Peter Spann 1 Day Investor Update

[Peter Spann]

Performance

buy write fund performance since inception was 14.04% p.a. s&P / ASX buy write index was 15.86% it also quotes s&p / asx 200 accumulation index was 26.29% p.a. but i don't think this is a relevant benchmarket.

anyone know the reason for underperformance against the asx buy-write index benchmark?

The Buy Write Strategy is a hard one to out perform with if you are going to maintain a diversified portfolio which a fund manager is “required” to do for risk management purposes - though I will concede it is possible. It is my view that Macquarie take a pretty conservative approach to their trading and this is a strong benefit from a risk management point of view, although is does reduce return compared to an aggressive approach. Take a look at the volatility - under 7% - as compared to the volatility of the index - over 9%. Statistically this is a BIG reduction in risk for a relatively small reduction in return. So I would not go into this with an expectation of constant out performance but a well managed approach to optimise the risk / return ratio.

The index remember has no costs attached. So even ignoring the fees you would be charged in a structured version of the product you would have had to pay broking fees on any trades you would have done. Even with a discount broker (I would not recommend trading that way), you are probably looking at 0.5% in and out, remembering that the shares, especially in the current environment, would be traded a number of times in a year.

And of course if you were trading on your own behalf you would not have the risk management, availability of capital protection and 100% finance options.

 

[Peter Spann]

Since the fund is not going to pay distributions until August 2007, does that mean we're
going to have to pony up another year's interest in advance next year before seeing any
return, or will they have a grace period until after the distribution is paid?

To answer your question simply, "yes".

When I first approached them I wanted more frequent distributions but they agrued (warren Buffett style) that the funds are better off remaining in the investment compounding away.

On a poitive note this would help on a tax perspective.

 

[Peter Spann]

BTW - received an Aurora buy-write income fund notification if anyone wants to look at another competitor releasing a 'similar' fund.

As a straight Buy Write fund it looks interesting - they are seeing us next week.
Upsides are low initial investment, low upfront fee and perceived liquidity.
There are some structural issues though if put in comparison with the MEEIF.
· One style only approach;
· Lacks potential for income from dividend run up strategy;
· Complication of Responsible Entity being different to fund Manager ( we would have had that problem if we tried to do the fund ourselves, hence the approach to Macquarie);
Directly correlated to the share market with lack of ability to move to an absolute return approach;
· "Interesting" bonus fee structure - ie having the performance fee correlated to an instrument that should produce a significantly lower result - me thinks this may be there attempt to make the performance fee look smaller to the casual observer (it is a lower % then "normal") but in actual fact get an equal or indeed potentially higher actual amount;
And lack of structuring:
· Lower LVR with possibly higher interest rate
· No Capital Protection

 

[Peter Spann]

Hmmm, Peter Spann mentioned at the launch that people often concentrate too much on fees and not the overall return. True, but there are numerous fees in this product that do add up somewhat. Fine if the returns are WOW , but the "past performance" figures quoted of around 14%+ make the fees look a bit high. Still, cheap finance available at 7.5% (for now)...

The Donut are not renowned for low fees - I will agree with that but I personally think their overall approach is the best for me - aim to produce as high a return as possible but still maintain intelligent risk management strategies. Combine this with the fees and the result may be one or two percentage points lower then optimal but in the long term I believe this approach will win out.

Also I think the way the fees are described in the PDS are a bit complicated with the same fee being listed a number of different times in different places with confusing names - they look higher then they actually are - it took me a while to figure out exactly what it all was all about. That's the early stages of "full disclosure" I guess - good for the consumer but a bit confusing until we all get an agreed format for it.

 

[Peter Spann]

At last!!!

And yes, at last the PDS is available on our website:
www.freemanfox.com.au

 

[HHH]

Had a quick first time read of the PDS.
It seems that they will not allow you to capitalise the interest on the loan, like you can with a margin loan. The PDS the interest must come out of your own funds.

Is that correct? Hopefully I am mistaken.

 

[geoffw]

HHH

That had been my understanding.

Though if the fund performs to expectations there would be enough to cover interest payments, plus leave some over.

The capital guarantee is on the original invested amount only, so there is no scope for increasing the lent amount (for 100% lend) above this amount.

 

[The Y-man]

Though if the fund performs to expectations there would be enough to cover interest payments, plus leave some over.

.

Keeping in mind that in essence you will be 2 interest repayments out of pocket before you receive the first return.
i.e. pay first lot June 2006, second lot June 2007, receive first distribution August 2007.

Cheers,

The Y-man

 

[twodogs]

The loan doc also mentions "interest assistance loan" I recall at the presentation that the first interest pre-payment may be financed. Can anyone elaborate of this ?

 

[ok180]

The fee's are as follow. I think....

Base Management fee - 1.10% pa
Buy Write fund fee - 1.15% pa
Income timing fund fee - 1.55% pa
Trailing fee - 0.2330% pa
Protection fee - 0.20% pa
Placement incentice recovery fee - 0.50% pa
Operational costs - 0.11% pa

total 4.843% PA

There were a few others that were triggered if certain things happend but i think thats basically the guts of it if you go for the 100% capital protection. I'll edit this if theres anything misleading to avoid confusion.

 

[Andrew]

I haven't read the PDS yet so I really should do that before commenting but
shouldn't the buy-write fund fee and the income timing fund fee only apply
to 50% of the investment each? That should make the total charged look
somewhat more attractive.

andy

 

[sonic]

Increase in financing cost

Does anyone know if there is an increase in Mac's fixed 7.5% loan rate for this product given the I.R. rise last week?

 

[Peter Spann]

Shouldn't the buy-write fund fee and the income timing fund fee only apply to 50% of the investment each? That should make the total charged look somewhat more attractive.

You are correct

 

[Peter Spann]

Does anyone know if there is an increase in Mac's fixed 7.5% loan rate for this product given the I.R. rise last week?

No - the 25 basis point rise from the RBA was factored in to this rate so no change at this stage.

 

[agent007]

And yes, at last the PDS is available on our website:
www.freemanfox.com.au

Hi Peter,

2 questions:

1/ How do we apply for the interest assistance loan and how does it work?. Couldn't find any info in the Structured Product Investmet loan doco. Am I missing something?

2/ What's the difference (if any) between applying to this facilty though Freeman Fox or directly to MAC?.

Thanks,

James.

 

[Melbear]

No interest assistance loan for the first payment unfortuately - Mac Bank said "no".

Anyone know if the 2nd payment (ie June 07) can be provided with an interest assistance loan?

 

[geoffw]

Anyone know if the 2nd payment (ie June 07) can be provided with an interest assistance loan?

I'd be guessing no to that.

My understanding was that the interest assistance loan was vetoed completely by Macquarie. So that you need to be able to provide 7.5% of the interest amount in June 06, and another 7.5% in June 07. And then, if they performed to expectation, perhaps 12% return in about August 07.

 

[thefirstbruce]

And then, if they performed to expectation, perhaps 12% return in about August 07.

Geoff, are you suggesting the fund's 'expected' return might perhaps be 12% net pa?

 

[geoffw]

Geoff, are you suggesting the fund's 'expected' return might perhaps be 12% net pa?

No, I'm guessing. I have no idea what the fund performance will be.

On the PDS, (p22), looking at the Buy Write portion of the fund, the performance for the last 12 months was 13.8%. So 12% is possible. But so is 0%. Or less. Or more.

I haven't yet found figures for the dividend runup strategy in the PDS yet.

 

[thefirstbruce]

No, I'm guessing. I have no idea what the fund performance will be.

On the PDS, (p22), looking at the Buy Write portion of the fund, the performance for the last 12 months was 13.8%. So 12% is possible. But so is 0%. Or less. Or more.

I haven't yet found figures for the dividend runup strategy in the PDS yet.

I inferred from the info provided and logical deduction that a reasonable return would be 12%pa too Geoff, but it was suggested I was off the mark...