Managed Funds What to do with the cash?

Hi all,

Just seeing who else received an email from Navra in regards to Junes distribution. It states that Steve recommends to use some of the very healthy income to reduce the margin loan back to 50%LVR, if thats what you are geared to.

I thought that over time the capital growth component should keep the LVR at around the mark you have leveraged to and should cover the capitilised interest as well. So that at the end of the day the income can be used for maintaining the portfolio, lifestyle or re-investment and so on. I hope that I have got this right?

I'm not sure if I should take this advice and pay down to get it back to 50% or leave it and hope that growth over time will take care of it. The income will come in handy to wiping out a good chunk of my new car loan, which is the only bad debt I have.

Any thoughts or advice?

Cheers,

Steve.

 

Steve

I think it comes down to SANF. In my case I have margin loaned aggressively (started at 60%).With the distrubution of this quarter and the general movement of the stock market ie down around 3% over the last 3 days alone, my LVR has ballooned out to 66%. For me I will be putting all of my distribution into reducing my margin loan. This will bring me back to around 60% LVR. On the flip side, with the application price dropping , it might be a good time to buy some more units using unused LOC thereby also reducing the LVR.

In terms of keeping the distribution for paying down bad debt or lifestyle and having the capital growth of the fund keep your LVR at your desired percentage, you need an ideal world. Steve N likes to talk about 10% income and 5% CG. I think if you look at the figures for this last year, you will see income was up around 17% but there was no growth (in fact I think it was negative growth) therefore what NI are suggesting makes sense. You need to use say 7% of the income to keep your LVR where you want it because you don't have the CG to do it.

cheers
Gazza

 

Personally it sounds good advice to me.

Capitalised Interest with increasing LVR's is something that certainly has the potential to increase your risk if the Unit Price isn't going up too. Lucky we live in such a stable world at the moment though isn't it.

By the way, was that like a general Navra Financial Investor Update email? Can't say I received it, but that sort of thing on say a monthly basis is something I've thought for a while would be a great addition to their products/services.

 

How often do you blokes check your LVR's?

I just went back through all my margin statements and my LVR has never been above 52%.

Of course if there was a significant stock market crash I would be looking at it, but the "corrections" we have experienced over the last few years haven't made me think it was worth checking.

Maybe it was just the timing of my margin loan setup which was processed at a low unit price?

 

As for "What to do with the cash" mine will be going towards ongoing improvements and renovations to the PPOR.

If the funds can keep performing at this rate they may save me from drawing on a line of credit.

 

Rick

I check my LVR once a week on a spreadsheet I have. More out of interest but certainly nowadays because my LVR is a bit high. The statements I get on a quarterly basis from Colonial don't necessarily reflect the higher LVRs that could occur during the quarter.

I also think you are right in that if you setup your margin loan when the application price was lower , then you are at an advantage especially if you only margined at 50% LVR. For me , not only did I margin at 60%, my application price was 1.13 hence the higher LVR at the moment after a big distribution and lower share market causing the unit price to drop to 1.09 ie a paper loss. Hence my decision to reduce my margin loan with tihs quarter's distribution.

cheers
Gazza

 

That's what I was going to say. Do what Sim says.

 

Thanks guys for the replys. This is what makes this place a great resource.

Sim your suggestions are exactly what I am thinking, I have to weigh up which way will benefit me most. I have always thought that any BAD DEBT should be wiped out ASAP - but as you say if I have enough cashflow to service the debt and can re-invest the distributions, well I have to run some numbers and see. Decisions, decisions don't we love making them!

Thanks,

Steve.