16th July 2008
Liquidity. This word has appeared numerous times in the media, particularly in the last 18 months. So, what does it mean and why is it so important?
In financial terms it means how easily you can convert your money from an investment into cash. Generally speaking, the harder or longer it takes to convert your investment into cash, the more 'illiquid' it is considered. For example, if you invest directly in a property it is considered 'illiquid' because it can take you months to recover your funds, as you need to advertise, sell and then settle the property before you can retrieve your cash. A transaction account at the bank is considered 'liquid' because you can redeem your money at anytime, at a moment's notice, and with Automatic Teller Machines (ATMs) and Electronic Funds Transfer at Point of Sale (EFTPOS) the banks don't even have to be open.
Like all investments the returns will vary greatly depending on asset class, risk and liquidity factors. The more 'liquid', or easily redeemable your investment, generally, the lower the rate of return.
In the current market environment, in particular in relation to the global 'Credit Crunch', liquidity is extremely important. Cash is becoming increasingly scarce in the market place as investors, corporates and individuals withhold their cash from investments due to the uncertainty of the market direction. What this means is that there is much less cash moving around the economy, which increases the cost of credit.
Liquidity is important for all portfolios whether they are billion dollar funds managed by Fund Managers or individuals managing their own savings. If you are still working it is suggested that the equivalent of about three month's pay should be available in cash, or at a minimum, one month's pay. Most retirees on the other hand should normally have a minimum of 5% of their portfolio or 1 year expenses in cash.
What does La Trobe do to maintain liquidity in the fund?
La Trobe is methodical in its management of liquidity, reviewing it on a daily basis. Maturing investments and redemption patterns are continuously monitored by our Fund's Portfolio Manager, Mr Jason Gidman, and Assistant Portfolio Manager, Mr Kirk Jackson. Jason and Kirk ensure that liquidity is maintained in line with the levels determined to be appropriate for the investment option throughout its investing cycle.
How can you make the most of your liquid assets?
For investment balances not requiring immediate or short term liquidity, term deposits are one option. Term Deposits offer a rate of return, if you are prepared to lock in your funds anywhere between 6 months to 5 years, currently in the vicinity of 8.15% p.a. and upwards. However, your funds are still locked away and depending on your risk appetite there may be alternative investment options that would provide a better return for your locked in funds. La Trobe's Pooled Mortgages Option presently offers 8.25% p.a. variable for a 12 month investment term.
If you are looking for more flexibility with your cash you may want to consider a Cash Management Account (CMA). By investing in a CMA:
- You pool your money with that of other investors
- A professional money manager looks after it in order to ensure you receive a good return
- As a full time dedicated manager, and generally of a large sum of money, a managed fund may have the opportunity to invest at higher interest rates and therefore may offer an increased return for the investor
CMAs usually come with a minimum investment amount and a range of features such as interest
re-investment, which compounds your return and helps to grow you savings, but this will vary from fund to fund.
It's worth keeping in mind that most CMAs are rated highly by the various independent rating agencies. Do remember, however, that higher rates usually mean higher risks, and always review the investment policy of CMAs that offer returns significantly above competitors' rates.
As at 1 July 2008 the La Trobe Pooled Mortgages Option and Cash & Mortgages Option offer the following opportunities for investing with an active liquidity management policy.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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