Instalment warrantsJason Petersen, our Head of Wealth Management, is well known for his expertise in the use of instalment warrants in wealth building.

Here he is interviewed for the Finance News Network and Chi-X on the subject.

 

So what is an instalment warrant?

An instalment warrant is a way of borrowing to buy shares while limiting the risk. For example, if you want to buy shares in a particular company, you could buy 100,000 shares using your own funds, and then use an instalment warrant to buy another 100,000 shares – thereby doubling your exposure to the asset. It is a limited recourse loan, so your liability is limited to the value of the shares.

Advantages of instalment warrants

Instalment warrants can enable you to:
• Increase your exposure to an investment asset
• Diversify your portfolio
• Limit your risk
• Create tax advantages via franking credits
• Generate an income stream via dividends

Instalment warrants are useful in many different scenarios. To describe the benefits, Jason gives examples of how they can be applied:

Young accumulators: For those who are just starting out and who don’t have a lot of assets, instalment warrants are an effective way to gain exposure to growth assets.

People with substantial assets all tied up in growth assets: Our goal here may be to diversify away from the growth assets, to give the investor more protection. We can use the instalment warrants to do that and get the same level of exposure to growth assets, but meanwhile make sure they have a fair chunk of their assets in defensive assets as well.

Superannuation accumulators: Here we can use instalment warrants to create franking credits and dividends, to create a longer-term income stream for the investor.

A specific example of an instalment warrant in action

“A really good example off the back of the GFC was Commonwealth Bank self-funding instalments,” says Jason. “At the end of the GFC, Commonwealth Bank shares were trading at about $30 a share. So say for example, a client went to buy 10,000 Commonwealth Bank shares worth $300,000; they only had to contribute $150,000. Now over the next five years, the dividends of the Commonwealth Bank paid off that $150,000 loan. If we look today that client with those 10,000 Commonwealth Bank shares is getting a dividend stream of $60,000 a year, including franking credits. And that’s a really good example where there’s no loan still sitting against the Commonwealth Bank shares.”

Factors to consider

Jason says there are several factors that prospective investors need to be mindful of. These include the need to have a positive view of the prospects of the underlying asset. The underlying asset should also offer good liquidity levels. He advised that the investor should seek to have a well-diversified portfolio, and be mindful of their level of gearing, and the interest rate that applies to the loan.

“It’s important for investors to do their homework and consider whether instalment warrants support their ability to reach their goals and objectives,” says Jason. “They should also read the Product Disclosure Statement carefully, and get expert advice to clarify anything they’re not clear about.”

Instalment warrants are an investment tool used regularly for clients of 5 Financial.

If it’s an area you’d like to know more about, please contact us. An initial consultation is free and at no obligation.

Contact us to schedule an appointment today.