Member Info for ade2a

Here I will have a quick look at the potential effect of gearing on the income and capital account in rising and falling markets. I will assume 10% gearing charged with interest charged 50/50 to income and capital.

A £25,000,000 fund.

First I would assume the interest rate will be marginally less than the yield on assets purchased. Now for rising markets.

Borrow £2,500,000 @ 4% since interest is only charged 50% to income and the yield on assets is higher than the interest payment there will be an increase in the revenue account. So e.g. interest payment £100,000, additional income from assets £120,000, £50,000 used to repay interest, £70,000 added to income account.

The capital account will be charged £50,000 annually to pay the interest. This will slowly decrease the capital base over time however if the assets grow fewer assets will be sold when the loan is to be repaid and there might be a net gain to the capital account.

This will benefit us as shareholders compared to an ungeared fund.

Revenue is increased by £70,000/£25,000,000 = 0.28% as long as the gearing is maintained.

If asset prices fall. The fall is magnified by gearing in this case 1.1X the fall in assets. Marginally more assets are required to repay interest from the capital account. If the loan is repaid more assets will be required to be sold than bought originally with the loan. This downward pull on the capital account will pressure the income account over time.

In conclusion gearing increases the risk of the fund. This will work in our favour if asset prices rise and there is a small boost to the income account roughly 0.25%. In weak markets pressure on the capital account will lead to modest downward pressure on the income account.

PS if 100 shares are bought when the loan is made and the price rises 100% only 50 shares need be sold to repay the loan. If the price falls 50% 200 shares or equivalent need be sold to repay the loan.

My apologies Oldandtired

You did mention borrowing costs charged 60% to capital.

As always there is no free lunch as investors we need to consider what may happen in various scenarios given the gearing. If I can get my head round it I might write a post.

There is a not so subtle difference between a dividend covered by earnings and yield on the Trust exceeding that of the underlying shares.

If you are not convinced look at what has happened to HFEL over the last 3 years.

Their dividend is still covered by earnings. But how are those earning produced? That is the rub.

Question; is the borrowing interest repaid from income or capital?

These are the sort of things we need to get to the bottom of.

The yield on NAV is 11.75/230 = 5.1%.

Charging to capital is not a free lunch the yield is increased but at the expense of capital returns.

Maybe all is well but I do not like a rapidly rising dividend and stagnant capital values we have seen the end of this story.

Actuary 63 & Barchid,

The suspicions look likely to be correct.

I would suggest the 4.5% yield is likely typical for the portfolio in any event 11.75p / 230 NAV = 5.1%. Given the rough 1% fees the yield should be about 4.1% to NAV. Certainly not as bad as HFEL.

Issue is the higher yield becomes the fixation for the Managers rather than total returns which is what matters for both income and growth investors.

Actuary 63

Surprised you are awaiting the results of my evidence. I certainly will be posting again after the results.

I considered you were the most technically competent on the HFEL board once you have all the info.

The managers always say that.

Have a look at the history of HFEL and the discussion board.

I will be posting on the likely sustainability of the dividends and having a look at the underlying holdings.

Thing is with these income funds there are ways of increasing the earnings beyond that of the underlying holdings.

Too many income funds are performing some of these 'nefarious' techniques.

The recent hike in dividend might be seen as good news I would be somewhat cautious. If the rise in dividend is matched by a rise in capital value that is fine.

I have been on something of a campaign at HFEL for the last 3 years or so the trigger was a dividend yield that was double the yield on the underlying assets. In that time HFEL has underperformed its benchmark and has been the worst performing fund on a total return basis and the Manager has been sacked.

AN increasing dividend matched by rising asset values is fine, an ever increasing dividend yield is a sign of trouble to come.

James

Thanks for your response.

I comment and post ratios numbers and analyse or leave the reader to analyse I understand you suggest this is not the way you approach investments.

Https://www.msci.com/documents/10199/ad5fe14c-7e93-4fc5-a3fb-e5ba994b58cc

Link for HFEL MSCI closest benchmark for those who are interested.

James

OK maybe I have some understanding why you disagree with my views but can I ask please leave the personals.

James,

If we cannot agree on yield. I really cannot ask or explain anything.

James,

"The buy now yield is that but my averages are just under and just over 3 quid not allowing for dividends received so I guess that makes my return around 8%?"

I guess this is the yield to you at the prices you bought. This is why I am asking the questions step by step. This was not my question.

Buying today can we agree the yield is 12% plus or minus and the management fee is 1%?

"Your posts do come over as muddled at times and that’s not meant as a criticism"

Still having some sort of a pop

James

I don't wish to labour the point but being told to get off the board is personal. Hopefully no more about that.

To start can we agree the yield is 12% plus or minus and the management fee is 1%.

James,

Given the hostility of this board towards me personally I am not going to give an opinion for some to pooh pooh all my posts. I will discuss with you the information you should consider and you can make up your own mind.

James

I extended the olive branch first. We are dealing with your response.

James

Are we friends?

James

Are we friends or not?

James

'i think sometimes you get too wrapped up in the management side almost like a disgruntled ex employee and any positivity on hfel gets railroaded by negativity and all the hogwash about dividend washing etc sounds more like a conspiracy theory!'

You posted.

'director buy and the buyback'

FACT

James

'So what are your thoughts about the director buy and the buyback RNS’d yesterday?'

'i think sometimes you get too wrapped up in the management side almost like a disgruntled ex employee and any positivity on hfel gets railroaded by negativity and all the hogwash about dividend washing etc sounds more like a conspiracy theory!'

The first is a fact. Do you want my opinion but how can you want an opinion given the second statement?