Summer 2007

Regular gearing for the regular investor

Where once margin lending was viewed as the domain of the more sophisticated and wealthy investor, the introduction of margin loan products, such as regular gearing, mean that borrowing to invest is now attractive to a much wider group of investors.

The next property boom?

Investors in Australian Listed Property Trusts (LPTs) have
experienced a decade of amazing returns. So what's the
next big thing for property?

China's growth, world commodity prices and global warming: it's just not cricket

BT's Chief Economist, Chris Caton, tells how China's growth, world commodity prices, global warming, and the surge in private equity can all be related to the cricket...

The many ways to avoid a margin call

The possibility of a margin call can deter some investors from borrowing to invest, but in reality you can minimise your chances of ever facing one with ease. Find out what you need to do to ensure borrowing to invest doesn't leave you in a cold sweat.

BT wins Ethical Fund of the Year - again!

BT's Ethical Share Fund was awarded Ethical Fund of the Year
for the second time in three years at the 6th Australian
Sustainability Awards last month. The awards, which are run
by Ethical Investor magazine, provide an opportunity to
recognise achievers in sustainability.

3 BT funds awarded in 'Best of the Best'

BT has won three awards in Money magazine's 'Best of the Best 2007'.

New Year's resolutions... for your finances

Join a gym, eat healthier, drink less... If you've ever made a New
Year's resolution, the aim has probably been to do something
positive and healthy. But what about making a resolution that is
positive and healthy for your finances?

Regular gearing for the regular investor

According to the latest RBA statistics¹, the Australian margin lending market stood at $26.12 billion in total borrowings as of September 2006, an increase of 39% on the previous year, and the number of people taking out margin loans in Australia that year increased by 11%. So, what is prompting this increasing interest in margin lending in Australia?

Until recently, borrowing to invest was considered to be for the wealthier investor, or those with a better stomach for risk. Now, however, margin lenders offer a wider range of product offerings that can reduce the risk and make margin lending accessible to almost everyone, for example younger investors, or those investors just beginning to build their portfolios.

One increasingly popular offering is regular gearing, also known as 'instalment' gearing or 'savings' gearing, which combines the power of margin lending with the discipline of a regular savings plan.

What is regular gearing?

Regular gearing involves combining your own investment assets with borrowed funds to purchase approved securities on a monthly basis. It is also a simple and automatic way to 'drip-feed' money into investments, allowing you to take advantage of dollar cost averaging - buying more when the market is down and less when the market is up, thereby smoothing out the highs and lows of investing.

Regular gearing also allows you to take a more disciplined approach to investing, with the monthly instalment being automatically deducted from your account each month.

Take a look at the latest Approved Managed Funds list- you'll be surprised at the wide range of investment options available to BT Margin Lending customers:

• View the latest BT Margin Lending approved managed funds (PDF 70KB)

How much do I need to get started?

The attraction of regular gearing is that it enables a much wider range of investors to access margin lending facilities because the minimum investment amount to get started is much lower.

While a standard BT Margin Loan requires a $20,000 initial investment, the BT Regular Gearing Loan requires a minimum initial investment of $2,500, inclusive of the loan capital provided by the lender. This means that the initial equity required from the investor can actually be much lower.

For example, an investor seeking to take out a BT Regular Gearing Loan using as collateral an investment with a 70% LVR (the percentage of the investment's market value that BT will lend you) would require only a $1,080 minimum initial investment, and a minimum monthly investment of $250. Every month, BT Margin Lending would match the investor's regular instalment- thereby doubling the amount invested each month to at least $500.

Why would I regularly gear?

We all want to reach our financial goals sooner. Whether your goal is to save a deposit for a home, save for your child's education or build an investment portfolio, you can get there faster by combining margin lending with a regular investment plan - the BT Margin Lending Regular Gearing facility.

Regular gearing gives you all the advantages of regular saving combined with the advantages of gearing to help build your assets and achieve your wealth creation goals sooner.

Consider the following case study:

Case study #1- Footloose and fancy free (PDF 100KB)

Jackie is a young woman who recently completed her studies and has started working, earning $37,000 per year. She currently has savings of $5,000 and her goal is to buy her first home, in five years time. This case study shows how Jackie achieves her goal by using a regular gearing loan to accelerate her savings.

Furthermore, investors at any life stage can benefit from the wealth-building power of margin lending. Visit BT Online to find a range of educational information and tools. These include a number of margin lending case studies which provide information on the financial benefits of borrowing to invest for any regular investor at any time in their lives.

For more information on how regular gearing can be used in conjunction with a margin loan to help build wealth more quickly:

• Speak to your financial adviser;
• Visit www.bt.com.au;
• Email client.marginlending@btfinancialgroup.com; or
• Call BT Margin Lending on 1800 816 222.

1 Reserve Bank of Australia, Statistics Bulletin, D.10 Margin Lending, 18 January 2007 (opens in a new window)

Important Information
The information in this article, dated February 2007, is given in good faith and has been derived from sources believed to be accurate as at this date. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. If you do not have a copy of BT FM's Financial Services Guide, please print a copy from before considering the newsletter. Any kind of forecast, analysis or prediction contained in this economic commentary may be proven wrong.

The next property boom?

Many Australians did well during the residential property booms that swept the eastern states a few years ago and the west more recently. Investors in Australian Listed Property Trusts (LPTs) have experienced a decade of amazing returns. So what's the next big thing for property?

The love of our life

Australians love property. Since the early 1960s, around 70% of us have owned our own home¹. Over the past decade there has also been a rapid rise in investment in residential property. The RBA's research shows that, on average, more people own investment properties in Australia than in Canada, the UK or the US.

Listed property

And we don't restrict ourselves to buying direct property. According to global property benchmark, the UBS Global Investors index², Australia comprises more than 70% of the Asian listed property market and at least 12.5% of the world market - yet we're responsible for only 1.5% of world GDP.

Australia also has one of the world's most sophisticated listed property markets. Australian LPTs have been around since 1971. Only two countries have a longer history - the US (1960) and the Netherlands (1969). Real Estate Investment Trusts (REIT's) as they are called in the US, were only developed in Japan in 2000, Singapore in 2002 and Hong Kong in 2003. They are only now opening in the UK, and Germany is still a little while off.

Where to invest?

The performance of Australian LPTs over the past decade has been exceptional. The market (as tracked by the S&P/ASX 300 Property index) has produced an average annual return of 16.45% over that time. Recently, heightened corporate activity has pushed LPT share prices to dizzying heights. The market is now highly concentrated, as many companies have merged and there are fears the market may finally be peaking.

Now might be the right time to look at other property opportunities.

Opportunity offshore

The potential for higher returns and the benefits of diversification make international property worth a look. In fact, Boston based real estate investment firm AEW say that the case for international property is now better than for international shares and bonds. Here's why.

Diversification - There is a very low correlation between the world's two largest listed property markets (the US and Australia) - much lower than for their respective sharemarkets. That means that the performance of one listed property market has little in common than the performance of the other. What this means for investors is that by investing in both markets it may be possible to reduce risk and increase potential returns.

Growing supply - The total value of the world's listed property markets is around $750 billion, and growing fast. And not only is demand rising, supply is increasing rapidly as well.

According to AEW, the global stock of commercial properties is estimated to have a total value of more than $15 trillion - only 5% of which is in the form of a listed security. That means there's plenty of room for growth.

Faster growth - The successful development of listed property markets in the US and Australia may be emulated in other Asian and European countries as rapidly ageing populations in Japan and Europe increases the popularity of investments that pay a steady income stream. As a result - the fastest growth from property over the next decade might come from outside its traditional strong points of Australia and the US.

Diversity of property types - By investing in global property, your clients can gain access to many property types which are not available in Australia. For example, while there are six major industry sectors in the Australian market (mostly represented by the retail sector), in the US there are 11 sectors.

BT's Global Property Fund

The BT Global Property Securities Fund invests in more than 300 listed property securities throughout North America, Europe and Asia. The portfolio is managed by AEW - one of the world's leading real estate managers, which manages $34.8 billion for many of the world's largest institutions and private investors.

As at 31 December 2006, the regional allocation of the Fund was as follows:

As you can see, the Fund is overweight in the faster growing markets of Asia and Europe and underweight in the well-developed North American market. The Fund allows investors to tap into the faster growing regions discussed above and also to gain access to many property types which are not available in Australia.

1. Australian Bureau of Statistics, 4102.0 - Australian Social Trends, 2004
2. AEW An Introduction to the size, composition and performance of the global market, Michael J. Acton, CFA - Director of Research

Information you should know
All forecasts and estimates are based on one set of assumptions that may change. A small change in any one of the assumptions may lead to a large change in results. This article contains the current opinions of the author but not necessarily those of BT Financial Group or any of its associates or affiliates. The author's opinions are subject to change without notice and any kind of forecast, analysis or prediction contained in this economic commentary may be proven wrong. The information in this article, dated February 2007, is given in good faith and has been derived from sources believed to be accurate as at this date. It is general information only and should not be considered as a comprehensive statement on any matter and should not be relied on as such. This information does not account for your investment objectives, particular needs or financial situation. These should be considered before investing and we recommend you consult a financial planner. Except to the extent prohibited by statute, no company in the BT Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any way including by reason of negligence for errors or omissions.

China's growth, world commodity prices and global warming: it's just not cricket

The world is slowly returning to what passes for normal after the lethargy of summer. The English cricket team has flown home to the UK winter, having dragged themselves from the depths of an Ashes whitewash to the top of the one day series. For those of us who are still closet Poms the victory was bittersweet, but I can't help but conclude that the Ashes score line of 5-0 flattered the English. It wasn't really that close.

Not all that much has changed on the economic front. The news out of the United States has been remarkably benign. Helped to some extent by a mild start to winter, economic growth there has held up remarkably well, and may even be accelerating. At the same time, the concern that inflation was rising to an unsustainable level turns out to have been misplaced (even I got that one right!). The year-to rate of increase of the "core" CPI now stands at 2.5%, down from 2.9% in the year to September 2006, and wages growth appears also to be past its peak.

The US bats on...

The US has been described as a "Goldilocks" economy in that it is neither too hot nor too cold. One could equally well describe it as a Rasputin economy, in that you just can't kill it. In 2006, a major sector of the economy, residential construction, was a severe drag on growth, but the rest of the economy powered on.

In recent months, markets have gone from expecting at least two interest rate cuts in the US this year, to questioning whether any will be necessary. Share markets like rate cuts, of course, but they also like non-inflationary growth, so the benign outlook there has helped the Dow Jones index to a series of record highs.

...while China's strike rate also increases

The Chinese economy continues to barrel ahead. It is likely to grow by 10% again this year. It is not clear that this growth will be enough to sustain the extraordinary performance of the Chinese share market, which more than doubled in value last year.

The Chinese appear to be revaluing their currency by stealth; it has been slowly creeping higher without any formal announcement. The trade surplus with the United States is no longer growing as rapidly as it was. Indeed there are tentative signs that the total US trade deficit may finally be stabilising. This may be enough to halt any protectionist talk by the new US Congress, which is good news for markets.

Back home, super changes set up a big innings

In Australia, while rate cuts are not in prospect, it is looking quite likely that interest rates are on a plateau. The Reserve Bank raised rates three times last year, leaning against what it saw as rising underlying inflation. The December CPI result was very good, however, and it now appears that underlying inflation has topped out, and will remain below 3% - the top of the RBA's target range - in 2007. The RBA probably judges that it has done enough to counteract inflation, and the rate rises seem to have kept investor appetite for housing cool.

It will be interesting to see how this appetite fares in the months ahead. As is well-known, investors have a "one-time-only" opportunity to top up their superannuation by 30 June. With superannuation so tax-effective now, one can't help but think that some investors are re-evaluating their passion for negatively-geared bricks and mortar.

If enough people take advantage of the opportunity to put $1 million into their super, this has to be a positive for the Australian equity market.

And commodities, private equity and global warming join the attack

What else could affect the market? Commodity prices, of course, but so far they are holding up well. The flow of private equity (and even just rumours that private equity may be on the way) has lifted the market, and this may not be over yet.

The surge in private equity has owed a lot to the low cost of debt, since such deals are always leveraged. Accordingly, the average gearing levels of Australian companies will be raised by the private equity phenomenon. Australian business tends to be relatively conservatively geared, so this isn't necessarily bad. Let's just put it this way: the testing time for private equity deals will come when rates rise and/or economic growth slows.

The global warming issue is clearly gaining momentum. If it has any significant market effects, it will be over several years rather than in 2007. If there is a serious attempt to reduce emissions, then the cost of electricity and energy in general will have to rise. This will have some clear sectoral effects. Alternative technologies also will receive a boost.

In this connection also, it is worthwhile pointing out that the current drought is big enough to have a significant effect on overall economic growth in Australia. If the "multiplier effects" are big enough, then the overall market may suffer. For the moment, however, its effects are only sectoral.

Have the Aussies peaked?

As is well-known, the Australian share market has had a fantastic run for almost four years now. In this time, it has been primarily driven by profits growth, but it is now starting to look somewhat over-valued, at least to me. Of course, overvalued markets can continue to appreciate, and the superannuation and private equity considerations outlined above seem likely to add to momentum in the short run. In addition, we know that almost every major correction or dip in the local market begins with some offshore event.

Chris Caton
Chief Economist

Disclaimer

The information in this article, dated February 2007, is given in good faith and has been derived from sources believed to be accurate as at this date. It has been prepared by BT Funds Management Limited (ABN 63 002 916 458) without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. If you do not have a copy of BT Funds Management Limited's Financial Services Guide (PDF 64KB), please print a copy before considering the newsletter. Any kind of forecast, analysis or prediction contained in this economic commentary may be proven wrong

The many ways to avoid a margin call

"Knowledge is the antidote of fear" Ralph Waldo Emerson.

Fear can do funny things to investors - particularly if the reason for worry is unfounded, or the source of the fear is misunderstood. But fear can also have a flipside; it can mark the boundaries of an investor's comfort zone regarding risk, and act as a catalyst for investors to learn how to overcome their fears.

The same applies to margin lending. One of the biggest sticking points for anyone thinking about borrowing money to invest is the possibility of an unplanned margin call. In reality, understanding the causes and best ways to manage a margin call can have long-lasting positive effects on your investor behaviour: you'll better understand your attitude to risk, the boundaries of your investor comfort zone and how to make smarter investment choices.

A margin call is a call to action, not a penalty

When you borrow money to invest, you increase your exposure to market fluctuations and create the potential for greater investment returns. Similarly, you also increase the potential for investment losses if the market drops. A margin call usually results because the market has dropped and the value of your security portfolio has fallen, or the lender has reduced the lending ratio of a security you hold within your margin loan. Both events reduce the amount you can borrow and subsequently increase your gearing levels (the ratio between the equity you hold in your investments compared to the amount of borrowed funds).

If a margin call occurs, it simply means you need to take action to restore the balance - either by paying off some of your margin loan to reduce the loan balance or by lodging additional approved securities to increase the value of the equity within your investment. While this may sound daunting, there are many strategies you can put in place when you set up your investments to reduce the likelihood of a margin call.

1. Start with the advice of an expert

It sounds like a simple idea, but employing a financial adviser to develop your portfolio and gearing strategy is one of the best steps you can take to avoid a margin call. Your adviser should treat a margin call in the same way as you - as something that might be avoided through sensible management of your investments - and will help you choose the right high-quality managed funds and shares to match your gearing strategy. An adviser can also ensure your investments are diversified to reduce the impact of a poor investment affecting your overall returns, and help you understand how comfortable you are with investment risk.

If you do choose to manage your investments yourself, don't forget the two investment basics: invest in quality and diversify your investments.

2. Invest within your comfort zone

Investing within your limits, or limiting the amount you borrow (not borrowing up to your credit limit) will make it easier for you to meet your regular interest payments and cope with any sudden extra expenses.

Borrowing less than you can afford will also help you widen the gap between your current position and the amount the market would need to fall before a margin call is activated. For example, if you invested into a managed fund with a lending ratio of 70% and you only borrowed up to 50%, your portfolio would need to fall by 38% before a margin call arises, compared to a 13% drop if you borrowed to the 70% limit.

The table below shows how much the market value of your portfolio needs to fall before a margin call occurs.

To ensure small market fluctuations and changes to your margin loan do not trigger a margin call, BT Margin Lending allows a buffer of 10% on managed funds and listed securities. The buffer can help prevent a margin call, even if your loan ratio has exceeded the LVR limit set by BT.

If your account is in the buffer, you are unable to borrow more money but it is not necessary for you to take any action, though it might be prudent to do so.

3. Make regular monthly payments on your loan interest

Paying your loan interest every month helps prevent your loan balance, and your level of gearing, from increasing. Not only does this reduce the risk of a margin call, paying your interest should also give you the flexibility to invest more money if an attractive investment opportunity crops up. Prepaying your interest can remove the risk of interest rate rises by locking in a fixed interest rate for up to 12 months, and you might be eligible for tax deductions on your interest payments.

4. Reinvest your distributions

Reinvesting your distributions, or crediting them against your loan, also helps to maintain your level of gearing and can reduce your loan balance.

5. Knowledge is the antidote, so stay informed

Borrowing to invest does contain an element of risk: just as having more money to invest can increase your potential returns, you could also increase your potential losses. Staying informed and keeping track of your margin loan is essential to maintaining a healthy gearing strategy.

You should also continue to monitor the lending ratios assigned to your securities. At any time, the lending ratios assigned to your securities could change (including being reduced to zero) and this could trigger a margin call or cancel a pending transaction.

BT Margin Lending customers can track their BT margin loan and all of their BT investments 24 hours a day, 7 days a week by logging on to our website, or by contacting BT Margin Lending on 1800 816 222 during business hours.

More information?

• Apply for a BT Margin Loan online
• Download BT's Margin Lending Made Easy brochure (PDF 610KB)
• Understand your attitude to investment risk
• Find out how much you can borrow
• Make an appointment with a financial adviser

Important Information

The information in this article, dated February 2007, is given in good faith and has been derived from sources believed to be accurate as at this date. It has been prepared by BT Funds Management No. 2 Limited (ABN 22 000 727 659) (BTFM) without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. If you do not have a copy of BT FM's Financial Services Guide (PDF 55 KB), please print a copy from before considering the newsletter. Any kind of forecast, analysis or prediction contained in this economic commentary may be proven wrong.

BT wins Ethical Fund of the Year - again!

BT's Ethical Share Fund was awarded Ethical Fund of the Year for the second time in three years at the 6th Australian Sustainability Awards last month. The awards, which are run by Ethical Investor magazine, provide an opportunity to recognise achievers in sustainability.

To be eligible for the Ethical Fund of the Year Award, a fund must invest mainly in Australian shares and, additionally, practice a comprehensive screen for environmental, social and governance factors. Each eligible fund is judged on the ability to provide strong investment returns while remaining focussed on investing in companies that have a positive sustainability profile.

BT's Ethical Share Fund won out over four other fund managers to take the award.

To find out more about ethical share funds and how they operate visit the new Fund Spotlight segment in this month's edition of Better Investor Online.

3 BT funds awarded in 'Best of the Best'

The 'Best of the Best' awards assess the best financial products, services and investments currently available in Australia, enlisting the help of research companies such as CANNEX, one of Australia's leading financial services research groups.

Two gold awards and one silver award went to BT:

• GOLD - for the Premium Cash Fund in the 'Best Cash Management Trusts' category, the second year in a row that the fund has won the top accolade.
• GOLD - to the BT Australian Share Fund (PDF 50KB) within the 'Best Australian Share Funds' category.
• SILVER - in the 'Best Smaller Companies Fund' category for the BT Smaller Companies Fund (PDF 50KB).

To find out more about any of the winning funds visit bt.com.au where you can view fund fact sheets and the latest unit prices. Alternatively please contact BT Investor Relations on 1800 645 685.

New Year's resolutions... for your finances

Join a gym, eat healthier, drink less... If you've ever made a New Year's resolution, the aim has probably been to do something positive and healthy. But what about making a resolution that is positive and healthy for your finances?

For investors, good financial health is just as important as physical health, and financial goals can often be achieved with less sweat and sacrifice (and they're easier to keep!). Take a look below at some New Year's resolutions to help you get your finances into top shape in 2007.

Top 10 New Year's financial resolutions:

• Lose weight

  Consolidate your super. Consolidating multiple accounts can cut out unnecessary paperwork, and cut down on multiple fees. Lighten the load by rolling your multiple super funds over to your BT super account.

• Discover new things

  Sign up to our Better Investor Online e-newsletter. Each month, you'll receive practical investment tips, stock stories, investment insights and the latest performance figures direct to your inbox. And it's free. Subscribe today.

• Break a bad habit

  Don't spend your distributions, reinvest them. Automatically reinvesting your distributions can help you grow your investment more quickly. You'll also benefit from 'compounding': the 'snowball' effect occurring when your investment income is also put to work.

• Get a new hobby

  Start managing your retirement funds and other investments online. Check your investment balance, update your personal details and get 'live' updates on how your funds are performing, any hour of the day or night on www.bt.com.au or call Customer Relations on 132 135 for more information.

• Spend more time with family

  Get your super sorted now. Retirement might be years away, but how you set up your super now could determine when you retire and the amount of money you have available. Consider dynamic and growth investments. Salary sacrifice. Co-contribute. Consolidate. Roll over. Top up. For more information see our Superannuation page.

• Improve your prospects

  Take out a margin loan. Margin lending, or borrowing money to invest in shares and managed funds, can give you the opportunity to achieve greater returns from your investments. At the same time, borrowing to invest can also magnify risk, so find out all you need to know by requesting BT's Margin Lending Made Easy booklet from our Investor Relations team on 1800 645 685.

• Start, or renew, a friendship

  Talk to a financial adviser. A qualified and experienced financial adviser can help you set your financial goals, develop a strategy, and select the right investments to help you get there.

• Spend less, save more

  Set up a Regular Investment Plan. Setting up regular payments into your investment is a great strategy for building your wealth. A regular investment plan means you avoid having to work out the best time to invest - taking the worry out of timing the market.

• Take a trip

  Get those holiday savings working harder for you and open our multiple award-winning BT Premium Cash Fund account. With one of the highest interest rates in its class, no account keeping or transaction fees, and low initial investment, it's an ideal way to accelerate your savings.

• Cut your stress levels

  Increase your insurance. Do you have enough life and income insurance to cover your mortgage payments, school fees and other financial commitments if you weren't able to work, or you weren't around at all? It's impossible to predict the unexpected, but by putting a few simple strategies in place you can ensure financial support and peace of mind if the unexpected does occur. To find out if you've got the right level of insurance, see your financial adviser or talk to BT Investor Relations on 1800 645 685.

Important Information:
Past performance is not a reliable indicator of future performance. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.