Islamic finance: Malaysia goes global
1 July, 2008Should you sack your fund manager?
15 July, 2008Smart Investor magazine, Up To Speed column, July 2008
NEW PRODUCT
JP Morgan IQ Instalment Warrants
What is it?
It’s a new series of geared investments.
What do they do?
Instalment warrants are a way of making an investment in stages. You pay a proportion of the cost of something (usually a share) up front, and borrow the rest. You pay the rest later – but, if the share price has collapsed in the meantime, you always have the option of just walking away completely.
Why would I use them?
They work particularly well in a high-yielding market like Australia because even though you haven’t yet paid up in full, you get all the benefits of ownership – in particular, you get the dividends. The leverage bit of it (borrowing to invest) means you can get more exposure than you could just by investing straight into the markets, and that in turn allows you to diversify your portfolio.
And why wouldn’t I?
Because leverage is messy if it goes against you. Leverage magnifies your gains if the investment does well, and magnifies your losses if it doesn’t.
What does the JP Morgan offer do?
You can use them over 50 major Australian stocks, and some exchange-traded funds which replicate the performance of the ASX200 or some foreign stock indices. They allow very high gearing – up to 95% (IQs come in two forms: regular, which are between 50 and 75% geared, and high yield, which are between 70 and 95%). In mid-May the rate of interest on the loan you take out to finance the borrowing is 9.25%. Borrowing to invest does carry tax advantages (see an advisor for your own circumstances) but you still want to be sure that your investments are going to more than cover that interest rate before participating in something like this.
