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Frequent Contributor

Using margin to overcome Instl class fund purchase hurdles

Example: ARTYX (Investor class) and APHYX (Instl class) have ERs of 1.36% and 1.09% respectively, a difference of 0.27%. But APHYX costs $1m to buy in.

I can buy $1m on margin (at TDA) today, and sell as much as I want tomorrow, and promptly eliminate the margin balance from cash. I would incur 1 day of margin interest = $1,000,000 x 7.5% / 365 = $205.

Suppose I only want $200,000 of APHYX. The difference in annual expense on that holding would be 0.27% x $200,000 = $540/year.

So the lower ER pays back the cost of margin ($205) in only 4.5 months. Even for a $100,000 purchase, the cost of margin is repaid in 9 months.

Has anyone done this to buy high-$-entry funds with low ERs? I am thinking about it.

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16 Replies
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Participant ○○○

Re: Using margin to overcome Instl class fund purchase hurdles

But, can you keep the Institutional Class if your holding value drops below $1 million?  I've never considered something like that, but good luck.

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Participant ○○

Re: Using margin to overcome Instl class fund purchase hurdles

There are cheaper ways to do this without using margin...  I am doing this exact same thing on Monday at Fidelity.

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles

Seems like a good plan. 

Except with Vanguard funds, I have never been kicked out of an institutional class just because I dropped below their initial minimum.  Vanguard kicks you out of their Admiral shares when one drops below thresholds.

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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:

Seems like a good plan. 

Except with Vanguard funds, I have never been kicked out of an institutional class just because I dropped below their initial minimum.  Vanguard kicks you out of their Admiral shares when one drops below thresholds.


My experience as well. I have bought I-class funds in an IRA (where the minimum is low) and distributed 1 share to an Individual account (where the minimum is high), and built the position up... but still below the minimum. I don't think the fund company looks at individual accounts held by the brokerage company.

@Anitya I think VG will kick you out for selling, but not if your balance drops below the minimum due to market fluctuations.

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles

You are correct about Vanguard - I was writing in the context.

BTW, I would transfer from IRA to a taxable account before buying on a margin - just my personal preference.

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Explorer ○○○

Re: Using margin to overcome Instl class fund purchase hurdles

Yeah watch those redemption fees. Many funds with 90 day penalties would be a concern--I think that would be too long in this environment to keep afloat an outsized margin loan given call risk.


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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:

BTW, I would transfer from IRA to a taxable account before buying on a margin - just my personal preference.


I am talking about a taxable account. I don't believe margin exists in IRAs.

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles


@chang wrote:

@Anitya wrote:

BTW, I would transfer from IRA to a taxable account before buying on a margin - just my personal preference.


I am talking about a taxable account. I don't believe margin exists in IRAs.


You are correct.  I was thinking you would buy in an IRA for a lower minimum and transfer 1 share to taxable.  Now I checked all the accounts I have access to and if this fund is available in an IRA, the initial minimum is still $1M.  I could not tell what it is in an IRA at TD, which sometimes has surprisingly low minimums.  For example, I can buy any PIMCO institutional class at TD for ridiculously small initial buys - much lower than at VG.  I have put trades for lower than the stated minimums at TD and they have gone thru.  

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles

I looked at this fund a few months ago - it is still in the list of funds I track.  As you know, it can behave different from other developing world funds or even international funds because of companies from US and other developed world in the fund.   So, I did not know how to fit this fund into my portfolio.  What is your thesis for investing if you do not mind my asking?

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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:

@chang wrote:

@Anitya wrote:

BTW, I would transfer from IRA to a taxable account before buying on a margin - just my personal preference.


I am talking about a taxable account. I don't believe margin exists in IRAs.


You are correct.  I was thinking you would buy in an IRA for a lower minimum and transfer 1 share to taxable.  Now I checked all the accounts I have access to and if this fund is available in an IRA, the initial minimum is still $1M.


Oops sorry I misunderstood you. Yep, that's an entirely different (and better) way to get into I-class funds with high minimums:

  1. Find a brokerage where the minimum is (much) lower for IRAs
  2. If you have an IRA there, buy the fund in the IRA (either paying a TF if applicable; or, as often happens, buying the minimum amount of the NTF investor class and converting it at no charge to the I-class)
  3. Transfer 1 share to your taxable account
  4. Add more (for only $5, for TF funds, if you're at Fidelity) 

I've done this several times at Fido. It sounds complicated but actually it's easy and quick. I picked APHYX in my example because I'm pretty sure there are no low minimums for Artisan I-class funds.

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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:

I looked at this fund a few months ago - it is still in the list of funds I track.  As you know, it can behave different from other developing world funds or even international funds because of companies from US and other developed world in the fund.   So, I did not know how to fit this fund into my portfolio.  What is your thesis for investing if you do not mind my asking?


As it happens, I actually own the Advisor class APDYX at TDA. Basically, the manager had an excellent record at Thornburg and has continued to excel at Artisan. I want to be overweight EMs, and this fund is a very flexible version of an EM fund; obviously investing not only in EMs but also in developed market companies that do business in EMs.

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Participant ○○

Re: Using margin to overcome Instl class fund purchase hurdles

And this will cost you about $2 which is the IRS 10% IRA early withdrawal fee for the value of 1 share. The only concern would be if the fund company/brokerage will allow *only* 1 share to be transferred to the destination account. They may enforce the minimum of the fund (you don’t own it in the destination account) which would require more shares to be transferred in kind to meet the fund minimum. Brokerages have been cracking down on this loophole so you will have to see if it still works. 

 

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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles

Nobody's mentioned the one drawback to my scheme that is holding me back. Owning $1m of a fund, of which you only plan to keep $100,000 (for example), exposes you to a lot of market risk for one day. Suppose you buy $1m of APHYX today and plan to sell $900,000 tomorrow. If it goes down 2% (hardly a major drop, at current volatility levels) you've lost $20,000, or 20% of your target $100,000 allocation. So you've dug yourself a deep hole that will take a while to get out of.

Of course, if it goes up 2%, you're going to feel pretty good about that.

Whatever the market does, the associated gain or loss will almost certainly dwarf the $205 margin cost for one day. So there's actually a significant gamble being accepted here.

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:

You are correct about Vanguard - I was writing in the context.

BTW, I would transfer from IRA to a taxable account before buying on a margin - just my personal preference.


Chang,

There are a lot of problems with buying $1M on a margin - hence, my above cryptic message.  For example, you arrange the buy and then you get hit by a truck.  By the time your spouse / heirs get to your account and figure out, it could be a massive mess - you will be leaving behind a potentially big headache for others.

The ER difference between Adviser shares (APDYX) and Institutional shares is only 9 basis points with the Adviser shares available for a 250K minimum.   Why does Artisan name a class Adviser shares and then make them available to retail investors without any Advisers?  At Fidelity I can not buy Artisan's Institutional class but I can buy Adviser class - as you know, I own APDTX.

  

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Frequent Contributor

Re: Using margin to overcome Instl class fund purchase hurdles


@Anitya wrote:


Chang,

There are a lot of problems with buying $1M on a margin - hence, my above cryptic message.  For example, you arrange the buy and then you get hit by a truck.  By the time your spouse / heirs get to your account and figure out, it could be a massive mess - you will be leaving behind a potentially big headache for others.

The ER difference between Adviser shares (APDYX) and Institutional shares is only 9 basis points with the Adviser shares available for a 250K minimum.   Why does Artisan name a class Adviser shares and then make them available to retail investors without any Advisers?  At Fidelity I can not buy Artisan's Institutional class but I can buy Adviser class - as you know, I own APDTX.


I think the risks you mention can be minimized. For instance, I could buy $1m of APHDX (using margin) at 3:59 PM today, and then place a sell order for $900,000 at 4:01 PM, which would execute tomorrow. The chances of my being hit by a truck between 3:59 and 4:01 PM, especially in my study, are really remote.

TDA offers Artisan Advisor-class funds with no minimum, which is why I bought APYDX in my TDA account. "Why does Artisan name a class Adviser shares and then make them available to retail investors without any Advisers?" Good question ... I have no idea. Oakmark and FMI did exactly the same a couple of years ago.

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Contributor ○

Re: Using margin to overcome Instl class fund purchase hurdles

APHYX - I was just checking how tax efficient the fund is to hold in a taxable account.   M* portfolio tab indicates portfolio turnover is 160% but the last couple of years, the fund distributions were next to nothing.  

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