Margin Fiend or Fool

[Walkeia]

Hi Fellow Fools,

I'm relatively new to this community but been in markets for over a decade. I've started this thread to discuss and hopefully post updates on my investment strategy using margin and get some honest feedback and suggestions for investment trusts / ETFs which may be suitable and I can do further homework on. I started in Jan as my previous employment had very strict personal investment policies.

My plan is to the emulate BTLs use of leverage to enhance returns - I would say without any hassle, but a better way of phrasing this is 'with hassle i enjoy' - which is digging through the annual reports etc. I use Interactive Brokers and my effective cost of funding to me is +1% to the respective CB base rate; the drawback I have found with IB is they do not quote the Specialist Fund segment of the LSE which is becoming increasingly frustrating.

As I posted in another thread, for every unit; I buy x1.3 using margin to finance the balance. I have split my target portfolio into three - REITS, Income and Growth with a target of a third into each segment. I have added the below assets in Jan/Feb which I view as 'foundation assets' from which to build (stealing from BBOX's style). Timing wise, I've started with a decent slice of luck on my initial capital input and going forward am using monthly portfolio additions rather than try and time the market. I feel focusing on GBP, USD and EUR makes the most sense but happy to hear what others think. Lastly, I do not re-balance to x1.3 market if the market rallies, my margin just declines is the current plan.

REIT - BBOX
Income - TRIG, GRP, JLEN
Growth - VWRL

One thing I recognise is how both REIT + Income sectors are concentrated. This is something I am in the process of correcting over time - currently e-mailing ERE.EU, European residential REIT, and this will be the next addition if the numbers stack up (I will write a post on this if they do). The other aspect is the double leverage - I am using margin to buy leveraged funds with the exception of VWRL. The reason I am comfortable with this is the trusts have inherent inflation correlation due to the underlying assets having contracts linked to RPI; in addition I am comfortable with interest rate risk and my personal view is they will never be going back to the pre-08 levels due to demographics - UKT 30y gilt is 1.7%.

I'd really appreciate any suggestions for investment trusts or ETFs which would fit the above strategy well. Low volatility + draw-down, an underlying diversification to a number of assets and as little correlation to the general market as possible is the aim.

Lastly I would ask thoughts on the general idea

Thank you

[Parky]

As I posted in another thread, for every unit; I buy x1.3 using margin to finance the balance.

As an alternative strategy, instead of gearing up yourself, you could buy ITs which themselves have high gearing. The effect could be similar.

[BusyBumbleBee]

Interesting idea, Walkeia , and glad to hear you read Annual Reports (so do I by the way)

Your income shares worry me : Two of them are Green Infrastructure Shares and you might like to read the topic "Investing in Green Infrastructure Funds (ITs)" viewtopic.php?f=8&t=17343 which contains a lot of information. Kind regards - BBB

[hiriskpaul]

I cannot comment on your particular investments, but I ran a heavily leveraged portfolio in the aftermath of the financial crisis. Leverage, which peaked at over 100% was obtained by drawing down on my flexible mortgage and a large spread bet on a corporate bond ETF. However, virtually all my investment was in fixed income and related areas such as bombed out structured products. As bond yields dropped and income flowed in, the leverage dropped as I did not attempt to maintain it. Eventually I closed out the spread bet and paid off the mortgage again. With the benefit of hindsight, I deleveraged too soon, but at the time it looked as though what looked like a one way bet on falling yields was largely over. Or over sufficiently for me not to want to make a geared bet on it continuing, but I still held on to most of the direct FI investments.

Looking at the markets right now, with bond yields where they are and mid to toppy equity valuations, I cannot really see the justification for using any gearing at all. I suppose if you have income from employment coming in, then a mild amount of gearing that you let drop over time might be worthwhile, but to me 30% looks high. I would be cautious about IB as well. In a chaotic market they might decide to tighten their margin requirements, or haircut right down your collateral. That might force you into selling even though a drop in the stock market on its own would not.

[hiriskpaul]

One other thing that has occurred to me was that you said VWRL was not geared. Strictly speaking this is true, but the underlying securities, ordinary shares, most definitely are geared and companies have been riding on a wave of central bank stimulus for over 10 years, taking on a lot of cheap borrowing. The merest hint that this stimulus may be withdrawn, or withdrawn more quickly than the market expects has set off a number of "taper tantrums". So far central banks and the Fed in particular have backed off for fear of causing a rout and bringing on another recession. They will not be this accommodative forever.

Small increases in the currently low long interest rates can have a marked affect over NPVs, and if you are wrong about rates staying low the next correction could be far worse than we saw in the Autumn. For what its worth, I agree with you and expect the withdrawal of stimulus to take a very long time, but I always find it helpful to map out the repercussions if my assumptions are wrong.

Best of luck anyway.

[Walkeia]

Thanks all for responses. I appreciate - my work has turned v busy but will come back with full responses in due course. BBB I have read the green energy thread - v interesting.

[JoyofBrex8889]

I have now been a market participant in two big downturns: the tech crash and the 2008 GFC. The first one I didn’t have much to lose which was just as well as I lost 80% of my meagre invested capital. The second time I was sat mainly in BTLs and cash and survived untouched and in a great position to make hay in the recovery.

Both times had I been invested with 130% gearing in equities I would have been very stressed.

[Walkeia]

Someone posted on another chat a quote - 'Don’t tell me what you “think” show me your portfolio'. So here it is

REITS (35%) - BBOX, RESI
Income (37%) - GABI, GCP, JLEN, SEQI
Growth (28%) - VWRL (75%), VEUR (25%)

Roll off - VCTs: Octopus, Mobeus, Downing. 3 x EIS & SEIS, 2 x leveraged loans.

The holdings in GRP and TRIG both worked out well - I decided to reduce my exposure to Green Infra recently moving them into GABI and GCP close to current price levels (Note GCP has ~65% exposure to renewables underlying so there is some overlap). So far so good with the use of margin but I have had a tailwind from starting almost 1y ago along this path so given me a good starting position. Most importantly I am enjoying doing this and feel am building fairly stable foundations.

Biggest win - BBOX in % and cash amount but most happy with Greencoat Renewables as never looked back from April time when I found it on the Dublin exchange at a cheaper discount to UK windfarm peers.

Problem child - RESI - in another post I said I was bullish the stock for income @ 97p; now 91p. Had institutional sellers most of the year and hit somewhat by social housing woes of triplepoint and civitas. I hold but on a tight leash into results on the 21st of Nov - I want to see dividend cover rising to show the dividend is secure at which point i think the price will drift back up to roughly where I purchased it.

Biggest view change - I decided to roll off all my VCTs, EIS and other investments into trusts and ETFs. Fees, illiquidity, transparency always niggled me and I think I was a bit blinded by the tax rebate. The loans should be next 6 months, VCTs and EIS starting in 2021.

2020 game plan - continue in the same framework. Be stricter with equity ETF additions as, I don't know about others but, even with monthly investments I always seem to struggle to be at target weight. I've also decided to limit the number of holdings I'm going to target to 20-25 to avoid 'disworthisification' a word someone used on a board which made me laugh - i like it.

This can count as an early Xmas update and will try and update spring next year as Q1 is usually when I get cash inflows and put money to work. Any constructive thoughts / comments welcome though I may be a a bit slow coming back on these at the moment my apologies

all the best,

[Hariseldon58]

My initial flippant reply to the OP would be " What can possibly go wrong..."

One thing the OP does not mention is the size of the portfolio, in relation to what other income or assets that are held.

The portfolio could be small £10k - £100k , income might be £100k year and there could be £500k in home equity. I'ts not a disaster if things go badly.

The OP might be retired and have a £1m portfolio leveraged, with little other income and no home equity, the consequences of the unforeseen could really hurt then.

My own experience of leverage on two occasions, over extended periods was not either here nor there in respect of returns, but significant management time, that could have been better used elsewhere.

[Spet0789]

What you propose is streets away from the leverage In BTL.

Unlike a mortgage, your leverage will be:
- subject to margin calls on the basis of asset MTM.
- vulnerable to changes in margin.
- short term... IB can pull the plug if they want to at very little notice.

In short, there are lots of scenarios where you will need to close out your positions and crystallise a loss.

What you propose isn’t ridiculous but you need to have other sources of liquidity to avoid ever being a forced seller. I am considering doing something similar but I also have an offset mortgage with lots of dry powder so I can enjoy cheap overnight liquidity from margin lending with the assurance of term liquidity (at higher cost) if I ever need it.