Tuesday 18 November 2008

Ejecting ballast from my portfolio

My margin loan portfolios continue to sink rapidly in value as the market slide shows no sign of abating. Last weekend's G20 meeting didn't inspire market confidence, with the Australian market trading down another 3% in the morning session. I decided to dump some of my smaller holdings in small cap stocks, as they could be no liquidity available in these stocks if the market has another "black" day, and I get a margin call. I'd have preferred to clear out my block ING Private Equity stock (I still have 90,000 of these - bought for approx. $1.02 via option rights, and last traded around $0.52), but there is no trading volume in these at the moment. The current bid price is around $50c, but only for 1,000 shares. The next offer is at $0.40 for 25,000. There hasn't been 100,000 IPE shares traded in total this month, so putting my 90,000 shares on the market would probably depress prices considerably. Although there is a risk that many of the small, unlisted companies owned by the Private Equity funds that IPE invested in will go out of business in a severe recession, at current prices it is probably not worth trying to liquidate this stock. Although any cash realised from selling off IPE would help reduce the margin utilisation of my Comsec account (as IPE currently has 0% margin value), the 0% margin value also means that any change drop in the price of IPE shares won't trigger a margin call.

In the end I cleared out three of my smaller share holdings (@$19.95 brokerage per trade), realising $7,096.39:

Stock Price Qty Net
Sold LDW $2.500 1,350 $3.355.05
Sold BBW $0.820 1,782 $1,441.29
Sold THG $0.580 4,000 $2,300.05

As LWD and BBW had 0% margin value, and THG only 50%, selling these stocks will have the same impact on my Comsec gearing as injecting $6,000 of cash. It will also reduce the number of individual stocks I own and therefore simplify my annual tax calculations of dividends and trust income.

I also placed an order to BUY 90 IANG shares with the proceeds, but the order hasn't been filled as yet. At around $77 the IANG shares are trading at a substantial discount to the underlying bond portfolio (around $100 per share), and yield a fully franked dividend of around 6%. The next reset date for the shares is 15 March 2010, at which time they may be redeemable for closer to the full $100 than their current market value. I already have 200 of these shares, so I'm just adding to an existing holding rather than adding another new security to my portfolio. The IANG shares have a margin of 80%, so using the sale proceeds to buy this stock will still have the effect of adding another $5,000 cash to the portfolio.

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Anonymous said...

I must say I am surprised at your honesty. Most people won't publish their losses because of pride.

Are you ever going to jump ship and sell everything or will you ride this out?

enoughwealth@yahoo.com said...

I wish I'd sold everything a year ago and used the proceeds to go on vacation for ten years... I think it's a bit too late to sell everything, so I'll just sell off bits and pieces as required to avoid margin calls. I'm still hoping that the market will bottom out before I have to sell off too much, as I wouldn't be willing to buy back in as the market rebounds with my margin utilisation levels so high. They'd be too much risk of a bear market rally reversing and new lows forcing me to sell again.

If I had any cash I'd be starting to invest in the market via index funds at these price levels. In fact I'm in the process of filling in an application form to open an account for my son to move the $10,000 savings earned from his paper round job a couple of years ago into a Vanguard High Growth fund.

Anonymous said...

How secure is IANG? The following is in their prospectus, which look like a whole lot of smoke and mirrors..

"The Issuer will lend the New Zealand dollar equivalent of the gross proceeds of the Offer to IAG (NZ) Holdings which will
use the proceeds to reduce existing intra-group loans from IAL. The Issuer will obtain the New Zealand dollar equivalent of
the gross proceeds of the Offer by swapping them with IAL. IAL will lend the Australian dollar gross proceeds of the Offer
to IAG Portfolio."

enoughwealth@yahoo.com said...

My order for 90 IANG was filled at $77.00, and they went up a bit during the day, which is nice considering the market overall fell another 3%+ that day.

I've really got no idea how secure the IANG investment is. I can't tell from what I've read if there's a $555m corporate bond portfolio underwriting the value of IANG shares, or if IANG's only real "asset" is a call on IAG(NZ) to repay the $555m they lent them. It seems deliberately confusing, which is often not a good sign.

Having said that, I'm holding 290 IANG shares worth roughly $22,000 in my portfolio. This illustrates the pathetic amount of due diligence I do for my stock selection, and why it's probably a good idea for me to be shifting my equity investments towards index funds rather than direct investment in individual stock picks ;)

Bigchrisb said...

Looks like today is going to be another grim day on the markets - at least based upon the overseas markets. If I manage to avoid a margin call today, it will only be by the skin of my teeth, and courtesy of falls in the AUD offsetting the losses in foreign index funds (ishares). Fingers crossed, but not optimistic!

Anonymous said...

On re-reading my previous post, I see it may be mistaken to be a comment on your methods - it wasn't meant to be. I followed your lead on IANG and found there were a few red flags: nebulous company structure, NZD currency exposure? and questionable credit ratings. Maybe everything is above board but it's hard to tell. Personally I have bought some STW - is this what you would invest in when buying the index?

Thanks for posting your progress, hopefully there are no permanent losses in your portfolio and the market turns soon!

Anonymous said...

I have to say I'm impressed by your uncommon level of honesty.

If I may be equally honest, I'm worried that you used the h-word. It seems the market's #1 objective is to eliminate as much leverage as possible. Who knows how many people are just a little bit more leveraged than you. I don't have any answers, but I'll offer some questions that I've found helpful.

* How would you invest if starting from scratch?
* Does it differ from your current holdings?
* Where are we at in the deleveraging cycle?
* How much wealth is preserved worst case?