Key points
- UBS Investment Builders enable borrowing to buy shares under a limited recourse loan structure.
- Dividend Builders allow you to receive dividends and Share Builders use dividends to pay down the loan.
- They are available to buy on the ASX or via a direct application to UBS.
What are they?
UBS Investment Builders allow you to borrow money to buy shares but because the loan is a limited recourse loan – which means the lender cannot come after you for any other assets – they are one of the few ways that you can borrow to invest within a superannuation fund. There are no margin calls.
There are two kinds – Share Builders, which allow you to use the dividend payments to pay down the loan, and Dividend Builders, which allow you to collect dividends and generate an income stream.
You can buy them over the top 50 shares by market capitalisation or two exchanged traded funds – the SPDR ASX/S&P 200 or the SPDR MSCI Australia Select High Dividend Yield Fund.
How do they work?
You purchase a UBS Investment Builder for a percentage of the cost of the underlying share and enter into an agreement to borrow the rest.
You pay interest on the loan, which accrues during the life of the product. They also come with a walkaway feature, which means you can ‘walk away’ from the investment not owing anything.
So when the product reaches maturity – at the annual interest rate date of June 9 every year, you can decide to either roll over into a new series of UBS Investment Builders over the same underlying share, repay the loan amount to own the shares, or if you do nothing and ‘walk away’ UBS will sell the share to repay the loan. You get the excess if the share has appreciated in value but are not liable for any loss if the share has fallen in value.
For a Share Builder over BHP, for example, trading at $33.96 on November 3, the purchase price is $14.52 and the loan amount at that share price is $20.25. The cost is the difference between those two amounts or 81 cents.
UBS Investment Builders don’t have a stop loss feature, which automatically sells the share once a predetermined price is reached. Instead, the walkaway feature ensures any loss is limited to the purchase price, through a put option. This also means that if the share price recovers, you still own your investment.
UBS Share Builders use the dividends to pay down the loan but are also more leveraged and have a higher walkaway cost component. UBS Dividend Builders have less leverage and a lower walkaway cost component.
Fees
The fees are the interest rate on the loan, which is 5.75% across all UBS Investment Builders, and the cost of the walkaway feature, which differs per share and whether it is a Share Builder or Investment Builder. For a BHP Share Builder it is 0.95% so the total interest rate per annum is 6.7%. (For other shares, like IAG, the walkaway feature cost is as low as 0.3%.)
So if you bought one BHP Share Builder on November 3, which has a maturity date of June 9, 2015, the total interest cost per share would be 81c for the remaining months of the year or:
Interest rate x (remaining days in the year/365) x loan amount
0.067 x (218/365) x 20.25 = $0.81
How do you buy them?
You can buy them on the ASX through a stock broker, or via a direct cash application to UBS. On market, they will have a 6 letter stock code – for example, BHP Share Builder is code BHPSSA, BHP Dividend Builder is BHPISI. If using an adviser, there may also be an adviser fee. You can also turn an existing share holding into UBS Investment Builders.
The verdict
It’s an interesting idea and a product that endeavours to offer investors a lot more transparency around pricing than traditional instalment warrants.
The ability to convert existing shareholdings into Investment Builders is also convenient.
It is still a leveraged product and of course carries the risk that while borrowing to invest can magnify gains, it can also increase losses. Fortunately with this product there will be no ugly margin calls and it provides an opportunity to build investments, particularly when interest rates are low, but should be used sparingly in a portfolio.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.