Sunday, August 31, 2008

Carbon Planet

Carbon Planet is a privately held Australian company "whose mission is to enable every individual and business on the planet to manage their contribution to the defining issue of our age, global warming. Established in 2000, Carbon Planet has been working with businesses around the world, helping them quantify the risks and explore the opportunities emerging in the carbon constrained economy." They are raising money through both a retail and institutional fundraising round to help in their expansion. This kind of venture fundraising from retail investors is legal in Australia if sufficient disclosures are made in the offer document. But it's rare. Which makes me wonder why they are prepared to go through the hassle of raising money from the public. They plan on listing on the ASX by the end of 2010.

The plan is to raise $(A)4 million from retail investors in amounts as small as $2,000 and $10 million from institutional investors. The shareholders equity of the company was -$2.7 million at the end of 2007 and they lost $2.3 million in 2007. The main liabilities are loans from directors. Since the end of 2007 the firm has already raised $6.3 million from private equity placements for it seems 151 million shares for an average of 4.2 cents a share. But 82% of issued shares to date are held by the directors. The retail placement share price is 50 cents. A massive paper windfall for the the investors (mainly the directors) so far this year. The company states it has $2 million in the bank at the moment and has not repaid the director loans. So did it burn $4 million so far this year? It would be really nice to have accounts for more recent months, but none are provided. The expansion plans are ambitious but vague beyond the very near future and they admit to a very large number of competitors in Australia and doubtless plenty more elsewhere. On the plus side, the directors and key employees have a strong entrepreneurial track record including founding and profitably selling a technology company.

Given the short track record, ambitious but vague plans, lack of up to date financial information, and seemingly exorbitant valuation placed on already issued shares (the company is valued at $85 million based on this placement or about 100 times 2007 sales) I'm not planning on participating in this investment. Maybe I'm missing out on the next Google, but I don't think so.

Saturday, August 30, 2008

Preliminary Report for August

August was an OK month and better than recent months. Our investment return was around 5% in Australian Dollar terms, 3% in currency neutral terms, but -3% in US Dollar terms due to the fall in the Australian Dollar. The MSCI World Index fell 2.11% but the Australian All Ordinaries was up 3.2% according to the AFR. As a result, net worth rose in Australian Dollars but fell again in US Dollars. Trading realised gains were $(US)1,062 and non-403b US accounts rose by around $2,000. There were no major expenditures and our car didn't depreciate so expenditure was just under $4,000. I'll post a full report after the end of the month.

Leveraged ETFs

A lot of nonsense is written about leveraged ETFs (ETFs that usually provide 200% long or short exposure to a given index) on the internet. These funds perform exactly like a margined portfolio of the unleveraged ETF would be expected to perform. In other words (on the long side) two times the index minus the interest cost of leverage minus the expense ratio (which is typically higher than for an unlevered ETF). This means that in the short term they tend to track two times the index very closely but in the long-term drift away from the index due to the interest cost and expense ratio generating a negative alpha. The Proshares annual report gives interesting information on how these portfolios are constructed.

The short funds exposure is achieved through a mix of swaps (similar to CFDs) and futures contracts. The long funds though also hold actual shares. For example, QLD's (I have 200 shares) exposure is achieved 85% through actual shares, 14% through futures contracts, and 100% through swaps. The money not invested in shares is invested in repurchase agreements with investment banks - in other words they lend their cash to these investment banks in return for US Treasury and Agency securities collateral. These provided margin for the futures contracts. The equities were partly used as collateral for the swap agreements.

Looking at the income statement, QLD received $3.6 million in dividends and $4.4 million in interest. Total expenses were $6.9 million. The interest cost of the swaps is apparently capitalized into the swap values. My only puzzle is why not construct the equity market exposure 100% out of swaps and/or futures? I'm guessing it's for tax reasons. Capital gains on stocks removed from the index can be distributed at the long-term rate while distributions from dividends earned may also be taxed at the lower US qualified dividend rate rather than the regular rate that would apply to interest. I could be wrong though. It seems that net gains on futures do not have to be distributed.

Friday, August 29, 2008

Which Type of Hedge Funds Give the Most Diversification Benefits?

I recently read a very interesting article about using hedge funds to diversify that was discussed by AllAboutAlpha. Adding hedge funds to a portfolio can both increase returns and reduce variability. Even if a hedge fund's returns were perfectly correlated with your existing portfolio's, if it had a positive alpha, allocating some money to the hedge fund might increase return and reduce drawdown relative to your existing portfolio. See my discussion of alpha-beta separation. But usually what is meant by diversification is adding assets whose returns are imperfectly correlated to the returns of the original portfolio. But you can go beyond that to also take into account "the higher moments" of the return distribution.

So what are "higher moments"?

The first moment of a distribution is the mean or in ordinary English the average. The second moment is the variance or its square root the standard deviation, which captures how tightly packed values of the variable are around the average. The "normal distribution" - the classic bell curve - can be entirely captured by these first two moments:

The mean is at zero and the numbers on the x-axis are standard deviations from the mean. The normal distribution always looks exactly like this, though the actual numerical value of a standard deviation could be larger or smaller and the mean might be different to zero.

The third moment of a distribution is skewness. A distribution is skewed if one side of the distribution is much more stretched out than the other:

A positively skewed distribution has a long-tail to the upside. The fourth moment is kurtosis which measures how sharply the distribution peaks and how fat the tails are:

The distribution marked in red is the most kurtotic. No longer is there a plateau of many values clustered around the mean, but values are dispersed towards the extremes.

An investment with negatively skewed and positively kurtotic returns is prone to "crashes". The MSCI world index has negative skewness and positive kurtosis.

The standard "beta" in the finance literature measures how much an investment's returns change when the returns on another investment change. Usually we are measuring how much a security's or an asset class' returns change in relation to the returns of the "market portfolio" or a stock index like the S&P 500. But we could also measure the relationship between the variances of two investments and the relations between the higher (3rd and 4th) moments of the distributions.

An investment with a low (less than one) or negative conventional beta to an existing portfolio will reduce the volatilty of that portfolio. A low variance beta means that when the volatility of the portfolio rises due to market conditions the additional investment will mitigate that increase in volatility by contributing less or even a negative amount to the increase in volatility. As is well known, the correlation between most investments seems to rise when market volatility rises. It would be really nice if we could find investments that reduced the tendency of our portfolio to experience extreme negative events. Investments with low and negative skewness and kurtosis betas will be best at achieving this.

Finally getting to the point :), the paper computes these higher order betas for a variety of hedge fund indices with respect to the MSCI index (the estimates are for monthly data from January 1994 to February 2006):

Any betas below one have diversification benefits. By far the best diversifier is managed futures. Fixed Income Arbitrage, Equity Market Neutral, and Convertible Arbitrage are also good diversifiers. The least good diversifier is long-short equity, which includes the likes of 130/30 strategies. Only managed futures and equity market neutral have normal returns, though Global Macro and Long-Short Equity also both have zero or positive skewness:

The author adds a mixture of the best diversifying hedge fund indices to a 60% equities and 40% bonds portfolio and finds increased returns and reduce variance for all mixes up to a 35% allocation to diversifiers. I have a feeling that if he tried pure managed futures the gains would be even better.

Given these results, and the high returns to some managed futures funds a large allocation to managed futures could be very advantageous (subject to tax considerations). For more on the advantages of commodities and managed futures see the Ibbotson-Pimco study.

BTW, another new category today: "Hedge Funds".

Thursday, August 28, 2008

Recent Moves

I sold out of NNDS and PSPT because the expected rate of return until the takeover deals close is less than my rate of margin interest. Yes I'm paying too much interest... Over time, I'll reallocate capital to my cheaper broker (Interactive Brokers). I also doubled my position in CHN. That's only about a 1/3 of the proceeds from the sale of the other two stocks.

Gain on my most recent NDS trade was $820.97. Total profit from trading and investing in NDS totalled $1826.84. The internal rate of return since the beginning of this calendar year has been 154%! PSPT is being sold at a loss of $555.94 or -29% at an annualized rate.

Wednesday, August 27, 2008

Glaring Market Inefficiency

Allco Equity Group continues to trade at a ridiculous valuation of $(A)1.75 per share while having net assets of $4.76 per share. The value of shares and convertibles it holds in IBA Health based on their current ASX listed price is worth $1.81 per share of AEP according to today's earnings release. The firm has $1.28 in cash and other marketable securities per share and its outstanding loan to IBA is worth $0.60 per share. The loan is due to be repaid in October. Its unlisted investments are worth $1.01 per share according to the company. Assuming these are worthless (which they're not - they earned $3.5 million in after tax profits for AEP this financial year while AEP's share of IBA's earnings was $4.4 million) AEP is still worth $3.75 per share. Obviously, we know that closed end funds can trade at a discount, but this is nuts.

The company is issuing a franked dividend of 6 cents per share in October (record date in early September) and will buy back 5% of its stock starting in mid-September.

BTW, I just created a new label category: "Private Equity".

Where Do Visitors to Moomin Valley Come From?

Sydney and Canberra are joint most popular cities - I do eliminate my own visits but not any Snork Maiden does from work :) New York is the third city. Around three times as many visits come from the US as from Australia with the United Kingdom a distant third. The remaining top ten countries are: Canada, Hong Kong, Israel, China, India, Japan, and Finland. Sorry to all those people in Finland looking for moomins :( Moomins are big in Japan too.

Tuesday, August 26, 2008

Qantas Chart

This is a pretty classic inverted head and shoulders. The target is around $4.50 if it plays out.

Managed Futures Funds

The Australian Financial Review recently (16-17 August edition) highlighted two lesser known managed futures funds offered in Australia that were developed by alumni of AHL which was acquired by Man Investments. The Select Futures Fund has a minimum investment of $A25k and has performed nicely:

though it then lost 8.6% in July. The Macquarie Winton Global Alpha Fund returned 27.2% in the year to June 30 compared to 16.9% for select futures. It lost 4.4% in July. The minimum investment though is $A50k. An advantage the fund has over the Man Funds is it is considered to be an Australian fund for taxation purposes and, therefore, not subject to the FIF regulations. Neither is the Select Futures Fund a FIF. The Man-AHL Diversified Fund has a minimum investment of $A20k while Man's various OM-IP offerings have $5,000 minima. The latter have very limited liquidity while the Winton fund allows daily redemptions and the others are in between in liquidity. Only the OM-IP and Global Alpha funds appear to be marginable through CommSec.

But, interestingly, there is a totally liquid alternative: The Macquarie Winton Global Opportunities Trust which is listed on the ASX. Is this a free lunch? That will be the topic of another post :)

US and Australia Sign Deal on Financial Markets Access

Does this mean that Australians will be allowed to buy unlisted US mutual funds? Or does it only cover exchange traded products? Currently new purchases of US mutual funds are only open to US residents and Australian IPOs are only open to Australian residents. US residents aren't allowed to trade foreign options including Australian options etc. US investments already have special status in the Australian foreign investment fund rules. US regulated investment companies (which includes mutual funds and exchange traded funds) are not subject to mark to market accounting, while such funds in other countries are. Will need to learn more on the implications of this deal.

P.S. 28th August

I just read in the AFR that the deal does not cover IPOs. Looks like it may lower costs for trading shares by allowing direct trading by US brokers on the ASX and vice versa rather than through intermediary local brokers.

Wednesday, August 20, 2008

Attitudes to Money and Gifts

As I've mentioned we're going to China later this year. Yesterday Snork Maiden's mother told her she wants to give her or us a total of RMB20,000 (almost $US3,000, which is a lot of money for the average person in China ) when we visit. Snork Maiden is then meant to give several thousand RMB to her grandfather and we also will pay for two family get together meals that are estimated to cost RMB2,000 a piece. What's left over - more than RMB10,000 - is for "spending money" when we are in China. From my perspective the arrangement is rather odd and I feel uncomfortable with receiving the "spending money". I don't understand the point of the gift to the grandfather - seems like fooling him that the money is coming from us rather than his daughter - though I'm sure that's not the intent. But anyway, if they want to do that, it's fine with me. Also I'd be happy if my parents-in-law paid for a wedding/get together celebration meal in China. Seems odd to give us the money to pay for it. But again if they want to do things that way it's OK with me.

I told Snork Maiden that I'm not so comfortable with the spending money arrangement. We've got the money to spend whatever we want in China. When I said that I think her parents may need the money, she said "my mother will spend it soon anyway, she can't have money lying around". Snorkmama and her husband receive government pensions - they both worked for government - which seem to cover all their costs and they own an apartment that the husband received when he retired.

Snork Maiden's parents already gave her a gift of money for "getting married" and we spent a lot less than that on the wedding, though more than that on setting up our apartment when we moved to Australia to live together. My mother also gave us a monetary gift for our wedding (as well as paying for herself and my brother to come to the other side of the world for the ceremony). So I have no problems with monetary gifts for specific events or regarding inheriting money. There's something though that I find culturally difficult with the "spending money" thing. I guess one thing is it makes me feel like they see us as children who need "pocket money".

The flipside to this, is that if and when Snork Maiden's parents visit us here will be spending money on them. I wouldn't think to give them cash to spend though. That would feel very peculiar for some reason whereas giving in kind does not for some reason.

My family have obviously different attitudes to money, gifts etc. which are result of both our cultural background, life experiences, and personalities.

Link to Snork Maiden's aka Yoyo's blogpost on this.

Large European Listed Private Equity Firms

The firms discussed in this post are the European firms among the top 10 in the LPX index. I've already covered (and invested in) 3i - the firm with the largest weight in the index.

Wendel: This French firm seems to be more of a buy and hold investor in the mode of Berkshire Hathaway or Loews than a private equity firm. RoE is less than 10%. So this doesn't look attractive as a LPE investment.

Partners Group: "Is a global alternative asset management firm with over CHF 25 billion in investment programs under management in private equity, private debt, private real estate, listed alternative investments, hedge funds and alternative beta strategies. Partners Group is headquartered in Zug, Switzerland." In other words, investing in this is like investing in BX. You are investing in the management company, not the fund.

Ratos: Is a pure listed private equity firm investing in Scandinavian firms. But its share price is way above book value and its RoE is not very impressive. Analysts are not positive on it.

Eurazeo: Private equity investor that also has significant stakes in listed companies and real estate. Almost all its investments are in France but many of those companies are multinationals. Analysts like it and the financial data I've examined looks pretty positive but erratic over time. It's worth considering.

Tuesday, August 19, 2008

Are Australian LICs Better Investments than Index Funds?

There are many "listed investment companies" (LICs) in Australia, which are similar to closed end funds in the US with the difference that they pay tax on their profits and then pay dividends with "imputation credits" attached for the tax paid, whereas US closed end funds do not pay tax and distribute capital gains and dividends in the same way that unlisted open end mutual funds do. Many of these LICs are rather small, but there are several fairly large "traditional LICs" that mainly invest in large cap stocks:

Argo Investments
Australian Foundation

The interesting thing is that these large funds have very low expense ratios. Argo's expense ratio is 0.12%. Choiseul's is 0.11%, Milton 0.14%, Djerriwah 0.26%, and Australian Foundation 0.14%. By contrast, Vanguard charges 0.75% for its flagship Australian index managed fund for amounts under $50,000 and Colonial First State charges more than 1%.

Also they are pretty much buy and hold funds with very low turnover compared to traditional actively managed funds, which means they are tax efficient and they typically offer dividend reinvestment programs with new shares available at a discount.

During the bull market which ended in 2007 they outperformed the index. This was due to their preference for shares with high dividend yields, typically banks. Surprisingly, this has not overly impacted them since the start of the bear market. In the six months till June 30th 2008 the ASX 200 Accumulation Index lost 13.4%. Australian Foundation lost 11.5% and Argo 15.3%. Dejerriwah lost 13.9%. Moom lost 13.1% in Australian Dollar terms.

One issue is that these stocks typically trade at a premium to net asset value. For example, on 31 July, Argo's shares traded for $A6.72 while it's net tangible assets were $6.54.

I'm not in the market for these at the moment as I am fully invested in Australia so I'm not going to dig any deeper into this investment class. But you should certainly consider these stocks if you are interested in broad exposure to the Australian stock market.

Monday, August 18, 2008

How Come Australia Has Less Government Spending than the US and Has Free Healthcare for All?

Following up from my comments on this post of Madame X, I thought I'd have another go at comparing Australian and US government spending:

As you can see from the chart, Australia spends less as a share of GDP than the US does. Only Korea and Switzerland spend less than Australia among the OECD countries for which there is data. Australian government revenue is slightly higher as a share of GDP than the US, because we have a budget surplus whereas the US has a large deficit. But we have more or less free healthcare for all, while the US does not. Australia encourages people to get private health insurance through tax incentives, and around 35% of people do have private healthcare. This makes free healthcare easier to provide than in other OECD countries where there is less private insurance. So how does Australia achieve universal healthcare when the US does not? Here are some suggestions:

1. Our defence budget is smaller. Also we have far fewer people in prison. The US has 4.5 times as many prisoners per capita as Australia.

2. Because we run surpluses our government has net assets rather than net debt. So we don't have to pay any net interest on the non-existent national debt. There are government bonds outstanding just to keep the market open.

3. Retirement benefits are means tested and less generous than average US social security benefits. Whereas the US gives more retirement and unemployment benefits to people with previously higher incomes, Australia does the opposite. Over time retirees will be more and more self-funded due to compulsory superannuation saving in Australia. Since 1992, employers have been required to put at least 9% of salary into a superannuation fund - the equivalent of a 401k. It's much harder to get the money out before retirement too.

4. Our medical care is much cheaper than the US. Reasons include the high level of litgation and consequent insurance and overtreatment in the US and price discrimination by drug companies due to the fragmented nature of demand for drugs in the US. Doctors earn less in Australia.

So, in order to get "socialised medicine" you don't need "socialist" levels of government spending ;)

Sunday, August 17, 2008

3i vs SVG

After finding that I couldn't invest in the Bear Stearns and Lehman Brothers funds I considered investing in two large UK listed private equity funds - 3i (III.L) and SVG (SVI.L). 3i is a private equity firm that invests on its own account and also manages funds for investors. SVG has the same combination of businesses but does not originate its own private equity investors, investing instead in Permira's funds. SVG was created in the reorganization of Schroder funds which also resulted in the creation of Permira. This adds an extra layer of costs, which is one reason that I think SVG appears to be underperforming 3i.

3i mainly splits its investments between buyout and late stage venture or growth investments, while Permira is primarily a buyout outfit. Both SVG and 3i have some infrastructure investments as well. 3i is mostly invested in Britain and continental Europe with smaller amounts elsewhere. SVG has a large part of its investments in North America. 3i invests in smaller companies than Permira typically does. This is reflected in the commentary from the chairman and CEOs of the two firms in their most recent annual reports. 3i's management dismiss the credit crunch as mainly affecting deals larger than those in their portfolio, while SVG's management are gloomy about prospects.

Compared to conventional stock or fund investments 3i looks very cheap:

  • It trades at a discount to book value. And it is well known that private equity book value is usually conservative. Most realisations of investments yield higher prices than the carrying value - so-called "uplift". Recent book value is £10.60 while the share price is £9.09. A 14% discount. It has traded at a premium in the past.

  • The trailing P/E is only 5.

  • Total investment return after expenses for the 2008 financial year that ended at the end of March was 18.6% on initial shareholders funds. In 2007 3i earned 26.8%. The underlying gross portfolio returns were 23.9% and 34%. From 2004-6 the gross returns were 19.4%, 16.7%, and 24.4%.

The buyout line of business has done even better with a 54% gross rate of return in 2008. The IRR of the different buyout funds has ranged from 35-62%. SVG reports that Permira's underlying buyout funds averaged a 20% IRR while SVG's NAV has grown at an average 14% p.a. since listing. It's not surprising that most analysts that track 3i rate it an buy or outperform. The modal recommendation on SVG is "hold".

I bought 200 shares of 3i for £9.06 each. Commission was £6 plus a 0.5% stamp tax which is a transaction tax on share trades in the UK. No wonder CFDs are so popular in Britain. The stamp tax doesn't apply to them. It'd be hard to day trade with a 0.5% tax on top of commissions.

Next I'll look for a second European private equity investment.

Saturday, August 16, 2008

The Best Private Equity Funds Show Persistence

There has been endless debate about whether the best mutual and hedge fund managers show real skill in terms of being able to achieve persistent outperformance. A recent paper by the Boston Consulting Group presents evidence that the best private equity funds do show persistent outperformance as shown in the key figure below:

As I argued in yesterday's post it is important to pick good private equity funds as the average fund globally shows high risk but not neccessarily risk-adjusted outperformance compared to public equities. There is plenty more interesting stuff in the paper.

Friday, August 15, 2008

Listed Private Equity Newsletter

LPX is a global index of listed private equity firms and funds. Though I can't find a public source for the fifty stocks composing the LPX50 Index, they do have a monthly newsletter, linked at the left of their homepage which inlcudes the ten largest firms in the index and the top 5 and bottom 5 performers for the month. Going through a bunch of these, one might be able to get most of the index components except the smaller persistently mediocre ones :) The recent performance of the index has been rather poor and it has been volatile over its history. So it is important to pick good stocks, if one can:

Thursday, August 14, 2008

UK Listed Private Equity Strongly Outperforms Public Equity

Source. This chart explains why this sector is so interesting :)

U.S. Listed Private Equity

In case you didn't know, there is a U.S. Listed Private Equity ETF. The problem is that many of the companies on the list are not even really private equity firms. For example, Capital Source does provide loans to private equity backed companies but that is just one of its activities. Other companies on the list are private equity management companies such as Blackstone. You are buying a stake in the management firm, not in the private equity portfolio. In other cases, for example, Ares Capital, the firm is mainly making loans, not taking equity. At a quick glance, the following included firms do seem to be genuine private equity investments:


I'm already a shareholder in MVC. I may look into the remainder of these in a little while.

Interactive Brokers Can't Add Private Equity Stocks

Unfortunately, Interactive Brokers can't add the two private equity stocks I discussed on Tuesday and Wednesday. The reason given for the Lehman Brothers fund is that it is traded in dollars on the Amsterdam exchange. Regarding the Bear Stearns fund, they just stated "we do not offer this segment on the LSE". It's not surprising that volume in these two funds is as low as it is. The following listed private equity funds are available for trading through Interactive Brokers:


.l indicates a London listed stock and .f a Frankfurt listed stock. I'll report on these funds in the coming days. Please let me know of any others you'd like me to look at.

I got 50 unique pageviews for my post on the Lehman fund and my traffic from New York and London is up significantly in the last few days - usually the cities where I'm most popular are Sydney and Canberra. But I don't know how everyone got here. According to Google Analytics a lot of people searched for Lehman Brothers ticker:

But when I put those keywords into Google (which totally dominates the list of search engines produced by Google Analytics) my blog doesn't come up in the results. So I'm mystified as to how the visitors actually got here.

Wednesday, August 13, 2008

Bear Stearns Private Equity

I bet you thought that Bear Stearns ceased to exist? This fund, though now managed by J.P. Morgan, retains the Bear Stearns name. Like the Lehman fund I discussed yesterday, it is managed by an American investment bank, listed on a European exchange (in this case London) and its price is quoted in dollars (rather than Euros or Pounds). It also currently trades at a discount, though not as large due to a biannual redemption feature. Whereas the Lehman fund is mostly invested in North America, this fund is invested 60% in Europe, 28% in North America, 9% in Asia, and 3% elsewhere. The two funds nicely complement each other geographically. Like the Lehman fund, the fund is mostly invested in buyout funds, though they have a somewhat higher proportion allocated to venture capital. Again, like the Lehman fund they invest both in private equity funds and direct coinvestments. An unusual characteristic is the fund's desire to buy out other funds of funds that trade at a discount.

The Bear Stearns fund now has a three year track record during which it has recorded very good performance, especially since the start of the credit crunch:

It has returned 18% since the start of the subprime crisis, while Lehman has returned 8%. Lehman was only half invested though at the start of the subprime crisis and seems to have picked up the pace more recently.

The fund is leveraged through the issuance of preference shares. Fees include a base management fee of 1.125% to 1.05% p.a. (depending on fund size) and a 7.5% performance fee above the performance hurdle of 8% NAV growth.

BTW, Interactive Brokers got back to me. They are going to look into including these two tickers in the their database. So if you are interested in investing in Private Equity and have an Interactive Brokers account - and if you either want to trade futures, invest internationally, or just pay low brokerage fees, you should - maybe you'll soon be able to invest via these two funds.

Tuesday, August 12, 2008

Lehman Brothers Private Equity

Lehman Brothers Private Equity is a closed end fund trading on the Amsterdam/Euronext exchange. It's only a year old. As the chart above shows the NAV has increased since inception in a period of very volatile markets though about half the fund has been allocated to investments since the IPO, which will have smoothed returns. The share price has been all over the place but now is trading at a very substantial discount to NAV. The firm mainly invests in private equity funds. 64% of those funds are managed by managers whose previous funds were in the top quartile of returns. A smaller portion of the fund consists of direct "co-investments" in companies alongside private equity funds. 75% of the firms investments are in North America, 22% in Europe, and 3% in Asia. The majority of investments are of the buyout variety, with smaller amounts allocated to "special situations" and venture capital. There is no debt at the fund level. The firm has an unused credit facility.

I tried to trade it in my Interactive Brokers simulation account but got the message that there is no such ticker symbol and it isn't included in IB's product listing either. So I've sent a "trouble ticket" to IB and e-mailed the company to see if it can be included.

The firm is listed in Amsterdam, I suppose because it is an investment fund that charges a performance fee. The SEC forbids charging performance fees to non-qualified investors. Other governments (including Australia's too) aren't worried about this.


I already got a response from the company. They contacted IB and IB told them that the request for a new listing has to come from a client. This morning I added a request for BPLE.L to my so far unprocessed ticket.

Monday, August 11, 2008

Listed Private Equity

I'm researching potential listed private equity investments. Currently I have a little under 7% of net worth allocated to private equity. My main investments are:

Leucadia National (LUK) Though people don't think of Leucadia as a private equity firm - it's usually mistakenly called an "insurance company" or a conglomerate - their model is to invest in or takeover struggling companies, turn them around and resell them, or provide venture finance - for example in helping Fortescue Metals get going - as well as invest in other funds, real estate and infrastructure development etc.

ING Private Equity (IPE.AX) This is a fund of funds, investing in Australasian private equity funds. It currently trades below book value, but recent asset sales have been at above book value.

Allco Equity Partners (AEP.AX) This company has a few large investments. Its biggest investment is in publicly listed IBA Health. But it also has smaller private equity holdings which it intends to eventually sell on. It trades at way below book value. The company hasn't tried to address this issue so far. They have no debt and are not entangled in the Allco Finance house of cards.

MVC Capital (MVC) This is a direct private equity fund with mainly US and some European investments.

MVC seems pretty unique as a US listed private equity fund. Another listed fund is Equus. Many funds and funds of funds are listed in London. The IPEIT website highlights several of them. And then there is a Lehman Brothers fund of funds listed in Amsterdam.

I'm looking to invest in a couple of them. But I can only invest $US4,000-5,000 without falling afoul of the Australian FIF regulations as I already have about $A8,000 invested in a Man managed futures fund. If a fund or stock is not exempt from FIF you must mark it to market each year for tax purposes and pay tax on the unrealised capital gain. This means you lose the long-term capital gains rate concession. While US mutual and listed funds are exempt from the FIF regulations, European ones are not. Under the FIF regulations you can invest up to 10% of your portfolio of foreign stocks and funds of funds which normally would not be exempt from the rules and still be exempt from them.

Anyway, I'll be posting soon some comparison of these European listed funds.

Saturday, August 09, 2008

Good News for Temporary Residents

On Friday the Australian government announced that they are backing down on their plan to grab temporary residents' superannuation contributions. Instead, if temporary residents leave Australia and do not claim their super within 6 months the money will be transferred to the government for safekeeping. This is much more sensible. People will still be able to claim their money back at a later data if they realize they "lost" it.

What's amazing is that Senator Sherry is quoted in the AFR today as saying that the rate at which departing people claim their super balances is "incredibly low". Financially non-aware people are just throwing away 9% or more of their salary.

The Rich Don't Focus on Real Estate

The Australian data above from the Tax Review as well as US data I've seen before refute a myth popular in get rich quick circles that the rich focus their investments in real estate. The table shows that only 4% of rental income is received by the richest 1% of income earners which is less than their share of salaries - 5.3% (i.e. salary income is 5.3 times average salaries in the top 1% of taxpayers). The bottom 20% of income earners collected 18.8% of rental income compared to their 2.4% share of wages. The bottom 50% of the income distribution share of rent was twice their share of salaries.

OTOH the richest 1% had 38 times the average level of capital gains and and 35 times the level of dividends. Their business and partnership income was 22-23 times the average. The lowest quintile lost money in business.

The truth is that people mostly get rich from incorporated or unincorporated business and mostly invest their wealth in businesses not in real estate. The average landlord is right in the middle of the income spectrum. The average stockholder (weighted by shares held) in the top couple of percent.

Friday, August 08, 2008

Arkmile Calls Off its Wind-Up Action

Challenger and Arkmile call off their legal action against each other and Arkmile drops its call for a meeting of shareholders and promises not to call one for another 12 months. What did Arkmile get in return? Nothing apparent. Why did they agree to that?

Picked up my passport with a Chinese visa in it. Has a nice picture of the Great Wall engraved into the background like this:

Saw my first snow of the winter - on a mountain range in the distance as I crossed over the lake to the Chinese Embassy and back. When I asked Snork Maiden what it felt like to have winter without snow, she just giggled :)

Why is "The Motley Fool" Still in Business?

I've always wondered how "The Motley Fool" remains in business since the 2000-2002 bear market. Many of the companies they praised in the late 1990s bull market as "breaking the rules" ended up crashing and burning. The model seemed totally broken. And then there was the nonsensical strategy called "The Foolish Four". Most of their comments that I read either state the obvious or seem to lack the relevant context. When I saw their headline: "Buyout or Sellout?" under the headlines for PeopleSupport, I was hopeful that someone else was outraged by this takeover. Don't know why I gave them the benefit of the doubt. They rated PeopleSupport highly but were really happy about the buyout. They completely omitted any reference to the previous $17 buyout that was rejected by management.

As I was thinking about how useless TMF is, someone pointed out to me two adjoining Motley Fool stories about Capital One Financial with diametrically opposing conclusions. Either Capital One Financial is a huge value trap that should be avoided or a low-rated stock that deserves your support. Certainly amusing, not very educational, and definitely not enriching.

In more positive takeover news, Newscorp raised their takeover offer for NDS to $63. That's a nice gesture with no other competition to buy out the company!

Thursday, August 07, 2008


The NASDAQ 100 finally broke out the range it was stuck in for the whole of July. If this was an inverted head and shoulders formation (It does look a little weird, the shoulders each have 2 subshoulders), we should expect a move to just short of 2000. Bears will be thinking that the last couple of days is a C-Wave in a corrective move off the July 15 bottom. The monthly chart, McClellan Summation and other indicators don't support that interpretation either:

This move could fail, of course, but starting from such a low level and being to powerful so far, I'd expect the stochastics to go the full way to the overbought zone. In this chart, I've highlighted a few comparable situations in terms of candles and stochastics:

I looked for a breakout from a bottoming area with a nice white candle and nice smooth stochastics reaching above the 50% point. The December 2007 rally failed. One difference is that it really wasn't at all promising looking in terms of the MACD. But then March 2007 didn't look too promising either... Neither of those rallies had as strong moves in terms of the McClellan Summation. I think the odds are good for a decent rally here.

Distribution of Australian Net Worth

Another highlight from the tax review are these charts of the distribution of net worth and income in Australia. The chart above shows the mean net worth of each income and net worth quintile in Australia. The median net worth is far in excess of the level in the US at around $A350k vs. $US93k in the United States. There is less difference in the means - $A563k vs. about $US450k - reflecting the greater degree of wealth inequality in America. Interestingly, the second income quintile has higher mean net worth than the third income quintile. Obviously a lot of retirees with low income but high housing wealth and some superannuation are in this second income quintile.

Our net worth places us about on the border between the third and fourth quintiles with 40% of Australian households wealthier than us. The long-term perspective, including expected inheritance money, puts us exactly at the mean of the top wealth quintile with less than 10% of households better off than us.

The following chart shows how your net worth should relate to age:

The average 43 year old household should be at close to 100% of average net worth. The average 33 year old household should be at 57% of average net worth. So we are ahead of the game on an age basis too.

Wednesday, August 06, 2008

Architecture of Australia's Tax System

The first stage of the Commonwealth Government's tax review was released today. The 366 page document describes Australia's tax and transfer payment system and compares it to other countries. These comparisons make it a worthwhile read for non-Australians too. Hard to imagine the US Federal Government doing something as systematic as this. There's so much here that I really can't begin to summarize!

But here's an interesting chart that surprised me:

According to this, only about half a million employees or 5% of the workforce make pretax contributions to their retirement accounts ("salary sacrificing to superannuation" in Australian jargon) in addition to money contributed by their employer. Employers have to contribute 9% by law. Many in the public sector contribute more than this for example 15.4% at one quasi-governmental employer. So there is less incentive to make extra contributions than would be the case in the US. We don't have the "matching contribution" approach that is common in the US. And you really can't get it out again until you are in the 55-65 age bracket (depending on circumstances and when you were born). I've commented before that to simplify the system they could just get rid of pre-tax contributions. Makes even more sense when we see the low percentage of people that would be affected.

Only around 2% have a company car included in their salary package. I'm not surprised about that.

Carpet Cleaning

I hate wall to wall carpets. Some people tell me: "all you need to do is vaccuum clean them" but I find they are extremely hard to keep clean. To my mind it's a very stupid thing to put on the floor. If you are going to put a fabric on the floor it ought to be possible to lift it up and wash it. While older apartments in the US usually have wooden floors, almost all rental apartments here in Australia (at least in Canberra) have wall to wall carpets. I've noticed that at least one of our neighbours has wooden flooring, but landlords think carpeting is a cheaper option. On the other hand, most houses here do have wooden flooring (at least older ones). In the Middle East, where I've also lived, everyone has ceramic or stone tiling. That's the most sensible option in my opinion though wood feels much warmer in cold climates. The floor can be cold in Jerusalem (800 metres above sea level) in the winter.

Our kitchen is an island in the middle of our huge living room and though the kitchen has marble like or ceramic floortiles the carpet comes right up to the edge of the island containing the sink and the largest workspaces and those areas are particularly hard to keep clean. Anyway, last weekend we bought one of the machines pictured above ("Bissell Petwash"). I just used it for the first time and so far the results look great. Skeptics would be amazed how much detritus as well as dirt came out of a freshly vacuumed carpet. The cost was $A299 at Harvey Norman. Yeah you can hire a machine for $A40 a pop and then add on $A10-20 or so for the chemicals. Getting professional cleaning done costs at least $A200 a go. The latter is clearly the least frugal option. I reckon it's about even between buying and renting a machine. We've been here less than a year so I'd want to be cleaning every six months probably. In that case, buying probably wins.

P.S. No we don't have pets. Don't be put off by the name of the machine and think it isn't suitable for general carpet cleaning. It is.

Tuesday, August 05, 2008

PeopleSupport Sells Out for Lower Bid

PeopleSupport received a takeover offer for $12.25 per share from Indian conglomerate Essar. This is a premium to recent prices but below a previous offer for at least $17 share which the board rejected. It's also less than my cost basis.

Seems someone else is also suspicious.

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.

Applied for Chinese Visa

I finally got everything I need together and went to the Chinese Embassy (pictured above) today to submit my visa application. This is the first time I've had to apply for a visa for a short-term visit to a country. I've applied for visas before for long-term stays, studying, working, and immigrating to the US and Israel. To get a tourist visa for China you need to provide evidence of which hotels you'll be staying in during your trip or get an invitation letter from relatives etc. if you'll be staying in a private residence. So I had to submit:

A two page application form
My passport
Letter from Snork Maiden's mother confirming I'll be staying with them
Copy of our marriage certificate
Copy of Snork Maiden's passport (to show she's a Chinese citizen).
$30 fee.

Compared to other experiences I've had dealing with consulates and interior ministries the place was deserted. Two women behind the desk - one reading a book and one who dealt with my application - and one other guy sitting in the waiting room. Out the front of the embassy across the street is a permanent Falun Gong demonstration (it was there in 2001) consisting of one guy huddled against the cold sitting beneath huge banners proclaiming "Falun Gong is Good" and other slogans and facing him one Australian security guard manning the main gate to the compound.

I have to return on Friday to pay and pick up my passport with the visa.

It's interesting that the PRC charges Australians who apply here $30 and Americans $155. Citizens of all other countries are charged $50. The fees are similar at the Washington Embassy. $130 for Americans and $30 for everyone else. The fees aren't correlated to what each country charges Chinese seeking visas. Australia charges over $100 to Chinese wanting to visit Australia while the US charges $131 which is not as big a difference. Interesting.

Friday, August 01, 2008

Was Snork Maiden's Superannuation Grabbed Already?

No contributions were paid into Snork Maiden's superannuation (retirement) account during July. We checked her payslip online and contributions were made, but they're not in the account. It might just be to do with her employer's transfer to a new computer system. Or is it the result of the implementation of the outrageous policy that was supposed to be implemented from the beginning of this tax year, where temporary residents' superannuation contributions will be paid to the ATO (tax office) and held until the worker either becomes a permanent resident or leaves the Australia permanently?

We're checking with the human resources/payroll department to eliminate the computer/bureaucracy slipup option. As I just discovered, Snork Maiden isn't a temporary resident for tax purposes as she is married to me, an Australian citizen. If it turns out that her contributions have been sent to the ATO we will be making the case that she isn't a temporary resident and this should not have happened.

If this is what happened, it hasn't solved any supposed bureaucratic problems as her previous superannuation savings are still in her account. So there isn't one less account for the authorities to track. It's just caused more bureaucratic chaos.

Frustrating Month

But at least it was better than last month. On the other hand I'm going to record "trading" losses for the first time in six months. I didn't really do any active trading apart from dealing with an expiring short options position but I mark to market my still open CFD position (SPI (ASX 200 Futures)). The Australian Dollar fell, reinforcing below market returns in US Dollar terms. Full details coming soon. The chart above though could be construed as an inverted head and shoulders formation and weekly charts definitely look like a near term bottom is in place.

I started working on our Australian tax returns. Putting together the spreadsheet for calculating Snork Maiden's tax return. It's the easier of the two but still plenty to learn about. For example, she's not a temporary resident for tax purposes because she is married to an Australian citizen. This means that interest received on her HSBC savings account must be included. However, foreign interest doesn't enter the "interest" box on the tax return but is included in "foreign source income". I vaguely remember that sort of thing from the last time I did an Australian tax return in 2002 (I previously lived in Australia from 1996 to 2002). However, I won't be able to submit Snork Maiden's return until I've completed mine. If my net income comes in sufficiently low we might be able to claim the spouse offset (offset = tax credit in US jargon). I won't be able to complete my tax return till I get full details of distributions from EBI and CIF in late August. But if my income is already over the limit before including those distributions we'll be able to submit Snork Maiden's return fairly soon. She should get a refund as she only worked for 9 months of the year, but has had tax withheld at the rate that would apply if she worked the full year. Unlike the US you don't actually compute on your tax return how much money you either owe the government or they owe you. But the tools are provided to allow you to estimate it.

I stopped by the ATO "shopfront" this morning and picked up a bunch of extra forms and information booklets. I still prefer to have a hard copy rather than a pdf. Also we have to submit our returns on the paper forms as electronic filing is only available if you have previously submitted a return and also the software doesn't work on Apple computers...