Like most kids (and many adults I dare say), my three young girls love playing with Lego.
With such a big age difference between my eldest (11) and youngest (4) we regularly have both “Lego” and “Duplo Lego” out simultaneously. For those who don’t know, Duplo is Lego for smaller children being twice the length, height and width of traditional Lego. While building towers using both types of Lego and watching the Duplo tower growing at twice the rate of the traditional Lego tower using the same number of blocks, I started thinking about building wealth using a gearing strategy within an investment portfolio. A gearing strategy is, in some ways, similar to those Lego towers – investors employ the same amount of their own funds (or building blocks in my analogy), and combine these with borrowed funds creating a larger investment (the Duplo in my example), which has the potential to grow wealth faster. Of course, unlike Lego, using leverage is not child’s play so let’s look at some research.
According to the ASX/Russell Investments Long-Term Investing Report released in June 2015, an investment which used gearing compared to an ungeared investment lead to an outperformance in returns for both Australian shares and residential property over a 10 and 20-year timeframe to end December 2014. In addition, for investors in the lowest marginal tax rate, geared Australian shares outperformed geared investment property over both time periods after tax. This is likely in part due to the additional benefit of franking credits. The full report can be found here. Please note that past performance is not an indicator of future performance and that geared investments involve much higher risk than non-geared investments, so it may not be for all investor types.
BetaShares offers investors a simple way to obtain a cost-effective geared exposure to the returns of the Australian share market via our Geared Australian Equity Fund (hedge fund) (ASX: GEAR). Like all our Funds, GEAR can be bought and sold just like any share on the ASX. By combining funds received from investors with borrowed funds, GEAR invests in a share portfolio consisting of the largest 200 equity securities listed on the ASX weighted by market capitalisation, as measured by the S&P/ASX 200 index. As an investor in GEAR you can expect to receive dividends, franking credits and magnified exposure to the capital movements, up or down, of the underlying share portfolio.
One of the major benefits of an investment in GEAR is that it’s “internally geared”, meaning that the gearing obligations are managed by the Fund. The Fund actively monitors and adjusts the gearing level to between 50 – 65% (the gearing level is defined as the total amount borrowed by the Fund expressed as a percentage of the total assets of the Fund). As a result there are no margin calls or credit check requirements for investors, and any losses are limited to the initial capital outlay. In my coming posts, I will look at a number of strategies where GEAR can be used to potentially enhance Australian Equity investment returns. Look out for my upcoming blog posts or visit our website for more information.
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.