The pursuit of this return premium, however, requires a deliberate shift in investment strategy. With the Reserve Bank of Australia's (RBA) cash rate at 3.6% (and market expectations pointing towards further reductions), a target return of 5.6% or higher may require investors to consider a different approach to their asset allocation and risk profile.
Even a seemingly small 2% difference in annual returns can create a substantial gap in portfolio value over a decade. Let's look at how an initial $100,000 investment grows in two different scenarios:
The RBA Cash Rate and the Risk-Return Trade-Off
The investor's goal of achieving a 2% premium above the current cash rate implies a target annual return of 5.6%. However, this is not a static benchmark. Financial markets, as reflected in the ASX 30 Day Interbank Cash Rate Futures, anticipate further rate cuts. Major banks also forecast a decline, with some predicting the cash rate could fall to 3.10% or even 2.85% by early to mid-2026. The RBA's own forecasts for private demand are conditioned on a cumulative 80 basis point easing in the cash rate over the coming year, which would support economic growth.
This dynamic environment presents a critical challenge for the investor. As the RBA's cash rate falls, the "risk-free" rate of return and the return on assets like cash and term deposits will also likely diminish. Consequently, an investor seeking to maintain that 2% premium would need to take on a higher level of risk to compensate for the diminishing returns from low-risk assets. This situation reframes the entire problem, transforming it from a static calculation into a dynamic investment strategy that must continually adapt to the changing economic climate.
The Hazards of Yield Chasing
The pursuit of a higher yield, such as the 5.6%+ target, can lead investors to focus on a single metric while ignoring crucial underlying fundamentals. This is a behavioural trap known as "yield chasing," and it can result in exposure to significant and often-overlooked risks.
Additionally, investors seeking a premium return must be aware of several other, more systemic, forms of risk.
To achieve a return of 5.6% (2% above the RBA cash rate of 3.6%), investors typically need to move beyond cash and term deposits, embracing assets that carry higher potential returns but also greater risk. The key is to find a balance that aligns with your personal goals and risk tolerance.
As CEO and the fund’s portfolio manager at iPartners, Travis Miller, notes: “There is strong demand for a fund covering cash, term deposits and private credit assets amid the increasingly volatile markets around the world.
Managing Partner at Kelly+Partners Private Wealth, Trent Doughty, said “We are offering a monthly distribution and redemption feature in some of our fund offerings so our investors can be nimble, while securing their funds in a relatively safe harbour for six months or longer.” For wholesale investors (individuals with a gross annual income of greater than $250,000 for the past two years or net assets in excess of $2.5 million), the Core Income Income Fund has been designed to deliver a higher yielding portfolio of private credit and fixed income assets.
The iPartners Core Income Fund, targets an interest rate of 7% per annum, maintaining a holding in a selection of credit assets, fixed income and managed funds. The fund is designed to provide monthly applications, distributions and redemption feature, with a view to provide a stable income yield.
To learn more, please contact Kelly+Partners Private Wealth at: investments@kellypartners.com.au
Source: iPartners