Warrants set to take off
The popularity of self-funding instalment (SFI) warrants is set to take off, now that recent legislative changes have created an exception to the prohibition on borrowing to invest in super funds for these products, according to an industry expert.
Executive director, structured investments UBS Mark Small said the conditions were perfect for investors to take advantage of instalment warrants, with new legislation enabling investors to leverage the equity in superannuation using SFIs.
“Over the last 10 years since I have been involved in the instalment warrant industry there has been some clouds over the product. This included the rules around superannuation, in particular self-managed super funds (SMSFs), which said you cannot borrow in a super fund to invest, so you certainly couldn’t take out a margin loan,” Small said.
“But recently the Government has stepped in and said they actually don’t have any objection to this and we’re going to legislate to allow it. So the Government recognised that a sensible level of gearing in super is not a bad thing, and over the long term can be an extremely successful investment strategy.”
According to Small, the second major change has been the new tax legislation, which has made the product a lot more attractive because it is easier to administer from a tax perspective.
“The new legislation recognises that the limited recourse loan actually gives you the capital protection, so therefore there is no real need for the put option as well. So the new law states you can deduct the interest amount up to the benchmark rate, which is currently at 13.4 per cent,” he said.
Small said the launch of UBS’ own warrant product marked the company’s first committed venture into the adviser/planner space.
“This is a really hot topic in the financial planner and accountant industry, with many turning towards finding ways of getting the most out of super… Our product is specifically designed to meet the expected demand from planner’s self-managed super fund clients.”
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