"Savers beware": Income investors given clear message as negative interest rates loom

Income investors have been given a clear message from the RBA that cash returns will become worse before they get better, according to an income investment expert.

Matthew Lemke, portfolio manager for boutique investment manager Prime Value Asset Management, says the RBA’s October rate cut, coupled with its latest statement, suggests income-directed investors need to consider other strategies aside from the traditional cash vehicles for income.

Mr Lemke said: “The RBA is unashamedly cutting rates to get unemployment down, and will presumably not stop easing until it sees the unemployment rate closer to the ‘full employment’ rate, which is now defined as an unemployment rate of 4.2% (currently 5.2%). The previous ‘full employment’ rate was 5%.”

He said income investors should be alarmed about forecasts suggesting negative interest rates in Australia, and quantitative easing. “Income investors should find this absolutely startling, and consider other options for a fair and decent interest rate on their savings.”

The latest RBA statement suggested Australia, like the rest of the world, has a ‘savings problem’, in that we are saving too much and not spending on investment. Yet Mr Lemke said monetary policy is not being used to protect savers, in fact quite the reverse.

“This is very much a ‘savers beware’ situation for the foreseeable future. The dilemma for savers is how to recover yield but not add unplanned and uncomfortable risk.

“There are options aside from term deposits and other cash vehicles to boost income returns.”

Mr Lemke said income-focussed investors might consider cash enhanced vehicles, which can outperform cash by investing in prime securities on the professional securities market.

“Income-focussed investors can outperform the RBA cash rate without dramatically increasing their risk profile. But they need to be aware that not all cash enhanced strategies have the same level of risk.”

Mr Lemke’s Prime Value Cash Plus Fund has outperformed its peers since 2014 with low risk. The Prime Value Cash Plus Fund has delivered investors a 4.8% net return including franking credits for the year to 31 August 2019, and has delivered a net 4.2% per annum, including franking credits, since June 2014.

Prime Value added to its enhanced cash funds on 1 August 2019 when it launched the Prime Value Diversified High Yield Fund, which aims to deliver 5% annual income returns to investors.