Risk Management Failure - ouch!

[VYBerlinaV8]

As many regulars here know, I bang on a bit about risk management, because I think it's important.

Well today I got hit with an event that had slid completely through my risk management net - I'd never even considered it.

My margin lender rang this morning to tell me that the managed fund I use as security for my margin loan is no longer acceptable (its status has changed following risk review by the bank). As such, I have 10 days to find the balance of the loan in cash, lodge extra security to cover the loan or be sold down.

Ouch.

I've started the process of getting some $$ by increasing the loan against a property that has risen nicely in value, and should be ok to cover the loan, but it took some thinking and scrambling to make sure I'm ok. I'm fairly confident that I'll be able to pay our the loan and retain the fund units in full (which is what I want), but it's still a wake up call to be thorough in managing risk.

 

[Intrinsic_Value]

One of the risk management strategies i use are stabaliser stocks.
These stocks are relatively stable, but they are boring.
In the event of market turmoil they can be used as sacrificial lambs (by liquidating them to support the overall portfolio).

Currently Telstra and Metcash are two of my main stabaliser stocks.

 

[cu@thetop]

Maybe a refinance is in order?

 

[Gargamel]

So how do you feel about the managed fund you were using to back the margin loan? Do you have any cause for concern?

 

[VYBerlinaV8]

Maybe a refinance is in order?

Just got off the phone with the bank. I have to fax through the usual bits and pieces and the $$ should appear. They did an 'online valuation' while I waited (literally 30 seconds), and it came back as acceptable for the loan. I'll get the other stuff I need this arvo and should be ready to pay out the margin loan next week.

 

[VYBerlinaV8]

So how do you feel about the managed fund you were using to back the margin loan? Do you have any cause for concern?

That's a very good question. I'm going to do some poking around to find out why the bank decided they didn't like it, but I'm focussing first on getting the loan sorted. Once the loan is sorted I'll have full control of the fund units again anyway and can make a decision about what I do with them.

 

[Aaron Sice]

wow!

i'm glad you had some kind of equity buffer.

goes to show the importance of reasonable LVRs.

i'm glad it all worked out for you.

 

[VYBerlinaV8]

Update

UPDATE:

The bank has come through with the cash (from calling to request it to getting the money in my account took 6 days, including loan application and assessment), and so I will be closing down my margin loan facility this week.

I've decided not to continue with margin lending for shares at this time, as I can't see a way to sensibly mitigate against the same event happening to me again. Instead, I'll keep all the shares, and have the money borrowed against property, which provides borrowing at a lower interest rate, and has a much lower likelihood of the bank suddenly not liking the security.

So this has been a learning experience, and at the end of the day I haven't actually lost any money, and am still invested in shares.

 

[Shaneelastic]

what was the managed fund?

 

[VYBerlinaV8]

Clearview Australian Shares Growth fund. If anyone's heard anything, please PM me or post it up.

 

[Aaron_C]

Just for future reference Berlina - only margin loan on actual shares, not managed funds. Managed funds are basically derivatives.

 

[VYBerlinaV8]

Just for future reference Berlina - only margin loan on actual shares, not managed funds. Managed funds are basically derivatives.

I've learned a lot about what and what not to do with managed funds this week! I originally used my managed fund, because I already had a substantial holding, and because it was acceptable to the equal highest gearing level by the bank. I figured they would have and issue given that it was considered as acceptable as the 'safest' shares.

From now, I'm arranging to stop contributions to the managed fund, and just to have it sit there (with dividends reinvested) while I have a think about to continue with shares. I'm tempted to periodically pick up some shares directly rather than using managed funds in the future. Alternatively, I could turn the fund into a 'neverending' pension of about $9k per year, and use this for other investment. Not sure yet.

 

[Aaron_C]

Re margin lending - if you want maximum leverage on your share portfolio the best broker is Macquarie Prime. They do 90% LVR on top 20 ASX stocks.

 

[redwing]

Re margin lending - if you want maximum leverage on your share portfolio the best broker is Macquarie Prime. They do 90% LVR on top 20 ASX stocks.

Wouldn't take too much of a drop before you received the phone call at 90% LVR though