Instalments in SMSFs - Portfolio Study background and rules

The scenario

On 2nd March 2009, we set up two mock portfolios and compare their performance over the 2009 calendar year. Each portfolio started with $125,000 and invested in the same four shares and one ETF over the index ($25,000 in each). The  results of the study will be available on the ASX website bi-monthly.

Objectives

The objective of the portfolio study is to compare the returns of using instalments versus shares when actively implementing the use of instalments within a SMSF. Instalments can be used in a SMSF to offset income and expense by creating an earning shelter through franking credits. Instalments can also be used to increase exposure whilst still complying with contibution cap thresholds within SMSFs. The portfolios will have the same constituents whoever due to the leveraged nature of instalments we will be purchasing approximately double the instalments as we would shares.

What type of investors will this strategy suit?

This strategy can suit all SMSF investors depending on their risk profile. The leveraged instalment portfolio will be suitable to investors with a moderate risk profile.

Expected results of the study

Our expectation is that the instalment portfolio will outperform the share portfolio significantly when  the market is rising. We expect the earnings shelter generated from the instalment portfolios to be significantly greater than the share portfolio. This will be due to the enhanced dividend yield and franking credits that our leveraged instalments portfolio provides. The losses in percentage terms may be greater in the instalment portfolio if there is a relatively large fall in the value of the selected underlying securities.

Which stocks will be selected?

The selected stocks are all S&P ASX 50 constituents. We have selects securities that may be held in a SMSF portfolio across four alternate GICs sectors. The selected securities are BHP, CBA, QBE and WOW.  An Exchange traded fund (STW) is also purchased over the S&P ASX 200 index. The ETF will cover the four selected securities as well as the other S&P ASX large and midcap securities, thus providing diversification and easy access to tracking the S&P ASX 200 index.

How we run the portfolios

There are two portfolios:

Portfolio 1 - Four shares and one ETF

Portfolio 2 - Four instalments over the shares and one instalment over the ETF - leveraged with the dollar amount equivalent to share portfolio

Each portfolio will have an initial $125,000 available from 2 March 2009. The portfolios will invest in the following securities BHP, CBA, WOW and QBE. An additional investment component will be the purchase of the SPDR S&P ASX 200 Fund Exchange traded fund (ASX Code: STW)

Share portfolio

  • The size of each trade is $25,000 per portfolio

Selection criteria for instalments portfolio

  • Instalments will have been issued in 2009\
  • Self funding instalments will be used - whereby the dividends will pay off the loan amount or second payment over time                          

How will corporate actions be treated?

We will treat corporate actions according to the issuers terms as dictated by the relevant Product Disclosure Statement or as directed by ASX.

What if the share price falls?

The original shares and instalment warrants purchased will not be sold at any time regardless of any adverse movements in the share price. This is because this is a buy and hold strategy.

Brokerage charges

No Brokerage will be charged.

Tax implications

All positions will be held until maturity.  As a result, the portfolio will eligible for the 12-month capital gains tax concession.