My Margin Loans with Leveraged Equities and Comsec are almost fully utilised (>80% MU, with margin calls if MU exceeds 105%), but I have a fairly low gearing level with my StGeorge Margin Loan, as I transferred all my miscellaneous mutual fund investments into this account several years ago and have only been using a 50% geared savings plan of $200/mo to slowly add to my investment in the Colonial FirstState Geared share plan. That particular investment has done well during the bull market, but is currently down around 50% from it's high last October. Assuming we're close to the bottom of the Australian bear market (which seems possible, given our economy is still growing around 4%pa and exports due to the commodity boom expected to rise another 30% in the next 12 months) it may be a good time to invest more into this internally geared fund.
The fund invests using internal gearing and generally invests in high quality companies in the S&P/ASX 100 Accumulation Index. These companies generally have strong balance sheets and their earnings are expected to grow at a greater rate than the Australian economy as a whole. The option’s gearing effectively magnifies returns from the underlying investments, whether they are gains or losses. The option predominantly invests in Australian companies and therefore does not hedge currency risk.
I've filled in an application form to invest a further $50,000 in this fund and faxed it to StGeorge margin lending. The investment will be fully funded from the available margin in my account. This will cost around $5,000 pa in additional interest payments, which are tax deductible, but would be partially offset by any distributions from the investment. Of course, borrowing 100% to invest in a geared stock fund is very high risk, but this is only around 5% of my 5% of my net worth. The strategy will pay off if this is a "normal" bear market (followed by a period of good market performance), but won't pay off if we enter a period of extended poor stock market returns, such as occurred the last time we had an oil shock and high inflation in the 70's. Time will tell.
Copyright Enough Wealth 2007