Geared KiwiSaver fund offers bigger returns – and risks

Grosvenor has launched a new leveraged fund to complement its current range of four multi-sector portfolios.

The Geared Growth Fund, which may be leveraged up to 50% of the net asset value of the fund, is aimed at those long term savers who are comfortable with using leverage to maximise investment returns, Grosvenor chief investment officer David Beattie says.

The fund was a natural fit not only with the philosophy behind the KiwiSaver Scheme, but also with the long-established principles of optimal investment portfolio design, he says.

“Many New Zealanders will already be quite familiar with the use of gearing and leverage relating to long term property investing, so gearing to buy other growth assets such as shares follows the same fundamental rationale,? Beattie said. “This is a particularly good time to make a geared option available, as both interest rates and share markets are currently very attractive from a long term fundamental perspective.?

“Indeed, it is now possible to implement a self-funding geared strategy, with borrowing costs effectively offset by the dividend income generated by the underlying share investments.?

All of the borrowing will be looked after within the fund itself, using non-recourse loans and active leveraging strategies to ensure that investors are never required to deposit any additional funds to cover liabilities or borrowing costs.

Active leveraging strategies will involve dynamically adjusting the leverage ratio between 0% and 50% over time, depending on some key variables.

Additionally, more advanced leveraging strategies, which use investment instruments such as call options and contracts for difference, may be used where appropriate.

On average, Grosvenor expect the Geared Growth Fund to boost savers returns by an additional 1-2% annually compared to a non-leveraged equivalent, provided savers are investing with a time horizon of least 15 years.

“For someone aged 30 now who earns the average wage and stays in the Geared Growth Fund for 35 years until retiring, this equates to an additional $470,000 at retirement,? Beattie said.

However, the new Fund option does come with some health warnings. “Obviously there are additional risks associated with any leveraged investments, with higher volatility of short-term returns the most visible,?  Beattie says.

In order to ensure that any potential users of the Fund are fully aware of the additional risks involved, Grosvenor will be requiring a specific signed acknowledgement from the member as part of the initial investment process with their financial adviser, or as part of any switching undertaken from existing investments.