Investment Action Plan

This is the action plan resulting from the Investments Review:

Immediate Action

1. Stop re-investing distributions at Winton Global Alpha.

2. Stop re-investing distributions at Aspect Diversified Futures. 

3. Stop re-investing distributions at ASADPF.

4. Switch from TIAA Real Estate to CREF Social Choice in my US retirement account.

Longer Term

5. Monitor and sell: Bitcoin, URF, Defi Technologies, TGF

6. Monitor and reduce: WAR, CDO, WMA

7. Add? CD3, WCMQ, Domacom if the management company looks more stable. 

 

Investments Review 8: Developing Alternative Investments

The last installment of the Investments Review, though, actually, there will be an action plan coming up!

Bitcoin Portfolio share: 11.9% IRR: 40%. We hold Bitcoin across the SMSF and our individual Interactive Brokers accounts. I first got into Bitcoin in 2019 when CME futures were introduced, thinking it would be good to trade it. I made some money and gave some back. Then last year, when the spot ETFs were launched I decided to do longer term trading. I got in a bit late and made things worse for myself by buying more when the price had already risen into the $70k range. Then the late 2024 surge generated some profit, which has been partially given back at this stage. The current game plan is to sell the ETFs sometime this year, based on market indicators. I am beginning to think of switching then to shorter term trading again, we will see.

Winton Global Alpha Portfolio share: 3.3% IRR: 4%. This is my larger managed futures investment. We hold it in the SMSF as it is not tax efficient. It didn't do well when interest rates were low and especially going into the pandemic. Then there was a big surge, as interest rates increased. These investments do well in high interest rate/high inflation environments. Recently, I redeemed some of the investment. Possibly, I should set distributions to be paid out rather than re-invested.

Masterworks Portfolio share: 2.6% IRR: 3%. I started investing through this fractional art investing platform in 2018. I have had a three profitable "exits" but the remainder of the portfolio is mostly down and I haven't added more. The IRR is pretty low. I will wait for this to gradually wind down I think.

Aspect Diversified Futures Portfolio share: 1.9% IRR: 12%. I invested in this (through Colonial First State) to diversify my managed futures holdings. We hold this in the SMSF too. The period of rising interest rates was good, but it is not doing so well since interest rates started to decline. Possibly, I should set the distributions to be paid out rather than be re-invested.

CD3 Portfolio share: 1.6% IRR: 13%. This ASX listed fund mostly invests in US private equity. It is also in the SMSF. It is trading at a large discount to NAV and has a good IRR. The portfolio is quite mature and exits are occurring. So, I think this is a good investment that I will continue to hold and maybe add more to.

Investments Review 7: Developing Real Estate Investments

The smaller investments have done better here, which is not optimal...

TIAA Real Estate Portfolio Share: 3.3% IRR: 4%.  I don't have a chart for this one. Currently this is the only holding in my US retirement account (403b). I would have done better investing in a balanced fund instead. The advantages of this fund are that it has very low volatility and it is possible to predict when it is going to go up or down. So, I have switched between this and the CREF Social Choice Fund. But just sticking with the latter would have given a better return. So, perhaps I just should switch back to that.

ASADPF Portfolio Share: 1.9% IRR: 3%. This fund was originally run by Australian Unity, had a fair degree of leverage and had performed well. It was one of the initial investments in our SMSF. It also has low exposure to office property. Most Australia property funds are office-centric. But profit peaked in February 2023 and the unit value has declined 14% since then. Australian Unity made a various attempts to sell or merge the fund. In the end. ASA took it over. It is very illiquid, though we could get the distributions paid out instead of reinvested. I have been thinking of doing that.

 

URF Portfolio Share: 1.0% IRR: 10%. This is a listed fund invested in residential real estate in the New York metro area. The managers are gradually selling off the assets. The original investors in the fund lost lots of money. I came in when it was already distressed. The fund continues to trade a lot below net asset value but has caught up quite a bit recently and so we have reduced our holding. The fund NAV does not take into the selling costs of the inventory. So probably fair value is near 50 cents rather than the stated 60 cents per share. It currently trades at about 40 cents. I would sell the rest if it got nearer to 50 cents.

 

Domacom Investments Portfolio Share: 0.8% IRR: 13%. Domacom is a platform for making fractional investments in real estate etc. The company, which I have also invested in, has struggled to build a big enough portfolio to be profitable and is perpetually on the brink of bankruptcy. It is in the process of re-inventing itself as Assetora. But some of the investments on the platform, which are in segregated funds, have been quite profitable. I have bought into investments after they traded below their original offer prices. Initially, I invested in a farm, which has now been sold, then in two properties near the new Sydney airport, and two NDIS properties in Perth and the Sunshine Coast. All of these are doing well.

James Hardie and Regal Partners Trades

 

 

James Hardie (JHX.AX) announced that they are acquiring US company Azek and the merged company will have a primary listing on the NYSE, though still listed in Australia. James Hardie is actually incorporated in Ireland and so the Australian listing is a "CHESS Depositary Interest". Azek shareholders will have 26% of the total company. In reaction, Australian investors have heavily sold the company today on the ASX and it is down more than 12%. I bought shares on the following basis:

1. US analysts were upbeat on the merger on the investor call according to the AFR and US trade will be happening tonight after whatever happens today in Australia.

2. Having a primary US listing means the stock can be included in US indices with subsequent buying by passive index investors.

I'm down on the trade right now, but not too badly... 

Regal Partners (RPL.AX) got trashed again today. I think this is related to the story about Merricks' (a subsidiary) loan to a development in Sydney that is in trouble. Given, this loan is in a private credit fund and not on the balance sheet, I think this reaction (down 15%) is exaggerated. I bought more shares. 

P.S.

There is another negative story on Regal. Again, this doesn't justify such a large fall in the management company. It's a 1-2% fall in assets under management. However, it turns out that Opthea was 5.6% of assets at Regal Investment Fund (RF1.AX), which I am invested in. That is big for what is otherwise a super-diversified fund.

What it Takes to be in the Top 1% in Australia

Interesting article in the AFR on what it takes to be in the top 1% in Australia currently by both income and wealth. You can go to the free article to see lots of charts, so I won't post them here.

To be in the top 1% by income, you need a household income of AUD 532k. The top 5% is above AUD 306k. The top 10% starts at AUD 235k. I predict that our taxable income will be AUD 263k for this tax year. So we fall within the top 10%.

The wealth data are also broken down by age group. For the 41-64 age bracket the top 1% starts at AUD 7.7 million, while the top 5% starts at AUD 3.8 million. At AUD 7.4 million we are just outside the top 1%. Our average adult age is 55. The top 1% for 65+ starts from AUD 10.9 million!

There are also breakdowns by type of asset. The top 5% by home equity for our age band starts at AUD 1.42 million. So we are well below that. The top 25% is AUD 650k and above. We are within the top 25%.

A top 1% household superannuation balance is one of more than AUD 2 million. We are definitely in the top 1% by this criterion. Moominpapa alone has almost 1.9 million and Moominmama more than 900k. The top 1% of individuals starts at 1.4 million.

Investments Review 6b: More Developing Stock Investments

Because of the delay in completing this review, the last of these is now an unprofitable investment!

WCM Global (WCMQ.AX): 1.7% of net worth, 1RR 15%. This is an actively managed ETF that targets global "quality" stocks. It is managed by US manager WCM but is listed on the ASX.

There is a history of using this stock to fund other new investments (Bitcoin I think) and then more recently re-investing in it as it has a good track record:

 

The ASX gained 66% in this period and the MSCI 90%. Seems good to me.

WAM Strategic Value (WAR.AX): 1.6% of net worth, IRR 1%. This fund specializes in mainly investing in other listed funds that trade below NAV. We invested at the IPO (a mistake):

While overall it has done nothing much, it has done well in the last 1-2 years. I think this should be monitored. Maybe can be a source for investing in other things...

Regal Partners (RPL.AX): 1.4% of net worth, IRR -8%. This is a leading Australian alternative asset manager, which I normally include in the Australian small cap asset category. I thought this company was doing well, but since the release of the most recent earnings report, the market doesn't agree:

 

I think in the long-term they should do well or be acquired by a larger fund manager, so am inclined to hold. Of six analysts who follow this stock, five rate it a strong buy. Morningstar Quantitative value it at $3.16, about 10% above the current stock price.

Investments Review 6a: Developing Stock Investments

I decided to rename this category "developing" as opposed to the mature investments we considered earlier. This section covers five Australian funds and stocks. The first two are in this post. Graphs are all in Australian Dollars.

First Sentier Imputation Fund: We now have 1.6% of net worth in this fund. This is the last remaining investment in an account, which was once my core investment. The fund aims to combine long-term capital growth with tax-effective income by targeting Australian growth companies with a high level of franked dividends. It aims to outperform the S&P/ASX 300 Accumulation Index over rolling three year periods before fees and taxes.

The fund has consistently outperformed its benchmark:

Our IRR is 16%. The only downside of this fund is that the unlisted unit trust structure is not very tax efficient, as all gains are paid out in distributions. An alternative is Wilson Asset Management's Leaders Fund (WLE.AX), which is more tax efficient. We have held that for a while in the past but ended up selling to raise cash for other investments. It has done better over three and five years than FS Imputation but much worse in the last year.

This was one of my earliest investments but then I didn't hold any for 20 years until 2021 when I began to consolidate other funds in the account into it. Distributions gradually pay back our investment.

Cadence Opportunities Fund (CDO.AX): 2.5% of net worth. IRR is only 3.5%. It is a long-biased listed Australian equity hedge fund. I recently consolidated my investment in sister fund CDM.AX into this one. 

CDO has more flexibility to quickly trade in and out of positions. Initially, the fund did extremely well. Then it became practically a twin of CDM. However, recently it has again begin to diverge in a positive way from CDM. It's not really doing well though. It's still way below the 2022 peak, unlike CFS Imputation above. Unless it starts to do a lot better soon, I don't think there is a good reason to hold it.

Metrics

Count Financial told clients to sell private credit funds managed by Metrics Credit Partners. This crashed the share price of MOT.AX, one of their funds that I have owned before. So, I bought some on Wednesday for a trade as I think the sell-off is exaggerated even if the true NAV of the fund is less than the stated $2.14. The share price rebounded a bit. Wondering whether to close the trade?

P.S. 22Mar25

I did sell the shares, booking about AUD 1,400 in profit.

Another Perspective on the UK Pension

Here is another way of looking at the UK pension, which I have applied to contribute to. Our net worth not counting our house is about AUD 6 million. Using the 4% rule, we could withdraw AUD 240k per year. Currently, our spending is below that, which is why I have been thinking about retirement. The pension would add almost AUD 20k per year to that.* And the contributions would only be around 1/2% of the 6 million.

* This depends on how much tax we end up paying in retirement. Based on last year's tax return, if I stopped working I would earn AUD 56k p.a. So, my marginal tax rate would be 32%, which would apply to this additional income. That seems like a really high rate at such a nominally low income.

UK Pension

 

This was totally not on my radar. When procrastinating on Wednesday, I saw an article in the Fin Review about how Australians who had worked 3 years+ in the UK could claim a UK pension by making extra contributions from overseas. The article explained that UK citizens in Australia could also do this. You need a minimum of 10 years of contributions to get the pension. If you have 35 years of contributions, you get the full pension of £11,500 per year currently. Unlike Australia, there is no means testing.

More than 35 years ago, I got letters from National Insurance in the UK, (I was living in Israel most of the time then) asking whether I wanted to make voluntary contributions to the UK pension. At the time, I was an undergrad student and the payment was a good chunk of money for me. I discussed it with my father. He argued that I could make more payments later and anyway who knew if there would be a state pension when I was ready to retire. So, I didn't make any contributions. So, I knew about voluntary contributions, but didn't realize I could be making them now. Most importantly, I didn't realize what a fantastic investment this is!

The main point in the AFR article is that up to 19 April this year it is possible to make contributions for the 12 years between 2006 and 2018. After this date, it will only be possible to contribute for the previous six years.

So, Wednesday evening I set up a digital ID on Government Gateway - the UK's equivalent of Australia's MyGov. It turned out that I could use my Australian passport to identify myself. My UK passport expired in 2024... This allowed me to check my record of contributions. Then, this afternoon, I submitted my application to make voluntary contributions. They will process the application and then send me payment details. Mainly, I had to enter information about my last UK employer and the employers I have had since I left the UK. Luckily, there are only three of these and I have a good idea of the dates I started and finished at each one.

Who knows whether they will process the application by the deadline for adding the extra 12 years of contributions, but at least I tried.

It turns out that I have 7 full years of contributions. They even counted years when I was over 16 and in high school! So, if I could add the 12 extra years, the most recent 6 years, and the 7 years till I am 67, I will have a total of 32 years, which will give me 91% of the full pension! Even without the extra 12 years I would have 57% of the full pension.

OK, so why is this such a fantastic investment? Each additional year of contributions buys £11,500/35 per year in extra pension or £329. The most recent years cost only around £900 in contributions! So, you are buying an annuity that starts at age 67 paying an annual dividend of 37%! All your contributions will be paid back by the time of your 70th birthday, and the payments after that are pure profit! If I live to the same age as both my parents did then the internal rate of return would be a real (i.e. assuming zero inflation) 17%. That's not far behind our track record with 3i (III.L).

This is a no-brainer investment.  

P.S. 21 March 2025

My brother says that if they get back to you after the deadline they will still let you pay as long as you lodged before the deadline. Good news if true.

Market Update

My call for a continued bull market in stocks is looking a bit crazy at this point, but note the drawdown at the beginning of 1997. Nothing goes straight up. Oscar Carboni has published his year end targets for the S&P 500. His initial target is 7,512 and the extended target, if that is exceeded, is 8320.

February 2025 Report

February was the first down month after positive months. In dollar terms it was our third worst investment result after June 2022 and March 2020. The Australian Dollar fell from USD 0.6237 to USD 0.6208 meaning that USD investment returns are slightly worse than AUD investment returns. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): -0.57%

S&P 500: -1.30%

HFRI Hedge Fund Index: 0.77% (forecast)

Australian Dollar Indices

ASX 200: -3.60%

Target Portfolio: -0.97% (forecast)

Australian 60/40 benchmark: -1.44%

We lost -4.11% in Australian Dollar terms or -4.40% in US Dollar terms. So we underperformed all benchmarks.

Here is a report on the performance of investments by asset class:

The asset class returns are in currency neutral terms as the rate of return on gross assets and do not include investment expenses such as margin interest, and so the total differs from the Australian Dollar returns on net assets mentioned above. Gold gained most while RoW stocks, futures (including bitcoin), and Australian Small Cap all had terrible performances.

Things that worked well this month:

• Gold was the only investment to gain more than AUD 10k. Domacom Investments also did well with a property in Perth being radically up-valued to 57% above the IPO. I bought post-IPO after the price had already declined. There have also been large distributions. Profit is now  AUD 9k on an initial AUD 7k investment.

What really didn't work:

• Bitcoin, Defi Technologies, and Regal Partners were all terrible. The latter was surprising as I felt their earnings report was good and it only slightly missed forecast earnings. Unisuper also lost more than AUD 10k.

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give the same statistics for three indices. The middle block gives our performance relative to the indices. Our rate of return remained higher than the ASX200 despite such a disastrous month and we have much lower volatility, resulting in a Sharpe ratio of 0.99 vs. 0.58. Our alpha relative to the ASX200 fell to 4.46% (from 4.94%) with a beta of only 0.47. We capture much less of the downside moves than the upside moves in the market. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of much higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is more than three percentage points lower.

We moved towards our target allocation due to the poor performance of the overweighted asset classes, which previously had performed well. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer superannuation contributions every two weeks. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. I am now receiving TTR pension payments from both Unisuper and our SMSF and contributing more than the total of these to the SMSF (around AUD 4k net contribution per month). I made the following additional moves this month:

• I sold 10k shares of Hearts and Minds (HM1.AX) as it neared the after tax NAV.
• With the proceeds I bought 3k shares of WCM Global (WCMQ.AX), which is a global stock actively managed ETF.
• I also bought another 100 shares of FBTC, Fidelity's bitcoin ETF. 
• I did a follow on investment of USD 2,500 in Chowdeck, a Nigerian food delivery app. This is their Series A investment round. Previously, I invested in the seed round at a lower valuation.

Where We Are at With the VSS

The latest episode. I met the director on Thursday. They didn't try to discourage me from doing it (I didn't expect they would). They even noted that they have at least a couple of other people who teach and research in my exact field. We are the top place for this in Australia. We also discussed other options included a transition to retirement plan, where you work part-time till a set retirement date at a maximum 3 years in the future. The director saw this plan as tied to a specific "project", which isn't something in the plan as described by the university. The key aspect in the university description is that the university keeps paying employer contributions to Unisuper at the full time rate even though the worker is now working part time. This is critical for people on the defined benefit scheme who otherwise lose a lot of money if they switch to part-time work.

The other option we discussed is simply working part-time. The director wouldn't commit to a specific reduction in salary that I need to take in order to reduce my teaching load. Instead, they said I should talk to my department head (HoD).* But they did say that all expectations needed to be adjusted and not just the teaching expectation. What does this mean? Academic staff are allocated a nominal percentage workload. In my case it is 40% teaching, 40% research, and 20% service. So, the director is saying that each of those percentages need to go down, not just the teaching one. This is totally expected. Having been a HoD myself, I knew that they couldn't make this decision by themselves. But what they can do is look at their teaching plans and see how it would work.

So, on Friday I talked to the HoD on the phone, who was very positive about the part-time plan and said there are two people who would be interested in teaching one of my courses. The HoD will now go back to the director to negotiate the percentage cut in FTE. The HoD is going to argue for a 30% cut. I think the director wants 50% but wouldn't say so. Maybe I'll end up at a 40% cut?

On Tuesday, there is an information session on the VSS, which I'll attend.

I have discussed this a lot with Moominmama. At one extreme we talked about taking the VSS and moving somewhere cheaper and doing homeschooling. In Australia, the lower the cost of living the worse the quality of public schools and there might not be a suitable private option.** At the other extreme we are looking at doing the part-time option.

I've debugged my simulations more and the VSS is equivalent financially to working part time to the end of 2028. After that, one year of part-time work adds 1.1% to net worth. Full time work adds 0.8% per year on top of the part-time option. The differential is because of progressive taxation.

So, why not just take the VSS? The main reason comes down to going cold turkey from an AUD 200k plus salary to depending entirely on investment returns.*** This month has been our worst in investment returns since June 2022. I have been very stressed out by the combination of that and the need to make this career decision. Moominmama thinks I will be very stressed out and maybe make bad decisions if I take the VSS. So, the lowest stress path is to ease into retirement gradually. In theory, the VSS gives you a pile of cash, so that you don't need to depend on investment returns for more than a year. But the temptation is to chase yield on that too...

* The director heads a "school" that comprises 4 academic departments. 

** In particular, coastal areas outside the big cities are notoriously areas of low socio-economic status and high unemployment. Here are the socio-economic profiles of our nearest public high school in Canberra:

and Bateman's Bay High School, on the coast near Canberra:

These numbers are relative to Australia as a whole. The main private school tbere only has 28% of its students from the top quartile and its performance is similar to the average school in Australia. At our children's school 80% of students are from the top-quartile! I think that is likely too far in the opposite direction 😀
 

*** Around AUD 245k pre-tax including employer superannuation contributions.