Despite the current volatility on Australia’s sharemarket, margin lending continues to be a valuable way for many investors to increase their long-term wealth. According to current Reserve Bank (RBA) statistics, there are approximately 144,000 margin lending accounts in Australia, with a collective $12.2 billion of loans being utilised.
Each year Canstar researches and rates margin lending facilities available for investors in terms of both their direct share and managed fund offerings. CommSec is one of the 2016 winners, achieving a 5 star rating in both the Share Investor and Managed Fund investor profiles, with an impressive suite of both loan and service features.
Canstar caught up with Niven Cattanach, Senior Product Manager, Commsec Product and Development, for a Q&A on outlook for and ongoing evolution of margin lending.
Q: The Australian sharemarket has had quite a volatile 24 months. What is your outlook for margin lending in the next year or two?
A: The Margin Lending industry saw demand for Margin Loans slow in the years following the Global Financial Crisis, however due to a combination of growth and volatility that presents investors with potential buying opportunities, we have seen demand for margin loans slowly increase since late 2013.
There will always be a demand for borrowing to invest (also known as ‘gearing’), however these days investors are generally more cautious, keeping gearing levels low in order to more effectively manage periods of increased volatility. We are now also seeing investors take a much more proactive role at monitoring and managing their geared investments, often rebalancing them sooner if investment returns are not in line with their investment objectives, which helps them reduce their exposure to potential losses. Due to the more proactive engagement by investors, we are seeing greater demand for loan features, and accessibility to loan information that enables investors to manage their loan anywhere, any time. Our outlook for the next few years is that these trends will continue, and as investors continue to grow their financial literacy and experience with borrowing to invest, their demand for margin loans and margin loan features will continue to increase.
Q: what type of buffer should investors be building into their LVR at the moment?
A: Every investor’s risk profile is different, so there is no ‘one size fits all’ rule when it comes to buffers. Investors should consider both short and long term price movements for any securities that they are investing in, and build an investment strategy which identifies; how much they are comfortable borrowing, how much the price would have to move before they would trigger a margin call, and when they should liquidate an investment if it is under performing. As a general rule though, the more conservative an investor’s risk profile is, the less they borrow – which reduces their exposure to potential geared losses, as well as potential geared profits, and ultimately provides them with a larger buffer.
Q: Regular gearing plans can be a good way to build wealth over time. Approximately what proportion of your margin lending customer utilize regular gearing?
A: A regular gearing plan provides an easy way for investors to automate continued investments into managed funds, by combining borrowed funds with their own funds. The benefit of this strategy is that the investment price is averaged out with each investment, reducing exposure to purchasing all of the investment at a high price. It also allows the investor to contribute to growing their investment as they can afford it. Regular gearing can be temporarily suspended and reinstated at any time, so it provides the investor with flexibility as their market outlook or investment objectives change. At the moment, approximately 10% of our managed fund investors are leveraging from our regular gearing capability.
Q: When it comes to managed funds or shares, can you estimate what proportion of customers hold one or the other, or both?
A: Our clients are continuing to diversify and rebalance their portfolios, so the percentage of portfolios in any one asset class will change over time. At the moment approximately 2/3 of investments are made into Australian shares, and the other 1/3 of investments are in managed funds.
Q: What fascinates you personally about margin lending?
A: What fascinates me about margin lending is the way it has continued to evolve to suit the needs of Australian Investors. What was historically a product for select investors leveraging the services of a professional stock broker, which wasn’t much more than a loan amount and a gearing ratio that was fully serviced by telephone, has grown into a product that is integrated with online trading and cash accounts and available for every investor with a computer or smart phone to see or use. The amount of development that has gone into education, investment reporting, real time updates, straight through processing, real time cash movements, online self-serve functionality, automated alerts, investment simulators, and an increasing number of securities that can be invested in, has made margin lending a very transparent and easy to use investment tool for anyone that is comfortable with the risks of borrowing to invest.
According to Canstar’s analysis, CommSec is the market leader in terms of advisor and direct client services with comprehensive market analysis and commentary.
The trading platform is clean and intuitive and reflects CommSec’s investment in technology. Find out more about CommSec here and read Canstar’s Margin Lending Star Ratings Report here.
This information has been prepared without taking account of the objectives, needs, financial and taxation situation of any particular individual. For this reason any individual should, before acting on the information, consider the appropriateness of it having regard to their own objectives, needs, financial and taxation situation and, if necessary, seek appropriate independent financial and taxation advice. Please be aware that a CommSec Margin Loan exposes you to unfavorable movements in the value of shares and units in managed funds, and possibly to margin calls. Please be aware that you are personally liable for any shortfall that occurs should your entire portfolio have to be sold to answer a margin call where there have been falls in the market value of your investments. Only investors who fully understand the risks associated with gearing into investments should apply’