NavraInvest and margin calls

Having just read the articles on margin lending and the Navra system back to back (Both very good by the way!!!) I am interested to know how much of a `cushion' the navtrade system would supply in the case of a `controlled fall'?

First a pre-cursor question:

1) When a margin call is made, what happens if the following day the market recovers and your investments move back into the safety zone, do you still have to make good on the actual demand of the call?

The real question:

One of the accepted (if frowned upon) ways of making good on a margin call is to buy more units to increase the percentage of `your' money in the system. However, if the fall is slow enough, isn't this essentially what the navtrade system would do if it had sufficient time to carry out several buy trades during the `controlled fall'? Doesn't this sort of action dampen the falls effect on the NavraInvest fund thus giving a (small) buffer against a possible margin call? If everything was essentially stable and valid, wouldn't the Navtrade system continue to trade, picking up bargins and essentially trading itself out of the margin call?

I don't expect any actual numbers (That would give the Navtrade system away) but am I correct in my reasoning?

Tailcat

I like when the fund drops in value. It provides buy in opportunities. The only time I spew about it is if I don't have any extra funds to invest.

Mark

Hard to time it well when we have to send the prospectus in via the margin lender. not nearly a efficient as share buying.

How do you manage to jump on opportunities quickly Mark?

Depends on the lender. Some lenders will accept direct deposit into a linked account and an email from you asking for cash to be deposited into the fund, others won't even consider the application until they see an original additional request form, a signed letter and a cheque.

I like my account manager very much. She always goes the extra mile for me (and clients) and tries to get everything done as quickly as possible. Sometimes a good, flexible account manager makes all the difference. But you know, as always it's horses for courses. What fits for me doesn't work for the next guy.

Mark

Tailcat,

I've considered exactly the same thing myself. My thinking was that the dollar cost trading (DCT) algorithm in the Navra fund should hopefully be robust enough to hold off on executing buy trades in a rapidly falling market, thereby preserving its cash holding at the top to execute buy trades when true volatility returns at the bottom. In this way the invested portion, lets say 60% (with 40% in cash) is exposed to the rapid market correction but the 40% cash is preserved. In effect, this almost halves Navra's exposure to the correction and therefore requires the market to fall twice as far for the Navra unit holders to get a margin call as those investing in the ASX200 directly via the same margin lender.

But that's in the case of a "rapid descent" or a "cliff" kind of event. Now, in a controlled correction I would hope that your logic remains correct too. i.e. The algorithm is clever enough to trade the ups and downs of the down trend market and thereby significantly reduce the impact of the correction on the fund's valuation. Whether or not it can trade sufficiently to completely avoid downward movement on the unit price would be a factor of the speed of the descent of the market and the associated volatility during the descent. I would think (based on my modelling of the fund over the last two years) that any fairly rapid descent would result in Navra definately giving away value. It doesn't seem to be able to trade sufficiently on my observed volatility to offset the decreasing market.

But either way, the fact that it trades, and the fact that it holds a cash portion would mean that your exposure to a margin call is sufficiently reduced to those invested directly into the ASX200 or a wholly invested buy and hold fund. I called this the performance over risk premium of this fund that I consider to be its biggest differentiating benefit over other funds. Having said all of that, I believe there is definately still an element of risk that cannot be ignored when investing in this fund. It is not immune from a market correction and therefore not immune from the possibility of a margin call. I'd just suggest that it is more robust than some alternative investment options in the ASX.

Cheers mate,
Michael.

Michael,

It's (almost) a shame this hasn't been tested. The fund was established in May 03, basically the start of our modern bull run. It would have been great if it this fund was trading in, say, Sept 2001.

My opinion is that the fund will perform extremely well AFTER a downturn, not immediately during a downturn. However, in theory the high cash holdings should see it fall less than the market in the short term, but a longer term downtrend may well see the fund fully invested, at which time it is at the full mercy of the markets.

Expect to see the fund drop sharply WITH the market, but perhaps not as far. Recovery should be better than the market.

If you are fully geared into this fund - I think you still run a pretty high risk of margin call during a 10%+ crash.

The key to remember is that the unit price is comprised of three components - the underlying value of the shares held, the cash held, plus any undistributed trading profits. Thus there are multiple variables at play:

1. as the market falls, the underlying value of any shares held will most likely also fall
2. cash will not fall with the market, so the component that is held in cash will retain its value, and thus contribute to minimising falls in unit price in the short term
3. as the market falls, the fund will become more fully invested, thus decreasing the cash holdings, reducing the positive impact described in 2 above during further falls
4. while the fund holds undistributed trading profits, there may also well be trading losses incurred during a downturn, thus negating those profits. This could go either way - but assuming all held stocks are falling in the downturn (no recovery yet), then trading losses will likely accumulate as the fund becomes more fully invested - having a negative impact on unit price.

The key is the bounce or upswing. In this phase, the above should (in theory) be reversed, with more positive outcomes on unit price that should (again in theory) see the unit price grow by more than it fell as the market recovers back to its pre-downturn value. The trick is - how long will this take ? 1 week ? 1 month ? 1 year ? more ? It is quite conceivable that the market will turn down and not recover to new highs for well over a year. During this time, I fully expect that the unit price will be lower than it was before the downturn - although there should be trading profits distributed, you will still see an erosion of capital over the short term.

So what does all this mean ? I think that anyone geared to a reasonable level (50% or below) should be pretty comfortable - it would take the biggest crash ever to see a margin call. You might see some short to medium term erosion of capital - but it should eventually come good again (within 3 - 5 years).

I'd also be pretty comfortable geared to 60% during a downswing - it's only a large crash that may cause problems there.

Anyone gearing higher than 60% should keep a close eye on the market and be prepared to kick in more cash/capital if you want to avoid a margin call.

As the end of the day though - a margin call isn't the end of the world ... unless you invested only in highly speculative stocks with minimal buffers in place where you potentially stand to lose all your capital if they drop in value too far too fast!!

Just my opinions !!!

No one except steve knows enough about DCT to say how navrainvest will perform.
Its dangerous to make assumptions
As a reminder
Black Monday (1987 - Wikipedia, the free encyclopedia)
"the decline seeming to have come from nowhere."
What if the market fell 41.8% and all your share holdings were in navra
That certainly would trigger a lot of margin calls

Do you have the guts and the funds to invest more?
Ive certainly been thinking a lot about risk and debt lately

Returns lately have been out of the ordinary
Margin loans are at 8+ percent
Do you really think long term we are going to have returns
15% plus
My opinion is that given the current market - long term returns for income
may be around 10%+, and certainly that is one of the stated aims of the fund
Now there is an MER of 1.5%

Think about every 100k you borrow to invest
borrowing costs of say $8500 8.5%
income of $10000 minus MER of 1500 - = 8500

as an example your return is going to be $500 on the 100k
You can argue that the averages are a bit higher like 12% after MER
but even then thats 3500 return
Plus because it is not franked you can take a third off the return due to tax

Is that worth it for so much added risk

If the stock market dropped 40% you would lose 40k of your equity
and also trigger a margin loan and sell at the lower price or have to pay more into the margin

You may also argue that it will recover and make more money in the end
in the end we really dont know how it will perform
Most of us have gone by Steve's stories in his seminars where he made x amount when stocks were going down.
What if the trading system does not work as well in the 2008 climate
We certainly have no evidence of late that it is outperforming by huge amounts because of low volitilty - we dont know that it will perform in high volatility - We go only on Steves word

Now that there is an MER involved - the fund needs to generate 1.5% more
to get those returns - not a mean feat

Asset allocation is a key in reducing risk and generating return

Another thing
Borrowing against equity at say 7.3% via LOC or refinance
is still borrowing
and then margining against that at 50% magnifies the risk enormously

from a person who invests with comsec, i must say this is most admirable... are you with LE mark? if not who are you with??? be great to know...