enough hikes.
7:59
You know, at the moment they've got 2 priced in for the remainder of this year.
8:04
Now we've come all the way from, you know, fourth quarter of 2025 where they were still looking at carts and the markets completely flipped, you know, in the last six months to, you know, we've already had two rate hikes and they're looking out for two more.
8:18
And certainly that is the debate as what Ben has articulated that growth side, how much of it's going to be impacted.
8:28
And we'll really only get, you know finer details as we sort of see this quarter out and we get more data points from you know the ABS on the demand side, but also from company reporting.
8:39
As we see, you know, quarterly updates, as we see half yearly results, and especially with the banks coming out next week with their half yearly results, I think there'll be a lot of people keeping a keen eye on that.
8:51
Where the evolution of the consumer is, you know, has lending also slowed down?
8:56
We've already seen two of the big banks signal, you know, high provisioning's, which suggests that they're a bit more cautious about the outlook for the consumer.
9:07
So, yeah, I think it'll be a lot of data watching between, you know, now and the rest of the years to see what the balance is between the inflation, the demand and how those two are playing out.
9:18 – Olivia Grace-Curran
And in an environment where rates are higher for longer, what would investors tend to tend to do in response?
9:30 – Ky Van Tang & Ben Samuel
Well, that's why we're making the argument for cash.
9:33
I mean, like very much is your introduction, you know, cash for almost 2 decades was not seen as a viable asset allocation decision because it was just, you know, central banks were intervening and they kept interest rates so low that people were thinking, what am I doing?
9:49
Why am I putting in a bank that earns me next to zero interest?
9:52
Whereas now, you know, with cash rates where they are average deposit rates before promotional is, you know, already in the sort of high threes to 4%.
10:03
And then you look at some of these cash products, you know, well, yeah, the yield on the fund is just under 5% at the moment.
10:09
That's right.
10:09
It's a pretty good starting point if you're looking at an overall portfolio, equities, bonds, property, infrastructure, whatever you might have in in the portfolio.
10:16
If your starting point for your least risky investment is close to 5% yield, that's a pretty good starting point.
10:21
Yeah, absolutely.
10:22
And you know, and even when you inflation adjust that you're still in a positive real yield, you know, environment where else we weren't there for a very, very long time.
10:32
And then, you know, there is the whole capital preservation side of the argument as well, which we've seen so many things swing around recently between the equity market gyrations, but even the bond market gyrations.
10:47
I think investors, you know, you have a yield in the mid-single digits and you've got capital preservation.
10:52
I don't think that's a bad argument for putting money into cash.
10:55 – Olivia Grace-Curran
Before we do a deeper dive into cash, let's touch on banks.
So, this is clearly a key area of focus for you.
We're seeing headlines around AI driven layoffs, questions around loan quality and concerns about what higher rates might mean for borrowers.
So, what are you watching most closely right now?
11:17 – Ky Van Tang
Very timely because there's a lot of headlines around AI about what that means for, I guess just general employment over the long term.
11:28
And we've seen a lot of the banks sort of mention that there could be changes to their workforce, mainly reductions to their workforce as a result of AII.
11:39
Think what resonates the most with me is maybe something that the head of CBA had said that in the near term or at least in the near to medium term, he sees AI as changing the way people work as opposed to fully replacing them.
11:53
I do think that is the greater trend now.
11:57
There will be areas and we've seen that already in other parts of the market with programming and whatnot where AI is able to replace a person as it were.
12:07
But I think, you know, broader speaking, I think that narrative of AI adjusts.
12:14
We, we, it just adjusts the way that we do work is the one that resonates with me the most.
12:20
And I think it should be able to help, you know, large financial institutions in fighting stuff like, you know, scams and whatnot.
12:31
I know that's been a hot topic in the financial press.
12:34
And I do believe that all the banks are working in coordination with each other to monitor these red flags.
12:41
Now, we're not told.
12:42
I guess we'll, we'll find out soon enough in the reporting season of how they are with that.
12:47
But they have spent billions over the last couple of years to to cover off scams, you know, anti money laundering and whatnot.
12:53
They have actually thrown a lot of money into ensuring that the processes and the systems are there to catch, I guess the bad guys.
13:03
Now, invariably the bad guys are also moving at the times and they're also using, you know, new and more sophisticated tools to try to get around the safety measures.
13:14
But overall, I think the the financial market is aware and working really hard to try to, you know, get on top of any potential, you know, fraud, as it were.
13:25 – Olivia Grace-Curran
Do you think that fraud, scams that that's a systemic risk or more isolated?
13:33 – Ky Van Tang
Look at this stage, it seems to be, you know, a very specific case and the banks themselves are self reporting.
13:43
So they did capture these odd instances and they immediately, you know, got, you know, I guess authorities and and they themselves were reviewing all their books.
13:54
So I would say at the moment it is more isolated.
13:58
Now, will this review uncover a more systematic pattern?
14:04
I guess we'll wait and see.
14:05
But I do believe it is still isolated for now.
14:09
And so, you know, while I did mention before that the provisioning has gone up or has signalled to be going up for the industry, I think that's more a reflection of the macro environment as we were talking about, you know, high interest rates, people might struggle to to repay, you know their mortgages and whatnot, but also slowing industry as it were.
14:31
So I think that's more a reflection of broader macro downside scenarios that the banks have modelled as opposed to anything to do with specifically fraud.
14:41
So bank, you know, the quality of their book has been really good for a very long, long time.
14:48
And we are sort of you you're saying the, the quality measures sort of weaken in the last two years, but we're moving from sort of COVID lows to longer term, you know, averages in terms of, you know, loan quality.
15:05
So I'm not worried yet.
15:09
And do you think markets are too complacent when it comes to bank earnings and balance sheet risks?
15:16
It's certainly when you look, oh, well, I'm, I don't want to talk out of line because I'm not an equity person.
15:21
But you look at the valuations for our banks and you do think, well, you know, that's a very expensive banking sector.
15:28
So if you're sort of saying, well, have they priced in for all the risks?
15:33
I I think the general market has not priced in for the risk that we feel are out there for the, you know, and this is broad equity market.
15:42
So I guess yes, you know, in terms of asset pricing, maybe we feel that the asset pricing is a little bit complacent at this point.
15:51 – Olivia Grace-Curran
OK, so let's shift back to the core theme cash.
That's what we're all here to talk about.
So for a long time, it was seen as a drag on performance, but that narrative feels like it's shifting.
So why exactly does cash make sense in portfolios right now?
Is this a short-term tactical allocation or are we seeing a more structural shift in how investors think about cash?
16:15 – Ben Samuel
I suppose there's two things here like why now like the big thing and kind of touched on this earlier is interest rates are higher, right?
16:23
So obviously if you're in the middle of COVID and the cash rate's close to 0 and you're earning next to nothing on a, on a cash holding, you don't want to really be anywhere near it.
16:31
And it's a tough game to to be trying to sell cash funds to people in that environment.
16:36
Obviously now with the yield on on our flagship fund up near 5%, that's a much, much better starting point.
16:42
And so that's certainly very helpful for us.
16:46
But at the same time, we don't like, we're not really in the business of telling people you should sell stocks and buy cash or get out of this and get in, you know, get into cash.
16:55
People always have cash for different reasons.
16:57
And you know, if you're a retiree, you might have a bit more of it because you're interested in capital security and income.
17:04
If you're someone my age, you probably don't want much of it because you're, you know, probably borrowing money or you want equities or whatever else, right?
17:11
So, but there's all always sort of background level of cash that people are holding.
17:16
Really for us, we just want to be there as the, the best option for people to help them get the most out of the cash.
17:22
So if they've got it, great.
17:24
If they don't, that's fine.
17:25
But the ones that do, we're gonna help them make it work as hard as possible for them.
17:30 – Olivia Grace-Curran
And if I'm an advisor or investor looking to increase my cash exposure, what are the main ways to do that?
17:38 – Ben Samuel
There's a couple comparisons we typically come up against.
17:42
One is sort of typical banking product and then the other would be competitor funds, I suppose, but really big ones, often online savers or turn deposits versus a cash fund or a manager like us.
17:52
And so these are a regular comparison that people make.
17:56
They and each of these products have their place, different pros and cons.
17:59
But really the, the big difference difference maker for a cash fund is liquidity.
18:04
So if you're putting cash to work in a term deposit, you can generate a bit of an income uplift versus what what you might be getting just leaving it sitting in an everyday bank account for example.
18:17
But you're also tying that money up for a period of time, whether it's 6-12 months or whatever the term of the term deposit happens to be.
18:22
And if things change and you need your money, it's you might not be able to get it or you have to give a notice.
18:28
There'll be interest penalties, etcetera.
18:30
And so there's not really given true liquidity.
18:33
It is giving income, it is giving capital security, but it's not really delivering on the liquidity front.
18:39
A cash fund, that's where it really stands out.
18:42
It still delivers on income.
18:44
It's still very conservatively invested, but it offers liquidity.
18:48
And so depending on the fund for us, that might be same day through the T2 if it's a listed vehicle, for example.
18:54
But this is something where you can still get that income.
18:56
But if plans change, you need your money, you bought a house, something happened, whatever, the money's available when you need it.
19:03 – Olivia Grace-Curran
And thinking about some of the other trade offs, can you touch on yield and risk?
19:09 – Ben Samuel
The analysis that we've done and we've published some papers in in this respect that looks on return over the time and the RBA publishes data on term deposit data.
19:17
So they will look at say for example, the four major banks, I think Macquarie's in there as well advertised sort of TD rates and they published this as a pretty long data series.
19:24
And we've got funds that have been around for decades.
19:26
And so we've got a pretty good starting point in terms of performance analysis.
19:31
And So what we generally find is that our funds perform better than a turn deposit strategy.
19:38
I would caveat that how to be fair, these are major bank turn deposits and our funds are mostly invested with major banks.
19:45
But people usually, I suppose if they've got turn deposits, they're not going to the majors.
19:48
They might be shopping around and going to different, you know, places.
19:51
And so we don't harp on too much, but what we generally say is they both deliver income, but really the difference is about liquidity.
19:58
And the fund is providing you liquidity on demand whenever you need it for a great level of income.
20:04
T DS still providing income, but you're just not getting that liquidity.
20:08 – Olivia Grace-Curran
And I understand there's an ETF coming.
So what can you tell me about that?S
20:13 – Ben Samuel
Yeah, we're very excited to be able to be bringing a listed version of our fund to market.
20:19
Flagship cash fund has been around for almost 30 years and.
20:23
One form or another throughout our history, but we've typically offered that in an unlisted format only by the wealth platforms here in Australia.
20:33
And so it really for us this is just another channel where we've noticed there's a big part of the investor community that just likes to access these types of products by the listed market.
20:43
And for us it's really just another channel.
20:44
It's the same fund.
20:45
It's a, it's a share class of our existing first any active cash fund that we're listing.
20:51
So it's the same investment strategy, the same history, the same philosophy, etcetera, but we're just making it available on the exchange.
21:00 – Olivia Grace-Curran
And zooming out, what do you think the biggest risk is to markets that they're under-pricing right now?
21:08 – Ky Van Tang
Gosh, that's a nice broad question.
21:12
I still think the uncertainty that the current situation in the Middle East, I do feel like the market has almost largely ignored that.
21:22
We did have a bit of a reaction when it all kicked off.
21:26
But you know, you look at markets around the world, equity markets and, and even you know, in credit markets issuance still is coming and being, you know, invested in equity markets back to close to all time highs.
21:43
So I do feel like they've discounted that situation even though as we were talking about it before could have long run impact on overall demand, you know, the inflation environment and whatnot.
21:57
So that's still in the number one in my case.
21:59
And then maybe more local, we do have the, you know, potential changes in government policy that has been flagged to the market, but I feel like there may be testing the waters on some of those policy changes, but I think those those could also impact the market.
22:19 – Ben Samuel
Maybe just to add to that, obviously the war is a big obvious one, which equity markets aren't really pricing all that much at the moment.
22:27
But I think also maybe a longer-term theme.
22:31
I people might be underestimating exactly how high interest rates may need to go to get inflation back to a controlled level.
22:38
And I think like if you think about just the structure of the economy and who has debt and who doesn't and who benefits from higher interest rates and, and who's driving spending, I think there are large sections of the economy which aren't all that impacted.
22:51
Obviously the the government sector can spend away for some time yet before that becomes a binding constraint.
22:58
It doesn't really impact them that if you're a retiree with no debt and a bit of wealth, it's probably beneficial for you.
23:03
That is probably even driving spending for that sector.
23:06
And so it's really a small cohort of the economy that has a mortgage and maybe even has a large mortgage because there's also people that might have, if you, you know, borrowed your house 10 years ago, it's the mortgage is probably quite manageable.
23:19
If you took one out in the last five years, it's a different story.
23:22
And so it's a pretty small slither of the economy where the RBA is jacking up rates in the hope that that group will reduce their spending enough to get inflation back to the right level.
23:35
In the meantime, there's a lot of government spending happening and there's other cohorts that are where their spending is supported.
23:40
So, you know, I think we've already been surprised.
23:43
I suppose if we think about where we thought interest rates might get to at from zero, it's already probably gone higher than a lot of people thought.
23:51
But I think that's probably still almost the case.
23:53
I think people might be underestimating how high rates have to go and how long they might be at these types of levels moving forward.
24:02 – Olivia Grace-Curran
Well, Ben and Kai Van, we really appreciate your time today.
Thanks so much for joining us on the podcast.
That's all we have time for today on Relative RETURN.
I'm your host, Olivia Grace Curran.
We'll see you next time.
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