storm financial

does anybody know if there any other financial planners that were a promoting a similar gearing strategy to storm financial, and what the results of their clients are

 

Also does anyone have a rundown of what exactly the storm financial basic strategy and gearing levels were?

Regards,

Jason

 

Basically here's a run down on how storm geared many if not all clients.

CLIENT - has equity in property, for example 200,000 equity

Storm takes $150,000 of that equity as a line of credit.

They then use this $150,000 to secure a margin loan on shares/managed funds. Let's assume they did a 50/50 margin loan so effectively doubling the amount you have to invest

So now your debt is now $300,000.

Effectively you are now double geared. They have been known to triple and quadruple gear clients into markets.

So, when markets are good, you are really going to be "in the money", when markets are bad, your going to be heavily "out of the money"

In some cases, because storm was multiplying the gearing so crazy levels, they actual debt level when calculated was actually much much higher than the underlying asset on the original line's of credit.

CRAZY CRAZY CRAZY.

Simple answer would have been to purchase a put option. Probably to logical an answer. Give up some upside to protect the downside which was plenty.

 

There was an article about storm in the Age on Wednesday.
Apparently they had an across the board policy of double gearing to 90%.
There was no factoring in peoples individual circumstances. Even if you were retired and couldn't afford repayments.
I think ASIC stated looking into them when they applied to float the company on the share market. At that point they disclosed what there business model was.

The article in the paper had side bar features about people who had apparently questioned the gearing but were told not to worry.

Was anyone here with storm?

 

Not me. I've missed out, got the wrong advise and invested in property instead....

 

So how do they triple and quadruple the gearing, I didn't think that would be possible?

Chomp

 

I haven't looked into it but I think people were told to take a line of credit against all the equity of their property and then used the LOC money as a deposit on a margin loan.

It had great gains when the market was going up but anyone smart would have jumped off when the market started to turn.

I saw on TV that many people got burned and didn't manage to keep any of their assets. I hope they didn't use their self managed super fund to invest in shares as well...

 

The max you could gear if you had $500,000 worth of equity (in your home for example) would be $400,000 drawdown on home (assuming 80%). Use this as a capital for margin loan at 75% - so get margin loan for $1,200,000. Total equity the original $500,000 with loans of $1,600,000. I guess this is the triple gearing ...

Nuts.... especially if you are capitalizing interest and don't have capital protected investments.

Regards,

Jason

 

Thats alot of credit! imagine going to 90% geared with LOC!

 

But what really annoys me about the 60 minutes report was that nothing at all was said about the fact that these people that lost millions also were the ones to blindly sign the paperwork and blindly go ahead with all of this. I just don't see how you could willingly sign a mortage agreement for millions when you just know you don't have the income to repay any of this. Wouldn't you at least seek a second opinion from somewhere!

I'm sorry these people lost so much money, but they do have a big part to play in all of this sorry mess.

 

CBA written response to 60 Minutes - Interesting reading...

I was dissapointed with 60 Minutes story last night, typical tabloid crap. Cassimatis didn't get more than a sentence in at a time, it reminded me of Homer Simpson and the gummy venus de milo episode. That said, I think he is incompetent (although well intentioned) and probably deserves it. What I really want to know is how he got away with charging so much in commission, why would anyone pay that much, I guess costs don't matter if the market is rising...

 

Big Buddha

What do you take a Put Option Against?

Say you wanted to protect a $1 million dollar exposure, how much would that cost for a twelve month period?

Regards

Denis

 

You could take a put position against the individual shares, or buy a put against the aus index say .. like a xao put.

on $1mill, it depends on the securities themselves you are buying the put option against. but it wouldn't be too expensive (relative to the potential lose of capital) if say you bought the put just above where you would get a margin call as this would be heavily "out of the money", but as the shares drop in value

now naturally, storm adviser's more often than not would have convinced people to use STORM badged MANAGED FUNDS, this is another atrocity in this whole STORM story. Using in house investments also bumped up the overall revenue being generated by Storm.

Generally you can't write put options against managed funds, although that would be an interesting option.

just a side note - managed funds i think will be a dead vehicle sooner rather than later. it's a generally a dud investment vehicle for investors and the markets in general.

 

Hi BigBuddha,

There are certainly advantages and disadvantages of managed funds. Eg, an advantage is for smaller amounts it makes it very cost-effective to invest in a wide number of investments, a disadvantage is that the end investor does not have a direct say on the investments.

I don't think managed funds will be dead, as what would most retail and industry platforms do? What would a balanced fund be invested in and who would be responsible for picking suitable shares to invest in?

Cheers,

Dan

 

AsxBroker,

I'm not to sure whether getting a wide number of investments is all that advantageous, I mean it really comes down to the value question. Sure you maybe able to "diversifying" amongst alot of stocks/shares/resources/commodities/properties with a relatively small amount of capital, but does that diversification really count for anything if almost all the assets bought under the fund are over-valued, based on most fundamental metrics at the time of purchase?

Wouldn't it be better to buy a smaller number of quality investments/assets at a good discount to current market price/value?

In regards to retail/industry platforms, why even have them? things like xplan or praemium can provide consolidated reporting for clients if they want it. I know that most if not all platforms provide access to vanguard or some index equivalent, why would you buy these "on platform" when you can purchase them much much much cheaper stand alone or buy the streetracks or ishare equivalents on market.

 

Hi BigBuddha,

While there is more "value" around now compared to two years ago when shares were overpriced.

I think you'd be better off having bought the property index (diversified) compared to Centro. So while both the index and Centro were over-valued, if you bought the index you'd still have some funds left (40% of your original amount) compared to close to 0% left. Same goes for buying financial index vs Citibank...

Was there much to buy two years ago at a discount to NTA?

Platforms can be used for reporting to give you a consolidated report of all your different though the main reason is to access wholesale funds which are cheaper than the retail managed funds. Obviously for a wholesale fund with a
minimum of $500,000 most investors won't be able to invest in whereas a platform will allow investors to invest in these wholesale fund without the same minimum.

Xplan can do a huge number of things and reporting is simply one small powerful function. My favourite function is to calculate how much clients can save with a TTR.

Platforms give one tax statement at the end of the financial year, if you have retail investments with four different direct fund managers you'll get four different statements. You have to consider whether your time (or your accountants time) is worth doing the paperwork or whether one statement is simpler and more straightforward?

Platforms are essentially do administration and reporting and charge for the service just like an accountant, a lawyer and everyone else. Eg, I do my own tax every year, so it's a choice we all get to make whether or not we want to use a particular service which we have to pay for.

Cheers,

Dan

 

ASX,

your example of buying the property index vs buying Centro.

You argue that a client would have been better purchasing an over-valued index vs an over-valued Centro share.

My arguement to this is why would you advise a client to invest in either one? you even state that both were/are/always "over-valued". My whole point is to only look to buy securities or anything for that matter at a good discount to current market price. So i wouldn't get my client to buy either one.

Why is it that financial professionals seem to always want their clients fully invested all the time? Why not show some patience and purchase securities as they get to points of "under-value"?

Wouldn't this make more sense?

As i have said before, valuing a security is hard, it relies on past data and performance, and somewhat sketchie future predictions, but it surely gives clients a much better chance of buying at prices below what most other "investors/fund managers" would be buying at, only because fund managers must stay invested due to mandates, so they'll buy securities on behalf of clients without regarding to real value or price. This practice seems insane to me.

 

Hi BigBuddha,

My example of an index vs a share is purely to show the advantages of diversification. Obviously the returns by investing in an index isn't going to have potentially huge returns compared to investing in a smaller number of shares. The more shares you invest in, the closer to index returns you get. An index is a reflection of the shares which constitute it, chances are if the index is over-valued (eg, high PE ratio) then shares (on average) in the index are going to be over-valued.

This is a very broad statement, I've got client's who are purely in cash doing TTRs. For me, it's about the strategy and investments are figured out after the strategy.

Unfortunately all the data everyone receives is old, whether it is accounting data or technical analysis data. A Random Walk Down Wall Street goes through in much more detail why both systems don't help.

Most fund managers have mandates of percentages of how much cash they can hold, this lets them reduce the funds investments when they cannot find value (this was the case for alot of Value fund managers two years ago). Most fund managers spend a considerable amount of funds on analysing which investments they believe are at a good price or value. All the fund managers would rather have better return figures than being fully invested.

Cheers,

Dan

 

Hi Dan/ASX

Unfortunately, what happens when they reach there max mandate for cash allowable? Then they must start purchasing shares, no matter what the cost base/value.

 

What ever happened to the old financial plan - accumulate slowly over time.

Every time you save up a few grand, then buy some securities that fits your profile.

Price averages over a long time.

Instead of being persuaded to borrow up big and buying it all now at an inappropriate part of the economic cycle - advice that maximises your Advisor's commission probably.

Seen it happen a few times in the last 20 years, but there seems no shortage of punters.

Cheers,

Rob