Update: Syfe Cash+ has updated its allocation as of Jan 2022. Read the latest review here.
Over the past days, there has been a lot of chatter around how Syfe Cash+ returns have been almost wiped out. More worrying, this volatility seems to have come as a surprise to people.
To put it out there, products like Syfe Cash+ (and those from Stashaway and Endowus) do not behave like bank deposits. Instead, they are very low-risk investments. As such, they are not capital guaranteed. The projected return can change any time and you may lose money if the market corrects.
Is Cash+ still a safe place for your cash?
We put some savings in Cash+ when it first launched in Jan 2021 due to the attractive rate of 1.75% p.a. We did see some solid returns, which lines up with what Syfe said about the actual Q1 return being 2.18%.
The bummer is that they recently adjusted their projected return to 1.5%. And following these few days of negative returns (Syfe sent a client note stating that drawdowns over the last three trading days were 0.18%), will we still leave our money there? Here’s what we think.
Understanding the underlying funds
Cash+ is made up of a money market fund, an enhanced liquidity fund and a short duration bond fund.
- LionGlobal SGD Money Market Fund (30% allocation)
- LionGlobal SGD Enhanced Liquidity Fund (35% allocation)
- LionGlobal Short Duration Bond Fund (35% allocation)
The underlying assets of these funds are short-term and low-risk financial assets ranging from government and corporate bonds to high quality interest rate securities.
If you’re invested in both StashAway Simple and Syfe Cash+, you might have noticed that Simple has less fluctuations than Cash+. At the same time, it has a lower projected return (1.2% p.a.).
The reason for this difference really is the inclusion of the LionGlobal Short Duration Bond Fund in Cash+.
You’ll notice that it is the “riskier” fund compared to the other two funds. First, it has a longer weighted duration of around 2 years, compared to half a year for the money market fund.
Funds with shorter weighted duration (i.e. their underlying assets have shorter maturities) generally tend to be less risky because the fund will get its principal back much quicker. Put simply, there is less time for things to go catastrophically wrong.
Second, the Short Duration Bond holdings lean more towards Singapore and international corporate bonds. The money market fund holdings are more towards government bonds and commercial bills with very short tenors. This also accounts for the difference in credit rating.
One thing to note is that although the LionGlobal Short Duration Bond Fund is rated BBB, that is still considered investment grade.
So what’s really going on with the Short Duration Bond Fund?
In our view, how quickly Cash+ can recover depends on how quickly market sentiment can bounce back from the ongoing volatility within the Chinese bond market.
This all stems from China Huarong and fears over possible bond defaults and even bankruptcy. In a nutshell, Huarong bond prices began dropping after it said it would delay the release of its preliminary financial results so an auditor could finalize a transaction. To make things worse, S&P said it would review Huarong’s credit rating.
If Huarong – a state-owned enterprise majority-owned by China’s Ministry of Finance – defaults, there will be reverberations across the entire Chinese corporate bond market.
Concerns have spilled over to the broader Asian bond market. This has also affected the LionGlobal Short Duration Bond fund which plunged in recent days.
Is the extra risk worth it?
You cannot earn extra returns without taking additional risk. In this case, the addition of the LionGlobal Short Duration Bond Fund has made it possible for Cash+ to project higher returns than other offerings.
This applies to Endowus too. Endowus Cash Smart Enhanced (1.2 % – 1.4% p.a.) has higher returns (and higher risk) than Endowus Cash Smart Core (0.8% – 0.9% p.a.) because it holds a short term duration bond fund, the UOB United AM SGD Fund.
So for investors questioning the addition of the short duration bond fund, the question to ask is whether the extra return is worth the incremental risk.
If you’re uncomfortable with the idea, then stick to StashAway Simple which holds no short duration bonds.
But if you don’t need to touch your savings anytime soon, and can leave it set aside for at least 6 months or more, then cash management products with exposure to short duration bonds could give you higher returns than your bank account.
Of course, you must be aware that there will be days where you see negative returns in your cash account. These are still investment products after all.
Will Cash+ recover?
What’s more important is how many days of negative returns there are, and how quickly they turn positive again.
In the client note, Syfe stated the following:
There were 15 out of 57 trading days where the daily return was negative. In all but one of these cases, the negative return was offset by positive returns within three days, and in one case the total return was positive again within two weeks.
Going further back, during the extreme market volatility of early 2020, our historical backtesting shows that the Cash+ portfolio would have experienced a peak to trough drawdown of -0.82% during March and April 2020. This loss was fully recovered by the end of May 2020, and the return for the full-year 2020 was +2.72%.
Assuming, the current volatility is as bad as what happened right as the pandemic broke out, the drawdown could last for a month or two. What mattered more to us was knowing that the portfolio clawed back the losses and then some.
Ultimately, with interest rates so low, the only real way to get rich is to start investing!
No point quibbling over the 0.X% difference in rates being offered by the various cash management providers.
If you’re interested to start investing in Syfe, get 6 months of free investing when you use our referral code FRUGALFOX (You will get SGD $30,000 managed FREE for 6 months. This works out to $75 saved in fees if you invest $30,000.)
Want to try out Endowus now that they’ve dropped their minimum deposit amount for their Cash Smart products to $1,000? Use our referral link – https://endowus.com/invite?code=KTSQ0
You’ll get $20 in Access Fee credit.