Warrants arrest the attention of advisers
It is not often that the government gives your business a boost in terms of promoting the products you offer, but for those investment product suppliers offering installment warrants it has happened twice.
The recent share offerings of the Commonwealth Bank and Telstra, in tranches and through installment options, has resulted in the profile of the products receiving a massive boost.
However despite this recent turn in the investor spotlight, warrants and other derivative style investment products still remain very much in the realm of niche products.
The reason for this, according to Macquarie Bank equity markets divisional director Jeff Weeden, is a certain level of confusion exists over what the products actually are and how they work.
Macquarie, as well as Societe General and a number of other providers, offer two styles of warrants, the first is a trading warrant and is primarily used by stock brokers who take short term positions on stocks.
Weeden says any retail investor considering these should make use of a broker as rapid market movements can cause considerable losses.
The second type of warrant is better known and is the installment warrant, or if issued by a government agency, an installment receipt.
These work on the basis that an investor purchases part of a share, as an installment warrant, with an agreement to pay the remainder at a later date. However in the interim the investor receives the full franking credit and dividends from the share.
Weeden says Macquarie’s product is starting to attract much more attention because it is being pitched as a semi-professional style of investment.
“The last tranche of the Commonwealth and Telstra floats provide a base to take these to investors, as they are not difficult but just a different sort of investment,” Weeden says.
“They are normally held for five years so they provide a medium-term investment with low volatility for the client. For the adviser they provide an annual trail as they bring shares into the managed funds realm.”
Societe General head of marketing Suzanne Salter says the reason warrants have not been grabbing the headlines is because they are relatively new compared to other investment products, or that they have not figured highly in the business of planners.
“The background of many planners is that they are older and these types of products were not available in the past as they were setting up their businesses and receiving training,” Salter says.
“Installment warrants are also seen as risky due to their speculative nature, but the Commonwealth and Telstra floats showed that they are much less risky than trading warrants and can also provide tax advantages.”
Salter says planners who recommend warrants still need a level of understanding and, in some cases, may need training or even certification, which has in part been responsible for the product’s low level of use.
Despite this Salter says there are many benefits in using warrants in a client portfolio.
“They fit well into a portfolio mix, especially for high net worth clients as they are akin to a geared investment and can also be used inside a do-it-yourself superannuation (DIY) fund.”
Chris Alcott, a financial planner with WHK Financial Services, says this application of the product is one of the most popular his group has undertaken based on feedback from clients.
“We have used warrants to offset tax in DIY funds and they are less risky than geared products.
“Clients have responded by telling us that these products are one of the most loved we have introduced to them,” Alcott says.
“We carefully pick the warrants we recommend and usually the stocks and returns both do well. In some cases there has been a five-year time frame and clients have managed to gain the projected returns within three months.”
However Alcott says that planners who would consider recommending warrants to clients need to take a different approach as they are still very much a niche market product.
“These are not the type of products that can be rolled out of the head office in a dealer group easily, where there is an absence of autonomy among planners. The level of research is high and those groups who I have heard about where they have just dabbled in the product have usually had very poor results.”
While the use of warrants may seem small in the investment product universe, Weeden is confident their profile will grow.
“There is a subset of advisers who use direct shares and a further subset who use derivative products and this is reflected in the coverage they receive compared to other products,” Weeden says.
“The market takes time to set up and at this stage is still embryonic, but figures from the Australian Stock Exchange indicate it is fast becoming a booming part of the industry as they appeal to clients prepared to try something new.”
AUTHOR
Jason Spits
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