Reputation king in booming margin loan market

Colonial First State, Commsec, Macquarie and Leveraged Equities were the big winners in a margin loan market that showed no signs of cooling off last year.

In the year to December 2005, the amount of money in existing margin loans continued to increase, largely thanks to strong market performance, and according to Reserve Bank of Australia (RBA) figures, the rate of establishment of new accounts increased by 8.6 per cent.

For those who took out a new margin loan in 2005, a new Investment Trends Report surveying 2900 investors found them more likely to choose their provider based on the provider’s reputation, rather than on interest rates or fees.

And after choosing a provider they like the sound of, clients are likely to stay put, with the report finding only 4 per cent were ever likely to switch loan provider.

The top margin loan providers by channel were Commsec by direct channel, Colonial Geared Investments via financial planners, and Macquarie Margin Lending and Leveraged Equities through brokers.

Surveyed investors were most satisfied with products from Commonwealth Securities, Macquarie Margin Lending and BT Margin Lending.

Future trends in the margin loan market are difficult to predict at present according to Investment Trends managing director Mark Johnston.

“Obviously growth in the margin loan market tends to cyclical — there is usually a lot of growth in the June quarter. So in terms of people taking out new loans, it’s flattened in the second part of last year, but we won’t be able to really tell where the market is going on a year to year basis until June 2006,” he said.

The RBA has kept interest rates unchanged for a year and many commentators are predicting the cash rate will stay at 5.5 per cent until 2007. Continued outperformance in the Australian equities market could also fuel further growth in the establishment of margin loans, but the market’s increasing value is causing some economists to predict lower equities growth in 2006.

According to RBA data there were 152,000 margin loan accounts as of December 2005, up from 140,000 a year earlier, representing an increase of 8.6 per cent.

Because the Investment Trends report found 13 per cent of the 2,900 investors it surveyed held multiple accounts, Johnston estimates that there are around 130,000 margin loans clients in Australia.

A separate Investment Trends study released in April last year found 60 per cent of the 490 financial planners it surveyed were increasing there use of gearing, with margin loans standing out as the most popular gearing strategy over line of credit, geared share funds, protected portfolio loans and instalment warrants.