Example of a Self Funding Leveraged Portfolio
For a South African Resident - updated for market conditions as at June 2008.
| Amount invested |
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R 2,000,000 |
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| Initial fee (3.50% once off for setup) |
R 70,000 |
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International |
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Margin |
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Equity |
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Income/
Expenditure |
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Shares |
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Loan |
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(interest only) |
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| Invested Offshore |
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R 2,600,000 |
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R 600,000 |
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R 2,000,000 |
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| Dividend Yield |
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10% |
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| Interest rate on margin loan |
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10.4% |
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| Dividend income @ 10% |
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R 260000 |
| Margin loan interest @ 10.4% |
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R - 62400 |
| Gross profit |
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R 197600 |
| My annual fees (1.00% of the equity, assuming 20% growth on average over the year) |
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R -22,600 |
| Net Profit prior to tax and share safe custody fees |
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R 175000 |
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| Potential capital appreciation pa on R 2.6M |
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20% pa |
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R 520,000 |
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| Potential capital appreciation pa on R 2.0M |
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20% pa |
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R 400,000 |
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| Additional capital gain due to leverage |
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R 120,000 |
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The above is an example of borrowing approximately 30% more than your initial
investment. This borrowing is facilitated using a margin loan (this is a loan that uses
your shares as collateral). As a conservative investor this is a safe limit bearing in
mind that dividends could be reduced and interest rates fluctuate.
The plan is to stabilize the loan and let the extra capital work for you. My job is to
find companies that produce stable rising dividends that increase the positive cash
flow of the portfolio over the long term.
The portfolio must be able to withstand a 30% share market crash and avoid a
margin call. In the event of a share market crash my defensive portfolio will still
generate dividends that will service the margin loan. Note: the true value of the
shares does not necessarily change in a share market crash just the market price
which means the portfolio will recover in time.
Long term bull markets (rising markets) are a certainty as long as we assume the
world is a going concern but short term bear markets (falling markets) are an
uncertainty. We must not allow our fear of bear markets to prevent us making good
investments over the long term.
Overseas institutions may advance up to 75% of the value of approved shares as a
margin loan.
In South Africa a margin loan is a new concept and local institutions will not advance
as much (more like 45%).
International interest rates are lower for margin loans than in South Africa. By using
overseas borrowing facilities we can safely increase the investment by approximately
30% thus a R2 million offshore investment allowance effectively becomes
R2.6 million invested offshore.
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