Transcription of Finance News Network Interview with Shield Wealth, Self-Managed Superfunds Specialist and Senior Financial Planner, Wayne Lear Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from Canberra based financial planner, Shield Wealth to talk about using warrants to enhance returns in self-managed super, is self-managed superfunds specialist and senior financial planner, Wayne Lear. Wayne, welcome.
Wayne Lear: Thank you Carolyn.
Carolyn Herbert: Can you talk a bit about the difference between say using a margin loan and warrants, and when you would use each of them?
Wayne Lear: A margin loan has recourse on the loan. So that means the lender can have recourse on other assets, other than the actual shares. Whereas a warrant is a non-recourse loan, so the only recourse the lender has is that specific stock in share. That’s the main sort of big difference there, from a security point of view, hence the reason why warrants are extremely attractive to have inside of a self-managed superannuation fund, because of the non-recourse nature of the beast.
The other big difference is that a margin loan is one loan over a number of shares. A warrant or a bundle of warrants, it’s an individual loan per security. In a margin loan you can sell the share holus bolus to somebody and you’ve still got the loan. Whereas in a warrant, when you sell the warrant, the loan goes with the share, so whoever’s buying that warrant is also buying the loan. That’s basically the fundamental difference between the two.
The same principle of getting as much of somebody else’s money, reducing the cost of that money, below which you believe that wherever you invest that money, it’s going to grow higher than the cost of that money. That fundamental principle always applies. And Australians are very used to that principle, because we are wonderful proponents of negative gearing into property, which is what people do. They get as much of somebody else’s money, invest it in property, many times without any deposit, so it’s 100 per cent leveraged. And they can reduce the cost of that money from the rent and the tax benefits that they get.
So Aussies are very familiar with that concept. However, not many of them are familiar with the concept of using that same principle, in a much more safer way mind you, in warrants. The big benefit of using a warrant, if you have a margin lending account, is that you can then transition the total exposure you have to the market, across into your superfund. So what I mean by that is this: Let’s just say you have a $400,000 portfolio, on which you have a $200,000 margin loan account. Your exposure to the market is $400,000; your equity is $200,000.
You would need to sell that entire amount in order to get that money into your superfund, which means that you’re not transitioning $400,000 in; you’re only transitioning $200,000 in, and therein lies the problem. You’ve now got exposure to only $200,000 where before you had $400,000. A warrant solves that problem.
Carolyn Herbert: As you say margin loans often do deliver attractive returns. Can warrants deliver that same attractive return?
Wayne Lear: Absolutely, I have found in the past the interest rate on warrants invariably are cheaper than the interest rate on a margin loan, because of the protection they put in that. So warrants are becoming the new margin lending, so to speak, and I think they’re a hell of a lot more attractive than margin lending.
Carolyn Herbert: We’ve talked about the benefits of warrants. What are the risks?
Wayne Lear: The same risk with borrowing money is that if the market goes down, then basically you can lose your money. It’s the same with margin lending they have margin calls. There are some warrants out there, which you won’t ever get a margin call, but you’ll never get your money back, because they have what’s known as stop losses.
But like with anything, you need to understand the rules. When you go and drive a car, you want to understand the rules of the road so you don’t have an accident. So it’s the same with warrants. Once you understand the rules of the warrants and how they work, there are some very, very attractive and a lot safer ways of investing your money, using warrants than there is using margin lending.
Carolyn Herbert: Can you tell us a bit about what happened during the GFC?
Wayne Lear: We all lost our money through the GFC. Those obviously, the thing about leveraging is that if you’re leveraging dollar for dollar, which means that as the market goes up, you’re doubling your money. And likewise as the market falls, you’re losing twice as much. With those that had warrants during the GFC, had no recourse and those that had margin loans had recourse. So yes everyone does lose money obviously, when the market is volatile.
I guess the next question leading on from that is when is the best economic circumstance to invest in, using borrowed funds to invest. And the answer to that is mathematical. And that is when interest rates are very low, dividends are very high and the market’s been plateauing out, or going along the bottom, that’s a good time to be investing in warrants. And funnily enough, guess what we’ve got today. We’ve got low interest rates, high dividends and the market’s on its knees. Now is a really good time to be buying warrants, if you have the long-term view in mind.
Carolyn Herbert: What are the key things you emphasise to clients with regards to these products?
Wayne Lear: There’s a number of issues, a number of things that planners or what I do at least. First of all, it’s not for everybody, this is definitely not for everybody. But those clients who have significant portfolios, $1 million or more, particularly in a self-managed superfund where 30 to 40, or maybe a 50 per cent is in the growth asset side of the asset allocation. Then it puts you above the rest in terms of maybe suggesting five, 10 or even 15 per cent of their allocation to Australian shares, to consider putting it into warrants.
This will help from a diversification point of view. I use a lot of ETF (Exchange Traded Funds) warrants. There’s some very very good ETF warrants out there with high yielding ETFs. High income ETFs like the YMAX, Harvester from BetaShares for example. And you can get ETFs just on financials and there are warrants on those. So you might as well double up. If you believe that that ETF, or that asset sector in the market like banks are not going to go broke, why not have a warrant if you’re there for the long-term.
Carolyn Herbert: Wayne Lear, thanks for your insights into using warrants in self-managed super.
Wayne Lear: Thank you Carolyn.
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