Investors exhibit many behaviours that do them a disservice from a return, tax efficiency and estate planning perspective. Hoarding excess cash in offshore bank accounts is one of the greatest crimes one could commit against your long-term financial planning objectives.
In his recent article, ‘Options for conservative, yield-hungry, dollar investors’, Paul Hutchinson outlined that despite the magnitude of increases in the Federal (Fed) Funds rate over the past couple of years, these increases are not being enjoyed at the same level by savers. He noted that holders of overnight retail bank deposits were earning less than 1% in US dollars (USD) and even those prepared to lock their money away for 12 months, were still earning less than 3% interest1.
As a result, conservative investors have turned to USD Money Market funds to access yields more commensurate with the Fed Funds rate. Our last article on this topic ‘Cash Conundrum 2.0’ pointed to the benefits of moving cash from a bank account to a USD Money Market fund and combining that with a policy wrapper to achieve tax and estate planning benefits. In summary these were:
- A pick-up in yield
- A reduction of the rate of tax applicable
- Deferral of tax liability
- Providing liquidity on death
- Greater preservation of wealth due to a reduction of the fees and taxes associated with death.
Recent flows to our offshore platform have shown that many investors are implementing this strategy, which has served them well over the past 12 months or so. However, with the consensus view that interest rates have peaked, and that the yield on offer from dollar cash is likely to reduce steadily over the next 12-24 months, should they be looking at other investment options?
Is it time for ‘King Cash’ to abdicate the throne?
Figure 1 below shows the returns of the major asset classes in each calendar year from 2008 onwards, from the best return at the top row of the table to the worst return at the bottom. While it is difficult to point to any discernible pattern that enables us to predict outperformance of one asset class over another, there is one trend that stands out. Where cash, as represented by USD Money Market funds (not cash in the bank), has been the top performing asset class in any given year it has, without exception, been the worst performing asset class in the year that follows.
And in an environment where impending rate cuts are likely to progressively reduce the attractiveness of cash, conservative investors may need to look to bonds instead to deliver their yield objectives.
Figure 1: Asset class returns over calendar years from 2008
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| DM Bonds 11.5 |
EM Equity 78.6 |
EM Equity 18.9 |
DM Bonds 5.5 |
EM Equity 18.3 |
DM Equity 26.7 |
DM Equity 5.0 |
US Cash 0.2 |
EM Equity 11.2 |
EM Equity 37.3 |
US Cash 1.9 |
DM Equity 27.7 |
EM Equity 18.4 |
DM Equity 21.9 |
US Cash 1.7 |
DM Equity 23.8 |
| US Cash 2.4 |
DM Equity 30.0 |
EM Bonds 14.1 |
EM Bonds 2.8 |
EM Bonds 17.3 |
US Cash 0.2 |
EM Bonds 0.8 |
DM Equity -0.9 |
EM Bonds 10.2 |
DM Equity 22.5 |
DM Bonds -0.3 |
EM Equity 18.5 |
DM Equity 16.0 |
US Cash 0.1 |
EM Bonds -14.8 |
EM Bonds 12.0 |
| EM Bonds -8.7 |
EM Bonds 26.0 |
DM Equity 11.8 |
US Cash 0.2 |
DM Equity 15.9 |
EM Equity -2.7 |
US Cash 0.1 |
DM Bonds -3.1 |
DM Equity 7.6 |
EM Bonds 12.8 |
EM Bonds -5.2 |
EM Bonds 14.4 |
DM Bonds 9.7 |
EM Equity -2.6 |
DM Bonds -17.2 |
EM Equity 9.9 |
| DM Equity -40.8 |
DM Bonds 2.1 |
DM Bonds 6.5 |
DM Equity -5.6 |
DM Bonds 0.5 |
DM Bonds -4.8 |
DM Bonds -1.7 |
EM Bonds -7.2 |
DM Bonds 1.5 |
DM Bonds 7.0 |
DM Equity -8.8 |
DM Bonds 4.8 |
EM Bonds 4.1 |
EM Bonds -5.4 |
DM Equity -18.2 |
DM Bonds 5.3 |
| EM Equity -53.4 |
US Cash 0.3 |
US Cash 0.3 |
EM Equity -18.5 |
US Cash 0.2 |
EM Bonds -7.2 |
EM Equity -2.2 |
EM Equity -15 |
US Cash 0.5 |
US Cash 1.1 |
EM Equity -14.6 |
US Cash 2.3 |
US Cash 0.4 |
DM Bonds -6.9 |
EM Equity -20.1 |
US Cash 5.3 |
Source: Morningstar, 31 December 2023.
Could now be the time to look at bonds?
The inverse relationship between bond yields and their prices means that once rates start to come down there is the potential to generate a capital gain, which can enhance the total return on offer. But at the time of writing, the date of the first cut by the Fed is still uncertain, so should investors be waiting for the Fed or consider positioning themselves ahead of the first movement?
If we look at the last five rate hiking cycles in the US and compare the performance of cash relative to bonds at various points during those cycles the results are quite compelling, as figure 2 illustrates.
Figure 2: The performance of cash relative to bonds at various points in the rate cycle
Source: iShares, reproduced by Ninety One. For illustrative purposes only. Historical analysis calculates average performance of the Bloomberg U.S. Aggregate Bond Index (bonds) and the Bloomberg U.S. Treasury Bills: 1-3 Months TR Index (cash) in the 6 months leading up to the last Fed rate hike, between the last rate hike and first cut, and the 6 months after the first cut. The dates used for the last rate hike of a cycle are: 1 February 1995, 25 March 1997, 16 May 2000, 29 June 2006, 19 December 2018. Dates used for the first-rate cut are: 6 July 1995, 29 September 1998, 3 January 2001, 18 September 2007, 1 August 2019.
- In the 6-month period prior to the last hike cash tends to outperform bonds by a reasonable amount, on average.
- Historically, the Fed has paused for an average of 10 months between the last hike and the first cut. It is during this period where bonds typically show their greatest outperformance above cash.
- Once rates start to fall, bonds continue to outperform cash, but the margin of outperformance is typically lower.
So, while our instinct may tell us that waiting for rates to fall will deliver the best outcome, history suggests that it is the period that we are in now, the pausing cycle, that typically delivers the greatest opportunity for outperformance of bonds over cash.
Ninety One Global Diversified Income Fund – a potential home for 12-month+ USD cash
An actively managed global fixed income fund can leverage more potential sources of return, and this larger toolkit can help to maximise income whilst also mitigating risk. Ninety One has recently launched an investment option for clients sitting with excess ‘lazy dollar cash’ in the bank to consider. While a USD Money Market fund typically provides a pick-up of between 2-3% p.a. over what is available in a bank account, the Ninety One Global Diversified Income Fund aims to provide further yield enhancement (approximately an additional 1% after fees) whilst seeking to eliminate capital losses, both over rolling 12-month periods.
These attractive return characteristics offer investors with a 12-month plus time horizon a compelling alternative to cash in the bank. The Fund is only available as a roll-up fund, which helps create greater tax efficiency than what can be achieved with a bank account. And investing via a policy wrapper can introduce additional tax and estate planning benefits, such as liquidity on death, into the mix.
Exclusive offer via Ninety One Investment Platform
As the rate cycle shifts, there is a strong argument for bonds to outperform cash. The Ninety One Global Diversified Income Fund allows investors to benefit by offering potential for enhanced returns and greater tax efficiency. And if investors need any further incentive to move their excess cash from their overseas bank account, we are pleased to make you aware of an exclusive offer:
Advisors who place their clients in the Ninety One Global Diversified Income Fund via the Ninety One Investment Platform will have permanent access to a share class where the fund fee is 0.30%, as opposed to the standard 0.45% annual management fee found elsewhere in the market. In addition, for a 12-month period from 1 March 2024 to 28 February 2025, the Ninety One Investment Platform will provide a fee holiday on any assets that are invested within the Fund on the platform. This offer provides a combined saving of up to 0.65% for the stated 12-month period and then 0.15% thereafter.
Figure 3 below provides an illustration of the hypothetical benefit of achieving the performance target, the benefit of the roll up fund, the policy wrapper and the combined fund and platform fee discounts on client outcomes over a 12-month period net of all fees and applicable taxes.
Figure 3: Potential benefit of yield pick-up plus fee discount over next 12 months
Source: Ninety One, for illustrative purposes only. Yield on offer will fluctuate over time. Assumed growth of 3% for bank account, 5% for USD Money and 6% for GDI. Platform fee and 0.25% advice fee deducted from policy wrapper for USD money example. Advice fee only deducted from GDI example. 45% income tax deducted annually from bank account example, CGT of 12% deducted at end of illustration from policy example for USD Money fund and GDI.
Conclusion
The move from offshore bank accounts to USD Money Market funds has been a ‘no-brainer’ over the past 12 months or so due to the pick-up in yield and the opportunity to both reduce the amount of tax payable and defer when that tax is due. However, the shifting rate cycle may also require a further shift in perspective and investment strategy.
The Ninety One Global Diversified Income Fund provides a potential new home for funds that currently sit in bank accounts and also those sitting in USD Money Market funds, thereby helping clients’ conservative offshore investments to work harder for them. While the benefits are compelling over the short period shown in the illustration above, they become more so when compounded over longer periods of time. Where these investments are combined with policy wrappers, such as the Ninety One Global Life Portfolio, it further allows for investors to simultaneously tackle the challenges involved with estate and succession planning, leading to improved outcomes for generations to come.
1 Source: Bankrate.com, Bloomberg.