This week is a slow week as I have been away from the computer due to some work engagements so I thought it would be better to address some questions that I have been getting here and there from some family members and readers.
I get comments about where should they put their money because they have tried putting money in cash management accounts but the returns were less than satisfactory.
When I asked why do they think the returns were not satisfactory, they said that the returns that they were getting were negative on cash management accounts.
I think we often do not help ourselves by having tunnel vision when we look at what to put our money in.
Many were enticed by the higher projected returns provided by the products from the Robo-advisers. When their experience is different, they become rather disappointed and say it is not such a good product.
There are a couple of things that you would have to understand:
- The cash product have to be constructed with some basic underlying assets
- The underlying assets have a spectrum of returns
- If the underlying assets have potentially higher returns, then it comes with risk, which exists in different forms
The following table shows 5 unit trust which is often used to construct the cash management products created by the Robo-advisers:
|Fund||1 week||1 month||3 month||6 month||1 year|
|LionGlobal Enhanced Liquidity SGD||0.02%||0.08%||0.27%||0.49%||1.18%|
|LionGlobal SGD Money Market||0.01%||0.06%||0.17%||0.28%||0.63%|
|Fullerton Cash Fund||0.01%||0.03%||0.08%||0.13%||0.26%|
|LionGlobal Short Duration Bond||-0.12%||-0.47%||-0.62%||-0.65%||0.17%|
|UOB United SGD Bond||-0.17%||-1.21%||-0.32%||-1.14%||1.23%|
Out of the 5 funds, the Fullerton Cash Fund is a fund that invests mainly in deposits.
The rest of the funds have a mixture of deposits but mainly short-term bonds that will mature soon.
The projected returns of the products that include a higher percentage of Fullerton Cash Fund would show the most unenticing projected returns.
This is because the underlying assets are the safest and therefore the returns are the lowest.
LionGlobal SGD Money Market has a combination of deposits but a mandate to include debt securities.
Recently, there is a lot of talk about interest rates needing to be higher to rein in inflation and when interest rates go up, the prices of existing bonds go down.
Hence we can see that the returns for the LionGlobal Short Duration Bond and UOB United SGD Bond funds are mainly negative for the past 6 months.
The LionGlobal Enhanced Liquidity SGD should feel the same impact as the two funds mentioned but because they do not mark to market their bonds, we do not see the changes in the underlying NAV.
You may see that the returns of the cash product are negative because you got greedy for returns and the products with higher returns is made up of funds with longer duration or riskier in credit quality.
And so now you would have to live with the consequences.
Ultimately, the returns that you can get from the products come from the funds.
Does that mean that the products are poorly constructed? I think they are marketed to prey on your need for safe returns more than poorly constructed.
Short term-wise you may have negative returns, but the negative returns are temporary. Most likely, the fund managers hold the underlying short term bonds till maturity. If you hold the bonds to maturity and the bonds do not default, you will get back 100% of your capital.
The manager can then reinvest the capital at short-term bonds with a higher yield. Long term wise, the product allows you to slowly capture higher yields if the trend is up.
The problem is… if you put in $5000 and die die require $5000 in 3 months time and this product does not give you that, then this product might not have served its purpose.
But I think most people have at least some extra buffers such that they do not need the exact sum so that is ok.
Cash management products are considered rather safe in the spectrum of returns and risk.
But sometimes, you got to understand what you are getting yourself into. If the returns are higher, the returns cannot come out from thin air. You are giving up something for that returns.
Some of the products do not have short-term bond investments, so you won’t see your money become negative but the returns expectations are lower as well.
I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.
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