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This is no ordinary team.
Cash markets have evolved over the past 3 decades. Interest rates have moved considerably lower and new securities have emerged.
Through time our approach has also evolved – our success lies in continuous innovation.
A steady hand often gets the best results
Why invest with us?
We manage a range of strategies, all of which provide a high level of liquidity and capital preservation. We also have a proven ability to tailor bespoke, segregated mandates according to client requirements.
A proven investment process is employed, which has consistently delivered favourable performance across market cycles.
With more than $50 billion of funds under management, we are Australia’s largest cash manager. Unlike in many other asset classes, size and scale within cash is often a significant advantage.
Credit analysts complete comprehensive analysis of credit risk associated with all securities held, incorporating an assessment ESG risks.
Operating for more than 30 years, First Sentier Investors boasts one of the largest number of dedicated portfolio managers of cash funds in Australia.
Head of Fixed Income, Short Term Investments and Global Credit
The evolution of cash markets
Some might remember the RBA cash interest rates being 18% thirty years ago and the unpredictability of central bank policy around that time. More recently, official cash rates in Australia have been cut to an all-time low of 1%.
This unprecedented level of monetary policy easing has important implications for cash funds. New types of ‘cash’ securities also tend to be issued as regulations change. Managing portfolios effectively through long-term market cycles requires an investment style that’s flexible enough to evolve with the market itself.
Cash never goes out of style
The right exposure to cash within a diversified investment portfolio depends on an investors’ time horizon and their reasons for holding cash within a broader investment mix.
Investors able to forecast their cash flow requirements typically allocate strategically to higher yielding, income-style investment options.
Get more from a cash exposure
Cyclically, the case for cash is dependent on the relative value of other asset classes.
Because the investment profile of cash is unlikely to change significantly over any given 12 month period, the use of cash reflects investors’ short-term risk appetite and expected returns elsewhere.
The value of active management
All of these security types carry some level of investment risk. It isn’t possible to eliminate these risks completely, but they can be mitigated through active duration management, in-depth credit research, portfolio diversification and ongoing monitoring.
Target consistent outperformance
The most important thing to bear in mind is that expected returns adequately compensate investors for the risks. We believe managing this trade-off using a proven investment process flexible enough to respond to structural shifts in the market can help generate consistent outperformance over the short, medium and long term.
Head of Fixed Income, Short Term Investments and Global Credit
Senior Portfolio Manager
Meet Tony Togher
This early bird has been to the gym and digested the overnight market news hours before Australian markets have opened. Tony Togher explains his morning routine and why discipline is important for investors.
Questions you may have about investing in cash
What does it mean to put your money in cash?
An investment in cash delivers returns in the form of interest payments. Over the last two decades, a large number of variant investments have been used in the management of cash portfolios. Most cash portfolios compare or benchmark themselves against the return generated from the RBA Cash Rate, or alternatively the Bloomberg 90 Day Bank Bill index.
Cash portfolios that benchmark their exposures against the RBA Cash Rate tend to maintain higher allocations to overnight deposits with banks, and include other highly liquid investments (which we would define as investments that are convertible to cash on a same day basis).
Cash portfolios that benchmark their exposures against the Bloomberg 90 Day Bank Bill Index (a synthetic index of 13 bank bill securities ranging from 7-91 days to maturity), also hold these types of investments.
Typically they also have some exposure to income style investments (which we define as highly rated and low volatility investments that may take several days to convert into cash, due to their settlement period or maturity profile).
What investments are considered cash?
Investments that can be used in cash portfolios include:
Overnight Deposits - In order to meet their everyday cash flow requirements, banks accept funds on an overnight basis that are repaid the next day. The interest paid is typically equal to the official cash rate, set by the Reserve Bank of Australia.
Term Deposits - Offered by most major banks, term deposits enable investors to park cash for a specified period, typically between one month and a few years. The funds are returned, with interest, at the end of the term – if access to the funds are required earlier, investors are effectively penalised as no interest is payable.
Bank Bills - These are short-term securities issued by banks, where the face value of the note is repaid on a specified date. Maturity dates typically range from seven days to six months.
Negotiable Certificates of Deposit - Negotiable Certificates of Deposit, or NCDs, are guaranteed by banks. They can be bought and sold in secondary markets, but the face value is not repaid until a predetermined maturity date – typically between two weeks and one year. Interest is normally paid semi-annually, or at maturity.
Mortgage & Asset Backed Securities - Instruments that are repaid on a specified future date, or upon demand if the investor wishes to redeem the investment sooner. Income payments are typically derived from a pool of underlying assets such as home loans, car loans and student loans.
Semi Government Securities - Instruments that are repaid on a specified future date, or upon demand if the investor wishes to redeem the investment sooner. These types of securities are often issued by Australian State Governments to finance regional spending plans.
Government Treasuries - Securities issued by the Commonwealth Government of Australia, which pay predetermined levels of income and offer the highest levels of capital security.
Floating Rate Notes - Floating Rate Notes, or FRNs, are debt instruments with variable interest rates that are linked to a benchmark rate, such as BBSW (Bank Bill Swap Rate – the interest rate at which Australian banks lend to one another).
Floating Rate Securities - Like Floating Rate Notes, these issues have variable interest rates. Interest payments reset periodically, based on movements in representative interest rate indices. Investing in Floating Rate Securities eliminates the need to roll over comparable short-term instruments, thereby minimising transaction costs.
What is a cash fund?
Cash funds provide an alternative to term deposit products that are typically offered by major banks. Blending various short-term, money market instruments into low-risk portfolios can deliver steady income with the flexibility of daily liquidity. Unlike most term deposits, investments in cash funds can be withdrawn at any time without surrendering accrued interest. Over the last two decades, a large number of variant investments have been used in the management of cash portfolios. Most Australian cash portfolios compare or benchmark themselves against the return generated from the RBA Cash Rate, or alternatively the Bloomberg 90 Day Bank Bill index.
How can investors use cash in their portfolio?
Different investors have varying exposure to cash, depending on their liquidity requirements, investment goals and risk tolerance. Accordingly, the appropriate exposure to cash within a diversified investment portfolio will depend largely on investors’ time horizon, as well as the purpose for which they hold cash within a broader investment mix. Generally, investors that are able to accurately forecast their cash flow requirements can allocate strategically to higher yielding, income style investment options. If cash flows are unlikely to impact an investment portfolio for the foreseeable future, the question becomes one of relative value for various investment options going forward.
Further, investors’ investment horizon is also critical as it will determine the likelihood of other investment types delivering superior levels of return. For short-term investors with known or unknown cash flows, current yields offer a relatively attractive return profile and a low level of risk relative to the RBA Cash Rate and, arguably, against recent and expected short-term inflation outcomes. Over the longer term, however, and taking into account the Reserve Bank’s inflation target of between 2.0% and 3.0%, interest rates would need to move higher to compensate for a period of higher inflation.
The structural decision to own cash largely depends on an investor’s time horizon and liquidity requirements. For example, superannuation funds with a relatively young member base and which are growing would be unlikely to hold significant cash balances. Other clients with specific near-term projects planned, or other known cash flow requirements would be likely to maintain higher cash levels.
Cyclically, the case for cash – as always – largely depends on one’s views of other asset classes. The investment profile of cash is unlikely to change significantly over the next 12 months, so allocations will primarily reflect expected returns elsewhere. In this sense, the use of cash essentially reflects investors’ short-term risk appetite.
What are the risks of cash investments?
While cash is considered a defensive asset class, all investment carry risk. Various types of ‘cash’ instruments – Overnight and Term Deposits, Bank Bills, Negotiable Certificates of Deposit (NCDs), Government Treasury Notes, Floating Rate Notes and Securities, etc – carry different levels of traditional investment risk. The primary risks are as follows:
- Duration risk – the risk of interest rates changing following the initial investment. The longer the term profile, the larger the potential risk.
- Credit risk – the risk associated with the counterparty with which the investment has been undertaken.
- Liquidity risk – the risk of being unable to sell / redeem or reduce the exposure of the investment, if desired.
- Return risk – the risk that both nominal yields and margins associated with various securities may change over time.
These risks are inherent in all debt instruments, though can be mitigated with diligent and active management. We are able to manage exposures in line with different client risk profiles through active duration management, portfolio diversification and ongoing monitoring.
What are the risks involved in investing in longer dated or lower rated instruments?
Regardless of the investment – in cash products or other asset classes – investors should expect to receive an enhanced return profile when exposing themselves to a longer investment horizon and to counterparties with credit risk (credit ratings reflect an assessment of the counterparty’s capacity to repay the investment over a given period of time).
These risks should not necessarily be considered detrimental – the important thing to bear in mind is that the level of expected return adequately compensates the investor for the risks. In relation to cash portfolios, these risks need to be constantly monitored with allowance made for known – and, potentially unknown – cash flow requirements. This can help ensure that adequate funds are available to meet these requirements and that no penalties are incurred that would detract from the expected return profile.
Our corporate RI strategy is based upon three strategic pillars of quality, stewardship and engagement.
In the Short Term Investments space, the Environmental, Social and Governance (ESG) assessment most often comes through its impact on the internal credit rating (ICR) provided by the Credit Analysts via our Credit Research process.