The Australian term deposit landscape

The size of term deposits in Australia held with Approved Deposit Institutions (ADIs) is around $530bn, with 45% or more held by Australians who are aged 65 years or more (ASIC report 353). The average term deposit invested is around $77,000 and banks are the main providers of term deposits.

Term deposit rates are around 2.30-2.50% pa at present, providing a meagre annual return from $77,000 of $1,925 per year. No surprise where cash rates are at all time lows.

In SMSFs, 23% of assets is held in Cash and Term Deposits, 30% approximately in Australian listed shares and around 15% in property. The rest is spread over managed funds and alternatives. Less than 10% is allocated internationally and to alternative assets.

Blue chip shares

Australian ASX 200 companies on the other hand, yield on average 4.2% pa with the opportunity for franking credits. That is $3,234 per year. Yes blue chip shares’ prices can move around (for example Telstra’s earnings have dropped and their dividend policy has adjusted which has recently impacted their share price), but they are generally considered ‘income producing’ investments.

Or are they?

There has been little growth in blue chip share values over the past several years – all banks are trading below their highs along with Wesfarmers, Woolworths and Telstra. Because the primary shareholder of these types of investments are super funds (including SMSFs) and retirees, these companies are less likely to change their dividend policy for fear of an investor sell-off. By not doing this will result in less reinvestment of profits back into other business generators, more innovation, or effective strategic change. But they are good income stocks.

Growth investment opportunities

We see an opportunity for Australians to diversify their portfolios away from low earning rates and income type securities into growth investments, but relative unknowns and other barriers prevent this leap of faith from occurring. Investors can drive this change. "Disruption" also applies to the domestic investment landscape and the central way of dealing with this new form of risk is through diversification. And we believe this will affect those portfolios weighted heavily to term deposits and ASX blue chips will suffer from underperformance.

The sectors I’m referring to are international shares, alternative investments (e.g. long life assets) and smaller companies to support earnings to grow in line with inflation. Even a good diversified index fund will help smooth returns and reduce investment risk. Every portfolio should have a little more exposure to growth assets, if possible, even if you’re in accumulation or pension phase of superannuation.

Forecast for term deposits and blue chip shares

Given the outlook for term deposit rates and ASX blue chip shares, returns are unlikely to grow for the medium term, and we believe consideration towards growth assets is essential. By investing over a wider net of opportunity, your investment risk (ie. concentration of assets and earnings) will reduce and lead to smoother, higher returns over the long term. Without investing for growth, the value of your dollar today will be less tomorrow.

More information

For more information or assistance with building a diversified portfolio with a wider net of opportunity, please contact James Cavanough at Lantern Advisory on 07 3002 2690 or email jamesc[@]lanternadvisory.com.au.