14 October 2020

In times of uncertainty, investors see cash as protection against risk. But given the historically low rates of return on cash and cash equivalents, there is also the potential risk that in a low return environment, the real return to cash and cash equivalent investments will go backwards.

Jason Todd, our Head of Wealth Management Investment Strategy, believes advisers need to be having a very different conversation with clients about their cash holdings – whether they are high net wealth or ‘mum and dad’ investors. 

He shares five considerations to help you start a more meaningful cash discussion with your clients. 

1. Re-set cash expectations 

First, a reality check. Cash rates are now lower than the inflation rate, which means real returns on cash and cash equivalents are negative. And this situation is unlikely to change for many years, given the RBA’s need to underwrite Australia’s economic recovery.1

“No one holds cash to make a strong return – it’s for capital preservation and for short term liquidity requirements,” acknowledges Todd. “However, the opportunity cost of holding cash, relative to other assets, is much greater than in the past.” 

In other words, there is a cost attached to using cash as a safe haven. And it’s not just draining portfolio returns, its purchasing power is being eroded by inflation. 

As of September 2020, household cash is at near-historic high levels, partly because disposable income has been temporarily protected by fiscal stimulus programs while there have been fewer opportunities for consumers to spend. 

And these deposit balances are at risk of further erosion. Todd expects cash rates could be cut even further in coming months, potentially by another 10 to 15bps. “Over the medium term, inflation could also pick up off the back of monetary and fiscal policy shifts, so you need to re-set expectations about the real returns of cash,” he adds. 

2. Actively manage cash 

The rising cost of using cash as a safe haven creates an opportunity to have a proactive conversation about cash management. But advisers have told us they struggle to engage clients in meaningful discussions, because cash is seen as ‘simple’. And they only have full visibility over 44% of their client base’s cash holdings.2

Without this visibility, it is difficult for advisers to ensure clients are on track to meet their wealth goals. Cash complacency could be causing a drag on overall portfolio performance. 

“Now is not the time to be holding excess cash,” says Todd. “It has never been more important to actively manage cash balances – just as you would any other component of your portfolio.”

3. Separate cash into buckets

Todd suggests separating cash allocations into short, medium and long-term requirements. 

“Short-term ‘sleeves’ are solely for immediate access to liquidity and can be held in an at-call bank deposit or Cash Management Account (CMA),” he explains. It’s vital to forecast exactly what you need here, as real returns are likely to be negative.

The medium-term sleeve is for emergency funds – unexpected cash shortfalls. The main objective here is cash preservation, rather than same-day liquidity. 

“A cash enhanced fund may be appropriate for medium-term cash holdings,” suggests Todd. “Make sure it meets the requirements for capital preservation: limited exposure to credit spread and interest rate changes, and no underlying investments in structured credit such as asset-backed securities.”

Long-term cash holdings target a 12 month-plus timeframe. Investors should expect to trade off some liquidity and volatility for a higher yielding investment, such as a bond fund.1 “This cash bucket should be actively managed like any other multi-asset portfolio,” says Todd.   

4. Weigh up individual needs for liquidity

Investors will have very different objectives for their cash holdings, and these factors should determine the amount held in each cash allocation ‘sleeve’. 

“Cash is the ballast in any diversified portfolio; for the most part, its primary role is to fund investment into other assets,” explains Todd. But individual requirements will vary in terms of capital preservation, liquidity and return generation.

He says high net worth investors tend to hold a higher allocation to short-term cash. “It can be common to allocate up to 20% to cash, for opportunistic investments as they arise.”

RFi Group research conducted for Macquarie Private Bank in April 20203 found cash at call is second only to real estate (outside the primary residence) as a proportion of total investible assets for Australian private bank clients. 

For mum and dad investors, on the other hand, risk aversion is more likely to drive cash holdings – and this is where advisers need to explain the true cost of holding cash. 

“I wouldn’t expect to see more than 5% to 10% in cash for retail investors,” says Todd. “If we are now at the bottom of the economic cycle, cash can be put to work in other financial assets.” 

It’s important to understand their individual circumstances. This includes job security and income levels, as well as a view on the housing market given their home may be their only other major financial asset.

5. Explain the true return on cash

Todd suggests sharing charts with clients, projecting the real rates of return of their existing cash allocations alongside other quality, low-risk, and highly liquid opportunities. 

“In reality, it may be many years before you get into positive returns on cash. But alternative options, such as cash enhanced or short-duration bond funds, also carry a very low risk. And ultimately may cost less in relative terms than cash at-call.”

However, our recent whitepaper Hidden risks in a safe haven highlights, it’s equally important to understand where any enhanced returns are coming from. Some cash alternative products may be trading on credit risk in the chase for yield. 

Any trade off in liquidity or capital risk needs to be clearly explained to investors. And conversations like this may help break cash inertia – and highlight the importance of strategically managing cash, just as you would any other asset.

Because in a low interest rate environment, holding a significant proportion of cash will have a long-term impact on portfolio performance.

To learn more about having proactive conversations with clients about cash, download our Hidden risks in a safe haven whitepaper.

Additional information


It’s time to be more conscious of your cash, Macquarie Wealth Management Research: Asset Allocation Series #4, August 2020


Cash Management Adviser survey conducted by Zing Research on behalf of Macquarie, August 2019 n=541


Research conducted by RFi Group for Macquarie Private Bank April 2020, sample n= 501 private bank clients, 255 non-private clients

This information is provided by Macquarie Bank Limited ABN 46 008 583 542, AFSL 237502 (MBL) for the use of licensed and accredited brokers and financial advisers. It does not take into account your or a potential client’s objectives, financial situation or needs – please consider whether it’s right for you or your clients.  

The Macquarie Cash Management Account is a basic deposit product issued by MBL.