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Best way to reduce MF LVR?

Discussion in 'Managed Funds & Index Funds' started by Chris.R_WA, 17th Aug, 2006.

  1. Chris.R_WA

    Chris.R_WA Well-Known Member

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    7th Aug, 2006
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    Location:
    Perth, WA
    Hi,

    I've just bought my first batch of NI funds, using an installment gearing plan with Suncorp. The total initial funds are not that large, 15K, with the gearing at 65% LVR.
    Each month I contribute additional equity, and my margin facility is drawn down as well and added together to purchase more units at a ratio of 1:2 ie. 66.6% LVR.
    This does not raise my overall LVR by too much, ie. after 6 months total overall LVR will be 65.4% (assuming no unit price movement). Ideally, I would like to have the LVR move more towards 50% (not exactly, but just in the right direction).
    At this stage my plan is to pay the margin interest monthly in arrears (as it is not too onerous) and reinvest the quaterly distributions.

    What are some other ways of reducing my LVR, whilst still increasing my total holdings? What structure do others have set up to maintain/control their LVR?

    Thanks, Chris
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    A contribution ratio of 1:2 will continue to increase your LVR ... if you are keen to reduce it more directly, I suggest a contribution ratio of 1:1 (ie you borrow $1 for ever $1 you contribute) ... this way you will eventually see your LVR at around 50%.

    But also if you are paying the margin interest from your own cash and not capitalising, plus also reinvesting distributions, then your LVR will naturally fall over time as well.
     
  3. Glebe

    Glebe Well-Known Member

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    Sim's 1:1 sounds the most sensible.

    But if your margin loan interest rate is, say, 8%, and you have assumed that the annual income or growth of the fund is say 9%, then over time you would be better not paying the interest in arrears (ie let it capitalise), and with the money you are saving by not paying the interest, buy more units. And of course re-invest your distributions as you are.

    With the value of your units increasing at a greater rate than your loan, your LVR is being reduced over time.

    This equation holds so long as the performance of the fund is greater than the cost of your borrowed money.
     
  4. Chris.R_WA

    Chris.R_WA Well-Known Member

    Joined:
    7th Aug, 2006
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    Location:
    Perth, WA
    Thanks

    Thanks Sim and Glebe,

    Its good to know I have several options open to me. The margin loan is fairly flexible with the contribution ratio, so I can easily change things down the track if they strat to skew a bit too much. You're right Glebe, I'll just have to keep my eye on the fund performance.

    Cheers, Chris