February 2008 Report

All figures are in US Dollars (USD) unless otherwise stated. Performance this month was more mixed than in recent months - net worth rose in US Dollar terms but fell in Australian Dollar terms due to the strong rise in the Australian Dollar this month. Investment performance was also positive in USD terms but not in AUD terms. Spending was high due to the wedding and "honeyweek" which took place this month.

Income and Expenditure



Expenditure was $7,271 - core expenditure was $4,067, which is higher than in recent months. This included $334 of implicit car expenses - depreciation and interest.

Non-investment earnings ($11,664) were dominated by the inheritance we received this month.

Non-retirement accounts lost $2,507 with the rise in the Australian Dollar offsetting $6,545 of what would otherwise have been a loss of $9,053. Retirement accounts gained $5,214 but would have lost $1,183 without the change in exchange rates. The differential between these accounts is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed $782 in realised gains.

Net Worth Performance
Net worth rose by $US7,419 to $US445,174 and in Australian Dollars fell $A12,976 to $A475,156. Non-retirement accounts were at $US226k (a gain of $1,400 or 0.6%). Retirement accounts were at $US219k. So we made progress on our first and third annual goals as net worth increased and non-retirement net worth increased by more than the MSCI index rose for the month (0.3%).

Investment Performance

Investment return in US Dollars was 0.62% vs. a 0.33% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.25% loss in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were -3.65% and -2.34% respectively. Both the MSCI and our portfolio outperformed the the S&P 500 this month due to the fall in the US Dollar. So far this year we have lost 2.07%, while the MSCI and S&P 500 have lost 7.86% and 9.05%, 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. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. This month trades resulted in modest gains or losses. The strength of the resource sector led to a nice gain in the Colonial First State Global Resources Fund. Completion of the takeover of Symbion by Primary Healthcare also produced a decent gain. Major losses were again dominated by the woes of the Australian listed fund sector. In particular the near collapse of Credit Corp (CCP.AX) hit the Clime fund (CAM.AX) hard due to its concentrated position in this company. Clime sold out its position in the middle of the month, but it seems that its other positions which had also been soaring high did not do well in the first couple of months of the year. Concentrated portfolio positions are dangerous when you are not an insider in the company and even then they are risky. I exacerbated things by doubling my position in Clime before it hit bottom. Seems I was as overtrusting in Clime's management as they were in Credit Corp's.

Progress on Trading Goals

Realised gains for the month were $782. This is the first positive month since June 2007! But the gains were entirely in securities trading as I didn't trade futures at all this month. I've only had two losing months in securities trading since last June (October and January). Anyway, it's nice to finally see a positive month in realised gains.

My three US trading accounts lost $1332 (or -2.33% which is better than the S&P 500 at -3.25%) and there is now $8047 to go till I reach breakeven across those three accounts, which is one of my annual goals. My Interactive Brokers account lost 0.77%.

So, I made progress on annual goal 5 (making money from trading) and slipped back on goal 4 (achieving breakeven in my US accounts).

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 0.52. Using a regression on the last 36 months of returns gives a beta of 0.76 to the MSCI or 0.61 to the SPX. Alphas are 0.9% and 5.7% respectively. A more sophisticated time series method yields a beta of 0.75 and alpha of 10.0% for the MSCI index. Therefore, we are doing well on our second annual goal (positive alpha).

Allocation was 35% in "passive alpha", 69% in "beta", 2% allocated to trading, 2% to industrial stocks, 5% to liquidity, 9% to other assets (including our car which is equal to 2.9% of net worth and otherwise mainly receivables) and we were borrowing 22%. Our currency exposures were roughly 58% Australian Dollar, 30% US Dollar, and 12% Other. We reduced exposure to industrial stocks this month and increased further our exposure to private equity and supposed "passive alpha" stock funds.

Summary
We made progress on four out of the five annual goals this month.