Investors who hold assets from term deposits to equities and managed funds may be interested to know that they can unlock equity from their existing securities through various lending facilities.

This means that they can borrow against their assets without having to close out of the position, and depending on the security held there are options that allow investors to hedge downside risks through a number of risk management strategies.

Gaining access to capital from existing assets isn’t always as simple as selling the entire stake, or breaking a term deposit, as investors may face significant costs and/or capital gains/loss tax consequences.

An alternative is to borrow against securities to gain additional flexibility and access to liquidity.

Margin lending

The core concept of margin lending is straightforward, investors use their existing portfolio as collateral to secure a loan, which they can then use to invest into additional investments.

One of the primary benefits of margin lending is the ability to expand and diversify an investment portfolio without the need to liquidate existing assets. This can be particularly advantageous when time-sensitive investment opportunities arise, such as initial public offerings (IPOs) or external business opportunities.

Additionally, there may be various tax benefits associated with interest deductions, negative gearing and/or interest pre-payments. Your tax advisor will be able to guide you through the options.

However, it’s crucial to understand that margin lending is not without risks. The most significant risk is the potential for amplified losses in a declining market.

In addition, as the value of the securities in the portfolio decreases, the loan to value ratio (LVR) increases. If it exceeds the maximum LVR set by the lender, a margin call may be triggered.

To mitigate these risks, investors should consider several strategies.

Firstly, avoid borrowing the maximum amount available. Maintaining a buffer can help absorb market fluctuations without triggering a margin call.

Diversifying investments across different sectors and asset classes can also help reduce portfolio volatility. Regular monitoring of the LVR and maintaining a cash reserve for potential margin calls are also prudent practices.

For those seeking a more structured approach to leveraged investing, NAB’s Equity Builder features a no margin call structure and regular principal repayments. This can provide a more disciplined path to equity accumulation, potentially reducing the impact of market volatility on the investor’s position.

Unlocking equity

Investors who are looking to borrow against an existing security, whether it be shares, bonds or funds can look to use their existing security as collateral for a NAB margin loan where we would provide a loan against a specified security with a corresponding loan-to-value-ratio (LVR). This may range anywhere from 40-80% depending on the portfolio composition.

Investors have the option to draw off the equity on a facility and be charged interest for the period the loan is drawn.

A margin loan can also be used for broader business or investment purposes. For example, by lodging your existing approved securities into a margin loan, you could use available funds for business needs such as purchasing vehicles or plant equipment, private equity, venture capital investment or further investment into the market.

Learn more about the options available

Mitigating Concentration Risk

Prudent diversification is crucial to protect your hard-earned assets.

An investment portfolio highly concentrated in just a few securities may leave an investor exposed to unnecessary risk. Further, unwinding a portfolio when in need of liquidity can also have potential tax implications. However, there are solutions.

Investors who feel they are under diversified could release equity from their current securities and use a margin loan to purchase a more diversified suite of investments. This will help broaden exposure without having to sell down a concentrated position.

Manage downside risks

In addition to diversification, investors can consider additional risk management strategies to protect wealth:

Protective Put Options: Hedge against downside movement by purchasing puts on your holding.

Equity Collars: This refers to selling a covered call and purchasing a put on an existing equity position, which could be used to monetise an existing position.

Both strategies can be explored by NAB wholesale clients via NAB’s Equity Options facility.

Alternative Investments: Consider allocating some funds into uncorrelated investments, such as NAB Equity Referenced Term Investments (NERTIS) and Duel Currency Investments, which are available to NAB wholesale clients.

Evaluating your options

Not all solutions are equal. NAB offers several equity lending facilities, each with their own unique features, to learn more about the different products available, wholesale investors can contact the investor desk contact number below.

To discover more call 1300 683106 or email us on investordesk@nab.com.au

Important information

All information in this article is intended to be accessed by the following persons ‘Wholesale Clients’ as defined by the Corporations Act.

This article should not be construed as a recommendation to acquire or dispose of any investments. The information in this website is general in nature and based on information available at the time of publishing, information which we believe is correct and any forecasts, conclusions or opinions are reasonably held or made as at the time of publishing. Past performance is not necessarily indicative of future results.

The information does not constitute financial product or investment advice, and no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither National Australia Bank Limited ABN 12 004 044 937, Australian Credit Licence and AFSL No. 230686 or any of its related entities accept liability to any person for loss or damage arising from the use of this information.

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Information correct as at August 2024.

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