Cash has unexpectedly become one of the most sought after and admired asset classes amid the global financial crisis.
Financial institutions and businesses began hoarding it to preserve balance sheet strength. Households started saving as much of it as possible amid high debt levels and uncertainty around employment. Some financial planners and fund managers, until lately, ploughed more into cash than ever before as equities crashed.
While the value of financial assets worldwide sunk by $66 trillion last year, according to the Asian Development Bank, cash became king and a booming sub-industry within financial services.
For Australian lenders, the crisis meant all out war for customer deposits as the cost of funding soared on news of massive overseas bailouts of institutions, including Royal Bank of Scotland, Hypo Real Estate and Citi.
The failure of Washington Mutual and Lehman Brothers also added to the chaos and forced wholesale-funding-reliant banks, such as Halifax Bank of Scotland, to merge with a stronger rival to survive.
Local banks could not afford to get into such a situation, so heavily promoted cash products with interest rates well above those set by the Reserve Bank of Australia (RBA).
The competition for deposits intensified when financial markets began collapsing in September last year as the United States government took over Fannie Mae and Freddie Mac, Merrill Lynch was bought by Bank of America and Lehman Brothers filed for Chapter 11 bankruptcy protection.
September's events spread shock and paranoia across the world and Australians suddenly became concerned about the strength of local banks.
By mid-October those worries reached fever pitch, forcing Prime Minister Kevin Rudd to step in and put the weight of the federal government behind the Australian banking system.
At the outcome of a crisis meeting on 11 and 12 October, Rudd said the government would guarantee all deposits at authorised deposit taking institutions (ADI) for the next three years and all term wholesale funding.
The initiative caused an explosion of inflows into savings accounts, term deposits and other cash products at banks, but forced many mortgage funds to suspend applications and redemptions.
As at 31 March, 2009: ANZ held nearly $172 billion in total deposits, Commonwealth Bank of Australia (CBA) $265.9 billion, National Australia Bank (NAB) $187.1 billion and Westpac Bank $201.4 billion, Australian Prudential Regulatory Authority (APRA) data showed.
In the same time last year ANZ held $149.23 billion, CBA $199 billion, NAB $161.63 billion and Westpac $165.62 billion.
Many platforms also benefited from the flight to safety.
CBA-owned Avanteos was the first major platform provider to introduce term deposits in 2007, Avanteos chief executive Chris Stevens says.
Avanteos introduced a range of cash investment products in direct response to adviser demand and market conditions and to provide investment choice within the Avanteos platform.
Products available include term deposit accounts offering a flexible variety of available terms through Adelaide Bank and CBA.
Negotiable certificates of deposits (NCD), an extensive selection of cash-based managed funds and a pooled cash account central to all client wrap accounts are also included.
Total inflows into term deposits and NCDs on the Avanteos platform during 2008 were $1.31 billion.
Term deposits accounted for in excess of 50 per cent of net inflows for the year.
Avanteos's total cash-based funds under advice (FUA) almost doubled to $1.64 billion during the 15 months to 30 March.
"The flexibility of our [term deposit] offering and our rapid response to adviser demand has resulted in significant inflows into this area," Stevens says.
"The attractiveness of our offer is evidenced by Avanteos's fifth position in the latest Plan for Life inflows survey, a fantastic result for a platform of our size."
Despite adding several cash funds and additional term deposits during 2008/09, Avanteos is still seeing demand for cash products. "We are still experiencing strong adviser demand for cash products and will continue to look for opportunities to expand our investment menu," Stevens says.
"The adviser interest in cash products has also driven the development of new functionality on the Avanteos platform.
"The addition of maturity and cash-flow reporting assists advisers with practice management, particularly during these difficult times."
BT Wrap channelled a mammoth $2 billion of inflows into parent Westpac's term deposits since it was added to the platform in April 2008.
"Without shadow of a doubt we added term deposits due to demand from dealer groups and advisers who use our platform," BT product and strategy head Craig Lawrenson says.
BT Wrap has three-month, six-month, one-year and two-year deposits and also a working cash account from Australia's largest financial institution by market value on its investment menu.
The most popular picks for advisers were the three and six-month terms, with slight demand for the one-year term and lower appetite for the two-year deposit, Lawrenson says.
"Shorter-term deposits have been most popular with advisers, as it allowed the adviser to offer solid yield for their client without the need to tie the money up for a long time" he says.
Adding term deposits to BT Wrap also clearly helped retain the significant funds on the platform, especially from self-managed superannuation fund (SMSF) clients, he says.
Macquarie Wrap experienced strong inflows in its various cash investment options in the past 12 months.
The amount invested in cash-type managed funds through Macquarie Wrap increased to $2.7 billion as of March 2009, from $1.7 billion at the same time last year.
Along with those gains, Macquarie Bank's term deposits through Macquarie Wrap attracted $500 million since they were introduced in May 2008.
Macquarie Wrap offers 17 different cash investment options on its menu from 11 different fund managers. They include Macquarie Bank term deposits, the Macquarie Cash Management Trust (CMT) and a range of cash products offered through managed funds from a variety of institutions.
Each investor in Macquarie Wrap is set up with a Macquarie CMT as their cash hub for the wrap service.
"We are always reviewing the comprehensiveness of the investment options available on wrap and canvassing advisers' views on the types of investments they require," Macquarie Wrap head of product Doug Chang says.
"Macquarie Wrap will continue to listen to the needs of advisers to ensure we can offer a range of cash investment options to meet advisers' needs and those of their clients.
"While currently only term deposits from Macquarie Bank are available through Macquarie Wrap, we are currently working on expanding this to other term deposit providers."
Macquarie Wrap is open to adding more cash or enhanced cash products to the menu, provided there is sufficient demand from advisers, the products pass the group's stringent review process and the products have an operational fit with the wrap, Chang says.
During the past six months, three-month term deposits have been the most popular options used by clients and advisers. However, during more recent months there has been a movement towards longer terms of up to a year.
"Macquarie Wrap's primary aim is to provide a wide range of investment options to allow advisers to meet their clients' needs and assist to effectively manage their portfolios," Chang says.
"Investment options are driven by demand from advisers. We will continue to listen to advisers to ensure we are providing the range of investment options they are looking for from us to meet the needs of their own clients."
Aviva distribution development manager Stuart Fechner says Aviva began adding further cash products to the Aviva platform in the second half of 2008 as adviser demand grew.
The timing was perfect as financial markets began deteriorating rapidly in the period and the implementation of the government guarantee acted as a tailwind for the flight to safety. Term deposits accounted for a record 28 per cent of gross inflow into Aviva's platform for the December 2008 quarter.
That 28 per cent was just term deposits. Cash funds on the platform also attracted inflows from financial planning clients and accounted for 5 per cent of inflows.
"Collectively, we had 33 per cent of inflows into the cash sector. So you're really talking about $1 in every $3 coming in that category," Fechner says.
Aviva offers guaranteed and non-guaranteed term deposits from Adelaide Bank, credit union Wide Bay Australia and St George Bank, the lender bought by Westpac.
Cash funds in Navigator include the Bank of Western Australia (BankWest) Cash Management Trust, UBS Cash Fund, UBS Protected Cash Fund, Macquarie Master Cash Fund and Wide Bay Platinum CMA (Government Guaranteed).
The products that gained most inflows were St George's 12-month term deposit, the UBS Cash Fund and Adelaide Bank's 12-month term deposit.
On Aviva's platform, non-guaranteed products had double the inflows of guaranteed products, Fechner says.
"The main reason is that there's certainly been communication in the whole marketplace on the quality of our banking system and the sound capital nature and structure of the Australian-based banks," he says.
"So I'd believe that most investors were comfortable with the soundness of the banks themselves and hence investing through the non-guaranteed offer provided them with a higher rate of return."
The fact interest rates have been cut by 4.25 percentage points since September 2008 to 3 per cent currently has also heightened the decision of people to choose non-guaranteed deposits, Fechner says.
The platform offers three, six and 12-month deposits.
"In investment markets 12 months can be quite a long time and it's long enough to know your money is secure but you also know that at the end of the period financial advisers can say 'lets review your personal circumstances and situation and what equity markets are doing'," Fechner says.
"And if confidence hasn't returned to markets you can just roll it over. People are wary about putting money away for too long as market conditions can change quickly."
Aviva is not planning to add any further cash products in the immediate future, but is planning to promote the use of responsible margin lending as the end of the financial year approaches. This is via a campaign called "Margin lending - incredible deals", which highlights very competitive lending rates and suggests equities represent reasonable long-term value.
"It's a campaign around the use of responsible margin lending and it really highlights the competitive interest rates that we have on offer," Fechner says.
"We certainly don't provide any advice on whether clients should margin lend or not, that's up to the adviser. We're just highlighting that we're doing a competitive rate through our partnership with Adelaide Bank's leveraged equities division.
"I'm sure this isn't just us, but over the course of the full year approximately 30 per cent of margin lending business comes through May and June each year, and that's driven by some of the tax benefits that can come from pre-paying interest on margin loans."
NAB, the country's third-biggest bank by market value, had a 15.75 per cent gain in balance sheet funding to $187.1 billion in the 12 months to the end of March.
One of the key sources of balance sheet funding is customer deposits, and NAB has introduced initiatives across its deposit products to attract customers.
"NAB Group has concentrated on making its deposit products available to a broader set of customers through a broader set of sales channels," NAB head of consumer deposits Lisa Palma says.
"Our customers, for example, can access term deposits directly through the bank, directly via their financial adviser and directly through the MLC MasterKey Custom platform.
"We have also focused on pricing initiatives to ensure that our customers have access to positive and secure returns on their investments despite a declining interest rate environment and volatile economic environment. Examples include the introduction of bonus rates onto our key At Call Online Savings Account product and introduction of the government deposit guarantee onto term deposits."
Palma says the volatile economic conditions have led to a flight to quality towards traditional bank products such as term deposits, with NAB being one of fewer than 20 banks in the world with a AA credit rating. "The role of cash in an investment portfolio has increased in significance given the volatile economic conditions experienced, which is something financial advisers have been managing on behalf of their clients," she says.
"The recommendations around cash made to clients are contingent on each investor's individual circumstances.
"Term deposits have increased in popularity amongst the financial advice community, consistent with the broader market trends towards the product category. This has been reflected in the level of deposits written via the MasterKey Custom platform as well as direct through advisers."
Consistent with the overall trends experienced with term deposits across the market, there have been steady inflows of term deposits directly via advisers, Palma says.
"Our experience has been that aligned advisers tend to prefer the on-platform term deposit options, where higher customer rates are available due to aggregation of funds into a wholesale deposit."
NAB's term deposits via advisers require a minimum investment of $50,000 and have investment terms ranging from 30 days to five years.
The deposits feature a trail commission of 0.25 per cent per annum which is paid monthly and a 100 per cent rebate is available.
One of the big initiatives NAB undertook was the development of UBank, a new direct channel offering focussed on savings products which was launched last October.
UBank, which has a focus on existing SMSFs, offers attractive term deposit rates and will later roll out new savings products. SMSFs require a minimum $10,000 to invest in UBank's products.
Deposits at UBank have grown beyond expectation, Palma says, without going into specifics.
"The results so far have been double the forecast number of customers over seven months," she says.
Bank of Queensland (BOQ) has achieved a phenomenal surge in deposits without the help of platforms.
The Brisbane-based lender's secret weapons: innovation and advertising.
Accounts, including reverse charges, WebSavings and competitive rates for online savings and term deposits, and offering tailored solutions for customers' needs, helped BOQ achieve a 41 per cent surge in deposits to $21.94 billion for the year to March, according to APRA data.
BOQ has struck no distribution deal to add its term deposits onto platforms, unlike regional rival Bendigo and Adelaide Bank and credit union WideBay, and does not plan to.
Its referral relationship with Genesys Wealth Advisers has not really helped with inflows towards deposits, but the group has a longstanding relationship with local funds management firm DDH Graham, BOQ group executive Daniel Musson says when asked if the lender's referral relationship with Genesys helped with inflows.
DDH Graham has generated about 15 per cent of full-year growth towards BOQ's deposits.
At present, BOQ has seen funds flow move from at-call products to five-month and six-month term deposits as customers seek greater certainty of their returns, Musson says.
"From a communications perspective, we are continuing to focus on brand building, product marketing campaigns, across both lending and deposits, and direct communication to existing customers," he says.
"In line with our unique business model and owner-managed branches, it's very important that we build a strong presence in the local areas where we operate."
The boom in the cash industry also resulted in the relaunch of online offering TermDeposit.com.au used by advisers.
The website is owned and operated by fixed income broker FIIG Securities. It compares and benchmarks term deposits and also offers special rates.
TermDeposit.com.au was developed during the dotcom boom but did not attract huge traffic until cash became king in 2008.
"It was a bit ahead of its time, but one of the things we noticed in early 2008 was the incredible amount of competition between lenders for deposits," TermDeposit.com.au managing director Jim Stening says. "The government guarantee perfectly complemented our business model."
The website is a high-volume/low-margin business so customers need to have a minimum $50,000 to invest.
Its business doubled in 2008, lifting its FUA to $2.5 billion.
"It's a really handy site for financial advisers because we're an agent for over 50 ADIs, so for investors it's pretty handy to get all the information in one place," Stening says.
Advised clients are generally picking 90 to 180-day deposits because they are ultimately looking to migrate into other asset classes and do not want to be stuck in cash for too long.
Even though interest rates are well off their highs, Stening says he expects term deposits to remain popular with customers.
"Cash has a genuine longstanding appeal regardless of the cycle for a lot of companies and corporates who manage their funds. It's important that you get the most out of your cash that you can," he says.
However, he says he expects the use of cash products to wane among SMSFs that are hungry for higher returns.
"Ultimately, I think due to the cash rate being at low levels, SMSFs will look to migrate into fixed income assets and ultimately into equities and property," he says.
"So once economic conditions improve, it will be the fait accompli for cash."
Cash funds have traditionally not been on top of the list for investors seeking to grow their capital, however, as stocks slumped and cash yields remained at 8.5 per cent, these funds started to draw more attention.
One of the top performing cash funds, the CFS (Colonial First State) Wholesale Cash Fund, which finds its clients in retail and wholesale investors, saw its inflows rise by $1.6 billion in the 12 months to the end of February.
"This is as large as the fund has ever been. In a favourable investment environment, people don't tend to park the majority of their funds into cash funds; they tend to invest in other asset classes," CFS head of short-term investments Tony Togher says.
"Cash funds have attracted more interest from the wider investment community, be they retail investors or wholesale institutional investors, over the last 12 months on the basis of equity performance and concerns over other more esoteric or less liquid assets."
One of the interesting yet common occurrences amid the financial crisis is that several fund managers not mandated to be 100 per cent invested have found themselves holding cash at the high end of target ranges.
The Magellan Global Fund (MGF) held around 25 per cent to 30 per cent cash from July 2007 to December 2008.
The fund declined 2.12 per cent for the 12 months to 30 April, making it the second-best performer of the 142 members of its Morningstar peer group with at least 12 months of reported performance.
"It was a view on what the credit markets were doing and a risk we saw in the financial markets and also then an increasing view about a macro-economic slowdown in the world," MGF portfolio manager Hamish Douglass says.
"So that was the primary reason we held cash. It would be fairly unusual for us to be holding such a serious weighting of cash, but we've been in a very unusual set of events.
"In a normal cycle it would be like 5 per cent of the fund would be in cash. It would just be a liquidity position."
At the end of December, MGF had 30 per cent in cash and is currently sitting around 20 per cent.
"My view is that there are some signs of stabilisation, particularly in the financial sector, but we still are very cautious for the next 18 months about the global economic outlook," Douglass says.
"But we do believe during these times of extreme dislocation that there are incredible investment opportunities and it's our intention to keep deploying cash over the next six to 12 months to . a more natural weighting of around 5 per cent." Cash has been a contributor to MGF's performance, but the major initiative made was moving into stocks that were inherently higher quality and more defensive than the market as a whole.
Nonetheless, Douglass says: "Over any longer period of time, cash is a value-destructive investment because you earn a very low return and inflation will eat away the value of your capital.
"And we understand that cash has been important when asset prices have been falling, but over the long-term, equities should well outperform holdings of cash and that's why we would say our normal holding of cash in an equity fund would be a low and liquidity position only.
"In extreme dislocation events, cash is a tactical call in the short term that is not a long-term investment for an equity fund."
Investment guru Warren Buffett has a similar philosophy. "It's nice to have a lot of money, but you know, you don't want to keep it around forever,'' Buffett recently said on cable TV channel CNBC.
"I prefer buying things. Otherwise, it's a little like saving sex for your old age.'"
Even PM Capital chairman and chief investment officer Paul Moore says: "When everyone believes cash is king, cash is more likely to be trash."
Douglass however agrees that the unprecedented wealth destruction caused by the financial crisis will lead to people holding more defensive assets such as cash and fixed income.
But at the higher-quality end of the equity curve, there are currently some excellent investment opportunities.
BT Investment Management (BTIM) chief executive Dirk Morris recently said the group's equity funds were positioned reasonably defensively throughout most of 2008, but less so recently as speculation that the worst of the financial crisis has passed led a rally in global stocks.
At the end of March, a record 26.7 per cent of BTIM's funds under management (FUM) was held within the group's cash products, compared with 19.1 per cent at same time last year. Holdings in equities funds fell to 35.9 per cent at the end of March, from 40 per cent last year.
But Morris says he noticed in March and early April that clients had become disenfranchised with the level of interest offered by the various cash products in the market and had dipped their toes into equities again.
"Term deposits were rolling over. They were maybe 8 per cent last year and now they're getting to 3 per cent," he says.
"So we're actually seeing some behavioural shifts just in the last six weeks.
"It may be too early to extrapolate - I'm surprised how early it's happening - but my long-run gut feeling is that those cash levels will go back down. That's what economics is all about.
"Central banks around the world are pushing cash rates down to zero because they want investors to take risk and eventually they'll get their way; it happens every cycle."
BTIM does not plan to launch any further pure cash products, but is aiming to release a flexible diversified income product aimed at retirees and post-retirees, he says.
It is aiming be something in the middle of a balanced fund and an income fund and to provide more stable returns in all market conditions. It also intends to beat cash rates.
"Retirees are looking for some capital stability and regular income. At the moment we see a lot of demand growing for retiree products that pay more than bank deposits," Morris says.
"But to do that you have to take some risk. And in the last 10 years that's been in mortgages and property or hedge fund of funds and generally been concentrated in one asset class, so they're the ones that have been hurt the most by fund closures and suspension of redemptions.
"What we're looking to offer is a more diversified, more flexible product that can move across asset classes and offer regular income.
"We're hoping to have that product before year-end as the markets stabilise and we think there'll be a big flow into this type of product."
