UBS pitches geared investment products to SMSFs

Concerns about borrowing by superannuation funds outlined in the interim report of the Financial System Inquiry have not deterred investment bank UBS from launching a limited recourse borrowing arrangement linked to a portfolio of shares and exchange traded funds.

The new product, UBS Investment Builders, comes in two forms: Share Builders and Dividend Builders.

Share Builders, which uses dividend income to pay the loan, is a structured product that provides geared exposure to State Street's SPDR MSCI Australia Select High Dividend Yield Fund.

Dividend Builders, which pays an income stream from dividends, is a structured product that provides geared exposure to 50 ASX-listed stocks.

The investor is the beneficial owner of the underlying securities and receives exposure to price performance, dividends and franking credits.

UBS director in equity products Peter Mermelas said UBS was looking at adding listed managed funds to the offering.

While self-managed superannuation fund trustees were the key market for such a product, Mermelas said other investors could consider it as an alternative to margin lending.

"We offer 60 per cent gearing and the rate is around 5.8 per cent, and there are no margin calls," he said.

On the subject of SMSF gearing, the FSI interim report said: "If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems. The general lack of leverage in the superannuation system is a major strength of the financial system."

Mermelas said the focus of concern about SMSF borrowing was direct residential property investment - an illiquid asset that could account for a significant proportion of fund assets.

"The market we are talking about is well regulated and liquid. SMSF borrowing for investment in equities is not excessive," he said.