Managed Funds Margin loans: What's your LVR

I aim to keep mine at around 10% less than my maximum LVR ... which means right now that is about 58%

Steve Navra recommends to his clients no more than about 50% LVR ... but that's deliberately conservative to significantly reduce the risk of a margin call.

 

That's a good point Bob ... I currently have my distributions paid into my margin loan - if I was taking the distributions myself, I would run at a lower LVR.

 

Capitalising interest means that the interest payments increase the loan amount, and thus the LVR increases.

Taking distributions as cash means that the value of the holdings decrease (by the amount of the distribution), which increases LVR too.

Reinvesting distributions maintains the LVR pretty much constant.

Taking distributions as cash (ie not reinvesting them), but having that cash deposited into the margin loan has the effect of cancelling out the drop in portfolio value from the distributions by also decreasing the loan amount. In fact it actually has the effect of increasing the LVR.

I don't actually capitalise the interest at the moment - I pay it from other cashflow sources.

 

Ahh ... but I am accumulating more units ... just not in the same fund

I'm currently diversifying my holdings, using proceeds from my existing funds to buy into new funds.

If you are still in the process of accumulating units in the funds you already hold, then reinvesting distributions is a good way to go in my opinion.

 

I only invest in wholesale funds (Platinum are considered wholesale, as is the Navra US fund - kind of) ... currently have money in several of the Platinum funds, and am about to put some into a couple of Colonial First State wholesale funds.

I like the Platinum International Brands fund and the Platinum European fund, and also the CFS WS Property Securities Fund.

Not a recommendation by any means, just telling you where I'm putting my money at the moment. I have other funds as well I'm investing in - but they are a bit more volatile and higher risk.

I'm down to about 50% of my portfolio in Navra now, and once I reach my target amounts across the portfolio, that will be more like 40% Navra (which includes more than doubling my current exposure to Navra in the process).

 

Actually ... just to confuse things a bit more ... I don't tend to actually reinvest using the distributions themselves, I reinvest using the increased equity in the portfolio throughout the year - which is a continual process of "gearing up" as the portfolio increases in value. I also refinance my property portfolio every couple of years to get extra capital to invest - which is handy when the markets are down and you can buy in cheap. This is what I'm doing right now ... just got a very nice cheque in the mail today from a loan refinance (idiot bank was supposed to deposit it into my account, but can't follow instructions ) ... which is very handy given that many of my funds are down (ie cheap) at the moment ... spending spree - waahoo

The distributions are really just deposited into the margin loan to maintain the LVR ... I add to my portfolio almost weekly (my account manager must be starting to dread my Monday morning faxes ) ... so it would kill me to have to wait for the distributions, especially the Platinum funds, which are only paid annually

 

Yes, but not by that much (since the value of the holdings has dropped as well as a result of the distribution).

Yes. This is only because I've reached my short term goal for funds allocated to Navra and want to diversify. Otherwise I would have continued to have distributions automatically reinvested in Navra.

My properties are not quite self funding - there is a bit of a shortfall each month which I can usually cover from other cashflow sources (eg my own pocket). Every so often cashflow gets short, so I draw down $5K from the margin loan to help pay the interest costs on the loans. It's what I call "occasionally" capitalising interest.

The only reason I don't fully capitalise interest is that I don't have to (yet) - and by funding the interest (as much as possible) from other sources, I maximise the growth potential in my portfolio by not forcing the LVR higher each month with the interest payments.

And yes, this is all definitely part of an overall growth strategy.

The key with having the distributions paid into the margin loan is that I don't intend to use that for cashflow. I intend to use the growth in the funds as my cashflow - drawing on the increased equity to fund other investments and eventually living off it too.

It requires a bit of a different mindset, but I don't differentiate between income and growth - it all just gets compounded together, some of it gets used to pay the interest costs and the rest is reinvested for growth.

When I've got enough funds growing, I'll start extracting some of that growth for living expenses (although in the medium term, it will be used to fund more property acquisitions).

Just remember - my strategy is quite agressive, and involves large (and increasing) amounts of debt. I have a high disposable personal income to back up my short term strategy - so it's not going to be suitable for everyone.

I'm not suggesting anyone else do this - heck, I don't even know if it will achieve what I expect ... ask me again in 5 years how well it worked

 

Cheaper. No entry fees, no exit fees, no trailing commissions paid, and lower ongoing management fees.

Downside: often requires a much larger initial investment ... but Platinum is only $25K minimum, and while Navra AUS Wholesale is $250K minimum, you only need $100K @ 60% LVR to get your $250K starting investment.

CFS requires a minimum $100K, but that can be split across multiple funds, and again, only need $40K @ 60% LVR to get you in to CFS Wholesale.