Friday, April 29, 2011

Reporting from Cloud Cuckoo Land


I'm at the airport in Cloud Cuckoo Land on my way home. The internet at the airport is free as is university education in this country. And any student who graduated high school can go to any university in the country and study any subject they like. There are no caps on enrolments. It really is Cloud Cuckoo Land :) Of course, a lot of those students fail the exams in the courses they pick and choose another subject or drop out of Uni. EU students can also get to study free here. The town is beautiful and everyone I met at the university was friendly. However the job involves teaching a lot of courses in a technical area which is a skill I have but not my research focus. I'm not so confident of teaching that subject at the graduate level. The hours of teaching per week required is similar to what I taught in the US but I would have to teach twice as many courses for half the time each. At my current university (where I don't have a permanent position yet but things are again looking up in that regard) there is an exceptionally low teaching load. And then there is the question of whether we would want to live in a foreign country learning a new language, though I do know quite a bit of the local language already and think I could learn fairly easily. On the upside there is a very good possibility of a job for Snork Maiden too.

Well, there were 6 candidates interviewed over the last two days in a non-stop marathon of presentations and interviews. The decision on the ranking of the candidates is supposedly being taken now as I am writing.

Saturday, April 16, 2011

Asset Allocation of US Estates

More interesting statistics from the US IRS. 34,000 estates needed to pay estate tax in 2009 and the average value of these estates was $5.7 million. Assets were allocated as follows:



Of course, this is the allocation of assets at death and does not necessarily indicate the allocation of typical wealthy people. But it is interesting how it reflects on certain myths floating around in the personal finance world. One meme is that the wealthy invest most of their money in real estate, another would be that retirees should have most of their wealth in safe investments - i.e. cash and government bonds. Neither is true here. There is quite good diversification with a likely 35% or so allocation to stocks directly and via pensions and 401(k)s. We don't know what is in "other" but can assume that that includes direct business ownership and alternative investments. By comparison, my Mom's portfolio is allocated to 29% stocks, 29% bonds, 16% cash, 17% alternatives, and only 9% real estate is a little conservative. Of course, the portfolio is quite a bit smaller than the typical one represented here :)

Tax Returns of the 400 Highest US Taxpayers

The US IRS puts out an annual report on the top 400 US taxpayers. In 2007, the average federal tax rate paid on adjusted gross income was only 19% despite the existence of the alternative minimum tax and a top US marginal tax rate of 35%. This is because 2/3 of their income came from capital gains.

This table shows the effect of the Clinton tax increases and the Bush tax cuts:



From 1993 to 2002 significant numbers of the top tax payers paid an effective tax rate of greater than 35% but none did before or after. The numbers paying less than 15% increased significantly in the later Bush years. Warren Buffett famously said that he paid a lower tax rate than his secretary. At least I'm not paying a higher rate than these billionaires :) Though Snork Maiden is :( Of course, those US figures don't include state taxes, which don't exist in Australia. But they'd likely only add an extra 5 percentage points at most despite so many wealthy people living in high tax California and New York.

Dow Jones/Credit Suisse Hedge Fund Index for March



The Dow Jones/Credit Suisse Hedge Fund Index rose slightly in March in contrast to the
HFR indices which fell. There were some similar patterns of relative returns across strategies with managed futures doing poorly and equity market neutral doing well.

Sunday, April 10, 2011

Hedge Fund Report: March 2011

The HFRX index fell 0.88% for March whereas the MSCI World Index rose by 0.72%. Equity market neutral, macro, event driven, and special situations saw gains. Equity market neutral saw the best gains, but equity hedge the second worst losses!



HFRX is a daily priced index in contrast to HFRI which only provides monthly results but covers a much wider selection of funds as a result. Dow Jones Indexes and Credit Suisse are launching of the Dow Jones Credit Suisse Core Hedge Fund Index, which will also be a daily priced index. The existing Dow Jones/Credit Suisse index is a monthly index. The index includes 40 component funds diversified across seven style-based sectors: event driven, long/short equity, global macro, emerging markets, managed futures, fixed-income arbitrage and convertible arbitrage. It is an asset-weighted hedge fund index, whereas the HFR indices are not I believe.

Early results for HFRI show a loss of 0.17% for the month:



By contrast to HFRX, HFRI shows losses for macro strategies and gains for equity hedge. Generally, I'd expect HFRI to be more representative of the broader reality for these individual strategies due to the larger number of funds included.

The Really Long Term

I don't know if any other personal finance bloggers have more than twenty years of data, but I haven't seen it posted. Now and then I like to update what the really long-term picture has looked like.



The graph has networth (blue) and the split into retirement accounts (green) and non-retirement (brown). The record starts when I first arrived in the US in 1990. The early years I was a grad student and then a post-doc and visiting assistant professor and in debt. Then I got a better job as a researcher in the late 1990s and savings began to accumulate. Unemployment and a stock market crash lead to a decline in 2002. Then an even better job in the mid 2000's followed by our move to Australia, merger of finances with Snork Maiden and a worse financial crisis saw net worth plummeting from near $500k to less than $200k. Since then the market rebounded and I've had a couple of jobs where we have largely saved my salary and we are now at a new high in US Dollar terms. The path seems a little smoother when measured in Australian Dollars:



I don't know whether this stuff might be useful to people just starting out to give an idea of how things might look in your future. If you don't dramatically expand your standard of living, higher paying jobs in the future can have a big effect on savings (countering the idea of the importance of starting early). And there can be some big deviations along the path. This one charts spending versus total income including market returns:



The big bumps are usually associated with international moves. Now with two of us in expensive Australia, our spending has bumped up to a new plateau but this graph isn't adjusted at all for inflation so the escalation in living costs is not so great, really. This is very roughly the inflation adjusted numbers (2008 US Dollars):

Sunday, April 03, 2011

Fund Distributions Begin to Return

Distributions from managed funds (Australian mutual funds) fell dramatically in the wake of the financial crisis. Some funds are now beginning to again pay significant distributions. More generally, dividends are rising.

For the January-March quarter, I got a $2035 distribution from the Colonial First State Developing Companies Fund, which is more than the sum of distributions received in 2008, 2009, and 2010. On the other hand, CFS Future Leaders paid out just $23 and CFS Diversified $71, and my other CFS funds seem to only be paying annual distributions. CAM.AX, CIF.AX, AOD.AX, and PMC.AX are all paying a reasonable level of regular dividends. IPE.AX hasn't paid a dividend since 2008 and EFG.AX since 2007 (no surprise there).

Snork Maiden got $236 from Celeste Small Companies and smaller amounts from property and fixed interest funds.

In the US TFS Market Neutral made its biggest distribution to date at the end of 2010 and there was a decent distribution from the China Fund. Other dividends are small or non-existent.

Receiving distributions is not necessarily a good thing as it means you have to pay tax (though it is the only way to get tax credits attached to company profits in Australia). But it is a sign that funds are doing well when they have to pay out money. I wonder how a strategy that sold funds that made big payouts and bought ones that didn't would do?

Moominvalley March 2011 Report

As usual everything is in USD. The AUD rose again to 103.6 US cents. This improved our returns in USD terms and reduced them in AUD terms. World stock markets rose a little in USD terms with the MSCI World Index gaining 0.72% for the month. Here is the summary account for March:



Non-investment income and retirement contributions were very high as this was a 3 pay month (we are paid every 2 weeks). Expenditure was $7,114 but a large part of that was the ticket to Cloud Cuckoo Land. Without that expense, core expenditure was a reasonable $4,061.

Investment return was $4,770 but taking out the effect of exchange rate movements was a loss of $2,722. The rate of return was 0.91% in USD terms, -0.52% in currency neutral terms, and -0.89% in AUD terms.

Net worth rose in USD terms by $16k (rose by $A7k in AUD terms) to $542k ($A524k) another all time high in USD terms.

Investment allocation saw a reduction in hedge funds and Australian stocks and a rise in other asset classes due to market movements, the return of capital from EAIT, and the investment in GTAA.

As a follow up to yesterday's post I've added our own rates of return to the table:



(well I dropped some of the timeframes as I couldn't be bothered to compute them). Moominmama's more conservative portfolio performed better over the 3 year period that included the global financial crisis but underperformed us across the other horizons. Over a 5 year horizon we have matched the MSCI World Index and over ten years beaten it. Over the ten year period our beta to the index has been 1.22 with an alpha of 2.11% p.a. Over 5 years, 1.22 with an alpha of 0.88% p.a. Over 3 years beta was 1.27 and alpha -2.29% and over 2 1.24 and 0.40%. So we have taken on more risk than the index but added more return than just the risk alone would provide except over the period around the global financial crisis.

The following graph shows the rolling estimates of alpha and beta using a 36 month window:



Alpha is much more volatile than beta. The high values of alpha achieved around the middle of the decade inspired over confidence and subsequent fall in alpha to negative values. Assuming no major setbacks in the next few months, I forecast the 36 month alpha will again rise to 6% by the end of this year.

Saturday, April 02, 2011

Moominmama Portfolio Long-Run Performance

We now have enough data to compute the rate of return over 8 years on Moominmama's portfolio. This table compares it to the MSCI World Index:



All rates are annualised. In general the portfolio has about half the performance of the MSCI World Index. This isn't surprising given the conservative nature of the portfolio. I estimate beta at 0.47 and alpha at -2.31%. The latter is not very good. The standard deviation of monthly returns is 5.91% for the MSCI for the months for which we have data on the portfolio and 3.3% for the portfolio. So it seems there is a bit over half the risk for less than half the average return and, therefore, a worse Sharpe ratio. So we have sacrificed return for a less than proportionate reduction in risk. Obviously, we could be doing worse than this too. I guess it depends on what your expectations are.

Career Update


I bought the ticket for the interview in Cloud Cuckoo Land - $2947. That's a bit over the budget they gave me of Euros 2000. A direct flight to the capital seemed to come out even worse and then I'd need to get a train for 2 1/2 hours. So I'm flying to Frankfurt and then flying to the city in question.

In the meantime in Australia I am making progress on getting a permanent job despite some setbacks. It looks like a position I can apply for will again be advertised soon and there are various developments I am pushing which would provide a course for me to teach and collaborations with other areas in the university.

P.S. I took my suit to be altered to fit my new smaller size. It was big when I bought it but for some reason I believed the salesman that that was OK. Since then I lost a few kilos in weight. The alteration cost is less than a new suit of that quality and I think it will look better than when I first bought it when this guy is done with it. He altered a suit for me once before many years ago and also adjusted Snork Maiden's wedding dress.