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Tuesday, 19 September 2006

AU shares - trading update

Disclaimer: I'm not a financial advisor, so DON'T take anything I write as advice! When I mention specific securities (such as in this post) I obviously have an financial interest in them.

As previously mentioned, most of my investments are in real estate, index funds, or stock funds in my retirement account (superannuation). But I occasionally dabble in trading via the small fraction of my portfolio that is in direct share investments via margin loan accounts. It stops me getting bored and doing something silly with the asset allocation of the major part of my portfolio!

I had bought 2,500 shares of ING Private Equity Access Limited (IPES) when they first were floated as stapled securities for $2.00 each`(15/11/04), and then bought another 1,500 for $1.77 on 11/8/05 .

They stapled securities converted into 2 ordinary shares (IPE) and 1 option (IPEO) to buy an IPE share for $1.00 (option expiry date is 31/10/07) on 7/11/05 for each stapled security. So I ended up with 8,000 IPE shares and 4,000 IPEO options.

After bottoming out around $0.80 per share, IPE has started to trend up in the past few months, now trading around $0.94. So I've just about broken even on the average cost of my holding.

The interesting thing is that the shares are trading for way under the reported NTA value of around $1.20 per share, and the are still 75% invested in a mix of top 100 listed equities, with only a quarter or so of their funds committed to private equitiy investments so far. Even so, the private equity investments made so far have gained around 5% in value, which is a good result considering private equity investments are meant to perform over the longer term.

Of course, listed investment companies usually trade as a discount to NTA, but their price should trend towards the value of the underlying assets in the longer term, and you get a good dividend yield in the meantime. The IPEO options have over a year until expiry, and will be really worth something if the price of IPE gets above $1.00

Based on a few heroic assumptions (guesses), I decided to buy 50,000 IPEO yesterday at $0.039. With Comsec brokerage of $19.95 and the $10.00 margin loan account transaction fee, the total cost of the parcel was $1,979.95 - ie. average cost of IPEO 3.96c

Last time IPE was trading close to $1.00 the options were around 6c- presumably based on the time value of not having to pay the $1.00 execution price until 31 oct 2007. Of course, this "time value" will slowly dissipate between now and 31/10/07 (Slowly at first, then very fast towards the end). If you wanted to try some more precise modelling of the option price over time I think the Black-Scholes equation is available online somewhere (I can't be bothered).

My guess is that the general market could rise 10% or so above it's current level at sometime between now at 31/10/07 - which should push the IPE shares to over $1.06 This should give the options a value upwards of 6c each. Any increase in the price of IPE shares above $1.06 should translate directly into a further gain in the IPEO price. eg. If IPE reached $1.10 by early next year, the options should trade around 12c - 15c each.

Anyhow, worst case is I loose the entire $1,979.95 if the options expire worthless in October 2007. Best case is I'll be deciding next October whether to take a capital gain on the options or pay the $50,000 to invest a significant sum in IPE at $1.00 for the long term...

nb. One thing to note is that IPEO options are VERY thinly traded, so even small trades can impact the pricing. My small trade yesterday was the entire volume for a typical week! And the current buy-sell spread is 34% (a buy quote of 3.3c {45,000 shares} and a sell quote 5c {22,500 shares})

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