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Macquarie Small Companies Growth Trust Blood Bath

Discussion in 'Managed Funds & Index Funds' started by S4OZ, 14th Jul, 2008.

  1. S4OZ

    S4OZ Member

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    Hello

    I borrowed $100k, and bought into Macquarie Small Companies Growth Trust in April 2007.

    I collected a quick $11,500 profit 3 months later.

    From there it's been an increasingly large blood letting exercise.

    My initial $100k is now worth $54k and decreasing daily. I am paying about $850-900 a month in interest, which I can sustain for a while.

    Would you hold, sell up and concentrate on paying off the shortfall on the loan, or re-invest somewhere else?

    Thanks for any advice, as you can imagine I am feeling a bit stressed over this one....
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Ahh - the joys of borrowing to invest in high growth assets :D

    I take it this is not a margin loan? Otherwise you would have been margin-called out of the market by now and wouldn't have been able to borrow 100% of your investment.

    The way I see it is that if you sell, you will have made a $46K capital loss. This loss can only be offset against future capital gains - so possibly no immediate tax benefits.

    The interest cost of $900pm means that it will take you over 4 years to spend more than the $46K in interest - much longer if you take tax into account.

    We could be near the bottom of the market - now may not be a great time to be selling unless you can't afford to hold.

    So there are two questions:

    1) can you make more money elsewhere in the short term?

    2) how long do you think it will take this fund to recover when the market starts going up again? If you think it will take a lot longer than 4 years then you may be better off selling now - otherwise you will still end up spending less by holding and paying the interest.
     
  3. S4OZ

    S4OZ Member

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    Thanks for the heads up Sim, you've brought more clarity to it than all the "experts" I have spoken to so far, in just a few words.

    It's not a margin loan, it's a line of credit based on family home equity.

    I don't have any other short term earners, except for my PAYG income, with which I can continue to service the interest, as long as I stay employed ;-).

    So, I understand it that if I speculate it will take about 4 years to recover to the original $100k, I will be out by about $45k in interest (tax deductions for interest don't apply in this case, long story) that I have paid during the 4 years.

    If I sell now, I will still be out by $45k+ and have the surety that the loan becomes P&I for $45k, which will take about $1200 per month to pay off in 4 years.

    Finally, I could still treat the loan as P&I, pay $1200 a month, keep the shares and look forward to the market coming back. It almost becomes like a forced savings plan under this scenario, obviously with the risk the market takes longer to recover.

    Personally, I like the last scenario the most as I am hedging a bit of risk by paying off some of the principal, whilst staying in a market that I agree should turn in no longer than 4-5 years.

    Any thoughts out there?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Good thought on the savings plan side of things - if you can afford to make the extra payments (especially if for some reason the interest is not deductible), then once you've paid out the loan, you'll have an asset that will cost you nothing more to hold on an ongoing basis, and should hopefully make good returns for you over the longer term.

    The big question is still whether the small companies fund can recover and make decent returns within the next 4 years or so ... I'd suggest it is not a certainty given our current market conditions - and that's the most difficult part of the whole decision. Unfortunately my crystal ball is still in for repairs :(
     
  5. archangelsupreme

    archangelsupreme Well-Known Member

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    Yeah, I have invested in this fund as well and purchased at a wrong time....i.e. just before the peak in October.

    The loss is huge...but i'm nowhere near the levels you are with your investment and am not gearing.

    I'm in for the long run so have been contributing bit by bit each month as part of the regular savings plan.

    Hope it could come back over the next year or so....
     
  6. MasterCheif

    MasterCheif Active Member

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    I too have invested in this fund - actually was my first ever investment last year... luckily only put around 2k in and i am contributing 100 dollars per month into this fund.. its only worth something like $1600 dollars now.. so lost around 1k.. But i figure it will be a good little nest egg in the future if i continue to contribute my $100 pm.. It actually paid a fairly good dividend last quarter aswell..
     
  7. S4OZ

    S4OZ Member

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    It's the "Small Companies Growth Trust broken hearts club" guys.... ;-)

    Where's the bar so I can sink my sorrows?

    I hover between wanting to quit, cash in what little is left and just focus on paying the debt, and staying in, actually buying a couple of $100 more every month now it's so low.

    At the moment I think I will hold and try and take a few $1000 off the principal of the loan over time.

    Me thinks the market hasn't tanked yet, so we will have to be strong..... 3-4 years worth of strong.... that's a lot of interest. Sorry, just venting...

    Cheers
     
  8. Billv

    Billv Getting there

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    S4OZ

    It's heartbreaking isn't it?
    I wonder though why people recommend to hold in this climate.

    How much are the exit and re-entry costs?
    Are you on a high tax bracket?
    Have you considered locking in your losses?
    Have you considered the ongoing tax deductibility of the already lost money?

    It will take a lot longer than 4 years to get back to $100K.
    Lets assume that the fund drops by another 20% during the next 6-12 months
    so you are down to approx $40K and then things turn around and it makes 10% in the following 12 months so you are up to $44K in 2 years time
    then we have a better year and it makes 17% so you end up with 51.5K in 3 years. The 4th year lets say it makes 20% so you are up to $62K and so on.
    In the meantime you will still be paying interest on the line of credit.

    I think you really need to sit down and do the sums
    and then decide what's your best option.

    IMHO

    Cheers
     
  9. Tropo

    Tropo Well-Known Member

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    I wonder though why people recommend to hold in this climate.


    Such a recommendation reminds me of HIH story...blue chip company which went broke some time ago and vanished in the thin air.
    When HIH was moving down, stockbrokers were recommending ‘buy’ because HIH was ‘cheap’ and undervalued.
    I wonder what explanation was given to the people who were following this recommendation and lost small fortune.:eek:
     
  10. MasterCheif

    MasterCheif Active Member

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    Do managed funds send out statements for tax purposes? if so i have received mine from Macquarie yet.. when should i be expecting it?..

    cheers.
     
  11. crc_error

    crc_error The Rule of 72

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    Personally I think you were greedy and foolish to borrow $100k against your house and invest it into such a high risk fund. I would consider this as a lession in investing.

    I would say now your best bet is to hold on, as entering such a fund, you would have needed a 7 year plus view, so why now sell in 6 months time? Your interest will be tax deductable, and use the funds dividends to help with the loan. Selling out now, you risk getting out at the bottom, only to kick yourself once the market starts to recover.

    You may want to consider selling down some of your fund, and buy something else as well. You also might want to consider buying a put option against the asx200 index to hedge yourself against further falls.
     
  12. S4OZ

    S4OZ Member

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    Thanks for the rethoric. I was ready to enter an investement vehicle, ended up choosing this one over PI, or other shares approaches. I don't think I was greedy, rather naive by not understanding I was entering at the end/peak of a cycle.

    And yes, I am increasingly of the opinion than rather than selling and focussing on paying the loan, I may as well try and do a bit of both: hold and focus on paying a bit of the loan. It seems the approach "this race is a marathon, not a sprint" applies.

    Distributing the risk across two funds is also a strong possibility.

    Put option, care to explain risk/benefits?
     
  13. crc_error

    crc_error The Rule of 72

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    That would have been the case as well :), but how did you choose this fund? Did you just look at its high returns? Entering an investment with very high returns means high risk. There is another fund I have seen people put money into, with me shaking my head, and thats the challenger china fund and the australian unity property fund.. both these funds had very high returns as well, and people didnt stop to think they could also fall by the same amount they grew.. now these funds have turned into a disaster.

    this is a good idea, keep the dividends (don't re-invest them) and use them to pay down the loan. but you should stick to your orginal stratergy. I'm sure when you read the PDS before investing, they would have said that investment timeframe is 7 years+ and high risk... you accept those terms, so now ride them out.

    You can buy a put which is like house insurance, it will cost you money, and you can use it if your house burns down, ie your fund value goes down. the risk is the cost of the put, which you will loose if the market goes up and you don't need to exercise it.
     
  14. handyandy

    handyandy Well-Known Member

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    A 'put' is hardly relevant in this instance.

    You would only be able to get a 'put' for this type of investment if Maq had packaged it up that way. They are not available for every product.

    Basically where Maq has offered a 'put' it has been packaged with a product that had 100% finance available and the 'put' is an additional expense to give a guarantee that at the end of the appropriate period (5-6 years) after paying all the interest costs for the 100% finance, you would get the initial capital investment back (to pay off the loan;)).

    They now have a slight variation on the formula in that should the investment actually perform then the 'put' amount ratchets upwards to lock in some of the gains.

    Thus far any of these products with the attached offerings seem to have woefully underperformed the market, even when the markets were going gangbusters so I would dread to thing how any of these are performing now.

    Cheers
     
  15. S4OZ

    S4OZ Member

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    Yes, I did look at the returns, plus some other bits:
    Manager's reputation and track record.
    Fund management/investement team track record, how long on the fund.
    Some fairly lose apparaisal of what they invested in.

    I also admit I was lured by doing something over a year rather than seven, but I am coming to terms with it and adapting my strategy (or lack of) accordingly.

    E.g. I did look at the China fund, but wasn't comfortable with the narrow focus.
    I also put 1/2 of my superannuation into resources, which like I said in another thread has turned out a godsend so far at least. The approach I used there was similar to the above.
     
  16. ashwright

    ashwright Well-Known Member

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    I think a XJO put (ASX200) is relevant.

    Of course it is based on the ASX200 and not the small compaies fund, but it would still protect you against downward movements in the (entire) market. Basicly for every point the ASX200 falls below your insurance (excise) point, you get paid $10. You then use this to offset against the fall in fund price.
    Equity Options, Index Options and Futures - ASX - Australian Securities Exchange

    Can be a handy insurance policy in tough times.
     
  17. crc_error

    crc_error The Rule of 72

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    thanks.. someone understands what I was talking about :)

    You can't get a put on the small ords I don't think, so the best option available at present would be the asx200.

    You may not want to insure everything, maybe say 1/2 your holdings, this way you can reduce risk, and sleep better at night. and you get to keep your managed fund without realizing losses. The fund will rebound, but it may take a couple years.
     
  18. crc_error

    crc_error The Rule of 72

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    everyone has been hit, so its not only you! I personally have lost over $50k myself from the peak, but we just need to live withit and continue investing. markets crash, markets recover. Best is to let this be a lesson.. when the going gets tough, the tough get going! Warren Buffet is actually currently on a spending spree!
     
  19. skeptoc

    skeptoc New Member

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    With respect, your single investment fund like most equity funds has tracked the market. With the benefit of hindsight your one off $100K geared investment was at the top of the market. Timing was your enemy; a weakening price depleted your asset and in your case your outgoings will now track your mortgage equity rate.
    Markets have crashed on a regular basis and have always of necessity come back.
    Check these out: 1973-74 Program Selling, 1987 Black Monday, 1997 Asian Crisis, 2000-2003 Dot Com Bubble amongst others on Wikipedia. The Gulf War and 9/11 are also in there. Unlike an individual share you have a basket of professionally selected shares so you have diversification to give some protection against HIH situations.
    You still have your $100K investment and will not suffer a loss or gain a profit until you sell. When your units are back around $1.60 then I suggest you sell, amortise your IO loan and start over with the benefit of your hard, protracted and sobering lesson.
    In the meantime I suggest now is not the time to sell your diversified fund. If you liquidate and crystallise your loss now, your home loan balance will be
    $46K greater than it was Apr 07. You also received the $11,500 dividend unless you reinvested. If you review the SC fund again in Oct08, Jan08, Apr 09 and Jul09 and its capital gain plus dividend stays at least equal to your accrued interest payments you break even and your home book equity increases by your funds price gain and your interest payments reduce by your dividends. If it trails, your position is negative but not necessarily worse than a liquidated position (you again need to do the sums); if it leads you gain the difference and are ahead of your liquidated position.
    So in a nutshell to give yourself a chance of reducing your outgoings without taking a $46K hit now I suggest you stay in for at least another full year and make your own decision on the basis of each three monthly accrued position review. Good luck.

    This is a general comment only. It does not constitute advice. Before making financial decisions you should seek advice from a professional who can take into account your specific circumstances and investment goals.