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Archives for October 2016

All About CDIF

Today, more than ever, there’s a huge range of investments to consider. We want to be your partner in searching out great opportunities and bring our professional expertise and proven techniques within easy reach. We think you’ll agree that this is something well worth considering as part of your investment program.

The Capricorn Diversified Investment Fund (CDIF) has been specifically designed to be the perfect complement to the mainstream investments you’re familiar with, bringing additional spread and other benefits to your holdings. Its clear objectives make it easy for you to decide how suitable an investment it could be.

CDIF is a regulated, pooled investment unit trust offered to a limited number of people. There is no entry or exit fee and the on-going fee offers excellent value for money.

The role of the Capricorn Diversified Investment Fund is to complement other investments in your portfolio. It uses a variety of ways to do this.

Some investments are not feasible to own in an individual portfolio, for instance, because of large minimum investment requirements or liquidity issues. Also, some legitimate investment techniques are impractical and expensive to apply at the individual portfolio level. Enhancing income using options and risk management using hedging techniques are examples.

The pooled unit trust structure overcomes these problems and conveniently opens up a wider choice of investments and solutions tailored to your needs.

Adapting another’s slogan: “it’s the opportunities that Capricorn reject that make its Diversified Investment Fund the best”. The investment committee has extensive and varied skills and this along with a comprehensive evaluation process means a highly selective approach is applied to portfolio construction.

The Capricorn Diversified Investment Fund uses its own team of experts to identify and evaluate many investment opportunities. Some of these opportunities are sourced from contacts from within its own network and some are great ideas and techniques that other professionals have developed.

Looking for opportunities around the world as well as in our own backyard makes sense. Using techniques mastered by others as well as our own expertise provides an additional choice of solutions and spread of holdings. A completely open-minded attitude combined with a rigorous evaluation approach leads to the effective identification of potential opportunities and successful selection of those to pursue.

Your adviser can give you more details of how effective blending is achieved and examples of past investment opportunities that have been considered and rejected and considered and adopted

It’s important that you understand the objectives of the Capricorn Diversified Investment Fund so you can make a decision about including it in your portfolio. By the way, a holding of no more than 10% of your overall portfolio in this fund with an investment period of at least 5 years would be a general guide to its position.

The fund’s objectives are:

Consistent annual income distribution of 8% with quarterly distributions.

Low level of volatility compared with share markets.

Longer-term capital growth in line with inflation.

Contact The Investment Collective on today, to set up your free initial meeting to speak with one of our friendly advisers and learn more about CDIF.

The Capricorn Diversified Investment Fund is a registered scheme, number 139 774 646. CIP Licensing Limited is the Responsible Entity for the fund under Australian Financial Services Licence 471728. The issuer of securities in Capricorn Diversified Investment Fund is CIP Licensing Limited. Potential investors should consider the Product Disclosure Statement (PDS) is deciding whether to acquire or to continue to hold, units in the fund. Investments can only be made by completing the application form contained in the PDS available online or by calling The Investment Collective on 1800 679 000.

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What’s A Bond And How Do They Work?

Recently we have been able to gain exposure for our clients to the wholesale corporate bond market. We see this as a great alternative to the recently issued bank preference shares as they are lower risk, and offer greater protection in the advent of a market downturn.

Firstly, what is a bond and how do they work?

A bond is simply a loan or an IOU from an investor to an issuer (such as the government, a bank or corporation). Think of the loan you take out from the bank to buy a house. The bank expects to be repaid interest and principal. If you fail to make the payments you break the contract and the bank has rights to recover its funds. Bonds work in much the same way. The investor agrees to lend money to the issuer who must then honour that legal obligation by paying back interest and principal. The interest payments (coupons) are typically made by the issuer twice a year and the principle is paid back at maturity.

Bonds are traded on a market much like shares and their price fluctuates from day to day. Generally speaking, we will aim to hold the bonds until maturity when they are paid back at face value – usually $100. As such, we are not overly concerned with the day to day fluctuations in price and holding bonds until maturity will also reduce brokerage as there will be no exit charge. If, however, an investor wants to sell their bonds before maturity they do expose themselves to the risk of selling below their purchase price and they will incur brokerage.

Different Types of Bonds:

Fixed Rate bonds – A fixed rate bond pays a fixed amount for the life of the bond, known as the coupon rate.

Floating rate bonds – A floating rate bond pays income linked to a variable benchmark. The margin over the benchmark is fixed and set when the bond is first issued, and income will rise and fall over time as the benchmark changes.

Inflation-linked bonds (ILBs) – An ILB is a security linked to the consumer price index (CPI) or inflation. Therefore the capital value of the bond grows with inflation.

Why Bonds?

Some key benefits of bonds include:

  • Regular income – the bond’s interest accrues daily and is generally paid twice a year.
  • Diversification – bonds provide a different type of return on shares and property.
  • Liquidity – although it is our intention to hold the bonds until maturity, bonds can be bought and sold prior to maturity.
  • The minimum investment for bonds is $10,000. This is much lower than a managed fund where the minimum is usually $20,000.
  • Lower risk – many of the recent bank hybrids contain caveats that put the owners capital at risk in the advent of a downturn. These hybrids also do not allow the holder to be rewarded should the bank perform better than expected.

If you would like to learn more, please contact us today. One of our friendly advisers would be delighted to speak with you. Please note that the above has been provided as general advice, it has not taken into consideration your personal circumstances or financial goals.

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Islamic Mortgages

The far right and the far left are equal in their attempts to inflame this Islamo-Christian divide, with the result that the ill-informed jump on a dangerous bandwagon.

My Facebook page is the recipient of dozens of admonitions and representations that someone or another is doing something bad to someone else.  Often ill-informed or downright kooky, there is no effective mechanism to knock out these damaging pronouncements, and simply commenting is, excuse the French, pissing into the wind.

Take the issue of Sharia Law for example.  Now I am no expert in the field, but first of all, it strikes me that the general take-home message behind Sharia Law is not that much different to that of the Old Testament.  The idea of “an eye for an eye” is found at Exodus 21.24.  In management, I am a big fan of it, just this week threatening a self-assured young employee that I’d “cut his balls off” if he stuffed up a second time on account of not listening to important instructions.  Not surprisingly his commitment to the task has grown exponentially, even with the availability of Western Anesthetic.

More seriously, Facebook posts are now focusing on Sharia Lending.  Apparently the Koran states,

“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275

Riba translates as usury, which is the action or practice of lending money at unreasonably high rates of interest.  Riba is therefore not interest, but the pricing and charging interest in a (supposedly) unfair or extortionate manner.  The pricing of interest in western markets is well institutionalised, and takes into account inflation and risk.  In a well-informed, competitive and well regulated market, it is near impossible to charge extortionate prices.  That is why in the west, we place so much importance on competition policy and consumer protection.

The translative subtlety between riba and interest has opened a loop-hole for Islamist scholars, many of whom have opted for a direct interpretation.  They say any interest is against Sharia law, because (they claim) it is a form of “effortless profit”, or extra earning that is “not the result of exchange”.  Such an interpretation is a careless application of the truth.  Whether as an individual or an intermediary, it is not effortless to accumulate money which can be lent out in the future.

And isn’t taking on the risk that someone might not repay you a form of exchange.  Interestingly, just last week I set up a loan where the terms included paying it back within a year, with 30 percent interest.  “Oh, no, the evil of it” I hear you all say.  But what if I told you all the banks had said no, creditors were at the door and it was the only way to save a business, 5 jobs and the owners’ retirement savings.  Isn’t the business owner getting something pretty tangible in exchange for someone taking on this risk, pretty much no questions asked?

Semantics aside, it is possible, even easy, to borrow under Sharia law.  The loans are structured so that the “lender” actually buys the asset and arranges for the borrower to buy it piecemeal.  So a Muslim schoolteacher might buy a house worth $500,000 on the market by making just 30 easy annual payments of $36,324.  Sound familiar – too right it does – it’s what we call in the West an operating lease.  In an operating lease, the asset is owned by the lessee until all the payments are made.  Those of you that are familiar with financial math will immediately grasp the fact that given the annual payments and the value of the house, you can easily derive an underlying interest rate – in this case, 6 percent.  Muslims know this – they and their near neighbours invented algebra.

Given all this, why focus on Sharia loans as “evidence” that Muslim people are not compatible with The West.  Unequivocally religiously motivated suicide bombing and religious murder is incompatible with Western doctrines, but if someone likes operating leases over traditional housing loans, what’s the big deal?  In fact, perhaps The West should explore expanding the application of operating leases, to farmers and graziers in particular.

Not only that, the Christian Bible also contains many admonitions regarding the charging of interest, Leviticus 25:35-37, Deuteronomy, Exodus 22:25, Luke 6:34-35, Psalm 15:5 Romans 13:8, Matthew 25:27, Ezekiel 22:12, and Proverbs are some.  To me, the most interesting of these is Psalm 15:5:

“Who does not put out his money at interest and does not take a bribe against the innocent? He who does these things shall never be moved”

Islam or Old Testament, it seems that the idea that charging interest on borrows is in some way generally undesirable.  This is something I have thought a lot about in my financial career, and the conclusion I have come to is that borrowing limits the ability of an individual to be themselves and to achieve fulfilment (personally or in God, however you wish to view it).  Think of all those people trapped in jobs they hate, simply to pay the mortgage, or of women in unhappy marriages, because (perhaps amongst other things) the mortgage prevents them from setting their own destiny.

Perhaps the last work belongs to William Shakespeare, who through the eyes of Lord Polonius observed:

“Neither a borrower not a lender be,

For loan oft loses both itself and friend,

And borrowing dulls the edge of husbandry

This above all: to thyne ownself be true.”

By David French
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How Can Young People Buy Their First House?

Interest rates are currently at historic lows which have seen capital city property prices experience substantial growth. The great Australian dream of home ownership is becoming increasingly tougher for current younger generations without assistance from Mum and Dad.

Actually saving for a home deposit in this low-interest rate environment is becoming harder and harder.

Increasingly it seems children are now seeking the assistance of Mum and Dad to be able to enter the property market. For many years the only way banks would provide funding for a property purchase without a deposit was if physical cash was “gifted” to the children from Mum and Dad in order to represent the required deposit for the property purchase.

This is no longer the case, with many lenders now offering alternatives called “Family Pledge” or “Family Guarantor Loans”, where instead of cash gifts being provided to represent a 20% deposit, family members are actually able to provide a limited guarantee of an existing property security to be added as security to the new property being purchased. The property is owned in the children’s names and the limited family property guarantee can be released once the loan has either been reduced down sufficiently or the market value of the property being purchased reaches the 80% “Loan to Value Ratio” or LVR. It allows people who do not have a deposit or sufficient savings to be able to purchase a property with the support of a family member. The guarantee being provided is limited to the 20% deposit that would normally be required for the property purchase.

One of the potential benefits of these types of loans is that because sufficient security of 20% of the property purchase is being provided to the banks, you are able to avoid the expensive “Lenders Mortgage Insurance” or LMI banks would normally require if less than a 20% deposit was being provided.

An important consideration when exploring these types of loans in particular is do the children have sufficient incomes to be able to meet and service the loan repayments over the life of the mortgage, especially in this low-interest rate environment, when interest rates will inevitably rise at some point over the potential 30 year life of the loan.

Another important consideration would be reviewing income protection and lump sum insurances for the borrowers to ensure that in the event of anything untoward happening to either borrower, the mortgage is fully protected and able to be repaid.

This is still a very complex area and it is important to fully understand the risks of helping out a family member and it is therefore important that you seek independent legal and financial advice. Contact us today if you would like to learn more about our mortgage broking services.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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