Bottom line: investing in bluechips

If you believe that it’s a good time to buy large-cap Australian shares, it’s worth looking at a leveraged product called Westpac BlueChip 20.

With as little of $2500 you can own a portfolio of shares in Australia’s top 20 companies, making it ideal for first-time investors who do not want to manage their own portfolio or don’t have the funds to build up a well diversified portfolio of Australian shares straightaway. Westpac BlueChip 20 aims to match to the total return, before costs, of the S&P/ASX 20 Accumulation Index.

It’s a geared fund using compulsory leveraging and is linked to a margin loan through BT Securities. The initial borrowing is 100 percent of an investor’s personal contribution. It promotes dollar cost averaging in the sharemarket by requiring regular monthly investments of at least $250. You can suspend the regular gearing and regular contributions for up to three months.

The Westpac BlueChip 20 was originally launched by Merrill Lynch in 2007, but it has been rebranded and is worth another look. Blackrock Investment Management operates it as a separately managed account rather than a unit trust, which means that investors have direct ownership of the shares in the portfolio.

This is more tax advantageous and the interest payment on the loan may be mostly tax deductible, depending on your tax rate. But all cash distributions are reinvested in the fund and cannot pay interest on your loan. The fees are a bit steep, amounting to 1.7 percent a year, above the industry average of 0.9 percent. This includes an administration fee is 0.6 percent.

MONEY VERDICT
This is an effective geared savings plan offering access to large-cap Australian shares for a small initial investment.

However, while gearing can result in higher returns, remember that there is a risk of larger losses and the possibility of margin calls. The fees are higher than the industry average – try negotiating with your financial adviser to cut back the maximum commission of 1.1 percent a year.

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