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
2 comments:
Margin trading in this market shows a lot of confidence in the Australian sharemarket. As you say, with the resources boom driving the economy, prospects look good for Australia. That said, if the RBA raises interest rates a few more times, would that start to have an effect?
I'm going to switch to CFS Geared Share Fund / Option soon, estimating it will be two weeks for me to be sure we are at bottom, though I think buying now is relatively low risk. I won't be using margin though to do this :) In my margin account I plan to switch from CFS Conservative Fund to Future Leaders, Developing Companies (I have holdings in them already so I can do this) and Imputation Fund.
BTW, thanks for meeting up with me and Snork Maiden last week in Sydney. It was fun.
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