In terms of volatility 2016 has certainly started with a bang rather than a whimper, thanks in some part to the Chinese stock market performance and global sentiment. Nevertheless it should be remembered that investment is a long-term game and borrowers who manage investment margins conservatively can ride out the short-term volatility.
This seems to be something that many Australian investors are comfortable with, with Canstar’s award-winning margin lending platforms reporting conservative growth in demand. Award-wnner nabTrade, inparticualr reports seeing interest in margin lending rebound quite strongly in the past year. Canstar caught up with nabTrade’s Adrian Hanley for some further insights.
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: Despite a volatile share market and recent price weakness, we have seen interest in margin lending rebound quite strongly in the past year. We expect this interest to continue for a number of reasons.
Firstly, margin lending interest rates are still tracking at historical lows, reducing the required performance hurdle (dividends plus price growth) for any target investment. Secondly, we have worked hard to expand the range of asset types that an investor can use as loan security; specifically internationally listed securities and unlisted corporate bonds. This vastly increases the investment opportunities to contemplate for a margin lending investor.
We have also customised a margin loan to cost effectively follow the guidelines for limited recourse borrowing by self-managed superannuation funds. This has created a new client segment of margin lending investors, which will continue to grow strongly.
Q: A regular gearing plan can be a great way for investors to ease their way into the market. What types of investors are most suited to a regular gearing plan?
A: Instalment gearing has been a popular approach for progressively investing into managed funds on a monthly basis; using a combination of client funds and borrowed funds. This method automatically delivers an average entry price into the market, as new investments are spread out over time. But, this method may also keep gearing levels elevated as the investor’s loan balance is increasing each month.
The concept of budgeting and putting aside funds each month will also have inherent appeal to an investor, who wants a more disciplined and structured approach to the use of their available cash flow.
At NAB, we have evolved a new loan structure that mimics a traditional home mortgage, where the borrowed funds are used to acquire managed investments rather than property.
This new loan (NAB Equity Builder) lets an investor make a larger initial investment, and the loan is then repaid on a monthly basis.
This new approach delivers a geared exposure to the share market, the discipline of monthly repayments, plus a number of new investor benefits: (1) no margin calls to manage, (2) no need to sell assets to repay the loan, and (3) progressively lower gearing levels – reducing the investor equity risk associated with negative price movements.
Q: What margin lending tips and traps should investors be aware of?
A: Whilst many investors establish a margin lending facility to implement specific advice or fund a current investment, a margin lending facility is a flexible funding structure that an investor can use for future opportunities.
In a perfect situation, when prices weaken and an investment opportunity presents itself, an investor needs the capacity to act quickly. A margin lending facility provides such capacity if it is established and holds sufficient loan security, when the opportunity arises.
The trap with a margin lending facility is that market weakness may rob a facility of any extra capacity to invest further. In fact, market weakness may trigger a margin call and the need to contribute additional equity.
By keeping gearing levels at more moderate levels, an investor is more likely to avoid the burden of margin calls, yet maintain the capacity to act when the right opportunity arises.
As there are no account keeping fees associated with a standard margin loan, it can make sense to have one in place as a ready source if funds.
Q: What fascinates you personally about margin lending?
A: When we look at household balance sheets in Australia it appears that equities are an underutilised asset class for borrowing purpose. According to the RBA Australian households own about $8 trillion worth of assets (outside of their superannuation) and have borrowed a combined $2.16 trillion. This means Australian Households are geared on average to about 27% when we exclude super assets. Of their $8 trillion in assets, households own $763billion in equities. Approximately $12billion of this has been funded through margin loans, which represents an average household gearing level against equities of just 1.6%. Given the liquid nature of equities and the yield profile of many Australian stocks, it would appear that there is potentially a greater role for margin lending to play in clients gearing strategies.
This underutilised opportunity to gear against financial assets, plus the scope to incorporate a broader range of assets as loan security, making margin lending an exciting sector to be involved in.
nabTrade, one of the companies in the NAB Group, was launched in late 2012 and advertises trade fees as low as $14.95 per trade (for amounts of $5,000 or less).
Achieving a 5 star rating in the share investor profile, nabTrade’s margin loan is new to the market and offers one of the lowest interest rates assessed. In terms of features, nabTrade has 378 ASX stocks on its acceptable securities list and 1,115 managed funds. Find out more about nabTrade here and read Canstar’s Margin Lending Star Ratings Report here.