Tuesday, January 04, 2022

December 2021 Report


Stock markets performed very strongly, with the MSCI World Index rising by 4.03%, the S&P 500 by 4.48%, and the ASX 200 by 3.15%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7122 to USD 0.7261 reducing Australian Dollar returns and increasing USD returns. We gained 2.14% in Australian Dollar terms or 4.14% in US Dollar terms. The target portfolio is expected to gain 1.13% in Australian Dollar terms and the HFRI hedge fund index is expected to rise 1.90% in US Dollar terms. So, we out-performed three of the benchmarks but underperformed the S&P 500 and the ASX 200. Though I track performance against the S&P 500, it isn't really a benchmark, as I can't imagine investing all my assets in it. This month's numbers are very preliminary though. The returns for two of the top performing investments are just estimates based on historical internal rates of return. These venture capital funds only update valuations every six months and report the results more than a month after the quarter end.

The record-breaking run of winning months in Australian Dollar (and currency neutral) terms continued. We haven't had a losing month since March 2020. This is a 21 months run so far. We have had several monthly US Dollar losses in that time.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

Private equity had the best performance and contributed the most to the account. This includes estimated returns of venture capital funds that won't report the year end value till some time in February and so is very preliminary. US and rest of the world stocks had negative returns. This was because of the negative performance of the Hearts and Minds Fund (HM1.AX), which lost 7% for the month and had a 3.7% portfolio weight.

Things that worked well this month:
  • Venture capital funds Aura VF1 and VF2 are predicted to perform well. In reality VF2 might not be upvalued at all and VF1 revalued by more than predicted because of a strong funding round for Shippit, which is the largest holding in the fund. Pengana Private Equity (PE1.AX) gained AUD 15k, Tribeca Global Resources (TGF.AX) AUD 12k, Cadence Opportunities (CDO.AX) 10k, Fortescue (FMG.AX) 9k, and Pershing Square Holdings (PSH.L), 9k also.
What really didn't work:
  • As mentioned above, Hearts and Minds was by far the worst performer, losing AUD 14k.

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are a little bit better than the median hedge fund levered 1.6 times. 

We moved a little bit towards our desired long-run asset allocation. We reduced the shares of futures and hedge funds in the portfolio and increased the shares of everything else. Private equity is the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

  • I bought a second Australian Dollar futures contract to hedge our foreign currency exposed positions.
  • I reduced our leverage quite a lot from 23% of gross assets (not counting our house) to 18%. This includes the mortgage on our house. The main reason was to reduce our most expensive debt – a margin loan from Commonwealth Securities. I also replaced a pile of AUD cash with the second futures contract and reduced our US Dollar margin loan from Interactive Brokers by selling AUD 66k. I sold the remaining 200 shares of the Ready Capital baby bond (RCB) to complete this delevering.
  • I invested in my twelfth painting at Masterworks. A David Hockney painting shown above. I just liked it. As usual, I invested USD 10k.
  • I sold 25k shares of Pengana Private Equity (PE1.AX) as the share price rose above NAV.
  • I sold 38k of Regal Funds (RF1.AX) shares I recently bought when the NAV hit AUD 4.02. NAV is now AUD 3.83. Still we made a profit of about AUD 3k on this trade.
  • I bought 1,000 shares of the China Fund (CHN) after they paid out a dividend that reduced the dollar value of my holding by almost as much.

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