It is important that financial planners and their clients research the products or shares they are negatively gearing before signing on the dotted line.
Speakers on researching margin lending products, shares, managed funds and property all repeated the same message – check the researchers’ rating before gearing.
“The best thing about margin lending is you have the ability to rectify things before it is too late,” says Cannex managing director Andrew Willink.
His company has introduced a star-rating system on margin lending products. It grants five stars to the top products, which accounts for only about 5 per cent of all margin lending products.
“Overall, the top 75 per cent of products are star-rated and the system was introduced to add value,” he says.
The Cannex rating system looks at the cost of the loan, its features and security of the product before it is rated.
The company also looks at the product provider’s charges over a 24-month period.
All the features of the product are studied and then it is given a weighting to determine how expensive the loan is, says Willink.
The weightings on costs have proved that a standard home loan is the most expensive way to borrow money, with a weighting of 75 per cent.
Margin lending has a weighting of 50 per cent, while a home equity loan has a 70 per cent weighting.
The top-performing variable lending products, according to Cannex, are ANZ, BT, Colonial State Bank (to be branded Commonwealth Bank on June 4) and J B Were.
When lending on shares, the key issues are liquidity, volatility and company gearing, says J B Were general manager retail products Rowan Fell.
“Generally, the margin lending will not care if the (stock) price goes up or down – only if there is a fundamental change in the stock’s market liquidity,” he says.
J B Were’s only real concern when assessing stocks for margin lending is the potential downside.
“This means if the stock heads south, and continues to head south, the earlier it is sold the better,” Fell says.
“Clients should also remember blue chip stocks don’t remain blue chip for ever and emerging companies can become blue chips.”
He cited the falls this year in stocks such as Lend Lease, Qantas, News Corporation and AXA that, if they were a major holding in a client’s margin lending portfolio, would all have had margin calls this year.
Van Eyk Research looks at growth rates in managed funds to pick out the quality products for margin lending.
“Managed fund analysis requires similar analysis to direct share investments,” van Eyk director Mark Thomas says.
“You still need a quality filter and you still need to address areas such as liquidity.”
The researcher’s assessment of a fund looks at how diversified it is and also reviews the fund’s liquidity. Generally, a fund with larger cap stocks is more liquid than a small cap fund. The proportion of illiquid stocks in the portfolio is also taken into consideration.
“Quality filters are an important part of gauging risk in managed funds,” Thomas says.
When looking at gearing into property investments, the level of gearing is an important factor, says Property Investment Research director Anton Lawrence.
“The appropriate level of gearing needs to be qualified,” he says.
“The location, income security, management strategy and the interest rate environment must all be taken into consideration when setting the level of gearing.”
The different types of property investment all require different assessments of the quality of the property being offered. When looking at offices, the tenancy profile is important while a shopping centre’s positioning is a critical factor.
Lawrence says the PIR property rating system is based on risk and return, to give an overall rating.
The researcher rates listed property trusts up to C, with most having an A or AA rating. Syndicates range between B and A+ while managed mortgage funds score either A+ or AA+ ratings. Agribusiness investments are usually rated between C to A-.
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