Managed Funds STATEMENT from Steve Navra regarding NavraInvest funds

Allow me to start by stating unequivocally that as Fund Managers, the investment decisions we make, do NOT DIFFERENTIATE between any classes of unit holder, whether they are NFS clients, NI Investor clients, general Public investors, geared or un-geared investments.

The rationalisation made with any and every investment decision is with the express purpose of adding value for our investors.

Please refer to a copy of the PDS; and if you do not have a copy please download one from the website: Welcome to NavraInvest Limited - Funds Management

I believe the fund to be unique in that unlike any other funds that I know of, it has the flexibility to move in and out of cash as market conditions dictate; and in this particular case necessitates from a compliance point of view, right up to a 100% cash holding.

Such a decision is not taken lightly and when taken, it is for the benefit of ALL INVESTORS.

For the record, since we started this action to date (Close of business 17th Oct 08) we have already saved in value an average of $23,232 per investor. An amount that totals in excess of $11,000,000 so far.

My personal belief is that we have made an absolutely rational decision and I expect to save value far in excess of what has so far been achieved.

An investor after carefully reading the PDS enters such a fund for the purpose of achieving income from realised profits. (These are after all “Income Funds”.)

These investors take careful note that we trade only in a universe of ‘Blue Chip’ shares (S&P 200 Index) and also ‘select out’ many of the shares in that index, for reasons of risk management and safety. (See PDS and website for the details.)

The trading system, the “NavTraDE System” works effectively within certain boundaries (volatility being one such boundry as an example) in a market of quantifiable risk. To operate out of this risk profile would as fund managers be remiss.

Should the risk or the boundaries’ of our mandate to trade and effect value for our investors change as a result of market conditions, then to continue trading falls out of our compliance mandate of taking ‘due care’ of our investors, in managing such risk. In such a situation we MUST by necessity act within our constitution to protect the investors.

Such a position has been reached, hence our decision to move TEMPORARILY into cash.

Implications and moving forward beyond the current conditions:

The first question, before we consider this topic is: “Have we achieved the objectives as stated in the PDS?”

We set out to produce a safe and regular income for investors.

Our stated objective as appears in the PDS and on our website:

The investment objective for the Navra Funds is to generate in excess of 10% pa income in a variety of market conditions, as a result of active funds management. Income is calculated and paid on a quarterly basis

The average income produced per year since inception right up to and including this current market decline, is 14.24% per annum. So I believe we have exceeded our objective.

Most everyone tries to compare our overall performance with the ASX200 ETF - STW STW -33.30%, or against other funds performances. Please note that at -27.90% we are well ahead of the index and lying 6th as measured against other funds in the sector.

As comparatively good as this might be, it IS NOT the comparison that investors in the fund should be making. The purpose of making an investment into an INCOME FUND is to receive income; and so the performance should be measured against other forms of income producing investments. It is not about whether we beat the ASX200 ETF - STW STW in a ‘Bull’ or ‘Bear’ market, it is about the income that is being delivered. If you are looking for GROWTH then your investment should be into a growth fund and not an income fund.

If you made this investment for the purpose of receiving income and wish to measure the performance, then compare the income to other income producing instruments such as the cash rate, listed property trusts, Government securities, annuities and many, many other such options right through the gamut of what constitutes low to high risk in choosing such investments.


You might then decide that the 14.24% per year income average that the Navra Funds have produced through a wide range of conditions are to date “par excellent.”

We have moved into cash for mainly the following reasons:
• The majority of shares in the portfolio have breached their ‘risk criteria’ requirements
• To continue trading, even in the short term, in such a high risk environment is in our opinion, tantamount to ‘gambling’ with investor funds.
• New risk management protective measures that offer the investors the risk profile that they sought when entering the fund need to be included, BEFORE we start trading again.
• By moving temporarily into a position of cash we are not affecting individual investors’ unit holdings, nor necessarily diminishing their potential for future gains.
• We will resume trading and producing the same level of income that the investors have enjoyed as soon as all of these risk protection measures are in place.

Please note very carefully that we have not moved into cash merely to protect the investors and the funds position, but the decision has been made to allow us the time to effect and insert some vitally important risk management procedures, before it became too late to manage with such due prudence.

Allow me to discuss each of the aspects that led us to take this action:

• The majority of shares in the portfolio have breached their ‘risk criteria’ requirements

Our share selection criteria includes “Stress Testing” each share in the portfolio to assess how the share might react to adverse market conditions. In the current conditions in an environment of what might only be referred to in the future as ‘Systemic International Financial system failure’ we clearly believe that even some of our strongest Australian Companies are at risk to a point that breaches our stated risk criteria.

• To continue trading, even in the short term, in such a high risk environment is in our opinion, tantamount to ‘gambling’ with investor funds.

Perhaps, even if in these extreme market circumstances, other funds might not have the flexibility to change their ‘modus operandi’. We do have such in-built flexibility and so not to act to protect our investors as we are doing would be extremely irresponsible.

• New risk management protective measures that offer the investors the risk profile that they sought when entering the fund need to be included, BEFORE we start trading again

Obviously we could ‘sit out of the market’ until conditions return back to normal, but this begs the questions: “What is normal?” and “How can one possibly know or predict when this has occurred?”

Also, if we stay out of the market for too long, we can potentially miss out on gains when the market corrects.

We are currently seeking to protect the downside that exists in current circumstances.

Risk mitigation can for example be achieved by taking out a form of fund ‘Protection Insurance.’ This can be done by way of example by purchasing a 20% or more downside protection of the fund. Should such a protection be in place, then it brings our risk criteria back into sinc and we can start trading again, knowing that if the market continues this slide, then our investors are protected to this point.

Does this cost money to do? Yes obviously it does and this cost will effect the upward growth of the fund. The question to be considered by every investor is if protecting a 20% downwards movement is worth the 5% upwards gain loss?

Let us consider our objective in investing in the fund: To produce INCOME.
As long as it is reasonable and safe to trade we set out to produce in excess of 10% income each year for our investors. The very purpose of the fund is NOT so much to be a ‘Star’ capital growth performer (Although that would be nice too) but is to produce and continue to produce the income. The rationale then is that we are prepared to give up a little bit of the upside to protect the value in the clients portfolios and to get back to our mandate of producing income for these investors within the stated risk profile. The 20% cover, given the current circumstances brings this risk criterion back into sinc. This is just one of the risk measures being investigated at present. We will resume trading as soon as we have to the best of our assessment, mitigated the current extreme risk that the market presents.

• By moving temporarily into a position of cash we are not affecting individual investors’ unit holdings, nor necessarily diminishing their potential for future gains.

Investors often take fright and give up their positions to try and protect what is left of their capital. To cash in one’s position at the bottom of a market is to realise the maximum loss. Our action allows the investor to move into the same position of safety (Cash) WITHOUT giving up their position or unit holdings and so continue to be in a position to reclaim their value when the market reverses and goes up.

The more the market declines the cheaper our re-entry will be and consequently the greater value we will add for each unit holder, over and above what has already been accrued. For this reason, investors are still investing into the fund (even though we are in cash) to increase their unit holdings to take advantage of our re-entry into what might be at a very cheap entry point.

They do so for two very valid reasons:
1. They are at this point investing into units for this potential and into cash which is very safe. The cash is currently held in a now Government Guaranteed deposit account.
2. They can gear into cash and by this I mean they can have twice or more the amount of cash working for them without risk as the cash portfolio doesn’t go down when the market does. Therefore such investors might have double the opportunity to enjoy a cheaper entry level and so share in double the upside when the market increases.

There is a corollary of course and that is what will happen if the market starts to increase before we start trading again?

This will mean that our entry point becomes more expensive and so we will be losing the initial upside that we might have gained if we were in the market, or due to the time it takes for us to re-enter the market. Each investor needs to take a personal view as to whether losing this potential upside capital is worth ‘risking’ their current value any further in conditions that are now so adversely threatening as to constitute gambling.
The very REAL POINT is that this is not a GROWTH FUND and so to be overly concerned with a few percentage points of growth is contrary to one’s purpose in investing in an income fund in the first place.

The Navra “Capital Protected Growth” fund is available for GROWTH purposes and please note well that this fund is already structured to include the necessary PROTECTION.

If clients see this any differently or wish to take on more risk than we think rational then of course they may withdraw their funds and place them with another fund manager who they think might manage their money better, or even do it themselves. We do NOT have an EXIT FEE and so each individual is free to make their own decision in this regard.

• We will resume trading and attempt to produce the same level of income that the investors have enjoyed, as soon as all of these risk protection measures are in place.

Obviously our mandate is to trade for our investors and produce income. As such we will move back into the market as soon as it is reasonably possible and viable to do so.

I repeat my assertion that it would be extremely irresponsible of us as Fund Managers to continue to trade with client entrusted monies in a market with unquantifiable risk . . . and that we will only resume trading for income when this risk has been mitigated by some of, or similar measures as I have enumerated above.

Up and until such time, there is very little downside in the shorter term with the safety of a cash portfolio and the lower cash return this offers.

Sincerely,

Steve Navra
Chairman of Navrainvest Ltd.




Foot note:
Sadly I notice that some members of this forum have made libellous assertions about the fund, even without knowledge or understanding and perhaps feel that by writing anonymously that they are immune from prosecution.

Please be aware that such libel will be legally addressed to the fullest extent that the law allows us to protect our name and reputation. Such members and so too the forum administrators and it's directors, for allowing such libel to appear on their site, are on notice that I have already taken advice in this regard.

For those members who have made such libellous assertions, I offer you and the forum administrators the opportunity to retract your incorrect statements by way of an apology to myself and my group on this forum within the next 48 hours.

I do not wish to appear in any way overly threatening, much rather I wish to be appeasing by suggesting to you that we as an organisation operate within very strict compliance parameters and with a very high degree of ethics.

Also I ask you to consider and find me another organisation who have gone to their ‘own pockets’ to help their clients in these trying market conditions.

Regards,
Steve

 

One further question if I may: I think I remember one of the posters mentioning some “capital losses” which could draw a tax benefit. Can anyone comment on this?

The reason I ask is the thought had crossed my mind that it could be a good opportunity to redeem our units and have a capital loss on our books. And then buy back in when things were moving again. Perhaps this is not necessary? I dunno?

 

Hi ffc1883_1996;66518,

As the individual investors have not sold units, then they have not incuured a capital loss.

The capital loss is held within the funds investment account and we will make use of this carried forward loss in a new GROWTH fund, that we might form later on.

An interesting point to note however is that the accrued loss does apply to the individual in the new fund!

In other words, the capital loss offset should theoretically then only apply to the same individual who was invested in the previous fund that incurred the capital loss.

Steve

 

Thanks for posting Steve. I'll be continuing to support Navrainvest as I start averaging in with a small $100 per month (hopefully you can waive needing $1000 to start of the savings plan if one already has units in the retail fund). We have two properties now and look forward to the extra income to pay negative gearing. (We are obviously going to be putting in more than $100 a month once some savings goals are out of the way (sometimes life gets in the way of investing)).

I attended the Melbourne growth fund launch a week or two back and was impressed with your clear intent to help people achieve their financial goals.

Cheers
Simon Voigt

 

The tax benefit is it's a great opportunity for future CGT free income! Depending on your situation this might present a further opportunity to invest.

I don't see the point realising now just to get a loss on your book, it just means you're going to incur the buy/sell spread and have less assets working for you. June next year would be the time to consider sacrificing assets to get a capital loss.

On the other side you're paying fees to have something in cash (which is probably a good place to be at the moment!) Two months of fees might cost the same as selling now and buying back in at a later time. It all depends on your personal situation.

 

Steve & I have lots of mutual clients and it is amazing how people's memories are short when the going gets tough.
I did not see the post in question, however it appears that Steve's openess and availability tends to make him a target for such criticism.
The Navra fund has provided a regular source of income for several years for many investors. Unfortunately no one in the world predicted the turbulance we are currently experiencing in the markets. The Navra fund has declined in value just like every other share fund in the country.
I, like many other investors geared into the Navra fund as the returns were consistent and strong. If you dont sell you dont lose. Not that easy if you are highly geared but this is the risk you take when you borrow to invest.
I do not see anyone game to personally criticise or slander the individual MD's of Colonial, Macquarie etc but again because Steve can be contacted easily he seems to be targeted.
I dont think Navra deliberately tried to lose money and somehow i think that Steve has potentially lost a hell of a lot more than any other investor in the fund.
Steve,
can you let us know when you get that crystal ball fixed
Nickm

 

Well said Nick. It seems that Steve is doing his utmost to ensure that any loses are only paper loses and so long as people can hold their positions those paper loses will be confined to history as precisely that.
The performance of the fund in relative terms is extremely good as demonstrated by the Bloomberg rating and Sims Compare Funds site, and should not be in question.
I'm just grateful that the majority of my funds were with Navra rather than in my listed property funds, both of which are down some 75%. I have had little or no explanation from these fund managers, in fact to read their updates you would think that nothing was wrong with their performance.
I think it's shame that Steve has to take this action, however he does have a company and employees to protect as well as himself.