Monday, December 03, 2007

November 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the decline in global stock markets this month. Net worth also decreased in Australian Dollars terms. Trading results were negative but I managed a significant turn around in the last few days of the month.

Income and Expenditure

I've introduced a breakdown of investment and trading income for the first time in this month's report. The two sum to "core investment income" which together with "forex" sums to "investment income". I've used different size fonts to try to express this relationship. Not sure that it works :) I've also broken out "core expenditure" which excludes work-related and moving-related expenses.

Expenditure was $6,680 but this includes a large work-related expense for Snork Maiden (which resulted in us effectively buying two thousand or so Australian Dollars (expense in US Dollars, reimbursement in Aussie) and port-handling charges in Sydney for both of us. Core expenditure was well under control at $3,280. This included $A59.07 of implicit interest costs of owning a car.

Non-investment earnings ($7,119) included the refund of the work-related expenses from Snork Maiden's employer. She also again got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions were $1180.

Non-retirement accounts lost $19,364 with $8,315 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $6,917 but would have gained only $249 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. In AUD terms non-retirement accounts lost and retirement accounts gained for the month.

Net Worth Performance
Net worth fell by $US24,563 to $US453,326 and in Australian Dollars fell $A3,171 to $A512,406. Non-retirement accounts were at $US241k. Retirement accounts were at $US212k.

Investment Performance
Investment return in US Dollars was -5.50% vs. a 4.38% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.18% loss in the S&P 500 total return index. Non-retirement accounts lost 7.46%. Returns in Australian Dollars terms were -0.96% and -3.01% respectively. In currency neutral terms the portfolio lost 2.26%, which is relatively good compared to the performance of the indices. YTD we're up 20.4% (USD) vs the MSCI with 13.4% and the SPX with 6.4%. Our non-retirement accounts are up 24.8%.

The contributions of the different investments and trades are as follows:

The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. My Australian funds all did horribly with Platinum Capital being the worst of all. I also suffered net losses trading SPI (Australian Share Price Index) and ES (S&P 500) futures but gained in NASDAQ trading. PSS(AP) is Snork Maiden's superannuation fund, where we are starting off with a loss...

Progress on Trading Goal

I lost $1,035 in trading following losses of $1,123 in September and $681 in October. The losing streak is depressing even though relative to net worth the numbers are small. The loss is 3.97% of trading capital vs a 6.69% loss in the NDX. My IB account lost exactly 6.69% for the month, though I gained 7.8% or $1,310 in the last week in this account. As far as my goal of achieving breakeven in my 3 US trading accounts, I have currently invested a net amount of $60k and the accounts are currently worth $54,230. At the end of 2006 the value stood at $41,042 so I have made progress even if it is slower than I would have liked.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.42. Recent performance shows, though, that actual beta of my USD denominated returns is a lot higher than this. My time series estimate using the Kalman filter estimates beta to the S&P 500 at 0.90 and to the MSCI at 1.00. The reason for this is that the Australian Dollar is becoming increasingly correlated with global stock market returns due to the carry trade where traders borrow in low interest currencies like the Yen and buy high yielding currencies like the AUD and stocks. When their "aversion to risk" increases they sell both Aussie Dollars and stocks and buy Yen and US bonds.

Allocation was 29% in "passive alpha", 67% in "beta", 6% allocated to trading, 4% to industrial stocks, 6% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 15%. The biggest losses this month were in the funds that I have designated as "passive alpha". Those funds really contain a lot of beta of course too. I include all hedge-fund like and alternative investments under the "passive alpha" label and all long-only equity mutual funds under "beta". Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

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