Managed Funds General advice!

Discussion in 'Shares & Funds' started by Ems, 7th Jun, 2007.

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  1. crc_error

    crc_error The Rule of 72

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    I have seen products that do 106% LVR, but really I think such a loan isn't wise. Prehaps for your first property, but really you should aim for 15-20% deposit so as the property isn't hugely cash flow negative.. Tell me, what sort of business stays in business with a consistant negative cash flow?



    With Comsec I get 75% LVR with a 5% buffer so essentially 80% LVR. As I have mentioned before, there are other products out there which allow 100% finance.. like Fusion Funds and protected lending.. They are really in my opinion only good for people with large incomes but no assets or savings.. as are the 95-106% home loans. But yes, comfortable LVR for managed funds is 50-60% At least with such gearing, there are no out of pocket expenses, and the same level of gearing for good quality growth property makes it cash flow netural. But considering average share market returns over the last decade has been 14% PA, whereas property is only 8%, almost 1/2.. With property you also are forgetting about the holding costs which also reduce your overall net return


    Your figures prove that you will get the same result with shares.. the average return for ASX has been 14% PA over the last 10 years, and property about 7%. Sure property gives you yield of 4% but this is quickly swallowed up in holding costs. Your talking about ungeared returns, well compare apples with apples.. you either gear both property and shares and compare the results, or don't gear either and compare the results.. I have funds which have returned 20%PA ungeared over the last 7 years... add gearing into this of 60% and then do the math!

    Again, its not a fair comparison to compare geared property with un-geared shares.. Both are gearable, so I suggest re-doing the math with gearing. And what will blow property out of the water is 100% managed funds gearing with no stamp duty! Add those figures into your spreadsheet!

    Your also assuming interest rates remain low.. lets jack up the interest rates by a couple percent (which is reasonable to assume over 10 years) and lets see how your returns are killed. Then the ungeared shares will start to look better! With my shares, I simply lower the gearing by selling some stock/funds.. can you adjust your gearing with property? I hope your income is large enough to support multipal properties @ 95% gearing when interest goes up 2%!!

    We can all do our simulations and come out with different results.. Its all to do with the assumptions we make.. But I do think you have left out some vital factors from your simulations.. Things like holding costs, the fact on how many properties you can actually buy with 95% LVR, interest rates remaining low, vacancies, agent fees, land tax, the fact that the government is raising the tax brackets, meaning negative gearing is less attractive, renovation costs after 7-10 years, general maintenance, insurance, rates, water, advertising, the list goes on.. You cant just say.. we borrow money @ 7.5% for 20 years, house goes up 8% PA, and we can keep on buying more and more property at 95% gearing..

    With my funds, I keep on gearing up as the underlining asset increases value.. its not restricted by my wage and serviceability. Its also not affected by interest rates going up as much as with property.
     
  2. Handyandy

    Handyandy Well-Known Member

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    Hi crc

    It seems to me that you are drawing your conclusions from a very limited time frame. From all your posts I have gathered that you have only really seen the boom in managed funds and as people have already pointed there are 'bad' times.

    Regarding your 100% finance/gareenteed funds these have inbuilt cost factors that will reduce the earnings with most of these funds. The MACQ Newton fund is just one example (which I invested in:( ) where earnings have only just kept up with the interest cost.

    If you read the PDS's you will find that if they fall below certain thresholds they will revert to holding cash only, you are then locked in for the duration of the fixed term and locked in to paying interest. If this were to happen you will not only have lost the interest costs but also to oppurtunity cost that that interest cost would have covered.

    All I am saying is just be carefull.

    You also make the point that banks love MF's and are ready to loan money at the drop of a hat. Absolutely true because they are liquid they will sell you up before you can blink an eye and you cop the loss. They can't do this with houses which is why they are more stringent with RE.

    The bottom line is if you are happy with MF's then go for it but just be aware of the pitfalls.

    Cheers
     
  3. MichaelW

    MichaelW Well-Known Member

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    Guys,

    That was an excellent read and a really informative debate. It was nice to see it all spelled out again.

    All I'll add is that there is also diversification benefits to holding both asset classes as they are historically counter-cyclical. I hold both shares and property in almost equal distribution if you exclude my PPOR. Whilst my IP growth has been lagging in a down Sydney market, my shares have been booming along doing 20%. I reckon the ASX has a year or so left in it before the cycle turns and property becomes my big winner and shares return to minimal or flat growth.

    The benefit to a well structured portfolio is not only in a good mix of growth and income assets, but also in a reduced risk profile due to the negative correlation diversification benefits. I posted the diversification formula here some time back if you're interested but the theory is simple enough that the formula is overkill really.

    But, if you're a trader and not a buy-and-holder like me then maybe you reckon you can time the markets. In that case it makes sense for you to be long shares at the moment and then swing out of that market in a year or so's time and go long property. That's a gutsy move as timing it wrong can have catastrophic results. I prefer diversification and buy-and-hold for the long term. Helps my SANF.

    Cheers,
    Michael.
     
  4. crc_error

    crc_error The Rule of 72

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    I totally agree with this.. we have seen a un-natural boom over the last few years. This is why I do think having a property in the portfolio is also a good idea, but not when its costing you $10,000 PA in negative gearing to keep. But in all my assumptions I have used 14% PA which is the long term uptrend of the ASX, so I'm not saying we will continue to see 20%+ PA from the index..

    Property has not done well over the last few years, peaking in 2003. Both shares and property run in cycles, sometimes opposite to each other! I did own 3 properties between 2000-2005 and did very well with the first one, ok with the second, and lost with the 3rd because I bought at the peak. What killed me was how interest rates kept on going up, and rents remained under pressure. I was losing $15k on one property and 10k on the other two.. sure great for deductions, but not good for the pocket.. Rents would have to double to come close to bringing the properties to a cash flow neutral before I would think about re-drawing equity. Owning over a million dollars in property wasnt fun at 90% LVR and interest rates going up!

    Agree here also.. I got burnt on the same fund, and am in the process of exiting now (waiting for the refund cheque, man it takes them a long time to process) But in saying that, you can invest via the Fusion Funds platform which allows you to invest in normal managed funds. I for one don't like 100% gearing, as I believe a investment needs to be able to stand on its own two feet, so you can move to the next one. These products are only good for people with high incomes with no assets or savings.

    Lucky I got out!! :D I hate any investments which have high fees and costs.. I subscribe to the KISS.. Keep it Simple Silly!

    They wont knock on your door so long as you keep on paying the interest! I my funds LVR at the moment is 53% so I have lots to room to move.. But remember, if your property is dropping down, when its costing you $10k PA, lets see how most people would ride through that one!!

    In the end, each has their benefits and pitfalls, and potential investors need to make a decision based on all the facts.. In my modeling I have found funds to work for me, and provide advantages I'm looking for..

    One day I might buy residential property again, but I would much rather get into a direct property fund like Cromwell and avoid all the high costs of buying property directly.. and selling it!
     
  5. crc_error

    crc_error The Rule of 72

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    Yep, thats what this site is for! People to express different views and experiences, and everyone learn from the process!

    I agree, you really need to hold both, and I'm not in favor of timing the market, so a balanced portfolio is the key.. Shares and property work well together!

    I also don't like trading, been there and done that... Buy and hold quality assets for the long term is the key, whether shares or property or funds!

    Happy Investing guys! :D
     
  6. TechMan

    TechMan Well-Known Member

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    It was interesting following the debate.

    I believe that Nigel's original statement of buying property (even if -ve geared) and having managed fund investments to help pay for the shortfall is a good strategy. Once the IPs grow in value you harvest equity and invest in more property and/or top up managed fund holdings. It is the one Steve N teaches.

    Sure you might buy at a bad time and it might cost you more to hold that property than if you simply placed all your money into a managed fund. But then you are not diversified and exposing yourself 100% to the performance of the managed fund. If the property is a good one and is in a good location it should come through after a few years.

    I personally only own a PPOR at the moment purchased earlier this year, and holding in the Navra managed fund so am not expert in owning IPs. But will be buying the first IP in the near future and following the strategy mentioned above. :)
     
  7. crc_error

    crc_error The Rule of 72

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    IP Asset Growth Interest Rent
    2007 40000 250000
    2008 45000 270000 20000 16875 10000
    2009 63900 288900 18900 18375 10800
    2010 84123 309123 20223 19793 11556
    2011 105762 330762 21639 21309 12365
    2012 128915 353915 23153 22932 13230
    2013 153689 378689 24774 24669 14157
    2014 180197 405197 26508 26527 15148
    2015 208561 433561 28364 28515 16208
    2016 238910 463910 30349 30642 17342
    2017 271384 496384 32474 32918 18556

    $28830 Capital gain less interest of 242k
    Totals interest 242554 rent 139362
    Capital gain less interest of 242k plus rent collected of 139k
    $168192 End result @ 8% PA growth and 4% PA rent and 7.5% interest


    MF Growth
    2007 40000
    2008 47600 7600
    2009 56644 9044
    2010 67406 10762
    2011 80214 12807
    2012 95454 15241
    2013 113590 18136
    2014 135173 21582
    2015 160855 25683
    2016 191418 30563
    2017 227787 36369


    $227787 End Result assume 19% PA return geared @ only 50%
    I assume 19% because 14% * 2 - 9% margin interest

    Above is my comparison of using IP or MF. over 10 years the result is alot better with MF. $227k vs IP 168k

    in the 168k I have not deducted additional costs of holding property like insurance, rates, water, maintenance etc over the 10 years, refinancing costs so the 168k would be even lower. I haven't considered negative gearing benefits as this would change depending on your tax bracket.

    With the IP we put down 10% deposit of $25k and $15k in costs. With the MF we geared at 50% putting down the whole $40k

    If you harvested some of the IP capital growth after year 4, you could add a few thousand extra ontop of the $168k which still would leave you short using managed funds. I haven't considered interest rate rises, as that would affect both outcomes, more so with the IP due to its higher gearing.
     
  8. Nigel Ward

    Nigel Ward Well-Known Member

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    I'll respond in more detail in due course but the fusion funds:

    1) have a short track record
    2) the performance for some over that period has been very poor as I understand it (but happy to be corrected)
    3) I haven't looked in detail but MBL aren't known for low fees :rolleyes:
    4) any gearing in these products is at a premium to home loan rates
    5) if it's a capital protected loan then interest rates are very high

    More importantly your assumed returns are wrong for the two asset classes concerned. The long term returns from the share market i.e direct shares not managed funds is for 10yrs to 31 Dec 2006 12.8pa and for 20yrs 11.1%pa. In contrast for direct residential property the returns are: 10yrs 11.7%pa and 20 yrs 11.7%pa.

    Source: http://www.asx.com.au/about/pdf/asx_russell_long_term_investing_report_2006.pdf

    Cheers
    N
     
  9. crc_error

    crc_error The Rule of 72

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    Thanks for the link! Didn't realize that global property performed so well.. Lucky I have a good portion of my portfolio in GP as well..

    But this was a interesting point

    When taking gearing into account (i.e.
    borrowing money to invest), Australian
    shares outperformed residential
    investment property at both the lowest
    and highest marginal tax rates.


    So I guess this underpins my argument!
     
  10. Nigel Ward

    Nigel Ward Well-Known Member

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    Ahhhh, no it doesn't. Look at the % gearing assumed in each case...namely 50%. Which is one of the key issues. To gear 50% with a margin loan is sensible. To gear only 50% with property is a lost opportunity... To be fair they should have geared say 50% for shares and 80% for property otherwise its an apples and oranges comparison. That aspect of the report is flawed in my view.

    Cheers
    N.
     
  11. crc_error

    crc_error The Rule of 72

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    yes true, but gearing at 80% property will give the investor a negative gearing situation, but the shares/property geared at 50% wont.. so that to isn't exactly fair either.
     
  12. ilori

    ilori Well-Known Member

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    Sometimes I think the real estate vs. shares debate is a little like Holden vs. Ford... maybe we just have a preference for one or the other... then try to find the facts to support it :)

    As others have suggested, both have their good and bad times...

    During strong periods of real estate you'll notice real estate agents come into their own and attract business easily, stories of successful investments are in the newspapers, capital growth is rocketing along... equity grows quickly... it seems too easy... Backyard Blitz type programs are trendy again *smile* On the flipside, financial planners start talking 'long term view' and 'dollar cost averaging'.

    During strong periods of stock market financial planners etc. talk up shares & their funds. If the index is tracking at about 20% pa. it's easy to get a fund to achieve 20%, advertise it, take credit for the great rate, entice investment while the numbers are good. On the flipside - there may be negative real estate articles in newpapers (affordability, rising rents) and then it might become a goverment issue. This is happening now and has happened in previous cycles.

    Just on a personal note - recently I had a planner advise me to sell my real estate and invest in his managed funds... 'justifying' it by saying his fund was achieving 20% but propery only has historical growth of 9-10%. Hmmm... pick the sticks out of that logic :)


    At the end of the day... real estate agents won't make money out of you if you have your money in shares... financial planners etc. won't make money out of you if you're buying direct real estate. All swings and roundabouts :)

    crc_error... don't get me wrong... I'm not pushing real estate over shares... just had a natural leaning that way but have been getting into shares more... I too tried to analyse things to death and work out what was theoretically the best... but what I found often is that the theory doesn't work out in practice. So many things come up, example, recently I've been discovering more about low doc loans and the fact that the underlying mortgage insurance companies dictate to retail lenders what LVR they will allow on certain postcodes re. LMI . (I'm not a broker or anything, so if I have some of that statement a little twisted, my apologies, but I think it's generally right.) The upshot of this is that I was doing calculations based on 90% LVR, but due to location of a property, was struggling to get 80% LVR due to LMI costs. This is a recent example, but have run into a number of these practical issues that knock my theory around :)

    Anyway, all good fun... main thing is to be in the game and having a go :)
     
  13. Nigel Ward

    Nigel Ward Well-Known Member

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    Well that's assuming both a poor rental yield and a reasonable dividend yield isn't it...so not necessarily fair either...:D

    Cheers
    N
     
  14. bundy1964

    bundy1964 Well-Known Member

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    Having a foot in both camps I will take shares/managed funds over property currently even with my property positivly geared and the shares negativly geared. The fact you can short the share market should also increase your returns during the off years as well as having some defensive shares as well.
     
  15. ilori

    ilori Well-Known Member

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    Good point Bundy re. down market.

    Does anyone have a strategy for using shares as part of property/share investment structure? If you're borrowing against property equity to invest in shares, what is best way to do it?

    For the sake of an example... say can borrow $100,000 against property equity at 7-8% interest. How should one manage this with respect to risk, performance, cashflow etc?

    Continuing... could/should the 100k be allocated as:

    a) 90k to buy/hold/manage strategy? What return should this expect? I understand realistic to get 10-20% above index without leverege (more with leverage from margin loan).

    b) 10k to trading strategy of some type? What return expect? Have heard people getting 100% pa trend trading with end of day data... is that realistic?

    Last thing, how do we handle the cashflow issue? Bank wants to be paid (say) monthly on it's 100k loan, but cash/growth from the share activity not regular. Things like capitalise interest, using dividends for servicing, selling down capital gains to release money?

    Does anyone have any experience of best way to get this all happening?
     
  16. bundy1964

    bundy1964 Well-Known Member

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    If I borrowed 100K against property and needed to meet monthly payments on the property loan I would -

    Either invest in listed Interest Rate Securities which pay quarterly and/or AMP monthly Income Fund No 1 and/or Navra Blue Chip Fund. I would lean towards Interest Rate Securities as you can leverage them highly and can get an effective monthly income by chosing 3 or more with staggered payout dates I currently use NAB, SUN and MBL ones with an eye on WOW as well at a lower LVR. I use them for a monthly income and as a stabiliser. AMP and/or Navra should both more than cover your interest costs, you will need to work around one fund paying monthly and the other quarterly.

    Using securities with 90% LVR you could invest 90k most of wich I would use for buy and hold and trade with the rest using dividend stripping. Capitalise interest on the margin loan. I would also have an option to go short.

    Using Managed funds I would go 80/20 using AMP and Navra you would get your interest bill coverd and have some wriggle room with the 2nd fund. You could then margin 75k for buy and hold as well as trading. Capitalise interest on the margin loan. I would also have an option to go short.

    In both cases I would have any income paid into an offset account or a seperate bank account so you can be a bit more flexiable and be able to buy dodads without hurting your tax position.

    Sim would say leverage to 50% as a safe option where I am more agressive, I think I can almost scare myself sometimes :p
     
  17. Tropo

    Tropo Well-Known Member

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    "b) 10k to trading strategy of some type? What return expect? Have heard people getting 100% pa trend trading with end of day data... is that realistic?"

    Ilori,

    "10k to trading strategy of some type?"

    What type of trading are you talking about ? Have you ever traded in shares before? Have you got some strategy in place if one day market changes direction?

    "What return expect?"

    It depends how skillful you are.

    "Have heard people getting 100% pa trend trading with end of day data... is that realistic?"

    In strongly trending market it's possible if you are a trader.
    During bull run most of the players are making money. During bear run most of the players are losing money. ;)
     
  18. Simon

    Simon Well-Known Member

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    Funny thing with share traders. They are very happy to talk about their successes but rarely mention their failures.

    I reckon people making 100% consistantly would be in the minority - esp outside a bull market
     
  19. Tropo

    Tropo Well-Known Member

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    Well said !!
    To make 100% in bearish market is still possible IF derivatives are traded.
    But only handful of people can do it consistently or should I say... from time to time.
    A lot of people who claim 100% success are paper traders. That is why you are not hearing about failures.
    Statistically 7 traders out of 10 are losing money, but some people still believe that trading is a super highway to become rich !!
    There are some people who have a gift for it (trading) and some who don't.
    Just because some people may be competent in one field of endeavour does not mean that competency will translate to the market.
    :cool:
     
    Last edited by a moderator: 20th Jul, 2007
  20. bundy1964

    bundy1964 Well-Known Member

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    Rosella who I consider to be one of the best traders around at last update was doing a 60% return. Market we have had has helped a lot.

    To be a success at trading you have to get it right 55% of the time and know when to take a loss and move on. 16/10 is my current portfolio and some of the 10 are only a light shade of red.