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Cash management trusts: Essential facts
Cash Management Trusts are short-term securities focusing on government guaranteed and bank backed securities, which in essence combines good short term income returns and ready access to funds. To put it another way, Cash Management Trusts are managed investments where the primary investment is in cash securities, namely money market securities (short-term securities such as promissory notes and bills of exchange, whereby the terms are one year or less). CMTs are low risk and a secure investment, usually charging no entry or exit fees, but management fees (usually around 1-2%) can make a difference. As with most investments though, the higher the interest rate you find with a CMT, the riskier the investment becomes (and in this case the steeper the management fees will be also). CMTs are generally only low risk when they offer less appealing interest rates.
Cash management trusts vs. cash management accounts
Cash Management Trusts are not the same as Cash Management Accounts (CMAs), which offer tiered rates of return depending on your account balance. While term deposits will offer a specified return, CMAs don’t offer the same guarantee. CMTs, on the other hand, act largely the same as an everyday bank account (less so for higher interest rate CMTs), with some offering the ability to draw and deposit funds on 24 hours notice and presenting a higher return than many savings accounts for what is considered a relatively low risk (with the trust staying away from volatile commodities).
In some cases, CMTs even offer a direct debit facility and cheque book features, making them much the same as bank accounts, except for the access limits, which can generally be minor. Where CMTs begin to reduce in appeal as a place to park funds, however, is with higher interest rate trusts, where the return improves but access diminishes.
High interest rate, low accessibility
Pooling funds to gain access to otherwise out of reach securities may seem like the perfect solution in the quest to find the highest possible, low risk return. However, there’s always a catch, and the highest rate CMTs will probably limit the number of withdrawals you can make or even lock funds away for a certain period of time, meaning that you could run the risk of missing out when a better opportunity comes along.
Bear in mind also that higher paying CMTs will almost always charge higher fees too. You’d be wise to weigh up an attractive exceptionally high interest rate very carefully against the corresponding fee rate – and then consider the actual expected return over a given period for your investment compared with that of the highest interest savings account across the same period. You may be surprised by the results of a few simple calculations.
Cash management trusts in focus
Macquarie’s Cash Management Trust, for example, requests no ongoing fee but takes 1.10% p.a. in management expense costs from the yield of the trust. It offers a 7 day average annualised return rate of only 6.03% (compared to the best term deposits’ and high interest bank accounts’ rate of between 7% and 8%). The Macquarie CMT requires a minimum initial investment of $5,000 and a minimum balance of $5,000 too, compared to most high interest savings accounts from banks requesting a much lower minimum initial investment or no minimum initial investment. ANZ’s Premium Cash Management Account requires a minimum initial balance of $10,000, and a minimum ongoing balance of $1,000, and is described as being "the ideal account if you have $100,000 or more to invest", which almost certainly differs from the needs of the average high interest account investor (perhaps appropriately outlining the difference between CMTs and CMAs in the process).
CMTs are a potentially useful tool for the average investor, someone who would not normally have access to the professional money market on an individual level. CMTs offer a means of getting involved with higher-yielding short-dated securities that can bring significantly higher returns than everyday bank accounts (sometimes with the same accessibility). Some see CMTs as a good means of keeping cash available whilst waiting for an investment to come along with an even higher rate of return. It could be argued that a high interest savings account offers much the same facility with a greater amount of access for personal management of funds. Whether CMTs suit you is largely down to your financial standing and how comfortable you are with undertaking an investment with risk, no matter how small.
If you have money set aside for investment but haven’t found the right security yet, and you still expect your cash to work hard for you whilst it’s stored somewhere for safekeeping, CMTs may appear to have the highest rate possible for the least risk - just be sure that you don’t lose access to your funds when the time comes to relocate them to a better deal.
