Cautious investors wrap themselves in term deposits

Investor caution has seen strong flows into the new term deposit options being offered on wraps, but both planners and investors concede that suggestions of a declining interest rate environment mean no one is committing to these investments in the long term.

Platforms have reported sig_nificant inflows into their recently introduced term deposit options, with inflows into the BT Wrap hitting $1 billion last week after only four months on offer and the Asgard eWrap claiming in excess of $80 million in new flows each fortnight.

In response to the growing trend, Putnam Investments’ director of retail business, Peter Walsh, warned of the risks some clients may face as a result of being out of the market too long. But platform providers said they too are aware of this risk, as are planners.

“We understand it’s what customers may need to do now to get through the volatility, but it’s not what we would rec_ommend for the long term,” AMP director of personal wealth management Andrew Hobern said.

According to St George Wealth Management general manager — product, Dean Thomas, inflows into the Asgard eWrap term deposits are largely coming from new money, with the majority being invested in short-term options.

“We haven’t seen a massive run on people jumping out of equity markets willy nilly,” Thomas said.

“Financial planners have done an exceptional job lead_ing clients up to this period É and we haven’t seen a mass panic in terms of redeeming assets and throwing them into cash.”

The Asgard eWrap offers six and 12-month term deposits, and Thomas said more than 80 per cent of inflows are going into the six-month option.

“And we’ve also been get_ting a lot of questions from advisers about shorter term deposits with three-month timeframes,” Thomas said.

“It’s not a long-term strategy but a short-term option to ride out the volatility.”

Those clients locked into 24-month options, how_ever, may suffer the impact of falling interest rates.

“There would be instances where term deposits would be appropriate for investors given the fact they do actually preserve capital, but if you’re talk_ing about a longer term time horizon, they do carry risk,” Walsh said.

“With the expectation that in two years time inter_est rates won’t be as high as they are now, investors will have further to go to reclaim investment objectives.”

Despite the negative impact potentially lower inter_est rates may have on those locked into products, it’s unlikely to deter investors anytime soon.

“There is the risk of being out of the market,” Hobern said.

“But until the market starts acting in a less volatile manner, cash rates will appear to be attractive.”