FolksWayjo has impressed me with the stocks he mentioned over the year.Cdo has been very strong. Good clothes as well.Fun has provide plently esp at Waynes entry .45c.Sbe did well early in the year but has been sold down.Wayjo sold SBE last week which is interesting, heard something I suppose.He is also holding ANZ (biggest holding) & nab.That suggests a strong year return wise, well done.WayjoI'm interested if you short stocks?On selling SBE-kinda flies in the face of the LTBH investor that I thought you were.JR
Yes Jono I had a very good year last year. I used instalment warrants on my bank holdings which gave me good leverage on Suncorp and ANZ and MBL.Best share I bought last year (and still hold) was Hunter Hall (HHL)following the float. Average buy in @ $1.40With Sabre I sold as I am losing confidence in their US expansion implementation, their inventory levels have risen dramatically and been largely unexplained other than new packaging. Saw something else I like and bought a few and not confident of same returns this year so I am reducing my gearing to below 20%.
WayneWhat actually are installment and endowment warrants - I went to the course at the ASX but they only explained option - call and put?Judy
Instalment Warrants are a derivative used in financial markets to gain leverage without having to recognise the debt as it is in effect a non-recourse loan because it has a put option attached to it.In plain speak if I can....Warrant issuers such as Macquarie Bank buy 10,000 NAB shares. They then package it as an instalment warrant by selling the shares to investors with an installment owing on the shares - this is the amount you see published in the newspapers. For example I have some NABIMC warrants with $17.00 owing on the shares. In todays market you would pay $14.50 for the warrant giving you a total purchase price of $31.50 but some of this will be prepaid interest which is tax deductible.The critical difference between warrants and margin loans is that the warrants have a put option attached to them so that if NAB should suddenly go broke I can sell the NAB shares back to MAcquarie Bank at $17 and effectively cancel out my loan. As you know with a margin loan they still want their money back.The interest rates are very similar and the "cost" of the put option is built into the pricing. Because of the put option the loan has a non-recourse nature and therefore does not have to be taken up on the books which makes them very attractive to superannuation funds as they can gear their portfolios. Under most normal circumstances super funds cannot borrow money.The other beauty of them is that they can be rolled over into new series without any capital gains tax implications as the underlying shares are not transferred, only the loan attached to them.I don't trade in them but am aware of some people who do. The warrant issuers are supposed to keep a liquid market but you will always find a spread of a few percent in any Macquarie Bank series. The new warrants that Commonwealth Bank have been issuing have a much lower spread which will help traders. Depending on your nature you can buy warrants with about 50% gearing and sometimes up to 80% gearing involved.The risk that you must assess is when rolling over in to a new series if the price of the underlying share has dropped then the instalment loan will be lower and therefore you will b required to make a payment to pay down the existing loan to roll over into the new series.They can also be used if you have an existing portfolio by having warrants issued aginst the shares and therefore no CGT will be payable but you will have to pay interest costs.Endowment warrants are similar but instead of receiving the dividends from the companies they use this to pay down the loan. I have not ever used them and don't know as much about them or their cost structure, maybe someone else can help there.RegardsWayne
Wayne..I thought the interest rates underlying Warrants were ALOT higher than market rates and aren't they also fixed? And Macquarie are issuing these because they are smart buggers and intend making heaps of fees out of them... Also I have stayed clear to date because they are so illiquid...your post will make me look again..thanks! Alex
The interest rates are slightly higher than Margin loans at around 8% and there is a fee attached as well which depending upon the issuer will run the overall cost up to around 9% - but you have the security of the put option which is worth it. The higher the gearing, the higher the fee because of the put option cost (and risk to the lender).Have a look at the Macquarie Bank web site and look for instalment warrants and you can download a circular which explains it all. UBS Warburg and now Commonwealth Bank are also getting into them. The big market for them is with superannuation funds.Liquidity is a problem if you deal in lots over 5,000 shares however as I hold them until expiry and treat them as an investment it's never been an issue I have worried about.They won't suit everyone but if your risk profile can handle debt and a bit higher volatility then they are well worth a look.Only other disadvantage against margin loans is the restriction in the companies covered which can be a problem if you don't like investing in top 50 companies.Regards
Wayne thanks for the explanation. what is the usual time frame for installment warrants? Is it similar to the telstra sale where a person paid $x for the first installment and $y for the second installment and recieved the full dividend the moment they bought the share (similar to buying a house on mortgage and renting it)?regardsjudy
Judith, the usual time length to expiry varies significantly between the issuers. Deutsche Bank have a series ending in IDA which expire in 2010 but interest and instalment loan are adjusted annually in June each year.Macquarie Bank series IMC expire in 2006 but have an interest payment and loan reset in May each year.Most other series usually run for at least 18 months and in most cases a new series will be issued by the same issuer and you can roll over into the new series without any CGT cost.If you sell Macquarie Bank issued warrants to buy into Deutche Bank issued warrants then there will be CGT implications even if its the same shares eg NAB. The way to get around this is to pay out the existing loan on the warrant and then apply for a warrant to be issued against the shares by the different issuer - similar to refinancing a mortgage with a different bank. If you do this there won't be any CGT as there is no transfer of the shares.Hope this is clear. Oh and yes they are very similar to the Telstra warrants.RegardsWayne
WayneThanks for the explanation. Warrants might be something I should look into.Judy
Just one last question Macquarie Bank series IMC expire in 2006 but have an interest payment and loan reset in May each year.does this mean that the owner of the warrant has to pay Macquarie Bank (in this case) an interest payment and then the loan for the following year is reduced or is this just an interst only loan?Judy
The simple answer is that it is an interst only loan and only the interest payment is made.... however... the reset function means that the issuer can adjust (reset) the loan amount depending upon the price of the underlying shares.As an example I own some ANZIMC series which have a loan amount of $8.50 which is approximately 50% of the value of the shares. If ANZ were to suddenly jump up to $25 then the loan reset would be approx $12.50 and warrant holders would receive back from Macquarie $4.00 less the interest payment. This happened on the rollover from the previous IMA series which had a loan amount of $4.50.Conversely, if the share price suddenly dropped back to $10.00 then the loan reset would probably be $5.00 and therefore the warrant holder would be required to pay the interest on the $5.00 loan plus the $3.50 loan reduction amount.If the ANZ share price dropped below $8.50 then you would exercise the put option and sell them back to Macquarie and then buy them back in the open market if you still wish to be an investor in ANZ.I find them a very useful investment tool but you must have an underlying positive view of the company. I would never recommend buying warrants if you don't have faith in the underlying company - unless you're a trader.Hope this helps.Regards
WayneI am getting a bit confused - i have printed your answer and will think about it for a bit and then get back to you.regardsJudy
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