Earlier this month, the Reserve Bank of Australia kept interest rates at 1.50 per cent, a historic low we’ve been stuck with for two full years. Moreover, the market is of the view we have at least another full year, if not longer, at this record low.
Many investors have been left feeling the pinch on their income and the need to search for a better yield while keeping funds allocated to low-risk-profile investments has never been greater.
Break the rolling habit
Australian Prudential Regulation Authority data indicates households are holding close to $900 billion in bank deposits. SMSFs alone account for $157 billion. The data shows that while more than 90 per cent of deposits are with the top 10 institutions, the lion’s share heads to Australia’s big four banks (over 80 per cent).
Many investors may feel they are stuck in a cycle of rolling short-term term deposits (TD) – taking out a three-month TD and rolling it five to six times. Towards the end of each term, when the bank asks them what they want to do, the response is “roll it”. While the intent may be to sort out an alternative next time, the problem is most haven’t. The end result is investors may have missed the opportunity to earn a higher rate that an 18-month investment would have paid and are missing out by getting lower and lower returns with each roll.
But, this cycle of short-term TDs offers a key opportunity. With most of the money in the shortest-term TDs – 60 per cent in zero to three-month TDs – that means up to $540 billion is due to roll in the next 12 weeks. Now’s the time to assess past behaviour and look for new opportunities.
It’s a matter of trust
Higher TD rates can often be achieved by looking outside of the top names, to ones investors are less familiar with. Making the choice to lock up money for longer periods can also provide higher returns. But both of these approaches have key drawbacks – is there the same level of comfort when investing with a less familiar bank? And what if unforeseen circumstances make earlier-than-planned access to funds necessary?
Add to this recent research published by Deloitte and Nielsen suggesting the banking industry as a whole has experienced a significant decline in trust over the past two months. The reports suggest the decline has resulted in more than 2 million Australians currently considering their options.
Gen X and SMSF trustees affected most
Nielsen research shows that across the population, generation X is the most affected. Perhaps their needs for an array of financial products (mortgages, insurance policies and bank accounts) may be behind a feeling of paralysis. With many SMSF trustees being gen Xers, the link between SMSFs and the need to look for alternative options, without creating too many headaches for the customer, is clear to see.
The greater the number of touchpoints with one organisation, the harder it can be to see where changes can be made. The research confirms this – Deloitte found 18-34 year olds are the most likely to make wholesale changes to their banking relationships, with over one-quarter saying they were highly or quite likely to switch banks. For 35-49 year olds the percentage dropped to 20 per cent and it fell again for the over 50s to 11 per cent. This shows gen X, and therefore SMSFs, have a dilemma – Deloitte research suggests they have the greatest concerns, but feel the most tied to their existing banking relationships.
Invest with brands you trust and make your money work harder
Much overlooked corporate bonds could be the simple solution that:
1. offers a choice of issuers outside of just the banks,
2. keeps your money in a lower-risk asset class, and
3. improves the return on your portfolio.
Corporate bonds provide predictable returns for investors and have a similar pay-off profile as TDs – return of capital and set income payments along the way.
They don’t have the government guarantee of TDs as bond investors are effectively loaning money to top Australian Securities Exchange (ASX)-listed companies rather than a bank. But, in exchange for the additional risk, the yield achieved is generally higher – up to 40 per cent higher.
Access, flexibility and choice at your fingertips
Accessing corporate bond returns has never been easier. With a range of almost 50 individual corporate bond XTBs on the ASX, investors can pick and choose from more than 25 ASX 100 brands – names they know and trust. Add to this a growing range of bond exchange-traded funds (ETF), and investors really have a broad range of solutions to choose from. Both XTBs and ETFs also come with the added benefit of being traded on the ASX. Investors can say goodbye to the drawbacks of minimum investments and break fees. They can buy and sell XTBs just as they do shares, benefiting from the ASX T+2 arrangements, giving investors quicker access to their money should they need it.
Corporate bonds could make your money work harder and put you back in control. So when your next TD matures, you have the perfect opportunity to move your investment to a brand you trust and get a better yield. It could be a win-win situation.
Richard Murphy is chief executive of XTB.