Savers beware: why income investors need to consider cash enhanced funds

By Matthew Lemke

Income is on everyone’s minds as the media runs riot with talk of negative interest rates and Quantitative Easing. And income investors have been given a clear message from the RBA – cash returns will become worse before they get better.

The RBA’s October rate cut, coupled with its latest statement, suggests income-directed investors need to consider other strategies aside from the traditional cash vehicles for income.

The RBA is unashamedly cutting rates to get unemployment down. This is a new focus for the RBA. It will presumably not stop easing until it sees the unemployment rate closer to the ‘full employment’ rate, which is now defined as an unemployment rate of 4.2% (currently 5.2%). The previous ‘full employment’ rate was 5%.

The RBA’s logic is a lower unemployment rate will stimulate wages growth and get the inflation rate higher. The problem is the rate cuts, three cuts in four months and the possibility of another on Cup Day, look ‘desperate’ and are causing people to fear a recession, which may induce businesses to slow down and become a self-fulfilling prophecy.

The RBA Governor Philip Lowe recently commented that Australia, like the rest of the world, has a ‘savings problem’ – we are saving too much and not spending on investment.  This categorically showed that for the foreseeable future the RBA will not use monetary policy to protect savers, in fact quite the reverse.

Income investors should be alarmed about forecasts suggesting negative interest rates in Australia, and quantitative easing. Income investors should find this absolutely startling, and consider other options for a fair and decent interest rate on their savings.

This is very much a ‘savers beware’ situation for the foreseeable future. The dilemma for savers is how to recover yield but not add unplanned and uncomfortable risk.

There are options aside from term deposits and other cash vehicles to boost income returns.

Income-focussed investors might consider cash enhanced vehicles, which can outperform cash by investing in prime securities on the professional securities market.

Income-focussed investors can outperform the RBA cash rate without dramatically increasing their risk profile. But they need to be aware that not all cash enhanced strategies have the same level of risk.

Prime Value’s suite of income-centred funds provide true income alternatives to simply investing in shares.

The Prime Value Cash Plus Fund has outperformed its peers since 2014 with low risk. The Prime Value Cash Plus Fund has delivered investors a 4.8% net return including franking credits for the year to 31 August 2019, and has delivered a net 4.2% per annum, including franking credits, since June 2014.

Prime Value added to its enhanced cash funds on 1 August 2019 when it launched the Prime Value Diversified High Yield Fund, which aims to deliver 5% annual income returns to investors.