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The ‘bucket strategy’ and the need for a rethink

By Grace Ormsby
06 November 2019 — 1 minute read

The “bucket strategy” of investing needs a rethink in such a low-rate environment, according to an investment expert.

The deputy head of fixed income at Schroders, Stuart Dear, has conceded that it’s a “serious challenge for investors to generate income using traditional approaches” as often advised by members of the financial sector.

The “bucket strategy” sees investments allocated to three asset buckets: equities, diversified but defensive, and cash.

“As the income and capital from the cash bucket is used for day-to-day expenses, the income generated by the riskier buckets flows down to top up the cash bucket,” Mr Dear outlined.

“This problem is compounded further on platforms where the rate paid to investors for cash accounts is nearing zero after fees,” he said.

Schroders is predicting that while 1 per cent has commonly been seen as an effective floor for the cash rate in Australia, “rates can go lower still — even to zero, given the global experience”, according to Mr Dear.

“And it’s likely that cash rates will be kept at low levels for a considerable period of time, exacerbating the challenges facing retirees, and indeed any investors, seeking the benefits of cash,” he continued.

He has advised investors to consider other alternatives in the environment, which is offering very little return on cash.

“For example, a diversified, defensively oriented fixed income strategy that offers periodic income and daily liquidity could be a good substitute for part of the cash bucket.”

But the trade-offs for swapping out this reliance on cash must also be considered, Mr Dear said, as by investing in alternative options to cash, “investors are likely to be taking on more risk”.

“As such, they should choose options that can generate higher returns while preserving the liquidity and relative certainty of return they require — both key features of cash.”


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