11 rate hikes later, where are we headed? — Endowus cash management solutions (October 2023)

Following the meeting in September, the Federal Reserve had announced that it’s holding interest rates steady. Having raised rates a grand total of 11 times this economic cycle to tamp down inflation, industry watchers are still divided on whether this will be the conclusive rate for 2023. While inflation rates are much lower than a year ago, it remains above the 2% target, with experts expecting an additional rate hike in the last quarter should conditions warrant it. 

How are markets reacting? Flat interest rates may actually cause banks to dampen or slow the increase of their savings and high yield accounts. At this point, it may be opportune to look at other ways to deploy your cash, especially for those with fixed deposit accounts that are reaching maturity. The flexibility that comes with Endowus cash management funds enables you to continue to grow your cash to take advantage of the current high interest rates, while providing you with the option to withdraw it for immediate needs (subject to the settlement time of redemption process, general is T+2 days), or even re-deploy it into other investment opportunities.

We’re here to help — Endowus has a suite of cash management funds and cash management solutions designed to suit your specific needs. Pick cash management or liquidity funds available on our Fund Smart platform, or consider our Cash Management model portfolios that potentially allow you to earn higher yields with no penalties on redemptions. 

Most importantly, enjoy daily liquidity for full flexibility. The funds on the Endowus platform are well diversified and enable you to take advantage of increasing yields in a rising rate environment, while minimising concentration risks to single issuers.

We have these solutions available in HKD, USD.

With higher interest rates, net yields as of 29 September 2023 now range from 3.7% to 5.4% p.a. for cash management funds available on the Endowus platform.

Cash management solutions on the Endowus platform

Here are the key money market, liquidity, and fixed income funds available on the Endowus platform for Hong Kong investors to consider:

For HKD:

• E Fund HKD Money Market Fund
• GaoTeng WeInvest HKD Money Market Fund
• HSBC Global Money Hong Kong Dollar

For USD:

• E Fund USD Money Market Fund
• GaoTeng WeValue USD Money Market Fund
• Abrdn Liquidity Fund USD
• Ping An USD Money Market Fund
• Amundi Cash USD Fund
• HSBC Global Money US Dollar

Bond yields vs returns — what’s the difference?

Many of the cash management funds highlighted above invest primarily in fixed-income securities, which include bonds. 

Simply put, fixed-income securities are debt instruments. An investor lends money to the issuer (basically, the borrower), and in return the investor receives coupons — or interest payments — on a regular basis. Entities that issue bonds include governments and corporations.

By investing your money in a fund that includes fixed-income securities, you are essentially lending your money to the issuers that the fund management company has chosen based on its analysis.

Here are quick definitions of yields and returns in this context:

• Yields: These refer to the payouts — that is, the interest payments — generated by a fixed-income security. Yields are based on the total annualised future returns that you would have received by the end of the security’s tenor (i.e. reflecting all the payments you would’ve received by maturity).
• Returns: These are generated by the increase or decrease in the value of a fixed-income security during the lifespan of the security. Returns are based on what you would have already earned up to the present day if you were to sell the security today.

A fundamental difference between yields and returns lies in the timeframe.

To illustrate this, let’s use a simple example of a one-year bond. You invest $1,000, which is the principal amount, in the bond of Company X and the company promises to repay this sum plus 5% interest (yield) at the end of one year. After a year, you would have earned a 5% return in total. 

In other words, as long as (i) you hold your fixed-income security until it matures, and (ii) the borrower does not default on the debt — the yield is very likely to be the total return you will earn. This is why yields are important in assessing the implied future return of cash management funds (and even longer-duration fixed income funds).

This scenario, of the yield equating to the return, changes when you choose to trade the bond. 

Let’s say the same Company X runs into financial difficulties. You’re not willing to stomach the increased risk of the company failing to repay the principal by the maturity date or missing the interest payment. Therefore, you decide to sell your bond investment in the secondary market. There, you are quoted a trading price that will mean you sell the bond at less than the principal of $1,000. If we assume this sum to be $900, that means you incur a loss of $100, or a return of -10%.

In other words:

• You would care about the “return” if you trade the fixed-income security before it matures.
• The value of fixed income securities are subject to various factors, including the financials of the companies, or even the broader market environment. Put simply, this value is what you will get if you choose to sell the security to a third party.
• This value changes on a daily basis, and is reflected as the returns.
  

Comparing time deposits, CDs, Government Bonds, and cash management funds

The world of cash management spans a wide variety of yield enhancement products. Investors in Hong Kong who are looking for a higher interest rate may turn to time deposits from banks, certificates of deposit, Hong Kong government bonds, or unit trusts, for example.

However, it is important for investors to clearly understand the pros and cons of each of these instruments — they often come with trade-offs involving yield, lock-ups, duration, minimum or maximum investment amounts, and transaction fees. 

The table below shows key details about time deposits, CDs, Hong Kong government bonds, and cash management unit trusts on the Endowus platform, including the latest available information on their yields (as of the time of writing). For time deposits, please note that the range of current yields should be taken as a guide only, given that time deposit interest rates in Hong Kong change frequently. 

Why do people invest in money market funds?

1. Maintaining an emergency fund: Life is full of uncertainties, having a liquidity fund can be a personal safety net to get through any unforeseen emergencies, such as a period of unemployment or an unbudgeted large expense. The general rule of an emergency liquidity reserve is about 3 to 6 months of monthly expenses. The accessibility and flexibility of money market funds makes them a good option while not having to sacrifice on yields.
2. Short-term investment/life goals: Money market funds could be useful for short-term goals such as saving for a vacation or wedding. As it is important to ensure the investment holds its value over shorter time period. 
3. Parking of assets: Money market funds are also good vehicles to park or transfer assets, when you are deciding on how to deploy your funds for the longer-term. We do not recommend money market funds as the investment vehicle for your long-term wealth goals. Although their stability might be appealing in the short run, over the long-term their returns would be much lower than stocks and bonds.

The smart and flexible way to earn more on your cash

Looking to supercharge your cash savings? The Aberdeen Standard Liquidity Fund, with a net yield of 5.14% p.a.*, could be a great addition depending on your needs and objectives. You can add it to your portfolio by following these steps. 

If you’re interested in model portfolios, Cash Management - Simple is another good option, with current net yield of 5.20% p.a*. Cash Management - Plus is available as well for investors who are willing to take more risk relative to the Cash Management - Simple solution. Critically, Endowus offers our cash management solutions at fees of just 0.10% (as of 31 August 2023), making our offerings highly competitive for your low-risk investments. This is on top of our longstanding practice to rebate any trailer fees back to our clients. Learn more about our Cash Management offerings here.

Make your cash work smarter for you. If you have money set aside for an upcoming expense, earn higher returns on it instead of letting it sit idle in your current or savings account. To get started with Endowus, click here. 

*As of 31 August 2023. Net yield after deducting fund-level fees and Endowus access fee, and adding back rebates. Source: Endowus Research, Aberdeen Standard.

Read more:

• How to choose between money market funds
• A focus on fixed income — curated bond funds (Fund Digest)

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Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes 

Before making an investment decision, you are reminded to refer to the relevant prospectus/ offering document for specific risk considerations and related fees and charges.

Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.

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Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus HK Limited (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus HK Limited, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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Complex Products

Some of the funds contained in this article are complex products and investors should exercise caution when investing in these products. Though these products have been authorised by the SFC, authorization does not imply official recommendation. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

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