Business. Insights. When cash is king. Investec Editorials

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1 Business Insights Investec Editorials When cash is king

2 Shelter from the storm Where do investors turn in times of uncertainty? What investment options can provide shelter from the ongoing volatility? These are the crucial questions facing fund managers and self directed investors. Preserving Australians retirement savings lies in their hands and finding optimal investment strategies is proving to be a real challenge in the current environment. Australian Bureau Statistics (ABS) data on household wealth certainly highlights the flight towards cash over the last couple of years has been considerable and based on recent market volatility shows no signs of abating. New data from the ABS shows the proportion of cash deposits held in superannuation funds has more than doubled in the past decade to 15 per cent. Of a total superannuation pool of $1.13 trillion, cash is now a record $172 billion. Similarly recent Australian Prudential Regulation Authority (APRA) figures reveal household deposits have ballooned by more that $150 billion in the three year period to April 2011, this figure is now in excess of $497 billion. This edition of Investec Editorials examines how Investec Bank s innovative approach to the safe haven investments of cash and gold or bullion is delivering optimal results for private clients and investors as they continue to navigate their way through continuing volatile markets. We hope you enjoy Investec Editorials and welcome any feedback, which you can to investec.editorials@investec.com.au 2 Investec Editorials

3 In this issue Cashing in on consistency Attitudes towards cash have changed significantly in the past two years. Cash is no longer seen as a short-term investment, but as one that can make an important contribution to an active portfolio. Gaining currency While currency funds are no substitute for cash in the bank, they can diversify a portfolio and preserve global purchasing power. Foreign currency deposit accounts are emerging as demand for investment in other currencies grows. The strength in the Aussie dollar has projected this asset class into the spotlight. Going for gold Uncertainty surrounding the European and US economies has driven interest in gold and silver. Gold trading has traditionally been the domain of the wholesale market. Until the emergence of Exchange Traded Funds, gold was not really an asset class embraced by professional and retail investors. 3

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5 TURN PAGE Attitudes towards cash have changed significantly in the past two years. According to Investec Bank s head of retail Financial Markets Ivan Katz, cash is no longer seen as a short-term investment, but as one that can make an important contribution to an active portfolio. Cash is once again a credible asset class, with its own investment characteristics and attributes, Mr Katz says. The decision to use cash in a portfolio is now being viewed as an active investment decision, rather than a passive one. Competition for retail deposits and relatively higher interest rates have made cash offerings an attractive proposition for a growing segment of the investor market Investec Bank is responding to this demand with a range of innovative high-yield savings accounts, including its recently launched 32-day notice account. Mr Katz says the hybrid account combines elements of call and term accounts. The innovative nature of this account has made it very popular with our clients. It offers the flexibility of a savings account, which appeals to investors who don t want to lock into a term deposit. The account pays an interest rate that competes with term deposits, but there is no maturity date depositors just need to give 32 days notice when they want to withdraw funds. The rate is variable, but Investec keeps it at least 100 basis points above the Reserve Bank of Australia cash rate. Investec Bank has also seen a considerable increase in the number of self-managed super fund (SMSFs) trustees looking to use cash more effectively to maximise overall returns. The growth in numbers of self-managed super funds has resulted from people seeking the freedom to manage their own investment performance. Cash holdings within SMSFs have increased considerably over the last 10 years and today constitute a sizeable portion. In March 2011, SMSFs held 26.4 per cent of all fund assets, or about $114 billion, in cash and term deposits, according to SuperGuide.com.au. The 32-day notice account gives clients, especially SMSF s, flexibility with their cash holdings while still achieving an attractive market related return, Mr Katz says. It means clients are comfortable, that they will always have access to cash if they need it and can take advantage of rate changes to ensure they are getting the best return. Although it is three years since the start of the global financial crisis, the anxiety lingers. So as long as share markets are unpredictable and cash can deliver better yields and capital security, cash investments will remain in favour with Australian investors. 5

6 While currency funds are no substitute for cash in the bank, they can diversify your portfolio and preserve global purchasing power. With the recent strength of the Australian dollar, there has been increased demand from Investec clients for cash deposits denominated in foreign currencies. 6 Investec Editorials

7 Gaining currency Utilising its local capabilities and global presence, Investec Bank is now able to deliver an attractive multifaceted foreign currency service. These foreign currency deposit accounts, based in US dollars, British pounds, Euros and Japanese yen, pay attractive rates of interest. The service includes a real-time foreign exchange trading capacity for private clients. Investec has received feedback from clients and advisers that the foreign currency account is appropriate when one wants gets exposure to a particular currency movement. Changing a portion of Australian dollars into foreign currency and holding currency in a term deposit, allows investors to benefit from potential favourable movements in the exchange rates, while earning interest rates applicable to that currency. Investec s foreign currency deposit account enables investors to keep their savings in Sterling for example and convert to Australian dollars at a time of their choosing rather than having to convert when the AUD GBP currency pair is trading at historic highs. he said. The increased demand for foreign currency deposits and widespread interest in foreign exchange services has led Investec Bank to develop an internal system that enables frontline bankers to deliver a real-time trading capability to private clients. It is a single account interface that essentially allows investors to execute foreign exchange trades over the phone at any time. Like moving money between savings accounts, investors can switch their savings into different currencies in response to any market event. There is no doubt the recent strength of the Australian dollar has focused attention on this asset class. Australian investors have traditionally been very Australian dollar-centric. Foreign currency deposit accounts have been rare, as there has never been much demand for investment in other currencies. The strength in the Aussie dollar has projected this asset class into the spotlight. Murray Payne from Financial Pathfinders agrees foreign currency deposit accounts offer solutions to investors transferring money to Australia from offshore. Financial Pathfinders deals with migrant and expatriate clients looking to transfer their assets to Australia, Mr Payne said....enables investors to keep their savings in Sterling for example and convert to Australian dollars at a time of their choosing rather than having to convert when the AUD GBP currency pair is trading at historic highs. 7

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9 Going for gold Given the high demand for precious metals, Investec Bank has introduced a private client offering previously available only to wholesale clients taking deposits in silver and gold. According to Investec Bank IFA Specialist Gareth Bird, interest in gold and silver has increased significantly, driven by the uncertainty surrounding the European and US economies. Gold trading is still very much the domain of the wholesale market. Before Exchange Traded Funds, gold was not really an asset class embraced by professional and retail investors, Mr Bird says. Investec s foreign currency and commodities account gives investors another way of accessing this investment option. It provides a way of gaining exposure to global markets as part of an overall investment strategy. Jeff Duncan-Nagy adds investors should be aware that the natural currency of Bullion is US Dollars and while the US dollar value of gold or silver may rise this may not be the case if the metal is purchased in another currency. For instance if an investor has an Australian Dollar denominated investment portfolio and gold is purchased in Australian dollars then the final return outcome to the investor will be a function of the gold price and the Australian dollar. As the focus remains on preserving capital over the next few years, gold and silver will continue to play a central role as an investment safe haven. If the macroeconomic environment remains volatile and demand from retail investors continues to open up, then a new wave of gold and silver investors may drive the price higher. Gold recently hit historic highs due to fears of a sovereign debt default in Greece. While some market commentary suggests the rapid run up in gold price indicated a bubble, others see its retreat as an investment opportunity. Investec Bank Australia s Head of Fixed Income, Currencies and Commodities Jeff Duncan-Nagy says there is no doubt that An increase in investor demand over recent months has been a significant factor behind the rising gold price. Unfortunately though, the ease in which gold can be converted back to cash has contributed to the recent fall in the price of the precious metal as some investors have had to liquidate a proportion of their gold holdings in order to raise cash for margin calls resulting from the recent falls in global equity markets. Looking ahead, precious metals will continue to play a key role in portfolio diversification as the world comes to terms with the fact that sovereign debt from major developed economies is no longer risk free. Looking ahead, precious metals will continue to play a key role in portfolio diversification as the world comes to terms with the fact that sovereign debt from major developed economies is no longer risk free. 9

10 About Investec Bank (Australia) Limited Investec Bank (Australia) Limited is a wholly owned subsidiary of the Investec Group, an international specialist bank and asset manager listed on the London and Johannesburg stock exchanges, with assets worth more than 51 billion and a market capitalisation of 3.9 billion (both figures as at March 31, 2011). Investec entered the Australian market in 1997 and delivers unique products and services in private banking, investment banking, capital markets, property activities and funds and asset management to high net worth clients, corporations and institutional investors. Investec Australia has offices in Sydney, Melbourne, Brisbane, Adelaide and Perth. For further information on Investec, please visit 10 Investec Editorials

11 Gareth Bird, Financial Markets IFA banking specialist Ivan Katz, Financial Markets, head of retail Gareth Bird is a senior banker who heads up the IFA distribution channel for Investec Bank in Australia. Investec Bank has adopted a partnering approach in developing strong working relationships with a number of IFA firms and dealer groups. Gareth has been with the Investec group since 1998, working in all three principal geographies, South Africa, United Kingdom and Australia. He has worked with financial advisers in various capacities for the past 10 years. Ivan Katz has been with Investec Bank for over 10 years focusing on the Private Client Treasury and Investment business. Ivan has been involved in raising treasury funding for Investec Bank in Australia through various retail distribution channels as well as providing clients with access to direct investment opportunities through Investec s specialised capabilities in property, lending, treasury, investment distribution and financial advice. Before joining Investec in January 2001, Ivan was an Associate Director Private Banking of the Australian and New Zealand Banking Group (ANZ) for 4 years. Prior to immigrating to Australia in 1996, Ivan was with the Investec Banking Group in (Johannesburg) South Africa for 8 years in various roles within their Private Bank business. We hope you enjoy Investec Editorials and welcome any feedback, which you can to investec.editorials@investec.com.au Disclaimer The information contained in this document ( Information ) is general in nature and has been provided in good faith, without taking into account your personal circumstances. Whilst all reasonable care has been taken to ensure that the Information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions. Opinions expressed in this document are those of the relevant authors and do not necessarily reflect those of Investec Bank. 11

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