Annual Report 2020

Overview 
The main financial themes of this year for us was continuing to invest the money we inherited in late 2018 and surprisingly strong investment returns for the year after the sharp fall in markets in March due to the COVID-19 pandemic. In my academic career I was also surprisingly productive in the second half of the year following the struggle of dealing with closed schools and our move to online teaching in the first half of the year. We spent less for the year overall because of a reduction in spending during the lockdown and no travel. Our house fell in value, which was against the trend in the Australian housing market.

 

All $ signs in this report indicate Australian Dollars. As I did last year, I'll do a separate report on individual investments.

Investment Returns 
In Australian Dollar terms we gained 11.9% for the year and in USD terms we gained 23.2% because the Australian Dollar gained 10%. The MSCI gained 16.8%  in USD terms and the ASX 200 only 2.6% in AUD terms. The HFRI hedge fund index gained 8.9% in USD terms. Our target portfolio is expected to gain 6.8%. So, we beat all benchmarks this year.

 

This chart compares our portfolio to the benchmarks in Australian Dollar terms over the year:

 

We tracked the MSCI World Index very closely till May. After that we started to diverge. I posted equivalent Australian Dollar returns in the December monthly report. Here are annualized returns over various standard periods:

US Dollar returns are not very good over longer periods, but they still beat the HFRI, especially over the 3-5 year horizon. Here are the investment returns (currency neutral) and contributions of each asset class in 2020:

 

The contributions to return sum to the total portfolio return. Hedge funds and private equity had the highest returns and hedge funds by far the largest contribution to total return. Gold had the third highest return and the second highest contribution to total return. The rate of return on bonds is surprisingly good actually given the almost total loss of our Virgin Australia investment.

Investment Allocation
The main changes in allocation over the year was that we ran down our bonds allocation while increasing hedge funds, private equity, and gold mostly:

We started investing in art, which for the moment is grouped together with real estate.

Accounts
Here are our annual accounts in Australian Dollars:

There are lots of quirks in the way I compute the accounts, which have gradually evolved over time. There is an explanation at the end of this post. 

We earned $128k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. This was down 13% on 2019 because Moominmama worked less and we had large tax bills due to investment income (investment income is reported pre-tax). We earned (pre-tax including unrealized capital gains) $370k on non-retirement account investments. The latter number was up on from last year. The former number continued its decline. The investment numbers suffered from the rise in the Australian Dollar ($67k in "forex" loss). Total current income was $498k. Not including mortgage interest we spent $121k. Total spending was down 18% on 2019 due to reclassifying mortgage interest as an investment cost since we paid off and redrew the mortgage and reduced spending due to the pandemic. Not counting mortgage interest, spending was down 9%.

$10k of the current pre-tax investment income was tax credits – we don't actually get that money so we need to deduct it to get to the change in net worth. We transferred $45k into retirement accounts from existing savings in "non-concessional (after tax) contributions. I list $2.4k of "inheritance". This is mostly due to adding the value of a painting I inherited, which I already had but hadn't included in net worth. The only other "things" included in our net worth are our car, a gold coin, and our house.

 
The change in current net worth, was therefore $324k. Looking at just saving from non-investment income, we dissaved $37k. So, before the transfer to retirement accounts we saved about $8k from salaries etc.

The retirement account is a bit simpler. We made $44k in pre-tax contributions (after the 15% contribution tax) and made an estimated $65k in pre-tax returns, which was strongly down on 2019. $8k in "tax credits" is an adjustment needed to get from the number I calculate as a pre-tax return to the after tax number. Taxes on returns are just estimated because all we get to see are the after tax returns. I do this exercise to make retirement and non-retirement returns comparable. Net worth of retirement accounts increased by $146k.

Finally, the housing account. I estimate that our house lost $34k in value. As our mortgage is now included in the current investment account there are no other entries in the housing account now.

 

Total investment gains were $401k, up 8% on 2019.

Total net worth increased by $436k,  which was up 12% on last year. $51k of this was from saving from non-investment sources, up 7% on last year. Thanks to employer superannuation contributions this was 30% of our total after tax non-investment income. Including investment gains our savings rate was 78% of our comprehensive after-tax income.

How Does This Compare to My Projection for This Year?
At the beginning of the year, I projected a gain in net worth of $425k, which turned out to be almost exactly correct. The baseline projection in my spreadsheet for 2021 is for a very high 19% rate of return, a 6% increase in spending, and flat other income, leading to an $800k increase in net worth to around $5.7 million. A more sensible projection would be for another $400k increase to around $5.3 million. Of course, anything could happen.

 
Notes to the Accounts
Current account includes everything that is not related to retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. However, property taxes etc. are included in the current account. Since we notionally converted the mortgage to an investment loan, mortgage interest is counted in current investment costs. So, the only item in the housing account now is increases or decreases in the value of our house. This simplified the accounts a lot but I still keep a lot of cells that might again be used in the future.

 

Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... 

 

For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, there are none of those one-off expenditures. "Saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.