Income alternatives more relevant as inflation surges and rates in ‘catch-up’ mode


Matthew Lemke

The RBA may have raised interest rates, but growing inflation has left cash investors so far behind they are unlikely to see the benefits from rate rises for some time, according to Matthew Lemke, fund manager (income funds) with boutique investment house Prime Value Asset Management.

“There is currently a huge gap between the inflation rate and the cash rate. The problem is that investors may need to temper expectations on rate rises and hence the catch up to inflation may not occur.

“There needs to be plenty of rate rises before cash investors enjoy meaningful returns, and it’s unlikely banks will pass rate rises on in full to depositors.

“Then there is the inflation question – it seems inflation is being fuelled from the supply-side rather than the demand-side, which may temper the RBA hikes. My expectation is only for a mild tightening cycle, certainly not the aggressive slew of rate hikes envisaged by the market.

“But an inflation rate of over five per cent while the official cash rate is under one per cent means cash investors are seeing their funds go backwards in real terms at increasing speed.”

Mr Lemke said CPI measuring 5.1% for the 12 months to 31 March 2022 was particularly hard on savers and cash investors. “Cash investors are now paying a very high price for safety. Bank savings accounts commonly pay around 0.25%, while inflation was 5.1% for the year to the end of March 2022, a 4.85% difference.

“Taking CPI, it means that if an investor deposited $100,000 into a typical savings account in March 2021, that money now buys $95,150 in real terms in March 2022.”

Lemke says alternatives to cash investments, such as diversified income investments, could help cash investors to stay ahead of inflation – if they are prepared to consider more risk. “The question over risk tolerance becomes more challenging for investors as inflation continues to spike”, Mr Lemke said.

Lemke manages the Prime Value Diversified High Income Fund, an income fund which has paid $0.42 per unit per month since inception, delivering 5.45% per annum to investors after fees since inception in August 2019.

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