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Geared index investing: Supporting your client conversations

Geared index investing: Supporting your client conversations

 

Our new geared index options are a low-cost option that can help your clients increase exposure to Australian and global equities.

CFS's new geared index investment options let you magnify returns for long-term investors while keeping costs low.

The new options, CFS Geared Index Global Share and CFS Geared Index Australian Share, are offered at a low price of just 50bps gross/113bps net pa.

Australian Share

Global Share

CPD webinar: Geared index investing

Join our General Manager of Investments, Scott Tully, and our Head of Platforms, Chris Shannon, as they explore low-cost investment gearing, and how you can introduce your clients to the concept.

Blending the benefits

Investment gearing

  • CFS borrows on the investor’s behalf, at institutional rates
  • Less risky than margin lending as the maximum loss is restricted to the original investment
  • Increases exposure to equity markets
  • No margin loan approvals, credit checks, need to provide collateral

Index investing

  • Broad market exposure 
  • Low management fees
  • Low transaction costs 
  • Potential for tax efficiency

 

Common questions


  • Gearing means borrowing money to invest. It can be a way to build wealth without requiring as much capital up front.

    Generally, geared investments require a loan to be repaid, regardless of the performance of associated investments. Money is raised by issuing notes or bonds in Australian or international capital markets, or by borrowing at a competitive rate from financial institutions.

  • Geared investments generally have a broader market exposure and have a higher potential for financial gains. They are also more sensitive to volatility, making them a higher-risk asset class similar to shares and property.

    Geared options increase volatility. Gearing can amplify potential financial gains when markets are rising but may experience magnified losses to the capital invested as well as the amount borrowed. Interest will also continue to be owed and paid on the loan amount.

    It’s important to recognise the risks associated with geared options. While potential returns can be magnified, in extreme market conditions it is possible that your client could lose all their capital.

  • FirstChoice geared index options are internally geared, which is a way of structuring the investment where the options borrow the money rather than the investor directly.

    Investors benefit from access to lower institutional lending rates and no requirement for additional security. That means more investing power without an increase to their personal borrowing.

    There are no margin loan approvals, credit checks, or collateral required. Our internal gearing strategy also removes the risk of margin calls, adding more certainty to the investments.

    Internal gearing means that we borrow on the investor’s behalf and manage the debt, not the investment manager. This frees up the manager to focus on the portfolio’s index alignment.

    Because these new options are indexed, they have lower management fees.

    The benefit to investors is that losses are limited to the amount of money originally invested and are not liable for additional loan payments.

    CFS Geared Index Australian Share is managed using dynamic gearing, which means that income from dividends and interest exceeds the cost of borrowing and other expenses. This helps preserve franking credits, which are passed on to investors.

  • The two new geared index investment options that we have brought to the market, CFS Geared Index Global Share and CFS Geared Index Australian Share, have a broad exposure to Australian and global equities.

    Using low-cost index funds as a base, we’ve engaged world-class investment managers to look after the underlying assets including State Street Global Advisors and First Sentier Investors.

    The Geared Index Australian Share option predominantly invests in Australian companies and does not hedge currency risk. Shares in this option are maintained within a very close margin to their weightings in the S&P/ASX 100 Accumulation Index.

    The Geared Index Global Share option is a portfolio of shares designed to match the performance of the MSCI All Country World (ex-Australia) Index. Its benchmark is 100% global shares.

  • The goal of the Geared Index Global Share and Geared Index Australian Share options are to outperform their respective index over a rolling seven-year period before fees and taxes.

  • Geared index share options are appropriate for clients with a long investment horizon. This will allow time to ride out short-term market volatility that may impact this type of asset class.

    Each geared index option holds a high level of risk and a minimum suggested timeframe of at least seven years.

    The combination of broad market exposure and low management fees make these options appropriate for investors willing to accept higher risk for higher potential returns over a longer period.

  • The target gearing level is 55%.

    For example if your client invests $1,000, the fund will invest approximately $1,200 of borrowing.
     

  • Because these options are wholly invested in shares, market volatility is one of their biggest risks. Gearing can magnify market gains but it will also magnify losses if the market falls.

  • Higher interest rates bring with them the risk of increased losses in share markets, which could be magnified in geared investment options. It could also make the cost of borrowing money within the fund more expensive, which could detract from overall returns.

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