Tuesday, August 05, 2008

July 2008 Report

Another bad month but not as bad in terms of absolute returns as July. However, the month was worse in risk-adjusted terms. In the chart, month's above the red line have risk adjusted excess returns, while those above the blue line have above average risk adjusted returns:

The gap between the blue and red lines is alpha, which is shrinking towards zero in this sample. July clearly has a more negative residual than June did. In other words underperformance relative to the market was worse.

So there was again negative progress on our annual goals, which is reported on in the first part of this report. Other statistics appear towards the end of the report. All amounts are in U.S. Dollars unless otherwise stated.

1. Net Worth Goal: Reaching $500k In US Dollars we fell back $28,707 to $404,772, while in Australian Dollars we lost $A23,504 to decline to $A429,832. We are down on the year so progress on this goal is very negative.

2. Alpha Goal: Alpha of 8.5% The point of this goal is to earn at least an average wage from risk-adjusted excess returns. Using my preferred time-series method our returns had a beta of 1.09 and an alpha of 6.43% with respect to the MSCI World index, which lags our annual goal and is worse than last month. The risk adjusted excess return for July based on this analysis was -3.5%. Multiplying this by net worth gives a loss of $14,812. For the year so far the risk-adjusted excess return in dollar terms has been $6,794. Using the estimate of alpha the smoothed annual income is $26,970. In Australian Dollars terms returns are somewhat lower, while they are higher using the S&P 500 as a benchmark.

3. Increasing Non-Retirement Net Worth by More than the MSCI Index The point of this goal is to make sure that we only spend out of non-investment income and excess returns and don't use the normal market return on investments to fund spending. In other words, this makes sure we have positive saving. So far this year these accounts have declined by 3.04% more than the MSCI return. In other words, we are now dissaving, by this measure.

4. Achieving Break-Even on U.S. Taxable Accounts After reaching this goal in May we fell back steeply in June and July, though the pace of loss was lower in July than in June. At the end of the month we were $11,665 below the breakeven point with a loss of $2,901 for the month. This means that no net progress has been made since February 2007. The rate of return on these accounts was -3.86%. One positive point was a positive 1.27% return on my Interactive Brokers account. The NDX gained 0.66% for the month.

5. Make at Least $10,000 from Trading Realised gains this month were -$1,783 (a loss) and so far this year $2,089. This negative result follows a record five positive months in a row. Even though I didn't do any active trading I closed out an options position at a loss and I mark to market my CFD position.

Background Statistics

Income and Expenditure

Expenditure was $7,784 in line with recent numbers. Spending included $A1,107 of implicit car expenses as our car depreciated by $A1,100 according to Redbook. We also spent $A3,814 on the China trip. Half of this will be refunded after the trip. Excluding these expenses, core spending was only $3,252. In addition to her ordinary pay Snork Maiden received her Vermont tax refund and Moom received his US Federal stimulus check boosting non-investment income to $4,657

Non-retirement accounts lost $14,249 with the fall in the Australian Dollar adding $2,411 to the loss. Retirement accounts lost $13,236 including $2,303 of exchange rate losses.

Investment Performance

Investment return in US Dollars was -6.34% vs. a 2.57% loss in the MSCI (Gross) All Country World Index, which I use as my overall benchmark and a 0.84% decline in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were -4.90% and -5.25% respectively. So far this year we have lost 11.31%, while the MSCI and S&P 500 have lost 12.71% and 12.65%, respectively.

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

The returns on all the individual investments are net of foreign exchange movements. More than half the total loss was due to the CFS Geared Share Fund which is our biggest investment. Resource stocks and broad exposure to the Australian stock market also performed poorly. Airlines and US financials were strong performers, though Australian private equity fund of funds, IPE, was our top performer.

Asset Allocation

Allocation was 46% in "passive alpha", 73% in "beta", 2% was allocated to trading, 10% to industrial stocks, 4% to liquidity, 3% to other assets and we were borrowing 38%. Due to the use of leveraged funds, our actual exposure to stocks was 134% of net worth. Leverage increased mostly because of the decline in the value of our assets. Our currency exposures were roughly 55% Australian Dollar, 22% US Dollar, and 23% Other and Global.

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