Managed Funds NavraInvest - 1st Quarter Performance Fee?

Sim, you keep emphasising that this is a conservative fund, however I would argue using the LOE formula is not necessarily a conservative approach to investment especially where the value of your ultimate use of funds could potentially lose you money. Dont forget for all those using Steve's LOE to then margin up, at present interest rates, we have to overcome 8.5% approx. hurdle before we make a cent. Therefore a 10% gross income is not acceptable for a potential net 1.5% income with the risk of your unit price falling off again after each distribution and not much capital growth. I would further argue that if you had a year with the 10% return less your 8.5% holding costs, take tax into consideration and hardly any capital growth you have probably lost money certainly in opportunity costs.

I cannot understand why the 10% mark is held up as an "acceptable return" especially when a lot of investors are using the LOE formula, and when some property trusts which pay quarterly and some monthly are showing a higher return with perhaps more security for your capital. 10% was never a figure mentioned at any presentation before the fund went public! the expectation was a lot higher as were the examples quoted!! In fact I remember sitting down with Steve at the hotel at Chatswood and being handed his spreadsheet showing a 35% return for the year and my beta testing had resulted in a 36% return, so where are these figures today - same system but has obviously been modified and not for the better I think. I dont appreciate those kind of figures being bandied about before a fund goes public and then being told to expect a much lower return once it is public and all the associated management costs involved to keep it running.

Those using the LOE formula and recommended to do so by their financial adviser (NI) would need a return of at least 15% gross to make the exercise worthwhile. Now for those that are shareholders when could you expect them to get a return on their investment. If the management company needs to increase fees at the cost of distributions then those shareholders are just chasing their tail.

I would look forward in the future to both the management company and the distributions increasing their profitability and sooner rather than later.

 

Sim,

Then take tax out of that at the top marginal tax rate and you're at a touch over $1,000 on a $100,000 investment. That may not be sufficient to offset the associated risk for this category of investment.

There is always the risk of a negative return, where you could go backwards in a given year. Lets assume a negative 5% annual return (conservative negative assumption for an equities investment):

Total interest cost = $8,000 pa
Actual return on funds invested = -5% = -$5,000 pa
Net return = -$13,000 pa

So if the range of returns were between -5% and positive 10% then the range of gross (pre-tax) returns would be between -$13,000 and +$2,000. Basically, you'd need a lot of good years to mitigate the risk of the bad ones. Sure the market has been trending upwards since inception, but we're yet to see how the fund returns in a bearish market. I've noted the unit prices do drop as the market drops so it certainly can lose value as the market does.

Even if the fund's range is -5% to +15%, the gross return range would be -$13,000 to +$7,000. i.e. the mid-point is still negative. We better just hope this fund does well in a bad market if the best it can do in a good one is +15%. The juries still out on that one.

Cheers,
Michael.

 

Sim,

But when you're leveraged those drops and recoveries can still result in a negative return net of interest charges. You know that I chart the funds performance relative the ASX200 but I also chart my net profits as attached.

You'll note that over that May to Jun peak-to-peak period I actually lost money (about $9,000) but the fund had recovered to its original position. And even today, when the fund is now some 4% higher than it was back in May I am still effectively neutral over that whole period. The reason being that my interest costs are around 8% pa and since May to now is about 6 months or 4% in interest costs.

Still, I am up about $60K net of interest over the 13.5 month period charted. About $50K has been paid in interest out of my $110K gross return.

Cheers,
Michael.

 

Michael

Could you factor inflation running at just under 4% p.a. into your calculations to see where that puts us, because if property rises approx 5% p.a. and inflation runs at just under this, with holding costs, we could be going no where fast!?!?!? This inflation aspect further reflects on the fund's performance in dollar buying power which I dont believe is currently factored in the equation?

 

I'm not sure inflation is all that relavant when you are using OPM is it?

Well I suppose it is if you are trying to LOE from the managed funds, but I think the capital growth for LOE should come from other investments apart from Navra being an income / cashflow fund.

Man cannot live on NavraInvest alone.

MJK

 

I think we should also consider the value of franking credits, when considering the place that the Navra funds have in portfolios.

About 6% of Navra income is franked.

The traditional approach of including fully franked shares in a portfolio, which can yield 4.5%-6% plus franking credits, should not be overlooked.

I am also wondering if other have noticed that GTP, Great Southern Plantations, has been included in the Navra list of shares? It seems a little out of place, in terms of its blue chip status and size, with some of the others? What has this done to what Sim refers to as the conservative nature of the fund?

 

Steve be warned (I will be calling you next week !!) - two "obvious" stocks to me are ZFX (Zinifex) and PDN (Paladin) - why these are not in the included stocks is beyond me.
Although PDN does not pay dividends (yet) - it has consistently been one of the better stocks for several years. Added is the fact that Uranium is tipped to double in price to $125 per pound over the next 4 years.
Zinifex - well Zinc has been a great performer for months now (apart from this week !!) , and pays a very good dividend. Check out the graphs for the price of zinc here - which is having a breather now as supply has increased in the last few days .
Also both of these stocks are extremely volatile - they can have 5% fluctuations up or down in a day - a perfect trading stock for the Navra methodology.

 

Maybe a new fund should be started - marketed as "high risk" - that holds the type of shares Perky mentions.

There are a lot companies with volatile share prices, but also that are very healthy financially with low debt levels so the chances of them going broke are minimal anyway. The high risk part is fluctuating share prices.

This would give the NavTrade system a real chance to show it's form.

 

high risk

Maybe forumites can then post that the Navra fund is taking too many risks

Bob

 

I know Sim - but BHP , STO for example are 2 stocks that are going nowhere over the last few months.

I tried to paste in the chart of BHP, but cant do it.....anyway my idea would be to drop those underperforming ones such as those above and put in the others as suggested.

 

Here's another idea even further outside the square.

I'd like to be able to pick my own shares and still have Navra operate their system - so maybe there could be a section at NavraInvest that acts more in a brokerage type capacity and once a client advises they'd like to invest so much in such and such a company Navra would invest the dollars using the NavTrade system.

Probably an administrative nightmare but really not much different to a full service broker.

For the hands on type this would be a real boon.

The reason the Navra funds are the only funds I invest in is because I never agree with all of the shares fund manages select. If I could use the NavTrade system for my own selections I'd be as happy as Larry.

I'd also be interested to see how my selections, which obviously would be picked to meet my own criterea and risk levels would perform using their system.

I know the current funds were set up for a specific purpose and I'm not trying to take anything away from that. I'm just looking to future possibilities.

What does everyone else think?

 

Why don't you trade your own system using full service broker ??.
Do not forget that Navra system was designed and tested to trade blue chips mainly, so this system may not work with other shares such as green chips...etc....

 

Hi Rickson.

I only just noticed the Great Southern Plantations(GPT) inclusion too and it does appear a little unusual doesn't it?

While I always understood the 'theoretical investment world' of the Fund to be the ASX200, it seems a bit unusual for them to even go out of the Midcap50 let alone into the ASX100. To select a company outside of the ASX100, albeit in the ASX200, seems stranger still.

 

I suspect that GTP is included because Steve was selling GTP tax advantaged tree plantings earlier in the year to act as a tax deduction for investors with a tax problem. It certainly cannot match the criteria of the other "blue chips" in the portfolio because there are other stocks that are more worthy to be included. I think it is to do with supporting the marketing campaign for the "trees"!!

 

Hi Redrover.

Personally I would hope.........no......expect, any companies included in the Fund to be placed there only for the strictest of Fundamental Analysis reasons.