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MACQUARIE GEARED EQUITIES INVESTMENT PLUS (GEI PLUS) ADVISER PRESENTATION.

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Presentation on theme: "MACQUARIE GEARED EQUITIES INVESTMENT PLUS (GEI PLUS) ADVISER PRESENTATION."— Presentation transcript:

1 MACQUARIE GEARED EQUITIES INVESTMENT PLUS (GEI PLUS) ADVISER PRESENTATION

2 2 Important information Preparer: This presentation has been prepared by Macquarie Bank Limited ABN , AFSL (Macquarie), the loan provider for Macquarie Geared Equities Investment plus (GEI plus). The information is current as at 6 April Confidential: The information in this presentation is confidential and is provided to holders of an Australian financial services licence or their representatives who are financial advisers only. It must not be reproduced, distributed or disclosed to any other person. The information may be based on assumptions or market conditions and may change without notice. General advice warning: The information contained in this presentation is general information only. It has been prepared without taking into account any potential investor’s financial situation, objectives or needs and the appropriateness of this information needs to be considered in that context. GEI plus is offered by Macquarie under a brochure dated 2 March The brochure is available on the GEI plus website at macquarie.com.au/protectedlending or by phoning A person should consider the brochure in deciding whether to invest through GEI plus. Past performance: Past performance is not a reliable indicator of future performance. Not an offer: This presentation is not an offer to issue any financial product – no part of the presentation is to be construed as solicitation or recommendation to make a financial investment. In no circumstances is the information in this presentation to used by, or presented to, a person for the purposes of making a decision about a financial product or class of products. Examples: Any examples including any assumptions or figures, contained in this presentation are purely hypothetical and are not actual or potential returns, estimates, projections or forecasts for GEI plus. Any examples have only been included for illustrative purposes. They have been prepared without taking into account any potential investor’s personal objectives, financial situation or needs. Examples are based on assumptions which may have a material affect on returns. The actual performance of investments will depend on future economic conditions, investment management and any future changes to taxation or other laws. No advice or verification: This presentation does not constitute personal financial or taxation advice. Any taxation discussion in this presentation is based on current laws, anticipated legislation and Commonwealth announcements at the time of writing. The application of taxation laws to each investor depends on that investor’s individual circumstances. An investor should seek professional financial and taxation advice before deciding to invest. The material in this presentation has been prepared in good faith with all reasonable care. However, certain parts of this material is obtained or is based upon information obtained from third parties which may not have been checked or verified. Subsequent changes in circumstances may also occur at any time and may impact on the accuracy of the information. No responsibility: Neither Macquarie nor any other Macquarie group company, or any officers, employees or agents takes any responsibility for the information contained in this presentation nor gives any representation or warranty as to the accuracy or completeness of the information nor does any of them accept any liability for loss or damage arising in anyway from the use of information in this presentation.

3 Agenda  What is Macquarie Geared Equities Investment plus (GEI plus)?  How does it work?  Key benefits  Tax treatment  Interest rates  Examples  Tailoring an investment portfolio  What happens at maturity?  Fees, costs and key risks  Identifying your clients  Case studies 3

4 What is GEI plus?  GEI plus allows investors to borrow to invest in their own tailored investment portfolio with 100 per cent capital protection* of the loan principal  Choose from an Approved List of Securities including more than 50 ASX listed securities and certain unlisted managed funds or pre-selected portfolios  Investors borrow 100 per cent of their investment amount, with each security individually protected at the initial purchase price  Full protection of loan principal* —protect loan principal against possible market volatility —no netting of gains and losses —no repayment of loan principal shortfalls referable to those GEI Securities that have fallen in value  Choice of a loan term between one and five years to suit your client’s preferred investment timeframe  Choice of interest rate: fixed or variable  Minimum investment amount of $50, * Due to the limited recourse nature of the loan, the loan principal is capital protected. This means that at the time the loan principal becomes repayable, if the value of the GEI Securities is insufficient to repay the loan principal in full, investors will not need to provide any additional capital to repay the loan principal.

5 5 How does it work? Macquarie buys selected portfolio on investor's behalf GEI investment portfolio Limited Recourse Loan interest only Client keeps any available profit after the repayment of their loan principal and costs $50,000 to invest Macquarie $50,000 loan Client $0 capital (Interest is payable) Distributions and franking credits Sell securities that have fallen in value – no loss of loan principal at maturity

6 Key benefits  Flexibility —investors can select from the Approved List of Securities or choose a pre-selected portfolio —tailor the Facility further by selecting the term (one to five years), day of investment and preferred interest payment option (variable in arrears or fixed in advance)  Exposure to potential capital growth, distributions and franking credits* —investors are entitled to receive the benefits of direct investment ownership  100 per cent finance provided by Macquarie Bank Limited —investors are not required to contribute any of their own capital upfront  The certainty of an ATO Product Ruling – PR 2011/5** —loan interest may be deductible up to the applicable benchmark rate for capital protected borrowings***  Protection of the loan principal throughout the loan term and at maturity  No margin calls  No offsetting of gains and losses —gains from the “profitable” GEI Securities will not be offset against losses from underperforming GEI Securities in the portfolio  Daily liquidity.**** 6 * Subject to the investor being eligible to claim franking credits (see the GEI plus Brochure dated 2 March 2011 for more information). ** The Product Ruling is only binding on the Commissioner of Taxation if the investment through GEI plus is implemented in the specific manner provided in the Product Ruling and the assumptions set out in that Product Ruling are satisfied. The Product Ruling is only a ruling on the application of taxation law and is in no way expressly or impliedly a guarantee or endorsement of the commercial viability of GEI plus, of the soundness or otherwise of GEI plus as an investment, or of the reasonableness or commerciality of any fees charged in connection with GEI plus. *** The applicable benchmark rate is currently the Reserve Bank of Australia’s Indicator Rate for Variable Personal Unsecured Loans. However, if proposed legislative amendments are enacted, the benchmark rate applicable to loans entered into on or after 7.30pm on 13 May 2008 will change to the Reserve Bank of Australia’s Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points. **** Daily Liquidity, subject to early termination costs for redemptions prior to maturity.

7 Tax treatment  ATO Product Ruling – PR 2011/5*  Interest is deductible up to the applicable “benchmark rate” for capital protected borrowings, expected to be the Reserve Bank of Australia’s Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points  Where the GEI plus interest rate exceeds the applicable “benchmark rate”, any amount in excess of this rate is attributable to the cost of capital protection and not deductible  This non-deductible component will either: — be added to the cost base of the GEI Securities where the loan principal protection is used, or — result in a separate capital loss where the loan principal protection is not used. 7 Interest deductibility * The Product Ruling is only binding on the Commissioner of Taxation if the investment through GEI plus is implemented in the specific manner provided in the Product Ruling and the assumptions set out in that Product Ruling are satisfied. The Product Ruling is only a ruling on the application of taxation law and is in no way expressly or impliedly a guarantee or endorsement of the commercial viability of GEI plus, of the soundness or otherwise of GEI plus as an investment, or of the reasonableness or commerciality of any fees charged in connection with GEI plus.

8 Interest rates  Interest rates are higher than an ordinary margin loan because of the limited recourse nature of the loan  Your client’s interest rate will depend upon: —the GEI Securities that they choose to include in their portfolio —the loan term that they choose —the interest payment option that they choose  Post-tax servicing costs will depend on: —your client’s interest rate —potential tax deductions on the interest expense —distributions —potential franking credits —client’s marginal tax rate. 8

9 Example: Five year term, interest paid in arrears Portfolio 1 High volatility Portfolio 2 Medium volatility Portfolio 3 Low volatility GEI plus loan size$100,000 Investment in ASX listed shares*$98,912$79,130$64,293 Investment in unlisted managed funds**$0$20,000$35,000 Facility Interest Rate13.57%pa11.82%pa10.52%pa Ave Pre-tax servicing cost$7,739 pa$6,230 pa$5,100 pa Ave Post-tax servicing cost$5,193 pa$3,807 pa$2,769 pa Ave Post-tax servicing cost (%)5.19%pa3.81%pa2.77%pa 9 Assumptions for all scenarios:  Based on the Balanced Growth portfolio as at 7 March 2011  Investor’s marginal tax rate is 46.5 per cent and the interest deductibility rate is 8.80%pa  The distribution yield on the unlisted managed fund is 4.65%pa  The distribution yield on the ASX listed securities is 5.90%pa. * Brokerage of 1.1 per cent is payable on any ASX listed shares purchased. ** Brokerage is not currently payable on any units purchased in an unlisted managed fund. This information is purely hypothetical and contains many assumptions. The information does not represent actual performance and should not be interpreted as an indication of future performance. It is provided for illustrative purposes only. Actual results may be materially different and investors may lose money on their GEI plus Facility.

10 10 Tailoring an investment portfolio 1. Select own portfolio —flexibility to create own portfolio from more than 50 ASX listed securities and certain unlisted managed funds 2. Choose from our five pre-selected portfolios —Balanced Growth portfolio —Growth Plus portfolio —Income Plus portfolio —Bank portfolio —Resources portfolio. Macquarie does not make any representations regarding the GEI Securities or the pre-selected portfolios, their suitability or their performance and the inclusion of any GEI Securities or pre-selected portfolios shall not be construed as the provision of financial advice in relation to those GEI Securities or pre-selected portfolios. Investors should obtain their own financial advice as to the suitability of investing in any GEI Securities or pre-selected portfolios as to their suitability in light of their financial objectives, situations and needs. Two easy choices

11 11 Pre-selected portfolios Balanced Growth portfolio Based on a $100,000 loan as at 21 March Pre-selected portfolios are made up of predefined allocations across a selection of GEI Securities, and may be compiled by a member of the Macquarie Group or a third party. Growth Plus portfolio Income Plus portfolio Bank portfolio Resources portfolio

12 What happens at maturity? For each of your client’s “profitable” GEI Securities, they can:  Repay that part of the loan and keep all of those GEI Securities  Take the net proceeds in cash or GEI Securities  Roll the GEI Securities into another GEI plus Facility For each of your client’s “unprofitable” GEI Securities, they can:  Take no action and these GEI Securities will be disposed of, and your clients will not have any further obligations nor will they receive any payment in relation to these GEI Securities. 12 Please note, under any of these options your client will be required to have paid all interest, fees and other costs owing on their GEI plus Facility (including any amounts owing on an Interest Prepayment Loan, if applicable).

13 Early termination of a GEI plus Facility  The loan principal is protected throughout the life of the loan, however costs apply if your client terminates their GEI plus Facility prior to maturity Costs  Break costs apply if the loan is terminated prior to maturity and will vary depending on: —remaining term —loan amount —cost of unwinding the protection —differences between fixed rate of interest at implementation and break date  Early Repayment Fee  Brokerage. 13 What happens if your clients end their loan term early?

14 Fees and costs  Interest  1.1 per cent brokerage (only on ASX listed securities)  No establishment fees  $175 Security Registration Fee applicable to corporate borrowers or corporate third party security providers  Adviser commissions  Termination costs (including break costs) if facility unwound early  Please see the Macquarie GEI plus Brochure for full list of applicable fees and charges. 14

15 Key risks  Performance risk: The value of the GEI Securities your clients choose may go down by a material amount, even over a short period of time  Borrowing to invest: By using a GEI plus Facility to invest in chosen GEI Securities, the investment is leveraged. Leverage can magnify gains and losses on an investment  Breakeven risk: There is a material risk that your clients will lose money on a GEI plus Facility. That is, the total value of the returns at maturity (if any) and Distributions from the GEI Securities throughout the term of your client’s loan (if any) could be less than the total interest payments and other costs (including break costs), and could be zero. In this case, your clients will have lost the amount of interest and costs they have paid  Early termination risk: A GEI plus Facility may be terminated by Macquarie early in certain circumstances or your clients may choose to terminate their GEI plus Facility early. In either case, they will still receive the benefit of the limited recourse nature of the loan. However they will need to pay any break costs, interest charges, fees and other costs that may apply  Interest rate risk: There is a risk that the interest rate applicable to your client’s Facility may rise  Liquidity risk: There is a risk that your client’s ability to close out their GEI plus Facility early or to sell their GEI Securities may be limited due to a lack of liquidity for their GEI Securities. 15

16 May be suitable for  Individuals who are looking to build wealth in a tax efficient way with potential tax deductions for interest expense  Limited upfront capital available to build an investment portfolio  Investors who would like protection across every security in their portfolio  Investors who have minimal time available to monitor and manage their investments  Investors who understand and are comfortable with the risks of gearing  Investors looking to protect an existing portfolio while releasing cash for other investment purposes. 16

17 How we can help you  Local and dedicated Business Development Managers and Account Managers to support your business  Secure online portal that allows you and your clients to monitor their loans at anytime  Client seminars  Visit macquarie.com.au/geiplusadviser, where you will find: –Regularly updated GEI interest rates –An adviser calculator –Marketing collateral –ATO Product Ruling* 17 *The Product Ruling is only binding on the Commissioner of Taxation if the investment through GEI plus is implemented in the specific manner provided in the Product Ruling and the assumptions set out in that Product Ruling are satisfied. The Product Ruling is only a ruling on the application of taxation law and is in no way expressly or impliedly a guarantee or endorsement of the commercial viability of GEI plus, of the soundness or otherwise of GEI plus as an investment, or of the reasonableness or commerciality of any fees charged in connection with GEI plus.

18 Case Study 1: Diversify with a Reverse GEI plus For adviser use only This information is purely hypothetical and contains many assumptions. It has been prepared to assist advisers in understanding how GEI operates. The information does not represent actual performance and should not be interpreted as an indication of future performance. Actual results may be materially different. It is provided for illustrative purposes only. The franking and dividend data used in this information is indicative only. Although Macquarie believes the assumed dividends and franking credits are from a reliable source (Macquarie Research Equities) and made on reasonable grounds, we have not verified them and there is no guarantee they will actually occur. Actual dividends and franking credits may differ materially and may be materially lower. Client situation  Matilda has an existing BHP shareholding worth $100,000.  She wants to diversify her exposure and increase the yield of her investments without crystallising a capital gain by selling her BHP shares.  She would also like some protection from a potential decline in value due to the current uncertainty in the global economy. Possible investment strategy  Matilda’s adviser recommends she enters into a Reverse GEI with Macquarie: –She transfers her $100,000 BHP shares into a GEI plus Facility –Once her BHP shares are transferred to Macquarie, $100,000 is released in cash, which her adviser recommends she use to diversify into high yielding bank stocks held in her share trading account –She draws down an additional $100,000 under the GEI plus Facility to invest in the MSI Cash Trust, further diversifying her exposure 18

19 Case Study 1: Diversify with a Reverse GEI plus For adviser use only Current BHP share holding New Portfolio after Reverse GEI plus Investment Portfolio$100,000$298,912 Portfolio Distributions Received (pa)$2,000$14,019 Franking Credits (pa)$857$4,015 GEI Loan Amount$0$200,000 GEI Annual InterestN/A$19,140 Pre-tax servicing cash flow (pa)$2,000-$5,121 Post-tax servicing cash flow (pa)$1,528-$1, Assumptions:  The investor holds the GEI plus Facility for the full 5 year term  Based on a GEI plus variable interest rate of 9.57% pa for an equally weighted portfolio of BHP and MSI Cash Trust on 8 August 2011  BHP has a fully franked dividend yield of 2% pa, the chosen bank stocks have a fully franked dividend yield of 7.45% and the MSI Cash Trust has an unfranked distribution yield of 4.65% pa. Assumes franking credits are fully available to the investor (this will be subject to the investor’s individual circumstances).  The loan is used to acquire securities that produce assessable income  Investor’s marginal tax rate is 46.5 per cent and the interest deductibility rate is 8.80%pa  Brokerage of 1.1% charged on the purchase of bank stocks by the investor’s adviser (paid as upfront commission to the adviser) This information is purely hypothetical and contains many assumptions. The information does not represent actual performance and should not be interpreted as an indication of future performance. It is provided for illustrative purposes only. By the numbers

20 Case Study 1: Diversify with a Reverse GEI plus For adviser use only Potential benefits  Matilda may benefit from: –A larger diversified investment portfolio (as opposed to single-stock BHP holding) –Potentially higher distributions paid by the bank stocks and MSI Cash Trust within the GEI plus portfolio –She retains her BHP shares and can benefit from any future price gains, but now also has capital protection over her $100,000 BHP holding –Potential tax deductibility of a portion of her GEI loan interest payments  The Adviser receives: –Trailing commission from Matilda’s GEI plus Facility –Brokerage on the bank stocks purchased & control over an additional $100,000 within her share trading account Potential risks  Matilda should be aware that this strategy has the following risks: –That the bank stocks she acquires using the GEI loan proceeds may underperform, and that payment of interest costs may exceed any potential gains received from positive performance –That her investment portfolio’s distribution yield does not meet her expectations –That she faces break costs if she wishes to unwind her GEI plus Facility early  Before Matilda invests she should carefully consider the risks outlined in the GEI plus Brochure and consult her financial adviser. 20

21 Case Study 2: Shifting out of Term Deposits For adviser use only This information is purely hypothetical and contains many assumptions. It has been prepared to assist advisers in understanding how GEI operates. The information does not represent actual performance and should not be interpreted as an indication of future performance. Actual results may be materially different. It is provided for illustrative purposes only. The franking and dividend data used in this information is indicative only. Although Macquarie believes the assumed dividends and franking credits are from a reliable source (Macquarie Research Equities) and made on reasonable grounds, we have not verified them and there is no guarantee they will actually occur. Actual dividends and franking credits may differ materially and may be materially lower. Client situation  Charlotte is nervous about re-investing back into shares after experiencing some capital losses during the GFC and the recent global market volatility.  She has become risk averse, and now only holds a $200,000 Term Deposit yielding 6% pa. Possible investment strategy  Her adviser informs her that she can create a $200,000 portfolio exposure of ASX listed shares and managed funds using a Macquarie GEI plus Investment Loan which will enable her to borrow 100% of the initial investment amount.  Charlotte transfers $19,900 out of her Term Deposit to prepay the first years interest on a 5 year GEI plus, leaving $180,100 in the Term Deposit earning 6% pa.  Assuming that interest and distribution yields remain constant, the expected distributions on her $200,000 GEI plus portfolio combined with the 6% interest earned on her remaining Term Deposit balance in this example would cover the annual interest costs for the four remaining years of her GEI term.  At the end of the 5 year GEI plus term Charlotte will retain ownership of any profitable securities in her GEI plus portfolio by repaying the GEI loan. 21

22 Case Study 2: Shifting out of Term Deposits For adviser use only Term Deposit only strategy Combined Term Deposit and GEI plus strategy Term Deposit allocation $200,000$180,100 Term Deposit Interest Received (pa) $12,000$10,806 GEI Loan Amount $0$200,000 GEI Annual Interest N/A$19,900 GEI Portfolio Investment $0$198,912 GEI Portfolio Distributions Received (pa) N/A$12,019 Pre-tax servicing cash flow (pa)$12,000$2,925 Post-tax servicing cash flow (pa)$6,420$2, Assumptions:  The Term Deposit pays interest at 6.00% pa, and there are no fees associated with a $19,900 withdrawal to fund GEI Interest  Based on a GEI interest rate of 9.95% pa (fixed for one year) for an equally weighted portfolio of the pre-selected Bank Portfolio and the MSI Cash Trust on 8 August 2011  The investor holds the Term Deposit and GEI for the full 5 year term of the GEI plus Facility  The GEI plus and Term Deposit interest rates remain constant throughout the term  The Bank Portfolio has a fully franked divident yield of 7.45% pa and the MSI Cash Trust has an unfranked distribution yield of 4.65% pa. Assumes franking credits are fully available to the investor (this will be subject to the investor’s individual circumstances).  Investor’s marginal tax rate is 46.5% and the interest deductibility rate is 8.80% pa  Brokerage of 1.1% has been charged on the purchase of ASX listed securities, but not on the unlisted MSI Cash Trust This information is purely hypothetical and contains many assumptions. The information does not represent actual performance and should not be interpreted as an indication of future performance. It is provided for illustrative purposes only. By the numbers

23 Under TD Strategy onlyCombined TD + GEI Strategy Bank Portfolio return: 0% pa or negativeTD Bank Portfolio Component Investment Value$232,100$210,9250 End Investment Value (Protection Utilised)$232,100$210,925* Bank Portfolio return: 4.15% pa Component Investment Value$232,100$110,925$121,212 End Investment Value (Shares Retained)$232,100$232,137* Bank Portfolio return: 8.00% pa Component Investment Value$232,100$110,925$145,334 End Investment Value (Shares Retained)$232,100$256,259* 23 Further assumptions:  If shares are in profit at Maturity, Charlotte will pay out her GEI Loan with $100,000 from her Term Deposit and retain the shares  This analysis takes into account tax paid to maturity of the GEI plus assuming the investor has a marginal tax rate of 46.5%, interest deductibility rate of 8.80% pa, and is fully entitled to any franking credits  This analysis does not take into account the timing of cash flows under either investment strategy, and assumes that the interest earned on the Term Deposit is paid out to the investor, rather than capitalised  Dividend yields under each scenario remain a constant percentage of the initial Bank Portfolio value * The analysis does not take into account any non-deductible interest, capital gains tax payable on eventual disposal of any profitable shares that are retained at Maturity of the GEI or any possible brokerage costs This information is purely hypothetical and contains many assumptions. The information does not represent actual performance and should not be interpreted as an indication of future performance. It is provided for illustrative purposes only. By the numbers (after 5 years) Case Study 2: Shifting out of Term Deposits For adviser use only

24 Potential benefits  Charlotte may benefit from: –Potential uncapped capital gains from Bank Portfolio Securities that have increased in value over the term (no offsetting of gains and losses). –Increasing the size of her investment portfolio from $200,000 (cash only) to $379,012*, by utilising a GEI loan –Receiving $60,095 in distributions from the GEI Securities over the 5 years in addition to her Term Deposit interest –Potential tax deductibility of a portion of her GEI interest and franking credit entitlements (subject to eligibility) –At Maturity, Charlotte may choose to pay out her GEI Loan with her Term Deposit and receive the Bank Portfolio Securities in her name, thereby delaying any CGT event until she disposes of these Securities  Charlotte’s adviser will receive upfront commission on acquisition of her GEI Securities and annual trailing commission on her loan. Potential risks  Charlotte should be aware that this strategy has the following risks: –That her investment portfolio’s distribution yield does not meet her expectations, and interest rates may change, potentially adversely impacting her worse case scenario –That the investment portfolio she acquires using the GEI loan may underperform, and that payment of interest costs may exceed any potential gains received from positive performance –That she faces break costs if she wishes to unwind her GEI plus Facility early  Before Charlotte invests she should carefully consider the risks outlined in the GEI plus Brochure and consult her financial adviser. * Term Deposit Value: $180,100, GEI Value: $198,912 24


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