Investment Road Test: Westpac Blue Chip 20

PORTFOLIO POINT: Westpac’s offering overcomes many problems of SMAs, with moderate – but not low – fees.

It’s been a shocking week in global stockmarkets and Alan Kohler’s weekend musings rightly pick up on the causes (fears of sovereign default in the PIIGS nations – Portugal, Ireland, Italy, Greece and Spain – continued massive US budget deficits, and worries about how the banks will cope with these pressures) as well as the potential outcomes. Most commentators are now calling for global and Australian markets to continue to fall; Alan quotes Gerard Minack calling for a fall of 25%, while Alan himself is looking for somewhere just below that.

The high-profile US analyst Harry Dent is the big daddy of all the doom merchants right now: he predicts global bank failures in 2011 and 2012, and the US market falling by more than 50%. The extremists will say the world is on a path to ruin, but the more moderate among us might say that Australian investors will have another great buying opportunity soon. Given the strength of global resolve and regulatory coordination, it seems on balance likely that the market will fall, but not collapse. So how can investors profit from this?

Westpac’s Blue Chip 20 is a flexible and easily accessible savings plan that gives small and first-time investors access to blue-chip shares in a low-cost account, perfect for starting a share portfolio for long-term wealth accumulation. Like my friend Andrew the Plumber (yes, he really exists) who was a first-time share buyer just after the GFC, there comes a point where the value in buying blue-chip shares is just to good to avoid, even for the first-timer.

The account is revolutionary in that it ignores the notion that direct share funds should track the rising and falling fortunes of the general market. Instead, the Westpac Blue Chip 20 is a “buy and hold” portfolio where investors can start with as little as $2500 and add by monthly ongoing contributions of $250 or more. The Westpac 20 uses the BlackRock Separately Managed Account (SMA) platform to hold stocks and can be accessed using a margin lending account provided by BT Funds Management. Buying stocks at current low levels and continuing to accumulate them at a time when they are expected to go even lower should give an extra boost to performance of the account over the medium to long term.

As the owner of some of the largest traditional fund managers in the country, it’s revolutionary for Westpac to offer this type of “benchmark unaware” investment product. If the market keeps falling the last place an investor would want to be is in a traditional fund: it will keep selling stocks as the market falls, locking in losses. In comparison, buying good stocks and holding them for long term dividend and capital growth makes far more sense '¦ as long as you have a long-term investment horizon.

The Westpac Blue Chip 20 is ideal for start up investors who can get set for as little as $2500 and who want to make ongoing deposits of $250 or more. They buy into the ASX top 20 stocks, and have all dividends reinvested into the account. It can be funded by accessing a BT Margin Lending account, which will lend a maximum of 100% of the investor’s contribution. Product fees are moderate but not cheap for the flexibility of this account, apart from an annual “dealer group” fee (see below), with a base fee of 0.6% for the BlackRock SMA administration system. Brokerage of 0.05% is about right for small share trades.

The BlackRock SMA is at the heart of the Westpac 20, as by avoiding the pooling that normal managed funds experience, the SMA doesn’t need to worry about liquidity across the entire investor base. This is the core of the problem with traditional managed funds, requiring those funds to buy and sell stocks based on what the broad market index does, irrespective of the fundamental value of those stocks.

And yet it is also true that it is not cheap; there are lower-cost and equally powerful SMA platforms available elsewhere. The Westpac “dealer group” fee of 0.825% pa is charged (inexplicably) if investors don’t establish their Blue Chip 20 account through a financial adviser. This additional layer of fees, on top of the BlackRock fee, takes some of the real joy of the underlying concept away from this product.

The score: 3.5 stars
1.0 Ease of understanding/transparency
0.0 Fees
0.5 Performance/durability/volatility/relevance of underlying asset
1.0 Regulatory profile/risks
1.0 Innovation

Tony Rumble is the founder of the ASX-listed products course LPAC Online, a provider of investment training to financial services professionals.