IN THIS REPORT

YOUR GUIDE TO PRODUCT EXCELLENCE

NO MARGIN FOR ERROR

Post-GFC, margin loans have been out of favour with many

investors. From a peak of 248,000 margin lending client

accounts in December 2007, the most recent Reserve

Bank of Australia (RBA) statistics indicate that client

numbers are now back to mid-2006 numbers, with

approximately 170,000 client accounts in existence. The

underlying value of securities has fallen even more, from a

December 2007 peak of $93.2 billion to just $44.9 billion

now. Somewhat more reassuringly, the RBA statistics

indicate that the average number of margin calls - at 0.47

per 1,000 clients, per day – is the lowest at any time since

mid-2007. So – with a lower proportion of margin calls and

a solid performance from the Australian sharemarket over

2013 – could margin lending be set for a resurgence?

Source of 3 graphs: www.rba.gov.au

CANSTAR assesses margin lenders from the perspective of two different consumer profiles: the Share Investor, and the

Managed Fund Investor. Each profile assumes that the consumer will have a preference over one of these forms of

security against the other, but will also seek some content from their secondary security type. In both instances,

CANSTAR ranks margin lenders based on value-for-money measures across both pricing and features, with each of

these profiles considering certain features to be more important than others. CANSTAR’s rigorous methodology is

attached to this report.

January 2014

IN THIS REPORT

We research & rate 9 margin lenders across

two investor profiles - Share Investor and

Managed Fund Investor

http://www.rba.gov.au/

YOUR GUIDE TO PRODUCT EXCELLENCE 2

THE PROS OF MARGIN LENDING…

Most Australian adults are familiar with the concept of borrowing to invest, with approximately $412 billion currently on

loan for investment housing alone. As with borrowing to invest in property, the rationale for borrowing to invest in shares

or managed funds is to access a tax-effective source of funding to purchase an asset that will hopefully increase in

capital value. The difference between a loan sourced for property investment and a margin loan is in the security held: a

standard investment loan is generally held against either the property being purchased or equity in the borrower’s own

home, whereas a margin loan is secured against the value of the shares being purchased. Some benefits of margin

lending include:

Ability to borrow without the need for property equity

Ability to borrow small initial amounts

Ability to build regularly on the loan and investments

Highly liquid form of investment and lending

Can be a tax-effective form of lending

Potential to magnify gains

THE CONS OF MARGIN LENDING…

While margin lending gives the potential for investors to magnify their gains in a rising share market, any form of

borrowing to invest risks the potential of magnifying losses. When borrowing via a margin loan to invest in shares or

managed funds, this risk is greater due to the highly liquid nature of the investment. Some potential risks of margin

lending include:

Risk of a margin call due to share market volatility

Risk of having to crystallise losses by being forced to sell into a falling market

Risk of LVR changes imposed by the lender

Risk of interest rate rises affecting the ability of the borrower to service the debt

The table below shows the potential gain – and loss – in a volatile market, assuming an investment of $50,000 and

borrowings of another $100,000.

First the potential gain:

Investment Without borrowings With borrowings

Shares in XYZ company $50,000 $150,000

Plus 20% gain $10,000 $30,000

Gross value at end of year $60,000 $180,000

less borrowings $0 $100,000

Value $60,000 $80,000

Source: Canstar

Then the potential loss:

Investment Without borrowings With borrowings

Shares in XYZ company $50,000 $150,000

less 20% loss ($10,000) ($30,000)

Gross value at end of year $40,000 $120,000

less borrowings $0 $100,000

Value $40,000 $20,000

Source: Canstar


WHO PROVIDES OUTSTANDING VALUE?

CANSTAR margin lending star ratings is a consumer-friendly benchmark that compares

both the price, including both the interest rate and fees and charges, and features,

including the maximum LVR, the number of shares/managed funds offered, repayment

options and other account features. Five-star lenders are considered to offer outstanding

value for money. There are three five-star products in each of the Share Investor, and the

Managed Fund Investor profiles.

Share Investor profile

Within the Share Investor profile, ANZ, CommSec and St George all achieved a five-star

rating, all maintaining their position from last year.

ANZ’s rating is driven by its acceptable securities score, providing lending on both the

highest number of ASX 200 stocks and the highest number of stocks overall. Currently, ANZ

provide lending on more than 700 stocks, which is significantly higher than the industry

average of 446 stocks.

CommSec maintains superior product features with good direct client services, including

an unlimited transaction history, “what-if” calculators and a weekly newsletter. They notify

clients within 24 hours when in buffer. They also offer trading in options and warrants.

St George offers investors a good balance between features and price. On the features

front, St. George offers periodic statements, “what-if” calculators and the ability to trade options among many

other features to its clients.

Managed Fund Investor profile

Within the Managed Fund Investor profile, CommSec, CommSec Adviser Services and St. George all achieved a

five-star rating.

Both CommSec and the advice model, CommSec Adviser Services, maintain superior product features, with the

Adviser Services model providing a wider range of acceptable securities than the purely DIY model.

St George achieves the top score for acceptable securities. They have an extensive acceptable securities list

with lending offered on 1,811 funds. This is significantly higher than the industry average of 1443 funds. They

also offer a buffer margin of 10%.

All the five star rated products offer regular gearing with 100% installment gearing option available to clients.

They also allow investing in unlisted managed funds. To summarise, the five star-rated products offer good

product features at a competitive price, representing outstanding value for money for consumers.


DURING THE GFC…

An interesting point of analysis is financial institution

behaviour in relation to minimising margin lending investment

risk during and post the GFC. One broad way in which a

financial institution can reduce margin lending investment risk

is to reduce the number of acceptable securities. This enables

financial institutions to weed out shares that may have more

short-term volatility, thus reducing the risk of a margin call.

CANSTAR research indicates that this has been the preferred

method of minimising risk in recent years, with the average

number of companies on financial institutions’ acceptable

securities lists falling significantly post-GFC. As would be expected, the average number of ASX 200 companies

on financial institutions’ acceptable securities lists did not decrease as significantly as the number of approved

companies overall.

It would appear that the average number of companies on financial institutions’ acceptable securities lists is now

beginning to increase again, presumably reflecting the more positive economic outlook for Australian business.

Average number of ASX

companies on acceptable

securities list

Average number of ASX 200

companies on acceptable

securities list

Date Average No. Companies Average No. Companies

Dec-06 520 185

Dec-09 390 180

Dec-12 419 189

Dec-13 446 192

Source: Canstar

BEWARE THE MARGIN CALL

While financial institutions will limit their own risk, ensure that you are also taking action to limit yours! A specific

risk of margin loans is the risk of a margin call.

Under a margin loan arrangement, it is the investor’s portfolio of shares or managed funds itself that provides

security for the loan. Generally that loan will be approved up to a certain loan to valuation ratio (LVR). However

because listed shares and managed funds are highly liquid assets, there is a very real risk that market

fluctuations could reduce the portfolio’s value to a level where it no longer provides adequate security for the

loan. Once the value has fallen far enough so that the LVR ratio exceeds the allowed maximum, the lender will

make a “margin call”, to bring the LVR back below the maximum level. If investors are unable to make the extra

loan repayment, they may be forced to sell part of their investment. Some ways to reduce your chance of

receiving a margin call include:

- Gear conservatively. While investing a minimal amount of your own money is appealing on the

upside, this will leave you more exposed to margin calls. The closer your borrowings are to the

maximum LVR, the smaller the needed fall in value of your investments to trigger a margin call.

- Regularly monitor your borrowings. The margin between your borrowings and the maximum

LVR can change on a daily basis as the value of underlying investments fluctuates. Keep an eye on

the medium term margin to ensure that it does not become unsustainable.

- Diversify your portfolio. Single stock portfolios are more susceptible to margin calls as there are

no other investments to counteract negative movements on their price.


COPYRIGHT © CANSTAR Pty Limited ABN 21 053 646 165, 2008. The recipient must not reproduce or transmit to third parties the whole or any part of this work, whether attributed to CANSTAR or not, unless with prior written permission from CANSTAR, which if provided, may be provided on conditions. DISCLAIMER:

To the extent that any CANSTAR data, ratings or commentary constitutes general advice, this advice has been prepared by CANSTAR Research Pty Ltd ABN 29 114 422 909 AFSL 437917 and does not take into account your individual investment objectives, financial circumstances or needs. Information provided does not constitute financial, taxation or other professional advice and should not be relied upon as such. CANSTAR recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser. A Product Disclosure Statement relating to the product should also be obtained and considered before making any decision about whether to acquire the product. CANSTAR acknowledges that past performance is not a reliable indicator of future performance. Please refer to CANSTAR Research’s FSG for more information at www.canstar.com.au. All information contained herein shall not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any purpose, in whole or in part, in any form or manner or by means whatsoever, by any person without CANSTAR’s prior consent. All information obtained by CANSTAR from external sources is believed to be accurate and reliable. Under no circumstances shall CANSTAR have any liability to any person or entity due to error (negligence or otherwise) or other circumstances or contingency within or outside the control of CANSTAR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication, or delivery of any such information. Copyright 2012 CANSTAR Pty Ltd ABN 21 053 646.

http://www.canstar.com.au/

Margin Loans Star Ratings

Company Min Loan

Amount

Options Trading

No ASX

200

Acceptable Securities

ASX

Other

Avg LVR

of

ASX200

No Of

Manage

d Funds

AVG LVR

of

Managed

Funds

Interest Rate

REPORT DATE: JANUARY 2014

Variable

(as at

01/12/13)

Fixed

(as at

01/12/13)

Buffer

Shares

Managed

Funds

Div

iden

ds p

aid

to

ban

k a

cco

un

t

Insta

lmen

t G

eari

ng

Availab

le

Inte

rnati

on

al

Researc

h A

vailab

le

Lo

ng

Call

Allo

wed

Lo

ng

Pu

t

Allo

wed

Sh

ort

Call

Allo

wed

Sh

ort

Pu

t

Allo

wed

We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. This is not

always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you.

Managed Fund Investor

««««« outstanding value

Commsec 195 221 5% 5% No min7.63% 7.60% P P P P P P P64.72% 1,638 71.41%

CommSec Advisor Services 193 157 10% 10% No min7.74% 7.60% P P P P P P P60.03% 1,811 71.01%

St George 192 300 10% 10% 200007.93% 6.99% P P O O O P O62.71% 1,811 72.62%

««««

ANZ 199 515 5% 5% No Min7.84% 7.40% P P P O O O O70.33% 1,073 72.29%

BT Margin Lending 184 138 10% 10% 200007.67% 6.79% P P O O O P O63.78% 1,812 72.63%

nab 197 166 5% 10% 200007.65% 7.40% P P P O O P O62.21% 1,059 68.02%

Suncorp Bank 194 274 5% 10% No Min7.74% 6.95% P P O O O O O62.63% 1,762 72.76%

«««

Morgan Stanley Smith Barney 191 117 5% 10% No Min7.84% 6.89% P P P P P P O60.58% 150 66.40%


2014 page 1

Report Date: January 2014 (All information is correct as at

Dec 01, 2013)

your guide to product excellence


Company Min Loan

Amount

Options Trading

No ASX

200


ASX

Other

Avg LVR

of

ASX200

No Of

Manage

d Funds

AVG LVR

of

Managed

Funds

Interest Rate

REPORT DATE: JANUARY 2014

Variable

(as at

01/12/13)

Fixed

(as at

01/12/13)

Buffer

Shares

Managed

Funds

Div

iden

ds p

aid

to

ban

k a

cco

un

t

Insta

lmen

t G

eari

ng

Availab

le

Inte

rnati

on

al

Researc

h A

vailab

le

Lo

ng

Call

Allo

wed

Lo

ng

Pu

t

Allo

wed

Sh

ort

Call

Allo

wed

Sh

ort

Pu

t

Allo

wed

We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. This is not

always possible and it may be that not every product in the market is included in the rating nor every feature compared that is relevant to you.

Share Investor

««««« outstanding value

ANZ 199 515 5% 5% No Min7.84% 7.40% P P P O O O O70.33% 1,073 72.29%

Commsec 195 221 5% 5% No min7.63% 7.60% P P P P P P P64.72% 1,638 71.41%

St George 192 300 10% 10% 200007.93% 6.99% P P O O O P O62.71% 1,811 72.62%

««««

BT Margin Lending 184 138 10% 10% 200007.67% 6.79% P P O O O P O63.78% 1,812 72.63%

CommSec Advisor Services 193 157 10% 10% No min7.74% 7.60% P P P P P P P60.03% 1,811 71.01%

Macquarie Prime 185 392 N/A N/A 200007.95% 6.25% P O P O O O O76.05% N/A N/A

Morgan Stanley Smith Barney 191 117 5% 10% No Min7.84% 6.89% P P P P P P O60.58% 150 66.40%

nab 197 166 5% 10% 200007.65% 7.40% P P P O O P O62.21% 1,059 68.02%

«««

Suncorp Bank 194 274 5% 10% No Min7.74% 6.95% P P O O O O O62.63% 1,762 72.76%


2014 page 2

Report Date: January 2014 (All information is correct as at

Dec 01, 2013)

your guide to product excellence

YOUR GUIDE TO PRODUCT EXCELLENCE

1

WHAT IS THE CANSTAR margin lending star ratings?

CANSTAR margin lending star ratings is a consumer-friendly benchmark or value index, unique to CANSTAR that

compares both the Price and Features across margin lenders. CANSTAR star rated lenders represent a short list of

quality institutions. This short list narrows the search for consumers to lenders that have been independently assessed

and ranked. Five-star lenders are considered to offer outstanding value for money.

CANSTAR’s rating methodology is transparent and extensive. The methodology compares all types of margin lending

products for an array of characteristics such as:

Interest Rates Fees and charges Loan to Value Ratio (LVR)

Features No. of shares/funds available

The results are reflected in a consumer-friendly 5-star concept, with a 5-star product denoting one that offers outstanding

value.

HOW ARE THE ‘STARS’ CALCULATED? CANSTAR ranks margin lenders based on value-for-money measures and then awards a star rating according to rank.

Typically the top 3 lenders will be awarded a 5 star (or outstanding) rating. The number of lenders awarded each of the 3

to 5 star ratings will ultimately depend of the dispersion of final scores. Scores are awarded to each lender on the basis

of rates, fees, services and list of approved securities. The methodology is revised and parameters are updated on a

regular basis to make sure that the products are analysed using the most up-to-date information capturing all industry

developments. A detailed methodology is provided below.

CANSTAR assesses margin lenders from the perspective of two different consumer profiles: the Share Investor, and the

Managed Fund Investor. Each profile assumes that the consumer will have a preference over one of these forms of

security against the other, but will also seek some content from their secondary security type. To arrive at the total score

CANSTAR applies a weight against the Pricing score, Features score and Acceptable Securities List score. This method

can be summarised as:

TOTAL SCORE = W1PRICING + W2FEATURES SCORE + W3ASL SCORE

MARGIN LOANS STAR RATINGS

METHODOLOGY

40%

50%

50%

1-year Fixed Rate in

Advance

Pricing

Score

50%

Feature

Score

50%

Variable Rate -

Historical

Product Features


List

60%

Indexed Score

Product with the best pricing or

features will receive a full score

2 YOUR GUIDE TO PRODUCT EXCELLENCE

WEIGHTINGS

The Pricing, Features and Acceptable Securities List scores are weighted for each product to reflect the relative

importance of each component in the determination of value for money. Current weights are:

Profile Pricing Weighting Features Weighting

Share Investor 50% 50%

Managed Funds Investor 50% 50%

PRICING

CANSTAR accounts for both current and historical interest rates in the calculation of the PRICING component of each

product’s overall score, which comprises of:

1. Standard 1 Year Fixed Rate in Advance – rates as at June for $50,000, $250,000 and $500,000 loan

amounts;

2. Historical Performance of Standard Variable Interest Rates – average of rates over the past 6 months for

$50,000, $250,000 and $500,000 loan amounts.

Those products with the lowest price receive the highest score in the pricing scenario analysis.

FEATURES

CANSTAR allocates points for over 250 Features of a margin lending product. These include flexibility, operating terms

and conditions, investor tools and imposed product parameters. The points are totalled for each product and then

indexed to determine the product’s Feature ranking.

Features have been assessed separately for the two investor profiles (Share Investor and Managed Fund Investor), to

take into account the fact that each of these two main categories of investor will have differing priorities when choosing

their margin lender.

Feature Score

50%

Product Features

Acceptable Securities List

50%

Feature Score

50%

Product Features

Acceptable Securities List

50%

40%

20%

60%

40% 1-year Fixed Rate in

Advance

Interest Rate as at 1 June

Pricing Score

50%

Variable Rate - Historical

Six Months Historical

$500,000

$250,000

$50,000 40%


Feature Categories

Category/Sub Category Shares Managed Funds Description

Margin Loan Trading 28% 25% Features available for trading Settlement Account and Risk Management 33% 37% Availability of CMT's and settlement account functionality

Options Trading 20% 15% Availability and cost of Option Trading Discount Broker Partnerships 4% 4% Broker partnerships Portfolio Platform 10% 10% Loan available through a platform

Third Party Trades 3% 4% Allocation of a purchase or proceeds of a sale to a third party

Execution Options and Costs 30% 30% Trade execution options and cost to trade either by phone or internet

Loan Features 12% 14% Loan application avenues and approval turnarounds Cash Advance 9% 9% Availability of cash advances Dividend Distribution 9% 9% Dividend distribution options Progressive Drawdowns 9% 9% Availability of progressive drawdowns and flexibility Repayments 55% 55% Repayment options and restrictions Split/Combination Features 9% 9% Able to split loan fix/variable or arrears/advance Switching 9% 9% Switch between managed funds

Direct Client Services 14% 8% Customer service- newsletters, account managers, statements

Advisor Services 5% 12% Advisor services - access to client information and advice

Fees And Charges 12% 10% Initial, ongoing, behavioural and discharge fees Charges 50% 50% Initial, ongoing, behavioural and discharge fees Transaction Costs 50% 50% Fees applicable on loan transactions

Margin Information 10% 10% Information relating to margin call, period to fulfil and options

Lending Terms 9% 5% General info relating to credit facility e.g. min/max loan amounts

Security 6% 6% The types of security able to be used as security Instalments Gearing 3% 10% Availability of Instalment gearing International Shares 1% 0% Availability of international shares

ACCEPTABLE SECURITIES LIST CANSTAR currently reviews the Acceptable Securities List (ASL) for only those securities that have either an APIR

(Managed Funds) or ASX (Australian shares) code. International shares are not included in the calculation of the ASL

score.

The score for ASL is comprised of:

The number of Listed Shares and Managed Funds available against which to borrow funds

A product’s average LVR for Listed Shares and Managed Funds

Diversified and undiversified portfolio offerings


Each of the above components are calculated at six points during the six months preceding the star ratings calculations.

This provides an ASL score on historical performance and benefits the institutions with a consistent high offering on both

the number of stocks/managed funds and the LVR.

A higher number of funds and shares on a menu, along with a high average LVR, will result in a high relative score.

Contribution of shares and managed funds to overall ASL scores will be reviewed in relation to their market size for each

star rating.

As with Features, the ASL score is assessed differently for the two investor profiles, with scoring weighted towards the

more relevant of the two main security types in accordance with the profile.

Profile Share Investor Managed Funds

Investor

Shares 90% 20%

Managed Funds 10% 80%

How often are products reviewed for star ratings and Award purposes?

All ratings are fully recalulated every twelve months, based on the latest submissions from each institution. CANSTAR

also monitors changes on an ongoing basis.

Does CANSTAR rate other product areas?

CANSTAR researches, compares and rates the suite of banking and insurance products listed below. These star ratings

use similar methodologies to guarantee quality, consistency and transparency. Results are freely available to consumers

who use the star ratings as a guide to product excellence. The use of similar star ratings logos also builds consumer

recognition of quality products across all categories. Please access the CANSTAR website at www.canstar.com.au if you

would like to view the latest star ratings reports of interest.

Acceptable

Securities

List

Number of

securities

Loan-to-

Value

Ratio

Shares ASX200:

70%; Others: 30%

Managed

Funds

Conditional – 85%

Unconditional -15%

50%

50%



DISCLAIMER: To the extent that any CANSTAR data, ratings or commentary constitutes general advice, this advice has been prepared by CANSTAR Research Pty Ltd ABN 29 114 422 909 AFSL 437917 and does not take into account your individual investment objectives, financial circumstances or needs. Information provided does not constitute financial, taxation or other professional advice and should not be relied upon as such. CANSTAR recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser. A Product Disclosure Statement relating to the product should also be obtained and considered before making any decision about whether to acquire the product. CANSTAR acknowledges that past performance is not a reliable indicator of future performance. Please refer to CANSTAR Research’s FSG for more information at www.canstar.com.au. All information contained herein shall not be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or stored for subsequent use for any purpose, in whole or in part, in any form or manner or by means whatsoever, by any person without CANSTAR’s prior consent. All information obtained by CANSTAR from external sources is believed to be accurate and reliable. Under no circumstances shall CANSTAR have any liability to any person or entity due to error (negligence or otherwise) or other circumstances or contingency within or outside the control of CANSTAR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication, or delivery of any such information. Copyright 2012 CANSTAR Pty Ltd ABN 21 053 646.

Account Based Pensions

Agribusiness

Business banking

Business life insurance

Car insurance

Credit cards

Deposit accounts

Direct life insurance

Health insurance

Home & Contents

Home loans

Life Insurance

Managed Investments

Margin lending

Online Banking

Online Share Trading

Package banking

Personal loans

Superannuation

Travel Insurance


Documents

IN THIS REPORT