My Musings

January 3, 2011
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Product Testing Westpac’s Bluechip 20

General Advice Warning: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial advisor.

With 2010 coming to a close – failing a Christmas miracle Santa rally over the next few days – it’s safe to suggest it has been a hard 12 months for anyone invested in the Australian share market.

Despite the investment community predicting a mid 5000’s S&P200 close back in January 2010, the great start to the year came to an abrupt halt in April following shivers through global financial market as a result of the the European debt crisis.

ASX200 for 2010

In the end, after 12 months of ups and down, the market looks to be pretty much back at where in opened one year to the day.

As disappointing as this has been, 2010 hasn’t been a total write off. Where local and Asian markets fell, the US and UK both posted strong gains off the back of improving economies.

Locally, our economy has moved from strength to strength; we’ve created heaps of jobs, shown strong corporate profit growth, smashed (and are now holding) parity against the USD, and seen a vote of confidence in our post-GFC future from the reserve bank in the form of a couple of cautious cash rate increases.

This indicates that the Aussie share market may be in line for a bumper 2011. With billions sitting on the sidelines in cash it shouldn’t take much to get investors excited and investing again.

So how can you gain some exposure to this expected recovery? Well you could look at opening an account under Westpac’s Bluechip 20 product.

The Bluechip 20 is a relatively now form of investment product know as a Separately Managed Account (or SMA for short).

SMA’s are a cross between direct share investment (ie, buying individual shares in a company through a broker) and managed funds. They aim to provide the benefits of both, being low cost, easy of reporting, and professional management as experience under managed funds and better tax treatment, and a high degree of control represented by direct share investment.

Differentiating the product from other SMA’s in the market, the Bluechip 20 also has built in margin lending and installment gearing as key product features.

Margin lending means BT will borrow money on your behalf to invest into the share market. The rational behind this is you gain additional exposure to growth in the share price, and also receive extra income in the form of dividends.

Naturally, there is a fee attached to this, in the form of interest payments to cover the amount you have borrowed, and while this provides you the opportunity for magnification of any capital growth, the same holds true for any decrease in the underlying share price, meaning your losses in a down turning market can be significant.

Margin loans are also susceptible to another risk, well known to Storm Financial investors, called margin calls.

Should the value of your shares slip below an agreed amount, your lender has the right to sell your investment to recover lent funds. Margin calls are nasty, because they hit you at the worst possible time and crystalise any losses, meaning you can’t “wait it out” until the market recovers.

Getting Started

You open an account with BT by completing a joint application form for both your SMA and margin loan.

You are required to start with a minimum investment of $2,500 of your own cash, which BT will match dollar for dollar with borrowed funds.

This is then invested into the top 20 Australian companies. These are the bluest of the blue chips and include the likes of BHP, NAB, and Woolworths. The benefits of investing in companies like these is minimum risk of corporate collapse, but you’re probably not going to the doubling of share price overnight you might experience with some risky speculative stocks.

In addition to your initial investment, you are also required to contribute a set amount on a monthly, ongoing basis.

Again, whatever amount you contribute, BT will match dollar for dollar, increasing your investment, but also your loan balance and interest repayment liability.

This requirement of monthly ongoing investment is handy as a sort of forced saving.

While most savers have the best intention to put a bit away each month, often this falls to the wayside once more attractive spending alternatives show up. Fair enough I guess, it’s much more fun to drop a couple of hundred on cocktails than on planning for the future.

Similar to a mortgage payment, if you know you need to have a set amount of cash available every month, chances are you’ll find a way to dig it up.

Operating your account

Once you’re up and running you’ll receive a username and password to access the online account platform. Here you can review recent transaction, investment balances, share prices, and also generate tax reports and annual statements.

The platform is based on the Praemium V-Wrap product, which, while not the prettiest interface in the market, is fairly comprehensive in regards to functionality.

Investment values are updated a few hours after market close, and any withdrawal or sell down requests are usually completed same day.

As mentioned, you’ll need to make a monthly, ongoing contribution of anywhere from $250 upwards, and which is direct debited from your account on the last day of the month.

You can opt to either capitalize interest payments into your loan balance, or pay them directly via DDR.

The margin loan interest rate currently sits at 9.74% which you can also reduce down by prepaying wither 3, 6, 9 or 12 months in advance.

All dividends are reinvested back into the account, and the ability regularly invest provides advantages through dollar cost averaging.

Is it for you?

While the product could probably benefit from a platform upgrade to make it truly competitive in regards to some of it’s online functionality, if you’re willing to sacrifice some of the more cutting edge stuff, the Bluechip 20 will provide a great value risk-minimised way to gain some exposure to Australia’s biggest companies.

The ability own and transfer shares in and out of the account provides a great degree of flexibility that you just can’t get with managed funds, and the requirement of ongoing monthly payments makes it attractive for those investors who have a habit of letting their savings plans slip during the leaner times.

You can learn more about the Bluechip 20 here


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