Managed Funds Navra NO LONGER an Income Fund ?

exactly Coopranas

 

I've got to say that I 100% DISagree.

So let me get this straight, because it’s other people’s money, it makes some sort of difference to your exposure (in a positive way I think the argument is). Then aside from that, 10% returns on 100% borrowed money at a rate of 9% is impressive regardless of other factors, just as long as it’s 100% borrowed?

Wow, I’ve been enlightened.

You’ve got to be joking?! If anything, borrowed money creates a greater risk and you should be more discerning with leveraged investments because it’s not your money and you may have to pay it back! Additionally, there are a multitude of circumstances where 10% returns on a 9% borrowing suck! Let’s see, should we consider volatility? What about similar offerings? What about the fact that the 10% isn’t even certain? What about the possibility of capital loss? So a 1% return is impressive considering all of those risks? Sorry guys, I think there’s a lot more to it than that simplistic view.

Also, I’m not referring to the current market or NI funds; I’m just putting this in perspective and saying that it’s not so simple. People have these views for good reason, we’re not just all part of some sort of hate group.

As for others insinuating Steve left because we have these opinions, well that's just rubbish. He invited the hard questions and said he wasn't engaged in hype and then threw a tantrum and left. If we can't have differing opinions, then what's the point of the forum? Self-gratification?

 

iiinvestor, I suggest you read the post by coopranos again. Where does he say that the main requirement is that the funds are 100% borrowed? In my reading of his post, he says the exact opposite. Evaluate the investment first; if it fits your requirements (risk, capital requirements etc), then consider leveraging your position to increase returns.

Slow down and read posts carefully before reacting.

Cheers,

Steve P

 

What a great thread - I dunno why I didn't get email alerted to replies - thanks Gazza and iiinvestor for the replies re. the 'shining light' of Peter Spann - I really want to understand why some people seem to blindly follow him and there never seems to be the same level of questioning as there is of Mr Navra - maybe there is a knack to making yourself only 'just accessible enough'. I actually went to school with Peter Spann, and let's just say I know some interesting history that makes the whole journey amusing to me

Iiinvestor - I might be one of those you're referring to re. Steve apparently having a thread removed because some questioned him on the Grapes scheme. I believe that to be the case (I could be wrong - I mean how do you second guess how an active thread justifies removal and an individual has the power to make that happen?), but my point was he should have stayed around and debated it. Pretty ordinary to pack up and leave IMHO. (and I was on 'his side' if anything ! )

Anyway, Coopranos - what an excellent point, and iiinvestor's thoughts are still a necessary reminder that no investment is without risk. This forum has played a great part in my ongoing education and let's hope freedom of speech and healthy debate don't die

 

Steve:

I think the first sentence is saying that being 100% borrowed makes a difference to the fundamentals of an asset and its returns. IMHO, it is clouding the investment decision with the financing decision.

The second sentence talks about using leverage to make one's self happy with the returns. I'm saying that leverage has nothing to do with the fundamental investment decision. I compare returns before leverage and exit an investment before the financing decision is even considered. I do consider leverage of acceptable investments, but using leverage to access an otherwise unacceptable investment is a recipe for disaster, IMHO.

You're right in one sense though, I shouldn't react so quickly. I guess this debate about this "10% income return" has got me going. It's completely futile because it's not like we're going to convince one another otherwise. But there's always that side of me that wants to defend basic finance theory. There are so many other theories that challenge this fund but I've restrained myself thus far.

 

Ahhh Try Hard; the voice of reason!

We need one of those around here when things heat up (well I know I certainly do). Although maybe you were taking a sicky yesterday!

 

iiinvestor,

Would you mind introducing yourself, you seem to come from a very knowledgeable background. Would be great to hear your story.

(If you've already done so, can you point me to the post. Ta).

 

I think its good to question, challenge and remind people of risk. It's also sometimes good just to leap in and give things a go once you're comfortable enough things look kosher. We did that with Navra Invest a few years ago and haven't looked back since. Returns from the fund have helped put our family in a position we just wouldn't have achieved on our own. Sure, there might be better vehicles, some less risk, some more risk, but I haven't got time to have a normal life, run a business, raise a kid, AND learn about them all. We are the 'mum and dad' investors the funds targeted at, which might make us naive, but so far, despite any potential risks that have been raised, its all been good. And it integrates with our key activity which is property investment for growth.

I'm not saying don't consider risk, I'm just suggesting sometimes theory and risk make investment decisions suffer, and its better to do something than nothing (usually )

 

Some great points here. Perhaps to summarise:

1) Leverage magnifies returns.

2) But leverage is a two-edged sword. It also magnifies losses.

3) As such asset selection is, as always, critical.

4) All investment involves some degree of risk. That must be accepted.

5) There are a number of scenarios in which one might use an income fund like NI.

a) One is where a person or couple is "asset rich and cash poor". In this scenario they have "lazy equity" which they can use to either borrow against to provide additional cash for lifestyle (using a reverse mortgage is one example of this) or take the loan proceeds and further invest them (for example in direct shares or other listed securities, indirectly through managed funds (such as NavraInvest), buy cashflow positive real estate (either regional residential or commercial) or maybe even buy a business to generate cash.

b) Another scenario is where an investor has lots of negatively geared assets (be they property or growth shares) and wants to use some financial engineering to optimise their investments to generate cashflow to service the debt on those negatively geared growth assets.

5) An actively traded fund like NI will viewed in isolation be tax inefficient compared to a more passively managed fund. But the point is you as a taxpayer are not separately taxed on each individual income item. Rather you're taxed on your overall assessable income. What counts at the end of the day (or more correctly at the end of financial year ) is your overall assessable income. As such if an income fund like NI is used as part of an optimised investment structure it can be a very valuable component of the structure in the above scenarios.

6) As to risk, well despite what the textbooks may say (and yes I have read quite a few of them) risk is a largely subjective measure. If you had spent the last decade working on the derivatives desk of an international investment bank, then writing the odd naked option would probably be relatively low risk for you. For Joe and Josephine Average Investor - that's probably a recipe for disaster. So it's all relative.

7) To take another example, many people point to the advantages of buying a whole unit block as opposed to an equivalent number of units in different buildings and suburbs (and perhaps even different cities or states). The advantages are many, but viewed from a different perspective there's also considerable risk in that strategy as you've got a lot of eggs not only in the same suburb basket, but the very same location. So again, risk is all in the eye of the beholder.

8) There are different risks associated with any managed fund. Some have currency risk (which may or may not be hedged), all will have manager risk (i.e. whether or not the manager performs), all will be exposed to the underlying economy, different funds will be exposed to different industry sectors in varying degrees...and I could go on. But the key point is that so long as you understand the risk then an informed choice about whether or not to invest can be made.

9) To pick the NI fund as an example, I would have thought that a fund which is invested in large cap stocks, spread across a variety of sectors, with no more than 5% of the fund permitted to be in any one stock, with a mandate to be anywhere from 0% - 100% in cash has got to be pretty low risk from an underlying asset perspective. With respect to manager performance - well the fund has done what it set out to do, and some! Namely provide high regular income. If the broader sharemarket had done its historic 10-12% then an income return of the level the fund has provided would be seen as sheer brilliance. What I think we all need to wait and see is whether when the tide goes out...and it will...whether the income levels remain high. We can all speculate, but only time will tell. I'm confident high income will be generated in poor market conditions - but that's just my opinion, not fact.

This summary has ended up longer than I intended...bloody lawyers...you'd think they got paid by the word

Cheers
N.

 

To be honest Glebe, I'd rather not say too much. I like that we can have these debates without personal issues getting in the way. I want people to challenge my posts (and for me to learn more) because they think my ideas are flawed, not because I'm a year 9 commerce student or an investment bank CEO or a fellow FP.

I think that was one of the issues for Steve N posting here; many had presumptions of his bias because they knew what he represented. So it seemed he felt the strain of trying to defend that position.

 

Iiinvestor:
I appreciate your comments, however on most of the points we may be barking up a couple of different trees.
My intention was simply to point out the insanity of complaining about an investment because it happened to only perform 1% better (even though as far as I know it has performed better than this) that the persons interest rate. By this reasoning if I used my 18% credit card to fund my investing, I might get upset because it was only returning 20%.
Your points about whether you should leverage in the first place are valid, but to do with a different issue, ie each individuals own risk acceptance.

However, on one of your points:

I did say "you first of all look at the investment return, then you look at how leveraging could help". So I think on that issue I agree.
However, I do think leverage plays a very important part in an investment decision. That is why property is such an attractive investment option, purely because of the very high leverage available. If you take leverage out of the equation, there are many far better opportunities for your money. The very beauty of it is that you can have access to $300k worth of growth without actually putting any of your own money into it. If you dont have leverage all of a sudden you are looking at an investment returning maybe 5% growth and 4% yield, plus costing you rates, taxes, repairs, etc etc.
You cant just suggest that because property is not a fantastic vehicle without using leverage that it falls short as an investment - bring leverage into it and it becomes an incredible vehicle.
Now whether people are prepared to leverage in the first place and to what degree is based on their own ideas, beliefs, and strategy.

 

Excuse me Mr Textbook , the sharemarket has done 27% during the fund's inception, so it has underperformed by approx 10%. Not that I think this is relevant, especially since it 'claims' to be an absolute fund. In reality, the market shouldn't even be mentioned by the fund manager or marketing literature.

I know what you're trying to say, but if we're going to compare to the market (which we shouldn't), then let's do it fairly.

To keep the debate alive and relevant, do you mind sharing why you think it will perform in poor conditions? Even if you say "the good Lord told me so", I'm still interested in the actual reasons rather than just the rebuttal to my reasons. Who knows, you may sound something profound enough to convert us all.

 

The reason that I invested was the capital guarentee and the 100% financing. Basically the pre paid interest in my case was 2 interest payments equavalent of 1.5 years interest before there was income which unfortunately was only equal to 1 years interest with a small amount 'reinvested' (not my choice) and a reduction in the value of the capital.

The capital guarentee is only good when the investment is held full term.

In retrospect, I would not enter into this sort of investment again. Even though there is 'no cost' the investment must return the interest plus a risk factor for the prepaid interest, which I would put at 10%. Unfortunately taking into account the loss in capital the fund I am in is not even returning the 8% let alone the 10%.

Another reason for this investment was to diversify and as it was I was able to do this without any of my own funds. Mind you it did record on my credit reference.


Cheers

 

DISagree...

I agree with points made by iiinvestor in this discussion, and am not at all convinced by the opposing arguments.

Coopranos, it's not hard to understand - regarding the above and the rest of your post...

- You may be 1% ahead, but that's still a debt of 100K or whatever the amount, with all the risk that entails.

- There is no point in leveraging if there is no capital growth, as in the long-term your absolute $ returns are eroded by inflation.

- Yes, you can leverage as much or little as you like to make the numbers work, but that doesn't make it a good or logical investment.

- Further, leveraging into a predominantly income based fund defies logic, it may work in the short-term, but in the long-term it just doesn't make sense.

- What's worse, is when you start capitalising interest on borrowed funds that are invested in an income orientated fund. It's like LOE (living off equity), if there's no capital growth, this strategy can really fall over.

I have not read any fancy books or know of any theories to back this up - but it is just basic financial sense to me.

GSJ

 

Hi,

Just a simple example,

50k at 10% pa income = 5k pa

Now, if you leveraged at 50% LVR,

100k at 10% pa income = 10k pa
includes 50k borrowed money at say 8.5% pa = $4250 pa
So Net Return is 10k - 4250 = $5750 pa income.

So in the unleveraged position you make 5k pa, in the leveraged position you make $5750 pa.

Slightly more income in the latter position, but the real benefit is not the increase in income, it is that you control an extra 50k of funds that are borrowed and not 'costing' you more in cashflow. This situation is only really advantageous if the fund you invested in generates at least moderate capital growth.

Any thoughts?

GSJ

 

I don't disagree with the thrust of your post except


If your base is property with a very low LVR then the funds you use can in affect be the equity from the properties. The properties are still providing you the hedge against inflation and the MF can just be an income fund.

For example you own a property that is valued at $600k

your lvr is 20% loan of $120k

extend your lvr to 80% giving you $360k to invest

you then get a margin for a further $240k

giving an investment of $600k returning say 12% giving $72k with expenses of $48k netting $24k.

In the mean time the property rents for $30k with interest costs of $9600, netting $20100 before expenses.

All up an income of $44k

No capital growth from the MF but say 7% on the property giving $42k increased value.

So on your $480k equity you have generated $44k income and $42k of capital gain which ensures that you are keeping pace with inflation.

I agree with not capatilising the interest on the margin loan because then you are LOE.

I would only use this strategy with a very conservative fund as you are still using loaned funds and want to minimise the risk to those funds.

Looking at the various funds available it appears to me that most funds do much the same in the way of returns. There seem to be categories of returns with the CFS perpetual geared funds returning 30-40% but using a $:$ gearing ratio then the next category at the 15-25% category and then the rest (which you wonder why anybody would bother).

So really most funds give the impression that they provide massive capital gain but the reality is that its not locked in and still tied to the investment and when the market turns so does the capital gain and infact can very quickly become losses. The only way around this situation is to sell down but then it become a timing problem.

Cheers

 

Hi handyandy,

What I am considering here is like this above scenario, on its own - ie. looking at it on its own to see it's worth as an investment strategy, without adding other variables such as other property held and their LVR's.

So, 24k net income divided by 600k debt = 4% pa net cash return on borrowed funds...

Now, why would you want to tie up 600k in borrowed funds, with its associated risks, irrespective of the fact that it is 'other people's money' - if it was not for capital growth?

Why would you put this much debt, 600k, on the line to get a measly 24k pa???

I would only do this for the sake of controlling a 600k investment, at no 'cost' - ie. it is cash flow positive, with the hope that there will be at least moderate capital growth.

If the 600k is invested in a fund whose strategy and aim is to primarily provide high income, and capital growth does not occur, or is very small, worse is a capital loss, then this is foolish.

I am not saying it won't occur, it may have in the past and may so in the future. But, I am trying to emphasise the critical importance of capital growth in this sort of strategy - when the main emphasis seems to be on income, and is being promoted as such; and this is the big trap here, and I think represents a fundamental misunderstanding and lack of financial sense...

GSJ

 

Exactly ! That's the basis for my leveraging into income funds. Using LOC and margin loans, I'm 100% geared. All net income (after interest) is money for nothing.

Well almost.

The "cost" are the risks

- not enough income to cover interest
- reduction in capital

If it wasn't for the "costs", I'd have 10 fold more funds in NI getting all that free money, not about the 20% of net wealth I do now.

Any growth is a bonus. If I want growth, I use growth funds like CFS Geared, or property even.