# Geared Funds



## SirRumpole (20 March 2020)

I was just talking to someone who mentioned geared funds as being a attractive prospect for investment.

He specifically mentioned Colonial State geared fund. He said they rise and fall faster than the market.

Can someone explain how they work and why they would be preferable to direct investment in the market ?

Thanks.


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## Value Collector (20 March 2020)

Gearing is just basically using debt or some other form of leverage.

Eg. You put in $1000 of you money, and the fund borrows another $1000 on your behalf and invests $2000 for you.

(ignoring borrowing costs) If the investment goes up by 50%, your $2000 investment goes to $3000 ($1000 profit) which is a 100% return on your original $1000.

However , if your investment goes down by 50%, your $2000 investment goes to $1000 wiping out your original $1000 capital you put in, leaving you only enough to pay back the $1000 loan.

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Basically its the old story, gearing is fantastic when the loans are cheap and your underlying investment performs strongly, But it can also create terrible results magnifying losses if the underlying investment goes bad.


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## SirRumpole (20 March 2020)

So do geared funds pay dividends, or just rely on capital gains ?


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## PZ99 (20 March 2020)

ASX:GEAR pays divvies




https://www.betashares.com.au/fund/geared-australian-equity-fund/


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## InsvestoBoy (20 March 2020)

One benefit of the geared fund model is you get a better interest rate than if you tried to gear yourself.

You can buy GEAR on the ASX without going to some Colonial mutual fund with probably high fees and crap spreads.


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## fiftyeight (25 June 2020)

Value Collector said:


> gearing is fantastic when the loans are cheap and your underlying investment performs strongly




Loans have never been cheaper and the gov is always there to bail me out, so I guess I should be MAX leverage at the moment?


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## Value Collector (27 June 2020)

fiftyeight said:


> Loans have never been cheaper and the gov is always there to bail me out, so I guess I should be MAX leverage at the moment?



I am not sure the government will bail you out for an underperforming investment, so while loans are cheap you still need to make sure you get part 2 right and have all that capital invested in something that is going to perform well.

eg. 2% interest rate is great, but if you are leveraged to 90% and your underlying drops 10% or more permanently you are wiped out.

As Ben Graham said "Some times its better to be safe and sound than to try and make all the money in the world"


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## fiftyeight (27 June 2020)

Value Collector said:


> I am not sure the government will bail you out for an underperforming investment, so while loans are cheap you still need to make sure you get part 2 right and have all that capital invested in something that is going to perform well.
> 
> eg. 2% interest rate is great, but if you are leveraged to 90% and your underlying drops 10% or more permanently you are wiped out.
> 
> As Ben Graham said "*Some times* its better to be safe and sound than to try and make all the money in the world"




Not sure it is that simple. You are permanently wiped out, if ALL your bets go to drop 10% AND you cannot make the margin call.

90% leverage on a small account that is spread across multiple bets and you can easily afford the interest payments (e.g. debt is personal loan or CC) wont be wiped out if something drops 10%.

I am sure there are plenty of people who bought BTC with a credit card and did very well. There are also many many more people who blew up.... many.

Not saying it is a good idea, but it is not as simple as one single draw down event and your done.

Some times, if 'believe' you have good idea/edge, you have to increase risk and hope for the best. You did this with FMG and CZZ,  increasing your risk into a few good bets and then cross your fingers. Results were goooooood, but as this pandemic has highlighted, one unforeseen event and a highly leveraged company like FMG was during the ramp up could of easily gone bust.

Not arguing about the merits of those bets/investments, they were great, just that 'some times' it is time to increase risk and that could come from leverage or concentrating total risk.


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## Value Collector (27 June 2020)

fiftyeight said:


> Not sure it is that simple. You are permanently wiped out, if ALL your bets go to drop 10% AND you cannot make the margin call.
> 
> 90% leverage on a small account that is spread across multiple bets and you can easily afford the interest payments (e.g. debt is personal loan or CC) wont be wiped out if something drops 10%.
> 
> ...




it is that simple, as I said if you suffer a permanent draw down of 10% you will be wiped out, you can obviously survive fluctuations, but I am talking about a permanent draw down.

people obviously just have to be aware of that added risk, hence why I mentioned it, and they have to be able to pick underlying investments that have the highest case of performing well.

I have personally used leverage multiple times and have done very well from using it, because it have amplified my returns on what turned out to be very good underlying investments.

but as you pointed out I would have probably been wiped out if things had gone differently, hence Graham’s advice.

But, I am not saying leverage is wrong or immoral, it just completely changes the risk vs reward picture, so having the skill to picture sound underlying investments, becomes even more important.


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## Dona Ferentes (27 June 2020)

SirRumpole said:


> I was just talking to someone who mentioned geared funds as being a attractive prospect for investment.
> 
> He specifically mentioned Colonial State geared fund. He said they rise and fall faster than the market.
> 
> Can someone explain how they work and why they would be preferable to direct investment in the market ?



As the post was dated 19 March ... if it took 4 days to contemplate this and act, such that your application was processed and money invested on 23 March (was there a weekend in between?), then yes, you'd be a genius, Volatility would be your new bestie.


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