Cash holdings a drag on investment performance

In today’s environment of low interest rates, investors need to constantly reassess the risk and return profiles of their portfolios in the hunt for increasingly elusive yield. 

Liquid holdings in particular are proving a challenge. Although they are an essential part of any portfolio, cash-style investments are currently creating a real drag on investment performance. With interest rates on savings and term deposits below 2 per cent, they are yielding little or nothing after inflation. 

However for investors that are prepared to increase their risk profile, they can still find cash-style investment options delivering returns significantly above inflation, says Henry Elgood, portfolio manager of Trilogy Enhanced Cash. 

Attracting investor attention

This Fund is currently attracting a lot of investor attention for its ability to achieve a distribution rate (3.96% as at 30 November 2019) while remaining liquid. It charges no entry or exit fees, and since inception has met all redemption requests within 7 days. 

“We see the Trilogy Enhanced Cash as an alternative to your short-term fixed-income investments,’’ says Elgood.  

“It doesn’t offer the liquidity and guaranteed security of a savings account or a term deposit with an ADI (a government-backed authorised deposit-taking institution, such as one of the big four banks) and it isn’t designed to. But what it does for that degree of added risk is offer a relatively strong return for the redemption profile it has, aiming to pay redemptions in seven days.” 

“This appeals particularly to people such as retirees needing to rely on an income but without having the capital value volatility that you can encounter in other asset classes. 

“Four or five years ago they may have been able to earn similar performance from a term deposit. But today, few if any, provide competitive returns. So our particular combination of liquidity and yield has a good place in a well-balanced portfolio with a diverse mix of investments across a number of asset classes.’’  

Portfolio diversity

Trilogy Enhanced Cash also provides investors with portfolio diversity by investing a portion (currently around 30%) of its holdings in the Trilogy Monthly Income Trust, a pooled mortgage trust holding first mortgages over a wide range of Australian residential, commercial, retail and industrial property. 

Investors looking to move further up the risk-return curve and that are prepared to accept less liquidity can invest directly in the Monthly Income Trust, which had a net rate of return of 7.12% p.a. for November 2019. After a two-month investment window, withdrawals are subject to a four-month notification period. However, subject to liquidity, withdrawals may be paid earlier. 

However, by keeping the majority of its holdings in cash and cash-like investments, Trilogy Enhanced Cash provides a unique balance of capital stability, above-inflation returns and greater liquidity.  

Remaining vigilant

In addition to overseeing the Trilogy Enhanced Cash portfolio, Henry is also Head of Governance and Risk, and reiterates the importance of remaining vigilant against any sudden moves in underlying cash rates or inflation. 

“Investors could also choose to invest in your true credit funds, where you have exposure to collateralised loan obligations and listed hybrids, for example. But we don’t have any hybrids or CLOs in either the Trilogy Enhanced Cash portfolio or the Trilogy Monthly Income Trust,’’ he says.  

“Our primary focus at the moment is on floating-rate notes that offer the ability to protect us from any upward shocks in the reference rate due to any spike in inflation.  

“Of course inflation is still relatively benign, but should something happen or should there be a point where the underlying bank bill rate does start rising then we are protected on that capital value of underlying bonds to some degree with the floating rate exposure rather than a fixed rate. With fixed-rate securities, sudden depreciate in value.’’ 

Learn more about Trilogy Enhanced Cash or read further on the value of a diversified investment portfolio and how a split tactics strategy could help you maximise cash investment returns in this low rate environment.  

*Past performance is not a reliable indicator of future performance. This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity for the managed investment schemes mentioned in this article. Trilogy has issued a Product Disclosure Statement (PDS) for each of the managed investment schemes mentioned within this article. The PDSs are available at www.trilogyfunds.com.au or by contacting us. You should obtain a copy of the relevant PDS, understand the risks, and seek personal advice from a licensed Financial Adviser before investing. Investment in the Trust is subject to terms and conditions, and risks which are disclosed in the PDS. These risks include the risk of losing income or principal invested. Applications will only be accepted on the current application form that accompanies the PDS. These managed investment schemes are not bank deposits and Trilogy does not guarantee their performance. 

The information on this website contains general information and does not take into account your personal objectives, financial situation or needs. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice.