Should You Trust A Trust Or Bank On An Account?

Depositors demand peace of mind.

MACQUARIE Bank has given its customers the option of moving into a Government guaranteed cash management account or staying in its cash management trust, which is not guaranteed but invests in securities that are guaranteed.

So what is the best choice?

When the Federal Government announced in October that it would guarantee bank deposits, the guarantee did not extend to cash held in unit trusts such as cash management trusts (CMTs).

Macquarie has the biggest CMT in the market, with about $15.5 billion invested in the fund. Macquarie could not offer its CMT investors a Government guarantee but it could make sure the securities in the trust were guaranteed.

As an alternative for customers, it launched a cash management account (CMA) in November last year – a bank product that is covered by the guarantee. A senior product manager in the banking and financial services division at Macquarie Bank, Peter Forrest, says the CMT invests in a range of short-term money market securities issued by banks.

Once the Government had finalised its guarantee arrangements, Macquarie went to all the issuers whose securities went into the CMT to ask them to provide it with guaranteed securities.

Forrest says that all the issuers complied with the request and now all the underlying securities in the CMT are guaranteed.

The catch is that there is a cost involved in having those guarantees.

The Government’s guarantee scheme provides a blanket guarantee of all deposit products of Australian banks, building societies, credit unions and the subsidiaries of foreign banks up to $1 million.

For deposits of more than $1 million, the financial institution can elect to have the guarantee or not. If the deposit is guaranteed, it comes at a cost of 0.7 per cent.

Forrest says the cost of this “wholesale” guarantee is reflected in the CMT returns.

The Macquarie CMT has been paying about 3.2 per cent to 3.3 per cent over the past month. The CMA is paying a higher return – about 4.5 per cent. The difference is the 0.7 per cent cost of the guarantee.

Forrest says there has been no significant outflow from the CMT. “The CMT is a AAA-rated trust that invests in a diversified range of bank securities,” he says.

“The CMA is a bank product that provides a return from Macquarie’s balance sheet assets.

“The guarantee on retail deposits will run for three years. The Government has not said how long the wholesale guarantee will last – only that it will cease once financial markets have settled.”

The CMA does not have the same functionality as the CMT. Since its launch in November, Macquarie has been adding to its features. It was launched with basic functions and then in December internet, telephone, telegraphic and BPay facilities were added.

 By the middle of the year the CMA will have international money transfer, automatic share transaction settlement, online audit letter and online deposit book ordering, giving it the full functionality of the CMT.

Forrest says it is too early to talk about funds flow. “We have not had any significant outflow from the CMT and the CMA is too new to report on,” he says.