Following on from my recent blog, ‘Utilising leverage in investment portfolios’, I’d like to show you a potential gearing strategy you could consider within a Self-Managed Super Fund (SMSF). Remember this all assumes you’re comfortable with the concept of gearing and are willing to accept high levels of investment volatility and potentially large moves (both up and down) in your investment value.
Since 2007, superannuation laws have allowed SMSFs to borrow to make investments in accordance with certain rules. There are a limited number of ways this can be done, the rules are strict, and it can be complex to organise and expensive to arrange. The allowable borrowing arrangement is known as a “limited recourse borrowing arrangement”, or LRBA. This arrangement, amongst other things, ensures that the lender cannot recover any outstanding debt from any assets of the super fund, and as a result the interest costs for this type of borrowing are generally quite expensive.
Sounds complicated! However, if you are looking to pursue a geared strategy providing exposure to the returns of the Australian or US share markets there is another less complicated way.
Internally geared funds such as GEAR and GGUS provide a way to pursue geared investment strategies which are less complicated than arranging a LRBA. The gearing obligations are met by the fund with no further recourse to the SMSF, and any losses are limited to the initial capital outlay (the purchase price of the units). It’s also cost effective compared with the alternatives – the fund uses its capacity as a wholesale investor to borrow at significantly lower interest rates than those available to SMSFs who arrange their own borrowing arrangement through a LRBA at retail interest rates. Another feature of internally geared funds is that the interest costs are met within the fund, eg offset against income generated via the investments, so the SMSF is not required to manage cashflows or direct further contributions for ongoing interest costs.
So internally geared funds such as GEAR and GGUS are a less complicated way to pursue a gearing strategy, is it still right for me?
The answer to this question lies with the trustees of the SMSF and your financial adviser who should understand your specific circumstances. However, here are some considerations;
Ability to make investments beyond your contributions; if the SMSF is in the accumulation phase and you are making the maximum contributions you can either afford or are allowable, then implementing a gearing strategy can provide additional funds for investment in the SMSF.
- Performance; potential for greater (magnified) returns (both up and down!), income, and franking credits in the case of GEAR.
- Cost effectiveness; Wholesale funding obtained by the fund means interest costs significantly lower for most investors. Management costs, at 0.80%p.a. of the Fund’s gross asset value, are lower than most geared fund alternatives and the costs of getting in or out of your investment are limited to any brokerage you pay your stockbroker or financial adviser and the bid-offer spread on the ASX.
- Diversification; GEAR provides diversified exposure to Australian shares while GGUS provides diversified exposure to US shares.
- Access; no need to set up a LRBA, no application forms, no credit checks. Simply purchase units in GEAR or GGUS on the Australian Securities Exchange (ASX) just like any share.
Like all investments, there are risks you should consider. While gearing can magnify returns, it too can magnify losses in adverse markets. It’s important to clearly understand your own tolerance for risk and your investment time frame amongst other things. You should consider the Product Disclosure Statement (PDS) available on our website and discuss your specific circumstances with your Financial Adviser.
So if you are considering a gearing strategy providing exposure to the returns of either the Australian or US share market with less complications than other forms of borrowing in a SMSF, which were highlighted earlier, you may wish to check out the BetaShares geared suite of Funds.
Both GEAR and GGUS are managed funds which are available on the Australian Securities Exchange (ASX).
Further information can be found at;
- BetaShares Geared Australian Equity Fund (hedge fund) (ASX Code: GEAR)
- BetaShares Geared US Equity Fund – Currency Hedged (hedge fund) (ASX Code: GGUS)
Please note: Gearing magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments. Investors should seek professional financial advice before investing, and monitor their investment actively. An investment in the Fund should only be considered as a component of an investor’s overall portfolio. The Fund does not track a published benchmark.