Facing up to the cash dilemma

Get The AJN Newsletter by email and never miss our top stories Free Sign Up

A sustained low interest rate environment is constraining the investment performance of cash and equivalents, particularly where inflation could outpace returns. This is challenging many investors who are seeking low risk pathways to generating stable income and returns.

While it’s important to hold cash reserves, beyond the desired allocation, these reserves can become an opportunity cost. More favourable returns can be sourced by carefully constructing a portfolio designed to support income whilst minimising the risk of capital losses.

At Lipman Burgon & Partners, we work with our individual, family office, and for-purpose clients to understand their risk appetite and offer alternative investment strategies to meet their needs. Identifying alternatives to cash in public and private markets can be complex, and we partner with clients to effectively navigate the opportunities and risks.

Do bonds still have a role to play?

Historically, government bonds have effectively played the defensive anchor role within investment portfolios. They provided reliable income, capital preservation and were negatively correlated with equity markets. That relationship no longer holds with interest rates close to zero, and even negative in some global markets, and the associated income from holding these assets is becoming negligible.

In this environment, we at Lipman Burgon & Partners were one of the first wealth management firms to adapt our portfolio construction process to incorporate a Total Portfolio Approach (TPA). An essential feature of TPA is to analyse investments on their individual return, risk, and diversification characteristics. This enables us to build portfolios that can break with the traditional allocation to bonds and equities and use alternative assets to produce income, protect capital and drive growth.

Finding suitable alternatives

When evaluating avenues to generate income with relatively low risk, there has been rising adoption of alternative investment strategies. This includes a growing number of fixed income funds implementing absolute return strategies, the growth of the non-bank lending sector in Australia and opportunities to invest in domestic and global private debt.

In the example of absolute return fixed income funds, they may take a more flexible and opportunistic approach to investing in government and corporate bonds than traditional long-only funds. Strategies can include using derivatives to reduce interest rate risk, investing in floating rate notes rather than fixed rate coupons and accessing credit across broader parts of the market.

Private debt, such as first ranked residential or commercial real estate loans, can also offer attractive risk and return characteristics. The major banks in Australia have reduced their exposure to the commercial real estate market and this has provided an opportunity for the non-bank lending sector to flourish. The key to investing in private debt is ensuring the lender has stringent risk management policies and the ability to step in and recover any projects that run into difficulty. (See table).

Our view on the investment outlook

As we look forward to the easing of restrictions and opening of our international borders, we remain confident that global growth will rebound strongly. Monetary and fiscal policy remains accommodative, global savings rates are high, vaccine take up is increasing and the risks from COVID-19-related lockdowns are receding.

Economic growth at this stage of the cycle tends to be supportive of equity market returns and we remain overweight risk assets in our multi-asset portfolios. We see government bonds as largely un-investable and prefer various alternative investments that add diversification to portfolios whilst also helping to achieve income and growth targets.

To reach the team at Lipman Burgon & Partners, visit lipmanburgon.com.au or call (02) 9230 9600

Promotional feature
*This information contains general advice and does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of it having regard to your personal objectives, financial situation and needs and read the relevant Product Disclosure Statement for any product before making any decision.