Gearing on the up: Investment Trends

Summary: More investors are using leverage as part of their strategy, with Millennials showing strong interest in borrowing.

Key take-out: According to Investment Trends, margin lending facilities remain popular.

Many Australian investors are not shying away from using borrowing facilities to gain leverage despite increased market volatility.

A new report by research firm Investment Trends has found there is strong interest in using leverage to invest, matching the wide range of benefits recognised by current borrowers.

The 2018 Borrowing to Invest Report studied the attitudes and behaviours of Australian online investors who use gearing to invest in direct shares, ETFs or managed funds.

The study is based on a survey of 8,718 Australian-based online investors conducted between July and August 2018.

Among other findings, the research found that:

• Millennial online investors are driving strong interest for gearing to invest.
• Margin lending investors are in it for the long haul.

Along with a growing number of online investors, the latest Investment Trends research shows that many investors also use debt to finance their investments.

“Nationwide, an estimated 86,000 online investors are gearing their investment portfolio through a variety of methods, most commonly with margin lending products, line of credit secured against their home equity and home loan redraw facilities,” says Investment Trends analyst John Carver.

“These borrowers firmly believe in gearing’s effectiveness as a wealth creation strategy and on a net-basis agree others their age should also use leverage to achieve their goals.”

The number of Australian investors who utilise gearing in their portfolios has significant room for further growth, with Investment Trends’ modelling indicating 81,000 intend to begin using gearing in the next 12 months (but not all will do so), and a further 230,000 could be encouraged to do so.

Millennial investors drive interest

At present, the use of gearing to invest is highest in the late-accumulation stage, with 16 per cent of online investors aged 35 - 50 and 19 per cent aged 50 - 64 using gearing, compared to 5 per cent of millennial investors. However, there is substantial interest among millennials, with 52 per cent saying they would like to or can be encouraged to begin using borrowings to invest.

“Millennial borrowers recognise many benefits of leverage-funded investing, particularly its ability to facilitate greater investment given their cash flow and ability to achieve increased diversification in their portfolios,” says Carver. “These benefits are cited more often than older borrowers, who are more likely to cite negative gearing as a key advantage.”

Margin lending leads

With 52,000 users, margin lending is the most popular credit product for those borrowing to invest in shares, ETFs and managed funds.

“Margin lending investors predominantly see borrowings as a long-term investing tool, not for short-term gains,” says Carver. “This is also reflected in their level of gearing, with an average margin loan LVR of 42 per cent.”

In the coming year, 40 per cent of margin lending investors intend to increase their margin loan borrowings.