Her analysis includes:

• the positive change in market sentiment and performance
• latest views on the cash vs shares debate, and
• the outlook for markets in the short, medium and long term.

View the Michelle Heinrich video here.

Late last year it was hard to avoid the media frenzy around the Federal Government’s guarantee on cash products and I observed the commentary with disbelief. The public debate was fixated on which companies would offer government-guaranteed products, which ones would pass on the cost of the guarantee to customers and whether or not customers could get access to the guarantee for free if they split their money among several different accounts.

However, no-one seemed to ask the most important question, which is: beyond bringing Australia into line with actions taken by governments around the world, what value was there for a customer with more than $1 million who would pay an additional 70 basis points for the guarantee on a low-risk, low-return cash product? The Government did not introduce the guarantee because it was worried about the stability or security of Australia’s banking system, which is strong and performing well. Cash products have operated effectively in Australia for decades and there is no reason why this would not continue. Unfortunately, these vital facts were missing from much of the public discussion around this issue, which seemed to be stuck at a product level rather than being focused on whether or not chasing the guarantee made sense.

The issue when it comes to cash investing is not whether the product is covered by the government guarantee, but rather whether bailing out of a long-term investment strategy and moving into cash makes sense. Government guarantee or no government guarantee, cash never, repeat, never, builds long-term wealth.

We now know that if you were going to switch to cash, the time to do it was around 14 months ago – wisdom that comes only with a crystal ball or the power of hindsight. Switching to cash today will result in two outcomes:

1. Crystallisation of losses in the equity portfolio as investors convert paper losses into real losses; and
2. Investors may miss out on the rebound in equity markets when it occurs.

On this second point, let’s be clear about this: businesses build long-term wealth and so even if investors managed to time their exit from the sharemarket correctly, they are still going to have to get back in at some point. Getting these timing calls consistently correct is extremely difficult for even the world’s best investors.

In times like these, the value of advice is proven day in, day out. Advisers who have helped their clients stay true to their long-term investment strategies, ignore the hysteria and prevent them from crystallising losses by switching to cash have served their clients extremely well. In the past few months this advice could be judged to have cost investors in the short term. However, in the long term, I believe it will be proven to be the right advice because the markets will recover and when the pick-up comes, it will come quickly and those invested in cash will miss out.

At the end of the day, investors need to look at the stability and security of the company that is managing their investments, whether they be invested in cash, equities, property or any other asset class, and not just at whether or not they are invested in a product covered by the government guarantee.

The market has fallen 50 per cent in the past 12 months – investors have every right to be worried and nervous, but for investors with a long-term investment horizon, history has repeatedly shown that staying invested in equities will deliver a better long-term return than investing in cash.

As an industry, our job is to not only make sure our clients’ portfolios are set and well diversified across asset classes, but also to help our clients not jump out of the market at the wrong time. I hope the silver lining of this financial crisis will be that after it’s all over, there will be thousands of fantastic examples of how financial advice has helped clients stay calm and protect their wealth through these difficult times.

A similar article written by MLC CEO Steve Tucker appeared in IFA magazine, Issue 439, December 15-21 2008, p24.

They did this, despite Australian banks being secure and well regulated, to give Australians confidence their cash is protected and to prevent panic withdrawals.

This has however created some uncertainty for investors in superannuation, pension and investment products, with some considering moving out of these products and into bank accounts.

Such a strategy can be at the expense of investors’ long-term investment goals, as it can have two undesired effects:

• Investors that sell down their investments effectively crystallise their losses;
• Investors may miss out on the strong equity rebound in equity markets that have historically occurred after a period of poor market performance.

MLC’s Cash Fund guarantee

At MLC, we understand the importance of secure cash investments.

And while it is not widely known, we have in fact always guaranteed the MLC Cash Fund in our MLC MasterKey super and pension products*.

So we are taking this opportunity to confirm and strengthen our guarantee on the MLC Cash Fund.

From Wednesday 26 November 2008, MLC will be extending this guarantee to the MLC Cash Fund in our MLC MasterKey investment products^.

Given many other financial institutions do not offer the guarantee MLC does, some fund managers have chosen to apply the government guarantee to their products.

From Friday 28 November 2008, the government guarantee will come at a cost that fund managers will generally pass onto investors through reduced interest rates of around 0.70% pa.#

MLC’s Cash Fund guarantee comes at no extra cost to our investors.

MLC’s cash portfolios

Our customers choose to invest in our cash portfolios for their safety and low risk status. So our cash portfolios are focused on investing in assets with a high credit quality and high levels of liquidity to achieve a competitive rate of return while safeguarding the investment.

This is just another example of how MLC grows and protects clients’ money keeping their best interests at heart.

The status of our cash portfolios is detailed in the following table:

Note: The significant majority of investments in our cash portfolios are eligible for the government guarantee at no charge up to and including Thursday 27 November 2008. MLC will not be applying the government guarantee to our cash portfolios from 28 November 2008.

While it is not a cash portfolio, we have received a number of enquiries in relation to the NAB Fixed Rate Fund. MLC Limited continues to guarantee the rate of return on current investments in the NAB Fixed Rate Funds. The NAB Fixed Rate Funds provide a guaranteed rate of interest on the investment for the term selected. This only applies if the investment in a NAB Fixed Rate Fund is not redeemed early.

More information:
Should you have any questions in relation to cash portfolios on MLC MasterKey, please contact your financial adviser or call the MLC Investor Hotline on 132 652, weekdays between 8:30am and 5:30pm AEST.

MLC advocates the importance of investors speaking to their financial advisers before making investment decisions.

* This guarantee is provided by MLC Limited in its capacity as investment manager and administrator for The Universal Super Scheme. Please refer to the table for a description of the MLC guarantee on the MLC Cash Fund.

^ This guarantee applies to the MLC Cash Fund within the MasterKey Unit Trust, MasterKey Investment Service and MasterKey Investment Service Fundamentals. It is provided by MLC Investments Limited, the Responsible Entity of the MLC Cash Fund. Please refer to the table for a description of the MLC guarantee on the MLC Cash Fund.

# This is a Government charge to provide the guarantee on investments over $1 million as covered in the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding Rules, dated 20 November 2008.

Important Information:
Any advice in this communication has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice in this communication, consider whether it is appropriate to your objectives, financial situation and needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited ABN 30 002 641 661 and MLC Limited ABN 90 000 000 402 and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at www.mlc.com.au

An investment in any product offered by a member company of the National group does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group of companies and is subject to investment risk including possible delays in repayment and loss or income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group of companies guarantees the capital value, payment of income or performance of any financial product referred to in this publication other than the capital value of the MLC Cash Fund which is guaranteed by MLC Limited and MLC Investments Limited. MLC Limited guarantees the rate of return on investments in the NAB Fixed Rate Funds.

Doing so can however have two undesired effects:

• Investors crystallise their losses. If an investor sells when the value of their investments is down, they will make a loss on their investment.
• There is also often a strong rebound in equity markets after a period of poor market performance, and an investor who has left the market would miss out on this.

Anthony Waldron, General Manager of MLC Platforms said: “While we don’t know exactly when, the one thing that is certain is that equity markets will recover and start to grow again and those individuals who have remained invested will benefit from the upturn, and those who are invested elsewhere will miss out.”

Another area for caution with cash is investors pulling their funds out of cash management trusts to invest in cash products covered by the Government Guarantee

“What’s important is that customers look at the stability and security of the company that is managing their investments – whether they be invested in cash, equities, property or any other asset classes – and not just on whether or not they are invested in a product that is covered by the Government’s guarantee,” said Anthony.

MLC advises Australians to get financial advice before making any investment decisions, so any changes to their investment strategy keep them on track to achieving their long-term goals.

General Advice Warning: Any advice in this communication has been prepared without taking into account investors’ objectives, financial situation or needs. Because of this, investors should, before acting on any advice in this communication, consider whether it is appropriate to their objectives, financial situation and needs.

Therefore MLC’s cash portfolios are focused on investing in assets with a high credit quality and high levels of liquidity.

Almost all the underlying securities in MLC’s cash portfolios are eligible for the proposed government guarantee of deposits.

MLC’s Cash Portfolios – October 2008 [PDF, 45KB]