Sunday, August 25, 2019

Understanding Wills and Estate Planning

As we don't yet have a will, I have been reading this book, which is a simple guide to this topic with plenty of examples. I now see that there is more to estate planning in Australia than I thought. There are no inheritance taxes in Australia, so I thought that "estate planning" wasn't a big deal here. But after reading the book I now see that you might want to design things to prevent various scenarios occurring, and yes there are some tax issues, and then there are all the issues of making sure your wishes are carried out.

For example, in the case of my mother, after she lost the ability to make decisions, we ended up being dictated to by the government about how we managed her money etc. We had to sell all her financial assets and reinvest them in an approved way. We had a power of attorney to act on her behalf, but crazily this became invalid when she most needed us to act on her behalf! This was because prior to 2017 apparently you couldn't have an enduring power of attorney in her country. So, it is important to set up an enduring power of attorney.

I aspire that my children will inherit in real terms at least as much as I inherited from my parents. Of course, we can't guarantee this as who knows what might happen to the economy etc. But we can try to prevent some adverse events happening. An example is if one of us dies and the other gets a new partner. Then they die and the partner inherits everything and decides to give none of the money in their will to our children.  Maybe because they have existing children and rewrite their will to include only them.... This kind of case is mentioned in the book but the solution isn't provided. On p58 it says that the survivor should see a lawyer before remarrying...

I am thinking the solution is to set up a testamentary trust on the death of the first spouse incorporating their share of the total assets. The beneficiaries would be the surviving spouse and the children. The surviving spouse will earn income from the trust during the remainder of their life after which the children will be the sole beneficiaries of the trust. So, clearly, we are going to need to discuss with a lawyer all of this.

Currently, if our nuclear family all died, it would be my mother-in-law who would inherit everything according to Australian law. I can't imagine she would handle that very well and given the large inheritance component from my parents, that hardly seems fair. So, we also need to have contingent inheritors to result in a more reasonable distribution of assets in that extreme case.

We also will need to think about who would be a guardian for our children if we both died. I can't really think of someone here in Australia that we would want to do this and who would agree to it as neither of us have relatives here. But it is something we are going to have to determine.

There are probably lots of things I still haven't considered but I think we are going to need to have rough ideas about all of these before meeting a lawyer. By the way, if anyone can recommend a lawyer that they have used, that would be great!

Sunday, August 18, 2019

Individual Investment Performance, July 2019

In July, generally alternative investments and small cap stocks did well and gold and our trading did poorly. Some things were just bouncing back from previous poor performance like Tribeca Global Natural Resources (TGF.AX) or Domacom (DCL.AX).

Monday, August 12, 2019

Trading Back on Track

After suffering some losses, it looks like I've got our trading back on track for the moment:

We were stopped out of Bitcoin this morning for a USD 16k gain at $11595 and $11600 in the August futures (3 contracts in total). As we are only doing long trades in Bitcoin, we don't have a Bitcoin position. This should be the impetus for subscribing to a data service and doing some backtesting of other markets...

We are also net positive in trading since 1996. However, the month is still not half-way over, so anything could happen by the end of the month.

Sunday, August 04, 2019

Designing a Portfolio for Baby Moomin

I decided that the best provider of investment bonds is Generation Life. This is mainly because they seem to be scandal free, not about to be sold off to an overseas manager, and have lower fees than other providers. Next I needed to pick an investment portfolio from their investment options. I decided on the following rules and criteria:
  1. 50/50 equities/fixed income and alternatives
  2. 50/50 passive and active management
  3. 50/50 Australian and international assets
  4. Pick the best fund from alternatives in each of these niches - focusing on long-term "alpha" and in particular their performance during the Global Financial Crisis and the recent December 2018 mini-crash.
This is the resulting portfolio:

50% Dimensional World Allocation 50/50 Trust. Here I compared a Vanguard balanced fund with this fund. In the long run, DFA have done much better than Vanguard:
Here, Portfolio 1 is a DFA stock fund and Portfolio 3 the Vanguard equivalent. The equity curves are for someone withdrawing 5% per year in retirement. Portfolio 2 is a DFA 60/40 stock/bond portfolio. The difference is stunning. Recently, DFA hasn't done as well as value stocks are out of favor. I am betting on them coming back. If there is a major market correction we might shift this core holding to a more aggressively equity focused fund.

10% Ellerston Australian Market Neutral Fund. Ellerston has done horribly in the past year, but prior to that it did very well for a market neutral fund. It now seems to be rebounding. This fund manager originally managed James Packer's money and then branched out.

10% Magellan Global Fund. This has been one of the best Australia based international equity funds. It did particularly well during the GFC.

10% Magellan Infrastructure Fund. This fund seems better than the other real estate options. It didn't do very well during the GFC, but all the others were worse.

10% Generation Life Tax Effective Australian Share Fund. This fund is managed by Redpoint Investments. The idea is to tilt a bit towards tax effective Australian shares given the high taxes on this investment bond overall. The manager is pretty much an index hugger, but the other options for actively managed Australian shares seem worse.

5% PIMCO Global Bond Fund. PIMCO is the gold standard for actively managed bonds. I decided to split my allocation to PIMCO between international bonds and

5% PIMCO Australian Bond Fund, as Australian bonds have actually done very well recently.

Friday, August 02, 2019

July 2019 Report

July was another positive month for long term investments, but we lost money trading. In July the Australian Dollar fell from USD 0.7012 to USD 0.6879. The MSCI World Index rose 0.33% and the S&P 500 1.44%. The ASX 200 rose 2.94%. All these are total returns including dividends. We gained 2.25% in Australian Dollar terms and 0.31% in US Dollar terms. The target portfolio is expected to have gained 2.38% in Australian Dollar terms and the HFRI hedge fund index is expected to have gained only 0.10% in US Dollar terms. So, we had a relatively strongly performing month, almost a bit below the ASX200 and more or less matching our target portfolio and the MSCI and beating HFRI. Updating the monthly returns chart I posted last month :

Here is a report on the performance of investments by asset class (futures includes managed futures and futures trading):

Australian Small Cap Stocks was the best performing asset class and Futures Trading the worst, losing 3.34%. The largest contributions to the rate of return came from hedge funds followed by private equity. The Australian Dollar return is higher than the 1.48% reported here because of foreign currency gains due to the fall in the Australian Dollar over the month.

Things that worked very well this month:

  • Hedge funds, private equity, and Australian small cap all did well. I think this could be because many of these investments were not doing well and were probably sold to crystallize tax losses last month before the end of the Australian financial year and then rebought this month. The CFS Developing Companies Fund gained 5.86%. 
  • I marked Oceania Capital to $2.30 at the end of the month, which was the record date for the buyback associated with the delisting that was approved at the extra-ordinary meeting.  The buyback price is $2.30 a share. This translated to a 7% gain for the month.
  • The Winton Global Alpha Fund also did well gaining 2.46%. A big contrast to my own trading...
What really didn't work:

  • We had major losses trading Bitcoin, though, so far, it is just a "correction". I closed short positions early which would have been winners. The Bitcoin "model" also suffered its worst percentage loss to date on a long trade. As I have been trading double the size long as short this just compounded the loss. Going forward I will only take long Bitcoin trades for the moment.
Including long-term trading in gold trading we lost AUD $17.2k for the month in trading. I prefer this measure now as it covers all the ways we are trading and is compatible with the long-term trading returns chart I recently posted. The rate of return on capital allocated to trading was -4.18%.

We moved a little more towards our new long-run asset allocation.* Gold and cash increased most and bonds decreased most:

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

  • We tendered USD 40k of Avon Products bonds into an early redemption and sold USD 21k of Deutsche Bank bonds. Also, USD 50k of Citibank bonds matured. I bought USD 10k of Lexmark bonds, USD 25k of Kraft-Heinz bonds, and USD 25k of Dish bonds. So, our direct bond allocation fell by USD 51k.
  • We traded unsuccessfully, as discussed above.
  • I bought 1,000 more shares of the IAU gold ETF. 
  • I bought another 450 shares of Oceania Capital.
* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.