Glitzer asked me a little while ago to simulate a China oriented portfolio diversified with the Man-AHL managed futures fund. She specified two US listed stocks for the base portfolio - CHN - the China Fund and IFN - the India Fund with 80% allocated to CHN and 10% allocated to IFN and the remaining 10% in Man-AHL. If you invested a lump sum in these three securities at the beginning of October 1996 and rebalanced the portfolio monthly this is how they would have performed till now (ignoring transaction costs):
Everything has gone up very nicely. CHN gained 508%, IFN, 640%, and Man-AHL 724%. Glitzer's allocation would have gained 558%. But CHN and IFN have been very volatile with monthly standard deviations of 10.9% and 11.4%. Man-AHL's standard deviation is 5.2%, which is more than most developed country stock indices. Glitzer's portfolio would have had a monthly standard deviation of 9.4%. Can we improve on this?
Keeping the 8/1 ratio of CHN to IFN the allocation to Man-AHL that minimizes the portfolio standard deviation is 78% in Man-AHL (!), 19.6% in CHN, and 2.4% in IFN. This portfolio has a standard deviation of only 4.6% and ends up increasing by 805%. More than any of the funds due to the wonders of rebalancing!
Now Glitzer actually proposed dollar cost averaging - adding $1000 per month to the portfolio in the 80:10:10 proportions and not rebalancing. How would this have turned out since 1996?
We would have invested $153,000 and the current value of the portfolio would be $565,000. The current allocation would be: CHN, 80.1%, IFN, 11.4%. Man-AHL 8.5%. So there would have been a little drift from the original allocation. The total gain over the period would have been 490% and the monthly standard deviation is 9.1%. Dollar cost averaging a fixed allocation doesn't work here - it underperforms a lump sum investment with rebalancing. The optimal allocation to Man-AHL here is actually 83%. Investing a lump sum 80:10:10 in 1996 and not rebalancing would have resulted in a 463% gain with a 8.6% standard deviation. The current allocation would be 72:13:15.
The bottom line here is that based on historical performance very large allocations to managed futures are justifiable in order to improve volatility and return of equity oriented portfolios. Rebalancing helps a lot. Dollar cost averaging less so.
In the real world rebalancing costs money. But if you are investing regularly, adjusting your allocation to effect rebalancing might make sense. We don't know whether managed futures will perform as well in the future and I would not risk putting 80% of my portfolio in a single fund. I would use a smaller allocation to managed futures and distribute it across managers and use other asset types for additional diversification. And unless you live in Hong Kong like Glitzer or have your managed futures in a retirement account, you need to think about the tax implications of these funds.
Sunday, May 31, 2009
Moominmama Performance: May 2009
Moominmama gained 9.21% for the month. The MSCI World Index was up 10.08%. Both gains were in large part due to the fall in the US Dollar over the month. The MSCI gained 6.51% in local currency terms and 3.06% in Euro terms. As you can see, Sterling rose about 9% against the USD. All the same, this is by far the biggest one month recorded gain Moominmama has had. Asian and Brazilian equities were the outstanding performers with commodities (including managed futures) and hedge funds lagging. Moominmama is now down 20% from the all time peak value in June 2008. We were down 31% at the worst point in February 2009. Beta to the MSCI is estimated at 0.47 with an annual alpha of -3.35%.
It's looking like Moom and Snork Maiden's gain for the month was a bit above 7.1% and a loss in Australian Dollar terms though net worth increased. The MSCI in Australian Dolalrs gained 0.8%.
Saturday, May 30, 2009
April 2009 Performance Report
Now all the unlisted fund returns are in for April I can present the final performance numbers. Australian Large Cap stocks, mainly via the CFS Geared Share Fund, provided the largest returns in dollar terms while private equity mainly due to Allco Equity Partners (AEP.AX), IPE.AX, and Leucadia had very high percentage returns. The rise in the Australian Dollar over the month from 69 U.S. Cents to 73 U.S. cents caused exchange rate losses in AUD terms and exchange rate gains in USD terms.
Friday, May 29, 2009
Long-Term Returns in the Housing Market
This article from the Wall Street Journal seems pretty solid. Let me know if you can see any flaws. The bottom line is that you shouldn't pay any more to own than to rent a house (principal + interest) because the real capital gains about match the other costs including maintenance and property taxes. Of course, that ignores any utility you get from owning rather than renting...
Tuesday, May 26, 2009
George Friedman
If you've been around the investment blogosphere for a while, you've probably come across the writings of George Friedman, CEO of Stratfor, a "private global intelligence firm". Today, I heard George Friedman of Stratfor speak here in Australia. I guess it was part of his global book tour. His book - the next 100 years - was on sale. Usually, I don't read the stuff he writes as it seems very boring to me. I often rely on the spin a friend in Hong Kong puts on his stuff (usually negative). It was much better in person in that regard. He started out pretty well talking about the constraints that political leaders like Obama face and the lack of choice they have with some reference to Machiavelli. He then went on to say what one would have liked to predict about the 20th century and that covered three of the major points - decline of European powers, quadrupling of global population and rise of transport and telecommunications technology. After that, the stuff about Turkey or Poland as "great powers" that I've heard mentioned in regard to his book was OK but speculative when conditioned on "only because the US will invest in Poland like in S. Korea". But whenever he talked about my areas of expertise in economics and energy or to some degree about China he made little sense and sounded very clueless or flat out wrong. For example, he stated that space based solar is inevitable because land based solar would need so much land it would be an "ecological disaster". The latter is clearly not true and no-one I know who knows anything about energy thinks that the gains from 24/7 cloudfree solar could overcome the energy costs of launching a satellite. At least not with any current technology for the size of the solar collector. His other stuff about capitalism requiring a rising price of land which can only occur due to population growth made no sense to me either... and so forth. I didn't have a very high opinion of Stratfor going in - most bloggers like John Mauldin think he is great - and this didn't change my opinion.
Monday, May 25, 2009
Extended Family Update
The Snorkparents finally left on Friday morning. We had to wake up at 4am to take them to the airport. Since then we have been reorganizing and cleaning our apartment (including moving almost all the furniture to different rooms, back where it was). It's nice to have our space back to ourselves again. I'd say, that if you have a choice don't have your parent-in-law (or your own parents) live with you unless you can divide your house into two self contained apartments. I'm not talking about a short visit of course and even 3 months is on the edge of tolerable but beyond that is a major lifestyle change...
Portfolio LVR
From 1st June, Commonwealth Securities will introduce margin lending rules that allow more borrowing against securities for more diversified portfolios including raising the loan to value ratios from 0% to 40% for one hundred stocks. You need to have 5 or more securities in your portfolio to take advantage of the new rules. Anything that reduces the risk of a margin call is good news :)
Update on Repeal of FIF
There is already more information available on the web (e.g. here and here) about the repeal of the FIF rules proposed in the budget. "The government has announced that the current FIF rules will be repealed and replaced with a "specific, narrowly defined anti-avoidance rule". According to Malleson's it's possible that funds such as Man-AHL that don't make distributions (they don't mention it by name) will be targeted by the new regime. But at least it should make investing in foreign stocks more straightforward. We'll have to wait and see as more details won't be available until the government tables legislation.
Monday, May 18, 2009
Changes to Health Insurance and Superannuation
The recent Australian federal budget announced changes to arrangements for health insurance and superannuation. The former surprised me because it made me aware of a tax concession I didn't even know existed. I'll also comment on how easy it is to exceed the new superannuation contribution limits for some middle income people.
Health Insurance Australia has more or less free government health care under Medicare (with very hefty copays effectively) but also since the late 1990s has tax incentives to encourage people to take out private insurance. When the Howard government introduced the current tax incentives (I lived in Australia at the time) I was under the impression that people earning less than $A30k a year would get a 30% rebate on the cost of their health insurance while people earning more than $A50k a year (which was the top tax bracket when the Howard government came to power!) would be taxed 1% extra a year - the Medicare Surcharge - if they didn't have private health insurance. This 1% wasn't marginal but applied to your entire income. Earn $A1 over $A50k and you got hit by a $A500 charge. The surcharge was also raised higher for a while. I knew that the threshold for the surcharge had been raised to $A75k a year, but what I didn't know was that rebates for private health insurance appear to apply at every income level. I found this out only because of the Rudd government's decision to means test them. Did I misunderstand the original structure of the Howard scheme? Or were the rebates extended to higher incomes at some point?
Back when I lived in Australia in 1996-2002 I never found it worthwhile to get private insurance as mostly I got my income below $A50k and even if I hadn't the insurance seemed to cost about as much as the charge and I like to avoid this kind of hassle. And I had no idea what benefits private insurance might give me. Now both Snork Maiden and I will probably earn less than the $A75k threshold for the 2008-9 and 2009-2010 tax years. When we had to take out private cover for Snork Maiden it cost around $A1,000 per year. Australian Unity quote a rate of $110 per month for the most minimal coverage for the two of us together and I think that is after the rebate of 30%. So it would make sense if both of us earned more than $A75k per year but not before we hit that level...
Superannuation The government lowered the maximum limit for concessional contributions to superannuation (taxed at 15% instead of your marginal rate) from $A50k per year to $A25k per year. It's important to note that required employer contributions are included in this limit. If you exceed the limit you are hit by an extra 31.5% tax on the contributions. The Unisuper superannuation scheme in the higher education sector has extremely high contribution rates. Employers contribute 17% of salary to the fund (instead of the legally required 9%) and employees contribute 8.25% from pre-tax salary. Any academic earning more than $99k per year - i.e. the Associate and Full Professor levels at most universities - will exceed the new limit. You can instead pay the employee contribution post-tax. Then you'll need to earn $A147k to exceed the limit which covers all regular full professors. But anyone in those ranks needs to switch to post-tax contributions.
I'm sure most senior administrators come in above that level - e.g. a department head who is a professor will probably earn an administrative supplement on top of the professor's salary and deans must earn more than that. Also some professors earn more than this due to supplements for people in some areas like law or additional fellowships like the Federation Fellowships. John Quiggin, for example, has one of these and, therefore, has a salary close to $A 1/4 million. These people will need to get their employer contributions lowered and their salary raised (with larger post-tax contributions) to reduce tax. I don't know if that flexibility is available.
Health Insurance Australia has more or less free government health care under Medicare (with very hefty copays effectively) but also since the late 1990s has tax incentives to encourage people to take out private insurance. When the Howard government introduced the current tax incentives (I lived in Australia at the time) I was under the impression that people earning less than $A30k a year would get a 30% rebate on the cost of their health insurance while people earning more than $A50k a year (which was the top tax bracket when the Howard government came to power!) would be taxed 1% extra a year - the Medicare Surcharge - if they didn't have private health insurance. This 1% wasn't marginal but applied to your entire income. Earn $A1 over $A50k and you got hit by a $A500 charge. The surcharge was also raised higher for a while. I knew that the threshold for the surcharge had been raised to $A75k a year, but what I didn't know was that rebates for private health insurance appear to apply at every income level. I found this out only because of the Rudd government's decision to means test them. Did I misunderstand the original structure of the Howard scheme? Or were the rebates extended to higher incomes at some point?
Back when I lived in Australia in 1996-2002 I never found it worthwhile to get private insurance as mostly I got my income below $A50k and even if I hadn't the insurance seemed to cost about as much as the charge and I like to avoid this kind of hassle. And I had no idea what benefits private insurance might give me. Now both Snork Maiden and I will probably earn less than the $A75k threshold for the 2008-9 and 2009-2010 tax years. When we had to take out private cover for Snork Maiden it cost around $A1,000 per year. Australian Unity quote a rate of $110 per month for the most minimal coverage for the two of us together and I think that is after the rebate of 30%. So it would make sense if both of us earned more than $A75k per year but not before we hit that level...
Superannuation The government lowered the maximum limit for concessional contributions to superannuation (taxed at 15% instead of your marginal rate) from $A50k per year to $A25k per year. It's important to note that required employer contributions are included in this limit. If you exceed the limit you are hit by an extra 31.5% tax on the contributions. The Unisuper superannuation scheme in the higher education sector has extremely high contribution rates. Employers contribute 17% of salary to the fund (instead of the legally required 9%) and employees contribute 8.25% from pre-tax salary. Any academic earning more than $99k per year - i.e. the Associate and Full Professor levels at most universities - will exceed the new limit. You can instead pay the employee contribution post-tax. Then you'll need to earn $A147k to exceed the limit which covers all regular full professors. But anyone in those ranks needs to switch to post-tax contributions.
I'm sure most senior administrators come in above that level - e.g. a department head who is a professor will probably earn an administrative supplement on top of the professor's salary and deans must earn more than that. Also some professors earn more than this due to supplements for people in some areas like law or additional fellowships like the Federation Fellowships. John Quiggin, for example, has one of these and, therefore, has a salary close to $A 1/4 million. These people will need to get their employer contributions lowered and their salary raised (with larger post-tax contributions) to reduce tax. I don't know if that flexibility is available.
Saturday, May 16, 2009
Hedge Fund Returns for April 2009
HFRI returned 3.74% for April while Credit Suisse/Tremont estimate that hedge funds only gained 1.68% which is very close to the HFRX estimate of 1.61%. Both providers agree that convertible arbitrage did very well (5.73% or 4.52%). Short bias of course did horribly, macro not very well, and hedged equity strategies OK to good.
For comparison the MSCI World Index gained 11.90% in USD terms, while Moom gained 12.76%. Our target portfolio would have gained 7.32% (in AUD terms: 5.89%, -1.29%, 6.75%). The AUD target portfolio suffered due to a loss in Australian shares and managed futures plus the rise in the AUD.
For comparison the MSCI World Index gained 11.90% in USD terms, while Moom gained 12.76%. Our target portfolio would have gained 7.32% (in AUD terms: 5.89%, -1.29%, 6.75%). The AUD target portfolio suffered due to a loss in Australian shares and managed futures plus the rise in the AUD.
Thursday, May 14, 2009
FIF Rules to be Repealed
Apparently, the Australian federal budget announced on Tuesday repeals the Foreign Investment Fund (FIF) rules which apply to investments in foreign domiciled managed funds and stocks. These rules are rather complex but essentially mean that with many exceptions you must pay tax on the annual change in value of your foreign investments whether you actually sold that investment or not. In essence they are all treated as trading assets and you do not have access to the lower rate of capital gains tax applicable to investments held for more than 12 months. These rules don't apply to funds based in Australia that invest in foreign assets.
If they are really repealed that would be very good news. One of the effects would be to advantage investing in Man Financial's managed future products over the alternatives. Man does not distribute income on a regular basis but instead accumulates it within the fund. However, Man funds are FIFs, while the competitors products are not. We'll have to see the exact details to know all of the implications.
If they are really repealed that would be very good news. One of the effects would be to advantage investing in Man Financial's managed future products over the alternatives. Man does not distribute income on a regular basis but instead accumulates it within the fund. However, Man funds are FIFs, while the competitors products are not. We'll have to see the exact details to know all of the implications.
Unisuper Member Pack Arrived
My membership certificate and other info finally arrived from my new superannuation fund, Unisuper. They completely ignored all the choices I made on my application form (apart from noting my tax file number - equivalent of the SSN in the US) and so now I need to submit them again. Including switching to the accumulation plan from the defined benefit plan. This seems to be par for the course for every retirement plan I or Snork Maiden have joined. No wonder people tend to stick in the default options provided by retirement plans!
I also added $A2,000 today to Snork Maiden's non-retirement account with Colonial First State and paid off another $A2,000 of my margin loan with CommSec. It's nice to have money to save again!
Wednesday, May 13, 2009
Back from Queensland
Got back last night from our trip to Port Douglas in Northern Queensland with the Snorkparents. Yes, we did see two cassowaries just like these crossing the road in the Daintree National Park. We'd already passed them as they came out of a "concealed driveway" when Snork Maiden spotted the flash of blue color from the corner of her eye. There was lots of other cool stuff. I tried snorkelling for the first time and saw some coral, a fish, a sea cucumber, and a sea slug kind of thing. I found it pretty challenging though. Sooner or later I made some mistake with breathing and had to surface to breath properly. I was managing longer stretches each time so think I need a lot more practice... The others didn't try it or get wet apart from the rain. It rained every day, but then it is a tropical rainforest, even if it was at the beginning of the dry season or end of the rainy season. On the other hand, I felt more comfortable than I ever have in a tropical climate due to the lack of sunshine. At times I even felt a little cold!
Back down south and back to "reality". Another paper I submitted for publication was rejected - par for the course - I still have two out there under review. One referee said they had no idea about the topic, the other said it was great, and the third actually had substantive criticism. So it shouldn't be too much work to get it ready to submit to another journal. OTOH, checking my citations for the week I found I have 8 new articles in the Web of Science citing me for a total of 11 citations. I'm up to about 90 citing articles year to date which is pretty good in my discipline. So getting a paper rejected is less upsetting than it might be if I was a beginning researcher. Of course, when I was a beginning researcher I expected to get rejected and so wasn't so upset by it. If you've ever heard that almost no-one reads any given scientific paper, that is incorrect - the distribution of papers by number of readers and citers is very unequal. Many are never cited and probably little read. Others are very highly cited and read.
Today, I did the "induction course" at my workplace. I did learn some things despite having worked at this university in the past. Some things have changed and some I never knew.
Thursday, May 07, 2009
Hedge Fund Returns for April 2009 Begin to Trickle In
The HFRX is reporting a gain of 1.61% for April. Equity market neutral and macro strategies lost money while convertible arbitrage did well. HFRX is based on a sample of 55 funds with a proprietary weighting scheme.
Currency Allocation
Our currency allocation is getting really out of whack as the Australian Dollar rises and Australian shares perform well and we spend USD. We currently have 60% roughly in AUD associated investments and 20% in USD and 20% other. The goal was to be 50:50 exposed to the AUD and other currencies. It makes sense to try to find foreign investments and maybe stop spending USD, but the AUD seems near fair value, so despite the imbalance we won't be selling AUD investments and buying foreign exposed ones yet.
It's the same with our stock exposure. It's way above the long-term target, but with stocks probably still undervalued it doesn't make sense to sell, I think.
It's the same with our stock exposure. It's way above the long-term target, but with stocks probably still undervalued it doesn't make sense to sell, I think.
Monday, May 04, 2009
April 2009 Moominvalley Report
This month saw one of the largest gains in net worth in dollar terms USD 31,220 (second biggest after April 2008) and was the biggest percentage gain in USD terms (14.31%) since October 2001. Not so spectacular in Australian Dollar terms - a gain of $A26,968 (third biggest after August 2008 and October 2001). Only a 9.22% gain in USD. What happened in October 2001? I quit my job at the university I'm now again working at (well it was the end of my contract but I still got a substantial termination payment). And the stock market was rebounding from the September 2001 low. This time we are also in rebound mode, I got my first pay (2 months worth) for my new job, Snork Maiden got paid 3 times for the month and we got some refunds for trips from her employer (which we make money on effectively). The crisis feeling has certainly relaxed. But at this point in 2001 it looked like the bottom was in the stock market too...
The following is based on the available data as a couple of funds as usual won't report till near the end of the month, when I'll give a final asset class performance report. As usual everything is in US Dollars unless otherwise stated.
The MSCI World Index rose 11.90% in USD terms and the SPX rose 9.57%. We gained 12.33% in USD terms (6.30% in AUD terms). Performance was strongest in private equity (34.66%) followed by US stocks (10.42%) and the Australian Dollar gained. Leverage also helped for a change. Alpha measured against the USD MSCI was 3% with a beta of 1.16 currently. Beta has had some crazy fluctuations through the financial crisis:
We spent $6,153, which is very high. More than $2,000 was on flights for four people and accommodation in Queensland (upcoming trip). Actually, we spent $3,189 from Snork Maiden's U.S. accounts which have been designated for expenses on the Snorkparents visit. No idea what we spent the other $1000 on apart from some restaurant meals in Sydney. So cutting that out, expenditure was pretty normal:
Transfer to super is my after tax contribution to my super account in a bid to get the government's "co-contribution".
As you can see from these accounts our retirement accounts and non-retirement investments gained about the same this month. Net worth reached $233k ($A319k). Asset allocation moved away from our target as Australian stocks gained strongly and the shares of everything else in our portfolio fell:
The main move I made was to reduce hedge fund exposure by selling some shares of Platinum Capital and to consolidate our U.S. brokerage accounts with Interactive Brokers, in the process paying off two small margin loans in Euros and Pounds. So our leverage continued to decline this month. Paying off credit cards also helped. We are now borrowing just 12 cents for each dollar of equity (we hit 38 cents per dollar at the peak) and including borrowings by levered funds we are borrowing 51 cents per dollar of equity. This measure reached 90 cents at the worst point.
The following is based on the available data as a couple of funds as usual won't report till near the end of the month, when I'll give a final asset class performance report. As usual everything is in US Dollars unless otherwise stated.
The MSCI World Index rose 11.90% in USD terms and the SPX rose 9.57%. We gained 12.33% in USD terms (6.30% in AUD terms). Performance was strongest in private equity (34.66%) followed by US stocks (10.42%) and the Australian Dollar gained. Leverage also helped for a change. Alpha measured against the USD MSCI was 3% with a beta of 1.16 currently. Beta has had some crazy fluctuations through the financial crisis:
We spent $6,153, which is very high. More than $2,000 was on flights for four people and accommodation in Queensland (upcoming trip). Actually, we spent $3,189 from Snork Maiden's U.S. accounts which have been designated for expenses on the Snorkparents visit. No idea what we spent the other $1000 on apart from some restaurant meals in Sydney. So cutting that out, expenditure was pretty normal:
Transfer to super is my after tax contribution to my super account in a bid to get the government's "co-contribution".
As you can see from these accounts our retirement accounts and non-retirement investments gained about the same this month. Net worth reached $233k ($A319k). Asset allocation moved away from our target as Australian stocks gained strongly and the shares of everything else in our portfolio fell:
The main move I made was to reduce hedge fund exposure by selling some shares of Platinum Capital and to consolidate our U.S. brokerage accounts with Interactive Brokers, in the process paying off two small margin loans in Euros and Pounds. So our leverage continued to decline this month. Paying off credit cards also helped. We are now borrowing just 12 cents for each dollar of equity (we hit 38 cents per dollar at the peak) and including borrowings by levered funds we are borrowing 51 cents per dollar of equity. This measure reached 90 cents at the worst point.
Saturday, May 02, 2009
Sixteen (or twenty four) Accounts
I'm just checking all our bank accounts, credit cards, and loans at the end of the month to record the data in my monthly accounting exercise and pay any bills that need to be paid. I made a list on my computer to check off against and realised there were sixteen accounts to check. Of course we have more total accounts than that. Actually, another six investment and retirement that don't have cash or debt balances to check and then there is the apartment deposit and the car value. So twenty four accounts in total. And I just closed one this month (TD Ameritrade - I still have a Roth IRA with them).
Don't know if this is a lot. Some bloggers have reported higher numbers...
Don't know if this is a lot. Some bloggers have reported higher numbers...
Friday, May 01, 2009
Moominmama Performance April 2009
Moominmama gained 3.91% for the month. Pretty nice, though not much compared to the MSCI World stock index. Brazilian stocks did very well, unfortunately we only had 0.60% of the portfolio in them. Equities and bonds generally did well and alternatives poorly.
MSCI World Index Up 11.9% for the Month
In USD terms. Currently I have us up 12.65% in USD terms and 6.62% in AUD terms - likely that the final numbers could be slightly higher - Snork Maiden's retirement account has a scheduled outage till Monday morning... Of course we won't have a real final number for April till the end of May when Everest and Man get around to reporting their unit prices for April...
The MSCI is up just 0.07% YTD. Been a bumpy path.
The MSCI is up just 0.07% YTD. Been a bumpy path.
Got Our "Stimulus Payment"!
Checking our bank accounts in preparation for the monthly report I noticed a discrepancy in the numbers and realised that our $A900 stimulus payment arrived today (1 May) from the Australian government. As I explained only Snork Maiden will get a stimulus payment which was reduced to $A900 instead of $A950 following the bargaining process in the Senate.
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