More Good Venture Capital News

I recently reported that my investment in the Aura VF2 fund was now in profit. Now, our Angellist investments through Unpopular Ventures have swung into profitability too:

 

There is a 3 month lag in reporting values. We invest in their Rolling Fund as well as individual firms. One of those firms is now reporting that it is worth 9.5x the value I invested at. On the other hand, two companies I invested in have effectively gone to zero. While I am excited to not be losing money any more, our overall IRR on our Angellist investments is only 2.76% so far. 

But this is an AUD 60k bump in value that makes a substantive change to our numbers for 2025. It pushes up our 2025 rate of return to 9.68% in AUD terms or 18.14% in USD terms. That puts us just ahead of the S&P 500 for the year:

The "retirement number" rises to AUD 7.011 million. Total net worth at the end of the year Was AUD 8.252 million, which is comfortably ahead of the base case net worth projection of AUD 8.2 million. Also, the private equity return for the year roses to 9.3% from 4.7%! The annual contribution to total return from private equity was 1.8% instead of 0.9%. Unpopular Ventures returned AUD 40,118 for the year, making it our 8th best investment.

How Closed-End Funds Should Trade in Theory

An interesting post from Financial Samurai or how closed-end funds trade. A closed-end fund is one that trades on a stock exchange but has a fixed number of shares on a day to day basis.* They may occasionally do additional share issues, or reinvest dividends, or even buy back shares, but they don't buy and sell shares continuously to keep the market price at the net asset value or NAV. ETFs, by contrast, do continually create or redeem new shares to keep the market price close to NAV. I posted a comment about where the equilibrium price of a closed-end fund should be that I thought was worth its own post here.

In theory, if the fund manager grows the NAV of the fund with distributions reinvested faster than the average stock market rate of return (for assets with similar beta), then a closed end fund should trade higher than NAV and vice versa. 

This should be the equilibrium price, so that investors don’t get a free lunch of a higher than average return or conversely a worse than average return. If the average fund manager performs the same as the market before fees then on average after fees managers will under-perform the market and so the typical closed end fund will trade at a discount to NAV.

Of course, actual prices often deviate from this equilibrium for a long time! Pershing Square Holdings, which trades on the LSE, is a classic case. It has either outperformed or matched S&P 500 performance over the last few years while investing mainly in large cap US stocks, but trades at a massive discount to NAV. As an investor, one of my reasons for investing was this large discount. We’ve experienced good returns but not much closing of the discount. In fact the discount today is the same as it was in 2021 when we finished buying our current position. The market price is 25% below NAV! Our internal rate of return has been 20%, which is clearly better than the stock market average. The S&P 500 has returned 15% p.a. over the last ten years or 14% over the last five. So, it is crazy that the discount hasn't at least narrowed.

* Sometimes people refer to unlisted private equity funds that raise a given amount of money and then invest it as closed end funds too.

Concentration in the Mag 7

What is our exposure to the Mag 7? This came up in recent discussions. People are worried about being overly concentrated in a few maybe over-valued companies. I can't put an exact number on our exposure, as Unisuper and PSS(AP) do not publish their asset allocation at the individual stock level and other funds also have partial or no information. But we can estimate it. I'll go through the calculation, fund by fund, in the following.

Unisuper: This is Moominpapa's employer superannuation fund. I estimate that 22% of the fund is in US stocks. The share of the Mag 7 in the S&P 500 is 34%. Without further information, I assume this share applies here. 11.6% of net worth is in Unisuper. Multiplying these three numbers together gives 0.87% of net worth.

PSS(AP): This is Moominmama's employer superannuation fund. I estimate that 13% of this fund is in US stocks and 8.5% of net worth is in the fund. Therefore, 0.38% of net worth is in the Mag 7 here.

CREF Social Choice: This is the main fund in Moominpapa's US retirement account. I estimate that 42% is in US stocks and 3% of net worth is in this fund. This fund, therefore, contributes 0.43% of net worth exposure to the Mag 7.

WCM Global Quality (WCMQ.AX): In their latest investment update, only Microsoft and Amazon are included in their top ten holdings. The exposure to these two is 7.05%. The exposure to US stocks in the top 10 totals 20%. The total exposure to the Americas is 55%. How much exposure to Mag 7 is there in their remaining 35% exposure to the Americas? A rough calculation is (5/7)*0.34*0.35 = 8.5%. This is probably an over-estimate. WCMQ is 1.5% of our net worth. 1.5%*15.55% = 0.23%.

Hearts and Minds (HM1.AX): Again, Microsoft and Amazon are in the top 10 holdings, as is Nvidia. But we don't know how much of the portfolio either of these is. The top 10 as a whole represents 44% of total portfolio holdings. Let's guess that MSFT and AMZN are 3/10 of this. The remaining non-conference holdings are 21% of the portfolio. Let's assume that 65% of this is US stocks and Mag 7 is 34% of this. 18% of the total portfolio is then estimated to be in the Mag 7. HM1 is 1.7% of net worth. So our exposure is estimated at 0.30%.

Pershing Square Holdings (PSH.L): They hold two Mag 7 stocks–Google and Amazon. The recent 13F shows they have $1.28 billion of AMZN as of 30 September and $2.72 billion of Google. The total portfolio value on 30 September was $19.2 billion. So, 21% is in the Mag 7. We have 6.2% in PSH and so our net worth exposure is 1.3%.

Acadian Global Long Short: They provide a top 10 list of holdings, which includes all the Mag 7 apart from Tesla! The total exposure is 25.6%. I assume that they do not hold Tesla and given our portfolio exposure of 3.3%, our Mag 7 exposure is 0.84%.

L1 Global Long Short (GLS.AX): They have not published any information on portfolio allocation. Assuming that 65% is in US stocks and 34% of that is in the Mag 7, given our 4.6% allocation to GLS, our exposure would be 1.02%.

In total, we have a 5.37% net worth exposure to the Mag 7. This is very small compared to someone who followed Warren Buffett's advice to just invest in an S&P 500 index fund. Someone who invested in a 60/40 portfolio including a global index fund would have about a 14% exposure. So, it's small compared to that too. Are we under-exposed to tech stocks? Well, we have around a 10% exposure to venture capital and WCMQ's largest holding is AppLovin. So, I don't think so.

Annual Report 2025: Long-term Graphs

After looking over some of my previous annual report posts, I realised that I haven't posted long-term graphs of net worth in recent annual reports. I focused more and more on just the year under consideration. So, here is some longer term context that I used to include.

Here is net worth since 1996 and a breakdown into home equity, retirement accounts, and everything else: 

 

The big jump in 2018 is the inheritance. Non-retirement accounts have not increased that much since then as we moved money into home equity and retirement accounts. The next graph shows a breakdown of savings:

 

This graph is rather messy, which is maybe why I stopped posting it :) Retirement and non-retirement accounts are each split into savings and investment earnings. Non-retirement savings are negative because we moved money into home equity and retirement accounts. There was a jump this year when I received the redundancy payment. On the other hand, non-retirement profits are the largest component. This year saw a fall in home value and slow progress in retirement accounts as discussed in the first post in this series. But there were strong non-retirement earnings. Retirement accounts value is roughly 50/50 contributions and earnings at this point.

 

Annual Report 2025: Individual Investments

As promised, here are the individual investment results for 2025 (Australian Dollars):

Other costs and benefits like interest and fees and exchange rate gains and losses are not included here. I also don't go down to the level of the very small individual investments inside the Masterworks, Unpopular Ventures, and Domacom investments boxes.  

I also make no attempt to compute individual rates of return. My goal is to have twice as many winners as losers and to make at least twice as much on winners as I lose on losers. So, position sizing is part of the story. Based on that goal, I had more than enough winners, but only won slightly more on each winner as I lost on each loser. Without the two worst losers, I only lost $9.9k per loser. In the long term, my winning positions have gained more than five times as much as losing positions have lost. Of course, both Bitcoin and Defi Technologies gained more in the previous year than they lost in 2025. In the long run, these were winning investments.

Gold was the top performer this year, after coming in second last year. It was followed by two listed hedge funds and then the Aura Venture Capital Fund 2. Next came our two employer superannuation funds, each of which is 8-12% of our portfolio. The diversified Regal Investment Fund put in a good showing at 7th position. WAM Capital is a new investment I made during the April Tariff Tantrum. Australian Dollar Futures are paying off this year after being the worst performer last year. Finally in the top 10, CREF Social Choice is a balanced fund in my US retirement account (403b).

Annual Report 2025

All $ signs in this report indicate Australian Dollars. I'll do a separate report on individual investments. I do a report breaking down spending after the end of the financial year.

Overview 

Investment returns were positive and net worth again increased. My base case net worth projection was $8.2 million and we reached $8.192 million. In December we again travelled to China and this time Vietnam for the first time. I did some short business trips to Sydney and Brisbane during the year as well. My 61st birthday was in December and at the end of November I took a redundancy package from my employer and retired.

Investment Return

In Australian Dollar terms we gained 8.7% for the year while in USD terms we gained 17.1%. The big gap is because the Australian Dollar rose. The MSCI gained 22.9% and the S&P 500 17.9% in USD terms while the ASX 200 gained 11.9% in AUD terms. The HFRI hedge fund index gained 12.7% in USD terms. Our target portfolio gained 7.3% in AUD terms and the Vanguard 60/40 AUD benchmark returned 9.8%. So, we under-performed all benchmarks apart from the target portfolio and HFRI. But we didn't do that badly compared to the S&P 500 given we target a much lower volatility. The poor performance of the target portfolio was also due to the rise in the Australian Dollar.

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

 

It was actually a smoother ride in USD terms:

This was unusual as the Australian Dollar usually falls during stock market crises.

  

Here are annualized returns over various timeframes:

 

We beat the HFRI, the target portfolio, and the 60/40 portfolio over the last 5 and 10 years. Our performance over 20 years is still very weak, though it matches the HFRI.

 

Here are the investment returns and contributions of each asset class in 2025 in currency neutral and unlevered terms:

The contributions to return from each asset class sum to the total portfolio return. The portfolio shares are at the beginning of the year. Rest of the world stocks did worst, because of the performance of Defi Technologies, followed by futures, which includes bitcoin. Gold was the best performer followed by hedge funds and each made similar large contributions to the total return. Private equity was disappointing, in large part due to the fall in 3i near the end of the year, the shutdown of Kyte, and a disappointing earn out at IPS. A good result from Aura VF2 saved the day.

Investment Allocation

There were significant changes in asset allocation over the year:

 

We reduced exposure to futures = crypto (-12.8% of portfolio), RoW stocks = Defi Technologies (-4.3%), and real assets (-4.2%) over the year and increased exposure to all other asset classes and hedge funds, in particular (+7.7%).

Accounts

Here are our annual accounts in Australian Dollars: 

 

Percentage changes are for the total numbers. 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 $440k after tax in salary etc. This grew massively due to the redundancy payment. Total non-investment earnings including retirement contributions were $473k, up 97% on 2024.

 

We gained (pre-tax including unrealized capital gains) $507k on non-retirement account investments. The rise in the Australian Dollar reduced those gains by $43k. We gained only $30k in retirement accounts with $32k in employer retirement contributions. Gold and hedge funds contributed strongly to non-retirement funds and retirement funds suffered from the crypto theme.

 

The value of our house is estimated to have fallen by $64k. As a result, investment gains totaled $472k and total income $945k.

 

Total spending (doesn't include mortgage payments, life insurance, margin interest etc.) of $158k was down 7% on last year.

 

$21k of the current pre-tax investment income was tax credits – we don't actually get that money directly so we need to deduct it to get to the change in net worth. We do receive some refund of franking credits in our annual tax returns, which count towards "Other income". We saved $289k from salaries etc. before making contributions of $74k to superannuation. I also record a $7k "inheritance", which is a gift we received on our trip to China. Current net worth increased by $701k.

Taxes on superannuation returns are just estimated because, though we know the tax paid by the SMSF, our employer superannuation funds only report after tax returns. I estimate the tax these funds paid to make retirement and non-retirement investment returns comparable. The total estimated tax on superannuation was $29k. Net worth of retirement accounts increased by $108k after the transfer from current savings. With the gain in the value of our house, total net worth increased by $745k.

Projections

Last year my base case scenario for 2025 was for an increase in net worth of $800k to $8.2 million, which we hit. For this year, my best case scenario is for an increase of $900k to $9 million. My bear case is for a decline to $7.5 million, which is roughly what we would expect if stock markets fell 20% assuming a beta of 0.5 and alpha of 5%. The Australian Dollar would likely fall in that scenario, boosting the Australian Dollar value of foreign investments.

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 in the spreadsheet 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.... 

 

"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.

Where the Money Came From

I just updated this graph, which breaks net worth down into savings, inheritance, and investment profits. 

Savings are from salaries etc and tax returns as well as employer superannuation returns. Inheritance is self explanatory. Investment returns include franking credits and an estimate of the taxes paid by industry and public sector superannuation funds. Here I also include the increase in the value of our house. To get actual net worth, we need to subtract from the total tax paid by the SMSF, franking credits received by non-superannuation investments, and taxes paid by those large superannuation funds. These taxes currently sum to AUD 400k.'

Roughly one quarter of net worth is from savings, one quarter from inheritance, and half from investment returns. You can see the recent effect of the redundancy payment on savings on the bottom right.

It would make more sense to place profits as the bottom layer on the graph as they were negative during the dot-com crash and the GFC. But I think it is more instructive to see the steady rise in savings over time. Now of course, I expect it to go slowly down again as we dissave.

 

January 2026 Report

We had very strong investment performance in January, especially in USD terms. The Australian Dollar rose from USD 0.6674 to USD 0.6989 meaning that USD investment returns are better than AUD investment returns. Stock markets rose (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 2.98%

S&P 500: 1.45%

HFRI Hedge Fund Index: 0.75% (forecast)

Australian Dollar Benchmarks

ASX 200: 1.78%

Target Portfolio: -0.74% (forecast - depends on HFRI result) - this is negative because of the rise in the AUD and the negative performance of venture capital this month.

Australian 60/40 benchmark: 0.53%

We gained 2.84% in Australian Dollar terms or 7.70% in US Dollar terms. So we crushed all benchmarks. Here is a graph comparing the portfolio's track record with two of the AUD benchmarks:

As you can see, the three portfolios have very similar volatility, which justifies using them as benchmarks. Also, all three target 60% exposure to equities.

The SMSF again outperformed, returning 3.25% beating Unisuper (0.82%) and PSS(AP) (0.33%). 

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. Only US stocks lost money. Gold had the highest rate of return and largest overall contribution. Australian Dollar futures contributed to the strong Futures result.

Things that worked well this month:

• Gold was the greatest gainer at AUD 116k - the greatest monthly gain for gold so far. In all, seven investments gained more than AUD 10k: L1 Global Long Short (GLS, AX, 41k), Tribeca Global Resources (TGF.AX, 36k), Australian Dollar Futures (23k), Pengana Private Equity (PE1.AX, 17k), Regal Investment Fund (RF1.AX, 17k), and 3i (III.L, 13k).

What really didn't work:

• Only one investment lost more than AUD 10k: Pershing Square Holdings (PSH.L) with a loss of AUD 28k.

We moved towards our target allocation. Our actual allocation currently looks like this:

About 68% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity and credit, gold, and futures. A lot of these are listed investments or investments with daily liquidity, so our portfolio is not as illiquid as you might think.

Moominmama receives employer superannuation contributions every two weeks. We also make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. There will still be capital calls from Aura Venture Fund II and III. I am receiving monthly pension payments from both Unisuper and our SMSF. I made an AUD 13k concessional contribution to our SMSF to bring my concessional contributions for the tax year up to the 30k cap. I will decide how much to more to contribute as non-concessional contributions to superannuation later in the financial year. I made the following investment moves this month:

• I sold 9k WAM Capital (WAM.AX) shares.
• I sold 500 3i shares (III.L).
• I sold 1,000 shares of the gold ETF, PMGOLD.AX.
• I bought almost 7k Hearts and Minds (HM1.AX) shares.
• I bought 19k shares of Tribeca Global Resources (TGF.AX).

Here are the income and spending accounts * for this month:

Other income includes Moominmama's salary and employer superannuation contribution and Moominpapa's payment of Division 293 tax :( There was a larger than normal transfer into of superannuation as I made the concessional contribution mentioned above. Spending was low - we spent the first 2/3 of the month in China and Vietnam. As a result dissaving was only AUD 3k for the month. The 4% rule says we could dissave AUD 23k per month :) Next month's spending is going to be a lot higher as we pay school fees. As a result of all this, net worth increased by AUD 193k to AUD 8.386 million.

* Results are shown separately for retirement and non-retirement accounts as well as housing, which nowadays doesn't have much activity. The grey lines are additional notes. Total investment income is split into investment income before exchange rate moves and the contribution of exchange rates. Other income is non-investment income including salaries, employer superannuation contributions, and net tax returns. Investment income is shown pre-tax. Tax credits include franking credits on Australian Dividends and imputed tax on superannuation returns. These are taken away from investment income to get changes in actual net worth. Inheritances include gifts from relatives. Saving is from non-investment income, transfers, and inheritances. 

Aura VF2 Reports

The Aura VF2 venture capital fund has reported for the final quarter of calendar year 2025 and it has jumped sharply into profit.

 

I now have an IRR of 10.6%. It increased the rate of return for December to 2.5% in AUD terms or 4.5% in USD terms, which crushed all benchmarks.

Tribeca Global Resources

After several years of disappointing performance, Tribeca Global Resources (TGF.AX) has performed extremely strongly in recent months:

My investment hit a new profit high exceeding the 2022 peak. After previously giving back all the 2022 gains, this strong performance makes me wonder if I should sell now. One reason not to sell is that if I wait my capital gains tax rate should be lower next financial year (it's in my personal name). Also, there is still a big gap between NAV and the share price, which wasn't the case at the 2022 peak. Pre-tax NAV is $3.81 and post-tax $3.34 while the share price is $2.88. Will the gap close? Finally, the fundamentals supporting resources strength don't seem to be changing yet. So, I think I will hold on for now.

Moomin's 2025 Investment Performance

I recently reported how well Little My's portfolio did in 2025. I was pretty pleased with his performance for the year. Today, my brother sent me the 31 December value of Moomin's investment portfolio, which he manages in my mother's home country. Both received the same amount of money (£25k) from my mother's estate. He gained 57.4% in AUD terms! His account is now worth AUD 114k while Little My's is worth AUD 73k. For the last two years Moomin's money has been invested in two mutual funds. Prior to that my brother had many more investments and changed them frequently with mediocre results. 

Each child can access their money at age 23. Two of my brother's children were already 23 when the estate was settled. I was interested to hear that neither of the two who had their 23rd birthday since then have asked to get their money. So, he is still managing their accounts as well as his youngest daughter's.

How Well Did Your Super Fund Do in 2025?

The Australian reports on superannuation funds' performance for calendar year 2025. Neither of our employer funds - Unisuper and PSS(AP) - made the top ten. Unisuper Balanced is in the top 10 for the last 10 years. The average return for 2025 was between 8.8% and 9.3% depending on the source. I assume this is for accumulation funds. I estimate that Unisuper made 7.8% pre-tax or around 6.8% post-tax. PSS(AP) made 10.5% or 9.2% post-tax. On the other hand, our SMSF returned -6.1% pre-tax :( This is mostly because of its outperformance in 2024 (34.0%) and cryptocurrency coming back down to Earth in 2025.

Little My 2025 Investment Performance

Little My (our second child) had a good year investment-wise:

His estimated pre-tax return was 20.8%.* The ASX200 had a gross return including estimated franking credits of 11.9%. The MSCI gross world index returned 14.1% in AUD terms and our target portfolio has an estimated return of 7.3%. 

 

Seems like I have finally managed to put together a decent portfolio for him. Currently, we have 33% in the L1 Long Short Fund, 28% in the Dimensional 70/30 fund, 10% in Generation Life Tax Effective Australian Shares, and the remainder in two Magellan fund options.

 

* 30% tax is deducted automatically from the returns of "investment bonds".  However, there is a trick that could reduce this tax to the recipient's marginal tax rate when the bond is finally cashed out. By adding an additional payment the ten year period of investment that is needed to get the 30% rate will be reset. This makes sense if the recipient has a marginal rate below 30%. This works because additional contributions have to be within 125% of the previous year's contribution in order not to reset the bond. Given that our additional contributions since the initial investment have been zero...

 

December 2025 Report

December was the first post-retirement month. I am changing the layout of these reports to remove investment performance over the last five years and add in the income and spending report I dropped back in 2018. This is because I have a new focus on making sure spending stays within our budget, whereas it is hard to change investment performance over a five year period on a monthly basis. I will report on longer term investment performance in the annual review as usual.

In December, the Australian Dollar rose from USD 0.6550 to USD 0.6674 meaning that USD investment returns are better than AUD investment returns. We had a good month in terms of investment return. Stock markets were slightly up with a lot of intramonth volatility (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 1.07%

S&P 500: 0.06%

HFRI Hedge Fund Index: 0.26% (forecast)

Australian Dollar Benchmarks

ASX 200: 1.36%

Target Portfolio: -0.19% (forecast - depends on HFRI result)

Australian 60/40 benchmark: 0.22%

We gained 1.28% in Australian Dollar terms or 3.28% in US Dollar terms. So we outperformed all benchmarks apart from the ASX 200, which we got fairly close to.  These returns are preliminary, as we won't get results from Aura Venture for more than a month, and Angellist report with a three month lag. I was curious about how much I end up revising my monthly performance figures when all the data is available. Here are the results for the last year:

"Original" is the rate of return reported in this blog and "Current" is my current estimate. In the last year, on average I overestimated the rate of return initially. On the other hand, I initially underestimated the return for last December but as you can see I have already trimmed this December's number a little.

The SMSF again outperformed, returning 0.62% beating Unisuper (0.37%) and PSS(AP) (0.40%). 

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. Only US stocks lost money. Futures had the highest rate of return with Australian Dollar Futures contributing the most. Hedge funds made the largest overall contribution.

Things that worked well this month:

• As mentioned above, most hedge funds did well with Tribeca Global Resources (TGF.AX) gaining AUD 42k and Regal Investment Fund (RF1.AX) 17k. Gold, 3i (III.L), and Cadence Opportunities (CDO.AX) all gained between AUD 9 and 10k.

What really didn't work:

• Only five investments lost money and no investment lost more than AUD 10k.

We moved towards our target allocation. Our actual allocation currently looks like this:

About 65% 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 liquidity, so our portfolio is not as illiquid as you might think.

Moominmama receives employer superannuation contributions every two weeks. We also make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. I made the last USD 10k contribution to the Unpopular Ventures Rolling Fund this month. There will still be capital calls from Aura Venture Fund II and III. I am receiving monthly TTR pension payments from both Unisuper and our SMSF. I will decide how much to recontribute to superannuation later in the financial year. 

This was a quieter month in terms of transactions:

• I sold 5k WAM Capital (WAM.AX) shares.
• I bought net 1k shares of WCM Global Quality (WCMQ.AX). 
• I sold 250 Perth Mint Gold ETF (PMGOLD.AX) shares. 
• I sold all our position in WAM Strategic Value (WAR.AX, 100k shares) in order to fund the 1:1 entitlement offer for the L1 Global Long Short Fund (GLS.AX, formerly Platinum Capital, 85k new shares). 

Here are the income and spending accounts for this month:

Results are shown separately for retirement and non-retirement accounts as well as housing, which nowadays doesn't have much activity. The grey lines are additional notes. Total investment income is split into investment income before exchange rate moves and the contribution of exchange rates. Other income is non-investment income including salaries, employer superannuation contributions, and net tax returns. Investment income is shown pre-tax. Tax credits include franking credits on Australian Dividends and imputed tax on superannuation returns. These are taken away from investment income to get changes in actual net worth. Inheritances include gifts from relatives. Saving is from non-investment income, transfers, and inheritances.

This month, salary hit a record number as I received the redundancy payment of more than AUD 1/4 million. Spending was fairly average at AUD 12k. There was a larger than normal transfer out of superannuation as I made excess concessional superannuation contributions in the previous tax year, which I withdrew from Unisuper. We received a cash gift from Muminmama's father (counted as inheritance). As a result of all this, net worth increased by AUD 347k, almost all of it in non-retirement accounts. Now, I will have to decide how much to contribute to superannuation. I want to hit the goal of transferring AUD 2 million to a tax free pension account. I also want to max out the concessional contribution cap of AUD 30k for this year to help reduce my taxes, which will be very high because of the redundancy payment. The payment itself has low taxes but it pushes most of the rest of my income into the top tax bracket.

To keep things simple, I will use net worth at the end of this month as the "retirement number". Net worth at the end of December not including our house is AUD 6.875 million. Using the 4% rule means we could dissave AUD 275k per annum. Our spending is a lot below that. Total net worth is AUD 8.112 million.

A More Realistic Target Portfolio

A couple of changes to the target portfolio. There are really two target portfolios. One is our desired asset allocation and the other is the benchmark portfolio I compare performance to each month and year. 

The first change applies to the benchmark portfolio. Up till now, I have used the FTSE DSC venture and buyout indices as the proxy for venture capital and buyout PE. But these indices track gross performance before investment fees. Investment fees are very high for these asset classes and it is unrealistic to assume I could match the gross performance. By contrast, the HFRI index I use for hedge funds is net performance after fees. So, I am going to apply the standard 2 and 20 investment fee structure to the returns of these indices. 2 refers to the 2% annual management fee and 20 refers to the carried interest or performance fee - 20% of the profits. 

There is actually a big difference between hedge funds and private equity in how these fees are applied. Hedge funds charge 2% of NAV each year and 20% of the profit above a hurdle rate of return. Usually, if gross profits are in a drawdown - below the previous "high water mark" - no performance fee would be charged. Private equity charges 2% of the original investment and only charges carried interest when an investment is realised - but usually there is no hurdle rate. I will deduct 2%/12 of NAV each month and 20% of profits when gross profits are above the high water mark. I implement this by computing the gross index and then a high water mark index - the maximum of the gross index in all previous months. If the gross index at the end of the month is above the the high water mark, 20% of the percentage increase relative to the high water mark is deducted from returns.* This exaggerates likely fees. On the other hand, I don't take into account the dilution that often happens to early stage venture investors. 

Venture returns are reduced from 1.67% per month gross since January 2008 to 1.22% net and buyout returns fall from 1.29% to 0.93%. These returns are still better than any other asset class.

I have also tweaked the allocations to give 20% to each of long public equity, hedge funds, and private equity. I have also increased the credit allocation to 10%. So, the benchmark portfolio consists of:

MSCI All Country World Index Gross in AUD 9%  

ASX 200 Total Return Index 11%

HFRI Fund Weighted Hedge Fund Index 20%

Net FTSE Venture Index 10% 

Net FTSE Buyout Index 10%

Gold Spot Price in AUD 10% 

TIAA Real Estate Fund 12%

CREF Bond Fund 10%

Winton Global Alpha Fund 5%

Australian Dollar Cash 3%

Short Australian Dollar Futures 31% 

The index is effectively rebalanced monthly.

The 31% short Australian Dollar position is half the total position in hedge funds, private equity, real estate, and bonds. The indices or funds for each of these is in US Dollars. This hedge implies that half of the allocation to these assets is in Australian Dollar denominated funds and half in US Dollar denominated funds.

Our target allocation for investment is close to this. We split the Australian stock allocation into 7% large cap and 4% small cap. Real assets, credit, and futures categories are also broader than the specific funds listed here.

I won't bother deducting fees from the long stocks allocation as you could use ETFs with very low fees to track these indices. 

Here is a graph of the simulated performance of the benchmark since September 1996:

The benchmark has about matched the returns of the MSCI index and gold with a lot less volatility. My own performance was terrible up to 2012 and has tracked the benchmark pretty well since then (it's a log chart). Here is a comparison of the benchmark, myself, and the Vanguard 60/40 benchmark since the latter funds inception:

 

* A simpler approach is just to multiply the gross return by 0.8 and deduct 2%/12 each month. The result of this approach is highly correlated with the high water mark approach. The high water mark approach is more realistic though. Let's say you invested $1000 and gross performance was 100%. Your account now has $1800 and the manager has $200. Now the gross price falls by 10%. Both your share and the manager's share fall by 10%. It would be incorrect to say that your $1800 fell by only 8%.