Leverage Low Risk

by | Jul 17, 2009 | Multi Currency Investing

Leverage is making increased sense.

Last May we looked at the idea of leveraging a low investment portfolio.

This has worked well and Jyske Global Asset Managers (JGAM) are now recommending investors with medium, high Risk or speculative profiles to invest in a leveraged low risk portfolio instead.

JGAM believes that the present economic situation favors bond investments and the low risk portfolio is primarily invested in bonds.

Steep yield curves mean that interest rates  on short term loans are low but interest rates on longer term bonds are high.   This creates a  positive carry that allows investors to borrow at very low interest rates so JGAM can reinvest the loans in high yielding bonds.

There are several reasons for this strong positive carry:

#1: Short term interest rates at their lowest levels in modern history.

#2:  Medium to long term bond yields are paying high yields.

#3:  Corporate bonds are paying a large premium over  government bonds, so JGAM is investing in high quality corporate bonds that provide unusually high yields.

For the first six months of 2009 JGAM’s low risk strategy has been their best performing strategy.  With a 100% loan their low risk portfolio has risen 11.4% or at a 23% per annum rate.

JGAM believes that this low risk strategy will remain productive for the rest of 2009 for several reasons.

First they do not believe that the economic recession is over yet.  JGAM expects the turnaround to be L-shaped (not V-shaped). This means economic growth is not expected to return to normal levels in a foreseeable time.

This economic stall creates a lack of growth that will limit corporate earnings potential and keep inflation in check.

A slow economy, without inflation, favors bonds and leaves equities at risk.   JGAM does not expect inflation to be a real threat in the near future.

Short term rates are also likely to be kept artificially low by governments to help the banking industry.   Banks are making huge profits by paying low rates on client deposits and lending the funds at higher long term rates.

Here is an example of how leveraged bonds work. Two bonds available now are:

US$ 5% Korean Electric Power  (A rated ) due 17 – 01 – 2017 paying a yield of  5.05%

GBP 5% Rep. of Hungary due 06 – 05 – 2014 price paying a yield of 10%.

Assume an investment of $100,000 in each bond… from a $100,000 investment plus a $100,000 US dollar loan at 2.75%.

The average yield per annum is 7.52% or $15,050, less $2,750 loan costs.

That leaves a $12,300 return or 12.3% per annum instead of a 7.52% return on an unleveraged $100,000 investment.

Both managed and advisory clients with JGAM can invest in a leveraged low risk portfolio but managed portfolios can obtain the greatest advantage of the strategy.

The two benefits of a managed portfolio are JGAM’s active monitoring plus the ability to invest  in a wide range of global securities that are not available for most advisory clients.

Americans who live in the US but have advisory accounts cannot buy most overseas bonds.  US advisory clients who live outside the US can buy these bonds.

An alternative for US investors is the CurrencyShares British Pound Sterling Trust ETF (FXB).

A recent ETFTREND.com article entitled “Why the British Pound ETF Could Be Rallying by Tom Lydon says:

The British pound and exchange traded fund (ETF) is getting another breath of life as money from insurers, pension funds and institutional investors pours back into the country. How long will it last? Currency flows back into Great Britain are supporting the pound, and many of the capital is coming from pension funds, insurers and institutional investors.  Joe Weisentahl  for Clusterstock reports that in the 60 days to May 13 the money flows were 99% higher than any comparable period since 1997, according to Boston-based State Street Global Markets LLC.

The pound gathered strength today after the Bank of England voted to hold the key interest rate at a record low of 0.5%, says RTT News.

The depressed pound is actually a way to play distressed assets with potential for the upside, says Weisenthal. Citigroup recently reported that the pound is one of the most undervalued major currencies.

This finance.yahoo.com chart shows how the British pound has fallen versus the US dollar over the past two years.


If the pound returns to its previous parity of 50 pence per dollar (two dollars  per pound), there would be a substantial forex profit on the pound. At 60 pence per dollar, a $100,000 buys 60,000 pounds. If the pound recovers it would take only 50,000 pounds to pay off the loan.

Leveraged portfolios create extra profit potential but also added potential for loss. The calculations above do not include trading costs and any initial loan fees.  There are risks of default on bonds and risks that the bond capital values will erode. The British pound could drop versus the dollar.  Be sure to use the formulas you gained in the initial portion of this course to calculate in advance the potential losses and do not risk more than you can afford to lose.

Leveraged low risk has been one of our main recommendations in the past few months and JGAM’s recommendation fortifies my thinking on this now.

You can get more information from JGAM by emailing Thomas Fischer at fischer@jgam.com

Or visit JGAM’s website JGAM’s homepage and click on “Investment Committee news”


Join Merri and me with Thomas Fischer of JGAM at our North Carolina farm this July or October for our International business & investing seminars below. Learn more about early retirement and Ecuador.

As a multi currency subscriber, you receive a reduced fee for our upcoming July 24-26 International business and investing seminar.  The normal fee is $749. You pay only $500.  You save $249.

July 24-26 IBEZ North Carolina

Oct. 9-11 IBEZ North Carolina

Or join us in Ecuador and learn more about living and retiring in Ecuador.

Sept. 17-21 Ecuador Spanish Course
Sept. 23-24 Imbabura Real Estate Tour
Sept. 25-28 Ecuador Coastal Real Estate Tour

Oct. 21-24 Ecuador Import Export Expedition

Nov. 6-8 IBEZ Ecuador
Nov. 9-10 Imbabura Real Estate Tour
Nov. 11-14 Ecuador Coastal Real Estate Tour

Read the entire ETFTREND.com article entitled “Why the British Pound ETF Could Be Rallying at http://www.etftrends.com/2009/05/why-british-pound-etf-could-be-rallying.html