Geared share funds can be a great way for investors to invest in shares – and share in the rewards – when the share market performs well over long periods of time.
Geared share funds magnify both positive and negative returns, so they’re considered high risk, high return investment options.
But exactly what is a geared share fund, and are they for everyone?
At CFS, we know a little bit about this, as our flagship CFS Geared Share fund recently reached $10 billion funds under management, after launching more than 25 years ago.
So let’s take a look at the ins and outs of this unique investment option.
Geared share funds accept money from investors and borrow money to invest alongside investors’ capital. The fund uses the pool of investors’ money and borrowed money to buy shares.
They amplify both positive returns and negative returns on the shares in which the fund invests.
On the upside, geared share funds generate higher returns than overall share market returns when markets are rising. Conversely, the value of your investment will drop further than equivalent investment options without internal gearing.
They are best explored as part of a long-term, diversified investment strategy.
When you invest money in a geared share fund, the fund will borrow money to invest on your behalf, alongside your investment.
For example, for every $1,000 you invest in the fund, the geared share fund may borrow another $1,000. That would give you $2,000 of exposure to the shares in which the fund invests. So in addition to the returns generated from your capital, you also receive all the returns from the borrowed funds (less the cost of borrowing).
The fund’s gearing, or borrowing, effectively magnifies the returns of the underlying investments, whether they are gains or losses.
Geared share funds generally perform well when the share market is growing at a higher rate than the interest charged on borrowed money.
Geared share funds borrow at institutional interest rates, which are generally lower than those offered to individual investors.
Geared funds can play an important role within a diversified portfolio for investors looking for above-average investment performance over the long term by accelerating their Australian and/or global share allocations.
Investors who can ride out short-term market volatility and do not need to take out their money in the short term, may benefit from the long-term returns that geared share funds can offer. Geared funds should therefore be particularly attractive to superannuation investors who cannot access their capital until retirement.
Investors who are risk-averse and who may need to cash in their investment in the short-term, may not find geared share funds a suitable investment.
Investors should always seek financial advice to ensure investments are suitable for their objectives, investment horizon, and personal circumstances.
CFS offers a range of eight geared share fund investment options, including CFS Geared Share fund, CFS Geared Index Australian Share fund, and CFS Geared Index Global Share fund, as well as multi-manager and systematic geared options.
Our flagship CFS Geared Share fund is Australia’s largest geared share fund, the longest-running geared Australian share fund, and the best-performing geared Australian share fund over the 5 and 10 years to 31 July 2024, according to performance data published by Morningstar.^
The fund returned 23.3% over the year to 30 June 2024 and has achieved an average annual return of 14.2% since it was started, 27 years ago.
The CFS Geared Share fund aims to magnify long-term returns from capital growth by borrowing to invest in large Australian companies. It aims to outperform the S&P/ASX 100 Accumulation Index over rolling seven-year periods before fees and taxes.
Long-term returns have been very positive: $10,000 invested in August 1997, when the fund began, would be worth around $330,000 today.
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* The CFS risk measure for the range of geared share fund options is Very High. While the gearing can magnify gains, it will always magnify losses. Minimum suggested timeframe to hold investments is at least 7 years. Investment returns and capital repayment are not guaranteed.
^ Based on performance data for comparable Australian geared share funds published in Morningstar for the 5 years and 10 years to 31 July, 2024.
Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the Target Market Determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36.