The Importance of Cash for Income Streams
Tuesday, October 08, 2019
Few could have imagined, pre-GFC, that the crisis in the US sub-prime mortgage market would morph into global issue affecting entire markets. Liquidity ceased in some markets leaving investors unable to access their money.
In 2010, one year on from the GFC’s deepest days, there was $20 billion in Australian frozen funds’ across the mortgage, high yield, property and hedge fund spectrums. What is Liquidity Management? This is the basic concept of access to readily available cash. It might be for income purposes or in order to fund short-term investments or cover debts.
A number of scenarios could set off a market shock and potentially trigger liquidity issues.
For example, Woodford Investment Management, founded by one of Britain’s best known investment managers, recently found they couldn’t realise cash quickly enough to meet withdrawal requests. They held unusually big stakes in smaller and early stage unlisted companies, which are hard to sell quickly. Their response: withdrawals were gated, leaving investors angry and in the unknown.
Unlisted assets, such as infrastructure, real estate, and private equity, as well as alternative investments, including hedge funds, have become larger parts of many Australian portfolios post-GFC. Although a good investment they do need to be carefully managed within a portfolio to allow for adequate liquidity and cash flow when needed.
Liquidity is an essential element of portfolio construction and needs to be inbuilt within an investment strategy particularly when planning income flow for retirees. Investment Managers also need to manage risk within their investment strategy. Stress scenarios developed by the many Investment Managers operating in Australia may differ, but a good strategy would be the ability to sell assets without incurring large transaction costs or quickly enough to prevent or minimise a loss.
Portfolios, particularly for retirees, need to be prepared for the inevitable unknown within investment markets. Currently we have the USA/China trade wars but there are many possibilities that can cause contraction in global markets.
As always it is wise to be guided by your Financial Adviser as to best investment strategies that include access to Cash when you need it.
For more Information contact Mark Digby at Maher Digby Securities Pty Ltd - Financial Advisers – AFSL No. 230559 Ph: 07 5441 1266 or visit our website www.maherdigby.com.au This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such. Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor