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Discussion in 'Managed Funds & Index Funds' started by AndrewG, 18th May, 2007.

  1. AndrewG

    AndrewG Well-Known Member

    Joined:
    3rd Feb, 2007
    Posts:
    61
    Location:
    Adelaide, SA
    G'day all,

    Could someone be able to work the following out for me, and show me their calculations for doing so? This way I can learn from the calculations provided, and play around with different scenarios in Excel. The example I will provide is as follows;

    Q: How much money would I have made, over and above the original $50K I invested as of 30/Apr/07 (4 months worth)?

    Scenario: If I had invested $50,000 into the NavraInvest Retail Fund on 01/Jan/07, comprised of $25,000 borrowed from my LOC @ 7.42% and $25,000 as a Margin Loan @ 9.15%. All distribution money has been left in the fund, therefore interest is capitalised on both loans.

    The purpose of this is not only to educate myself with some formulas and calculations of working out possible scenarios, but also to be able to show my wife that investing in Managed Funds doesn't mean losing the lot tomorrow. If I haven't made myself clear in the above scenario just yell out.

    Thanks,
    Andrew.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
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    Location:
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    Okay - here's what I got:

    1/01/2007 loan draw down date (let's assume they were working new years day!)
    30/04/2007 analysis date

    =120 days

    Capital:

    $25,000 from LOC
    $25,000 from Margin loan

    $50,000 total capital invested

    1.1296 Application price as of 2/01/07

    $50,000 / 1.1296 = 44263.4561 units allocated (I'm assuming no entry fee)

    4.5 c/unit distribution as of 30/03/07

    44263.4561 * 0.045 = $1991.86 distribution

    1.1373 unit price 1/04/07 for reinvestment

    $1991.86 / 1.1373 = 1751.3937 units reinvested

    44263.4561 + 1751.3937 = 46014.8497 total units at end of period

    1.1825 unit price as of 30/04/07

    1.1825 * 46014.8497 units = $54,412.56 market value as of 30/04/07

    Now, LOC interest rate = 7.42%, Margin loan interest rate = 9.15%

    LOC interest:
    Jan: $25,000.00 * 7.42% * 31/365 = $157.55 + $25,000.00 = $25,157.55
    Feb: $25,157.55 * 7.42% * 28/365 = $143.20 + $25,157.55 = $25,300.75
    Mar: $25,300.75 * 7.42% * 31/365 = $159.44 + $25,300.75 = $25,460.19
    Apr: $25,460.19 * 7.42% * 30/365 = $155.27 + $25,460.19 = $25,615.46

    Margin interest:

    Jan: $25,000.00 * 9.15% * 31/365 = $194.28 + $25,000.00 = $25,194.28
    Feb: $25,194.28 * 9.15% * 28/365 = $176.84 + $25,194.28 = $25,371.12
    Mar: $25,371.12 * 9.15% * 31/365 = $197.16 + $25,371.12 = $25,568.28
    Apr: $25,568.28 * 9.15% * 30/365 = $192.29 + $25,568.28 = $25,760.57

    Total loan outstanding at end of period = $25,615.46 + $25,760.57 = $51,376.03

    $54,412.56 - $51,376.03 = $3,036.53 Net return

    $3,036.53 / $50,000 = 6.07% return on capital
     
  3. Glebe

    Glebe Well-Known Member

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    Sydney, NSW
    You would have done in 4 months what ING could have done for you in a year :)
     
  4. dinky

    dinky Member

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    16th Sep, 2006
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    Location:
    Sydney
    Hi AndrewG,

    Actually, you would have created money out of nothing. Because the $50,000 are other people's money (i.e $25,000 from the LOC and $25,000 from the Margin loan). So,

    $3,036.53 / $0 = infinite% return on your hard earn money

    That's sweet, isn't it? :D

    Cheers,

    Dinky.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I don't treat loans as "free" money - if you stop paying the interest, they will demand their money back ... so it shouldn't be treated that way.

    Actually, I usually measure ROC slightly differently to what I did above though ... I'll recalculate.

    For my own investments, I treat my margin loan and share/fund investments as an "investment entity", and measure the amount of capital I put into this entity and the returns I get from it. Thus, money from my own pocket, from LOCs, and even from distributions are treated as capital. Money I take out of the entity is treated as a return of capital.

    My reasoning for this - at the end of the day, there is only a finite amount of capital available to invest (from income you've earned, or from equity you borrow, although you may also count gifts I guess). You need to treat that capital with care, since it's not easy to come up with more if you waste it.

    So in the case above, I would treat the $25,000 from the LOC as capital invested, as well as the distribution of $1,991.86 (you could have taken it as cash, but you chose to put it back at risk).

    Thus, there has been a $3,036.53 return on a capital investment of $26,991.86 = 11.25% return on capital

    ROI is measured based on the amount invested into the investments themselves, versus the return gained:

    $3,036.53 / $50,000 = 6.07% return on investment after margin costs

    That's the way I do things anyway ... I don't get all excited by the "infinite returns" from using other people's money ... like I said, that money isn't free - and so it's important to treat it as a valuable resource.
     
  6. AndrewG

    AndrewG Well-Known Member

    Joined:
    3rd Feb, 2007
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    Location:
    Adelaide, SA
    Sim,

    Thanks for your calculations, and the way you broke down the 'algorithm' as such. I can use your example to perform my own Excel calculations with other scenarios. The objective is of course to "pretend" I had already invested $x into Managed Fund $y for $z length of time, along with $a of LOC funds, $b of Margin Loan funds, and arrive at some varying outcomes.

    Thanks,
    Andrew.