Strategies for 3 Types of Investors

What Sort of Investor Are You?

By Jason Fittler

1. Are you looking for income and security, like the idea of term deposits but now interest rates have fallen how will you maintain your income?

2. Are you interested in borrowing to invest and want to know how to do this without the risk of a margin call?

3. Are you a sophisticated investor looking for an adviser who deals in more than just managed funds?

This article answers the above 3 questions.

Q: Are you looking for income and security, like the idea of term deposits but now interest rates have fallen how will you maintain your income?

A couple of months ago when interest rates were high it was OK to hold cash as you could still receive around the 6-7% interest yield on term deposits. Now however is a different story, interest rates have fallen to 4.25% and are expected to fall further. I would expect that interest rates will get as low as 3% in the coming months.

Further more I expect interest rates will stay low for quite some time as the government works to stimulate the economy and encourage the housing industry.  As such it is time to start looking at some alternatives to cash and term deposits.

You do this through Preference Shares.

Preference shares are higher ranking stock than ordinary shares, and its terms are negotiated between the corporation and the investor. Preferred stock usually carries no voting rights, but may carry superior priority over ordinary shares in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy.


1. You receive a much higher yield
- A well structured portfolio will produce 7.3% pa.
2. At present you can buy these at a discount to their face value, this is due to the poor performance of the market. This means that if you buy now and hold to maturity and receive the face value you will also receive a 10-25% capital. The average term to maturity of Preference shares on offer is 4 years.


1. The risk is that the underlying shares fail;
this is where you really do need expert help to structure the portfolio. With the right advice you will reduce the risk of this happening dramatically.
2. Getting poor advice, each preference share has its own unique structure as such you need to understand how it works. If you compare solely on return you could lose money. Talk to someone who specializes in these investments.

If you are interested in making your cash work harder for you give us a call and we will put together a fixed interest portfolio for you. Ph 07 4771 457

Q: Are you interested in borrowing to invest and want to know how to do this without the risk of a margin call?

Gearing is one of the best ways to grow wealth quickly but you need to be careful, there is good gearing and bad gearing. First let’s look at bad gearing of which there are two types;

1. Negative Gearing – borrowing money to achieve a tax refund makes no sense at all. Accountants push this strategy of wealth creation all the time. The fundamental fall in the strategy is simple; to get the tax deductions you have to make a loss (that means you are losing money) the whole strategy revolves around the increase in the value of the underlying asset. Long term this strategy will not work. Only use negative gearing in the short term say 1-5 years as a method to get into the market. The aim should be to be positively geared.

2. Over Gearing – this is where investors borrow a large portion of the investment capital typically between 50- 100%. This is a high risk strategy. A good rule of thumb is that you should be able to service your borrowing commitments without relying on the income from your investments. If this is not the case wind back your gearing levels.

Good Gearing

The fundamental reason for gearing is to accelerate the growth of your investments, to do this you need to take a long term view and adopt a strategy which limits your gearing level, my preferred level is below 40%. The next step is to make sure that you can service the debt and plan to pay the debt out at some point generally before you retire. The last step is to make sure that you protect your investments by limiting your downside losses.

To limit your losses there are a number of products out there some are more expensive than others but by far the best way to do this is through the use of warrants. There are two type of warrants, installment warrants and self fund installment warrants. Details of both are below.
Instalment Warrants

Instalments are an example of a “financial product,” and can be used in a wide range of situations to add value and reduce risk to investment portfolios. By combining a number of financial building blocks, instalments allow investors the opportunity to obtain equity market exposure plus various levels of capital protection, as well as providing yield enhancement and strong tax benefits. Unlike margin loans, instalments do not involve margin calls, and they are eligible for use within complying super funds.

Instalments are simply packaged loans over shares. When you buy an instalment the issuer includes a loan which is used to finance the purchase of the underlying assets. When you pay the “Final Instalment” you are actually repaying that loan.

Instalments enhance the benefits of share ownership by allowing the investor to purchase the shares in two separate payments.  There is no obligation to make the Final Instalment.  This allows the holder extra time to decide whether to take full ownership of the shares whilst continuing to receive the benefits of full ownership.

Investing in Instalments allows you to:

•    capture all capital gains that accrue on the underlying shares.
•    enhance dividend yields and franking credits.
•    further diversify their share portfolio without incurring any capital gains tax liability.
•    take advantage of potential tax benefits.

Following the introduction of the new franking credit refund provisions, where an investor has a surplus of franking credits, a refund will be paid on lodging an investor’s tax return.  This means an investor can use interest deductions from Instalments to lower their tax bill, and any excess (i.e. unused) franking credits will be refundable in cash from the ATO.  As franking credits are now fully refundable, Instalments provide an extremely effective way for DIY super funds to generate higher returns.  They can do this by using the dividends and, if necessary, the attached franking credits to pay the interest costs.  In addition, any excess franking credits can be used to provide a shelter from contributions tax payable by the fund.

Self Funding Instalments (SFI)
The benefits of Self Funding Instalments are:

1. Leveraged Exposure to the Underlying Entities' Shares
SFIs enable the investor to benefit from growth in the price of the underlying shares. As the cost of an SFI is a fraction of the price of the underlying share price, and the instalment price will move in line with the underlying share, the Instalment provides a leveraged exposure to the underlying share.

2. Set and Forget Structure
An investment in SFIs allows the investor to "set and forget" the investment, as dividends are applied to reduce the Instalment Payment and with no annual cash payments required from the Investor during the investment term.

In addition, yearly interest payments are paid on the investor’s behalf and added to the Instalment Payment automatically.

3. Potential Tax Advantages
Deductibility of the Interest Amount for Income Tax purposes.
SFI investors may be able to claim income tax deductions on interest amount incurred. ABN AMRO Australia will provide the investor with an Annual Statement detailing the Interest Amount following the end of each financial year, as well as following the Expiry Date.

Franking Credits
Many of the shares over which ABN AMRO SFIs are issued yield fully franked dividends, meaning that company tax at 30% has been paid on the profits from which the dividend has been paid prior to shareholder receiving it. As a result, shareholder (and hence ABN AMRO SFI investors) may be entitled to a tax rebate in the form of franking credits. This depends on several factors including the tax circumstances of the Investor.  

4. Most Self Funding Instalments allow Leverage within Self-Managed Super Funds(“SMSFs”)
Self Funding Instalments are one of the few leveraged investment products allowed in SMSFs.  This is confirmed in the Insurance and Superannuation Commission’s (“ISC” – predecessor to APRA) Superannuation Circular No.II.D.4.

The risks of Self Funding Instalments are:

1. Self Funding Instalments and Leverage
The leverage provided by SFIs means that the risks of investing are greater than in the case of a direct investment of the same dollar amount in the underlying shares.

2. General Market Risks
General movements in local and international stock markets, prevailing and anticipated economic conditions, investor sentiment, interest rates and exchange rates could all affect the market price of SFIs.  These risks are generally applicable to any investment on ASX or any other stock market.

If you like the sound of warrants make sure you speak to someone who is qualified to discuss warrants. That’s right, you do need to do extra study and pass an annual exam to be provided information on warrants, and this ensures that you get well educated advice.

Many financial planners do not offer such products as they are not qualified and instead will quite often warn you off these products.  Do yourself a favor and get the right advice before making a decision.

Q: Are you a sophisticated investor looking for an adviser who deals in more than just managed funds?

To qualify as a Sophisticated Investor, clients must:

1. Obtain a Statement of Income signed by a Chartered Accountant proving income of at least $250,000 per annum for the past 2 years; or
2. Obtain a Statement of Net Assets (i.e. Assets minus Liabilities) signed by a Chartered Accountant proving net assets of at least $2.5 million.
3. Chartered Accountants may now aggregate an investor’s income or net assets of corporate, trust and personal accounts to satisfy the monetary thresholds. Each account that is aggregated in the income or net asset assessment by the Chartered Accountant may be included on the Register as a Sophisticated Investor.

If you qualify to be a Sophisticated Investor another world of investment opportunities will open up for you including;

1.    Sub Underwriting
2.    Intuitional Placement
3.    Sophisticated investors placements

These allow you to get into opportunities which other investors do not have access to; effectively giving you back stage tickets to the market. These opportunities do not come up ever day but when they do you have the opportunity to buy investments at discounts to the market.

If you are a large investor who wants more from your adviser take a look at getting on our sophisticated register today. Give us a call on 07 4771 4577.

Until next week.