Despite of a drop in Australian super funds’ ‘underinvestment’ in bonds, super funds still invest far more in deposits and less in bonds than their counterparts abroad, according to Spectrum Asset Management.
However, the firm said, the reasons behind the Australian preference for deposits had begun to evaporate and now it would make more sense for a more balanced allocation between the two types of investments.
According to Spectrum’s study, Australians traditionally tended to invest more in equities, in particular local equities, which was favourable from a tax perspective. At the same time, they also preferred deposits over bonds, which were often used as part of their overall fixed income or bond allocation.
Spectrum’s principal, Damien Wood, said that this could be explained by the fact that post the Global Financial Crisis (GFC) term deposit interest rates were comparable to corporate bond yields and additionally came with the safety of a government guarantee.
However, he stressed, that now the landscape for deposits had much changed.
“Post GFC, the banks were willing to pay up for deposits to shore up the perceived stability of their funding bases,” he said.
“Now the banks have exceeded regulatory liquidity benchmarks, the pressure for them to raise more deposits has eased.”
Also, under the new regulations, the banks would treat term depositors less favourably.
“Previously, one could make a term deposit, enjoy the benefits of higher rates than savings deposits and break the deposit before maturity without penalty,” Wood said.
“Now, the depositor needs to give the bank 31 days’ notice to break a deposit. And then the bank is discouraged from paying the interest earned until the break date.”
Wood also stressed that although savings accounts could give access to money at call, the offered interest rates on them were nearing zero per cent and if investors wanted to be able to access funds at will and earn a reasonable return, a corporate bond fund or corporate bonds may be the answer.
“Like savings accounts or cash management trusts, corporate bond funds can provide readily available access to funds,” Wood said.
“To get deposit returns near typical corporate bond yields, an investor needs to give up liquidity and tie up the funds for a longer period.