Sunday, 5 December 2021

Bought some GEAR shares

I was doing some reading for a Margin Lending 'course' from Kaplan learning (to possibly add margin lending to the list of things I'm approved to give personal financial advice on as a registered financial planner) a couple of days ago, and there was mention of 'internally geared' investments (managed funds). These funds borrow to invest more than the unit holders funds, which should provide larger gains during positive market performance periods and larger losses during negative market performance periods. One advantage of this type of gearing is that you (the unit holder) won't ever get a 'margin call' if the value of the assets decreases (the fund may go out of business and the unit value drop to $0, but you won't lose more than your initial investment). I had a quick look around at what geared investment funds (ETFs) were available, and the GEAR ETF run by betashares looked interesting, as it invests in basically the ASX200 companies. Despite the fund 'fact sheet' stating that the fund invests in the top 200 ASX shares according to market capitalization (which would be a plain vanilla ASX200 index fund) it is actually an actively managed fund, with a quite hefty management fee of 0.8% of the total fund (ie. including the borrowed funds). You also aren't told what the fund's borrowing costs are. Looking at the fund unit price compared to the ASX200 index for the past 5 years it looks like the fund pretty much tracks the index during periods of average market performance, outperforms a bit when the market is doing well, and underperforms when the market performance is below trend. So, whether or not the fund outperforms the ASX200 index over the next decade or two will apparently depend on whether there is a 'bull market' or a 'bear market' overall (i.e. the index performs above or below trend).

I decided to use the available credit in my Commsec margin loan account to purchase ~$20,000 worth of GEAR. As this is 100% borrowed funds, whether or not this turns out to help or hinder my NW over the next decade or two will depend on whether the fund total return (distributions + capital gains) exceeds the interest charged on the $20,000 loan. It won't have a material impact on my NW either way, so it was pretty much a 'spur of the moment' decision to make the investment. It will add a tiny bit more work to doing my annual tax return calculations, and eventually there will be some CGT calculations and payment required when I eventually sell the investment.

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