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24 | International savings
horizon – months or years? Many other ques- Diversification. As the risk and return charac- complementary to the cash component.
tions also need addressing. teristic may vary, having all your eggs in one During these difficult market conditions,
The potential complexity of these issues sug- basket is not necessarily recommended and clients may feel more comfortable investing into
gests that investors could gain from the advice of diversification across the differently rated insti- AAA sovereign debt as an even safer alternative
a financial adviser for this asset class. As well as tutions is a way in which a cash investor can to cash.
offering general advice, an adviser can also help access the higher rates of return available for There are basically two ways to go into gov-
in blending cash products into an appropriate taking on more risk with a part of the portfolio ernment bonds. With direct purchases, the client
portfolio. Importantly, they can also use their whilst maintaining the remainder in more stable has to select the term, counterparty, type of bond
expertise to ensure that the specific cash products holdings. and so on. When clients are transferring their
offered are in reality “low risk” – something that cash to sovereign debt as a precautionary meas-
requires a detailed knowledge of the industry Cash products – plenty to chose ure, we would recommend purchases are always
which individual investors may not have. from made on a ‘buy and hold’ basis, as they will find
It makes sense for investors to have a cash solu- themselves wishing both to buy government debt
Understand the risk drivers tion that has been personalised to meet their at the same time as their neighbours –and to sell
Any investor or adviser must start from some individual risk, investment duration and liquidity when the market is calmer, along with everyone
basic questions about the structure of any cash needs. Cash portfolios can be built from invest- else. (We all watch the same news, which leads to
investment. To restate the obvious, the days ing in multiple cash products designed to work the same fears, at the same time.) If the client
when you could treat cash as a simple, uniform together to give the client optimal flexibility. The then decides to sell early, and if they are selling at
asset class are long gone. Much more attention main components of such portfolios are likely to a period when everyone else wants to sell too,
must be put into understanding cash products consist of the following products. then they may find it difficult to get a good price.
and how to allocate and diversify between them. Cash Deposits. These may be instant access or So they risk buying at a premium and selling at a
But, as with any other investment, returns on term. It is possible to segregate investments, so loss.
cash increase in return for accepting greater risk that the investor takes on the on the credit risk of Alternatively, one purchase in a fund allows
to income and capital, so it’s worth starting by the institution taking the deposit, if they are client to get access to a range of government
considering the risk drivers. comfortable with this. debt, minimising dealing costs. Funds can also
Investment duration. Generally the longer Cash Funds, also known as Money Market provide the client with liquidity on their holding.
you are able to place the cash – the ‘term’ – the Funds, provide an excellent source of diversifica- These funds are a relatively new and welcome
better the return, although as the current money tion. They are pooled investment vehicles addition to the investment universe. But the
markets demonstrate, this relationship is not a designed to optimise security, liquidity and risk yields can be quite low, but the liquidity is high,
straight line or, even, always an upward curve diversification by investing in highly rated, highly making them particularly suitable for clients who
and it may vary significantly between currencies. liquid money market instruments. Important are uncertain about when they will begin to feel
The shape of the curve is highly influenced by factors in choosing a Cash Fund are experience more confident about moving funds into even
expectations of rate setting; the point in the (how long has that fund or fund manager been slightly more adventurous investments.
business year – rates typically peak towards the in operation), expertise (the size and quality of Conclusions
year end for instance – and the institutional the team running the fund and in particular the Interest rates are low, so everyone is making
need for liquidity. Cash investors should there- credit research resources available to them) and less from their cash at the moment. Moreover,
fore be reviewing their liquidity positions to finally size. because of market nerves, people are more likely
identify what proportion of their holding they Beyond their ability to offer general advice, to hold a large proportion of their portfolio in
can place in various terms, to take advantage of Investment Advisers/Banks should be able to cash. And, even within cash, there is nervousness
variations in yield. earn their keep by using their specific knowledge about the security of any investment. This makes
It’s also worth thinking what the investor and skills to the HNWI’s advantage. An adviser it particularly important for the investor to con-
would do, were equities or bonds to suddenly can review the whole of market searching for the sider both their requirements and available
pick up – would he be able to redeploy his cash most consistent payers, and monitor all offered options, so as to develop a tailored cash portfolio.
investment quickly enough to benefit? Liquidity, products, tracking their credit ratings. Meetings It is by selecting the right options for the right
for cash investments, is a measure of how quick- with fund managers and senior managers within client that investment advisers and private banks
ly the cash investor can access their invested cap- banks and building societies can also prove can help them achieve a return greater than the
ital. An assessment therefore of how much liquid revealing. interest rates paid on an average bank account.
capital is required in the short term both to There is now more focus on both cash and alter-
ensure that liabilities can be met, and to meet Complementary investments native capital-protected products to provide
potential investment opportunities should they The conclusion drawn by most investors from those clients with larger sums to invest more
arise, is essential before looking out to the term discussions with their advisers is that a wholly opportunities to beat these bank account rates.
money markets to take advantage of any avail- cash portfolio is not a desirable outcome. In fact, So there is a lot to consider when looking at
able yield pick up. This is effectively what we find that many HNWIs have around 20-30% “cash” investments. They can differ widely in
Corporate Treasurers do day-in, day-out ?and of their portfolio in the form of cash invest- nature, potential return – and risk. Guidance and
the principles hold as true for the private ments. With this in mind, it is worth quickly advice can make a huge difference in terms of
investor. reviewing other investments that could prove effectiveness, yield and peace of mind.
Zurich Bank International
There’s strength and then there’s Zurich strength
R
Licensed by the Isle of Man Financial Supervision Commission to take deposits.
April 2009 Investment International www.investmentinternational.com
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