Colonial First State geared fund allows offshore borrowing

Colonial First State has established a US$1 billion Euro Commercial Paper Program for its Wholesale Geared Share Fund, enabling the fund to borrow outside Australia for the first time.

Colonial First State general manager, funding and alliances, Graham Hand said under the new program Colonial First State would borrow on behalf of the fund and swap the proceeds into fully-hedged Australian dollars.

“For example, when an investor invests a dollar, we borrow another dollar and invest $2. It’s not the investor borrowing, its Colonial doing the borrowing,” Hand explained.

“It’s been part of our evolution. As the next year or two unfolds, we will look for other opportunities offshore,” he said.

Hand said such a move would assist in reducing costs and further diversifying funding sources. He said the program should further reduce borrowing costs for the fund and help meet the escalating demand from investors for geared products, particularly from superannuation funds that cannot borrow in their own right.

Recent figures revealed since its launch to market in 1997, the Geared Share Fund has produced annual returns of 27.9 per cent, after fees.

Over a one, three and five-year periods up to December 31, 2006, its annual returns have been respectively 38.1 per cent, 48.9 per cent, and 24.6 per cent, respectively.

The program has obtained the highest short-term rating from Moody’s Investors Service of P-1. It also has an A-1 rating from Standard & Poor’s. The fund has total assets of over $6 billion. It has been issuing short-term notes into the Australian market since 2002, and has raised money directly from banks and asset managers since 1997.

Commenting on the fund’s new offshore reach, Colonial First State chief executive officer, Brian Bissaker, said: “Through the Euro Commercial Paper Program, the Geared Share Fund will be able to borrow outside Australia for the first time.

“Colonial First State is the only fund manager in Australia which uses capital markets directly to finance our geared share funds. This unique capability gives us the opportunity to further reduce our funding costs, which gives us a competitive advantage.”

Geared share funds raise money within the fund structure, creating equity leverage without the need for the investor to borrow in their own name or meet margin calls. By raising money at institutional rates and directly in capital markets, interest costs for equity leverage are less than on competitor products.

The Euro Commercial Paper market has a total outstanding of US$650 billion as at December 31, 2006, of which about US$220 billion is asset-backed. The major investors are central banks, insurance companies, fund managers and banks, especially in Europe and Asia.