Superannuation Returns for the 2023-24 Financial Year

The Australian reports on the performance of superannuation funds for the just completed financial year. This year, retail funds tended to perform better than industry funds because of their higher allocation to public stock markets rather than private assets. How did our SMSF do by comparison? I don't actually compute comparable after-tax performance figures, which are how superannuation returns are reported.* Public offer funds make an allowance for future tax payable, which includes capital gains tax if the assets are sold. This means that members who withdraw funds don't push tax liabilities onto those that stay. This is unlike a regular unlisted managed fund where tax is at the investor level and attached to distributions... 

So, instead I estimate what the performance of our employer funds might be pre-tax. This probably over-estimates the performance of the employer funds, but reconciling tax expected with tax actually paid on our SMSF would be hard work. On that basis, the SMSF returned 9.54%. Unisuper returned 10.89% and PSS(AP) 10.55%. Both the latter are balanced funds. Even though we underperformed for the year, we are still ahead overall since inception:

PSS(AP) has, however, inched ahead in risk-adjusted performance. It now has an information ratio (Sharpe ratio with zero risk free rate) of 1.02, versus 0.96 for the SMSF. Unisuper is on 0.83. 

Since inception, the SMSF has returned an annualized 7.9% pre-tax versus 6.44% for Unisuper and 6.63% for PSS(AP).

* Reported performance does deduct administration, audit, ASIC fees etc. As an example, for the year to 31 December 2023, Unisuper report a return of 10.3%, while I estimate a pretax return of 11.15% for the fund.

Spending 2023-24

For the last seven years I've been putting together reports on our spending over the Australian financial year, which runs from 1 July to 30 June. This makes it easy to do a break down of gross income including taxes that's comparable to many spending reports you'll see online, though all our numbers are in Australian Dollars. At the top level, we can break down total income (as reported in our tax returns plus employer superannuation contributions) into the following expenditure categories:

The gross income for this year (bottom line), and so also "Other Saving", is just an estimate. It is based on the gross income we expect to report in our tax returns (before investment expenses etc.) plus employer superannuation contributions. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending here (though usually I consider them to be an investment cost), while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Other saving is then what is left over. This is much bigger than our saving out of salaries because gross income includes investment returns reported in our tax returns. Spending increased by 4% this year in line with inflation. Gross income, especially in real terms, has been slowly declining since the peak in 2020-21. This is partly because I moved high-tax investments into superannuation. Expected other saving is the lowest it has been. The latter includes the AUD 20k concessional contribution we made for Moominmama to our SMSF in each of the last three years. Graphically, it looks like this:

We break down spending into quite detailed categories. Some of these are then aggregated up into broader categories:

Our biggest spending category, if we don't count tax, continues to be childcare and education, which declined slightly this year as the youngest moved out of daycare and the older one changed schools. Both are now in the same private school since the beginning of this calendar year. As mentioned above, the income, tax, and other savings numbers for this year are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions (we don't do any salary sacrifice contributions) but not the concessional contributions we paid into the SMSF.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This includes tax on our concessional contributions to the SMSF. It does not include taxes on SMSF earnings as the superannuation earnings are not included in income here.

Franking credits: Income reported on our tax returns includes franking credits (tax paid by companies we invest in). We need to deduct this money which we don't receive as cash but is included in gross income in order to get the numbers to add up.* Foreign tax paid is the same story.

Income tax paid is one category that has fallen since 2017-18! Franking credits rose fourfold.

Life and disability insurance: I have been trying to bring this under control and the amount paid has also fallen since 2017-18 as a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). Rising interest rates have pushed up spending this year again as has replacement of our central air-conditioner, which will cost more than AUD 11k.

Transport: About half is spending on our car and half is my spending on Uber, e-scooters, buses etc. I tried to spend less on Uber this year. I reduced my transport spending by 22% as a result. Also, the value of our car rose, contributing AUD 1,700.

Utilities: This includes water, gas, electricity, telephone, internet, and online storage etc.

Subscriptions: This is spending on all online services that aren't basic infrastructure. After rising strongly during the pandemic we brought it back under control this year with an 8% reduction.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets. Spending has been stable in nominal terms for the last three years.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low in 2020-22 because of the pandemic. It then jumped as life got more back to normal and rose 11% as prices are climbing I feel particularly in this area. I just paid more than AUD 7 for a large coffee this morning in Queensland, which is a record for me.

Cash spending: This has collapsed to almost zero. I try not to use cash so that I can track spending. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. Has been falling since 2019-20.

Mail order: This continued to decline since the pandemic peak in 2020-21. Down another 15% this year.

Childcare and education: We are now paying for private school for both children plus music classes, swimming classes...

Travel: This includes flights, hotels, car rental etc. It was very high in 2017-18 when we went to Europe and Japan. In 2020-21 it was down to zero due to the pandemic and having a small child. This year it almost reached the nominal level of 2017-18. We paid to rent a house in Bondi Beach in Sydney because my brother and his wife were supposed to visit. That was very expensive. In the end, they couldn't visit because of the war in the Middle East. And now we took a second vacation in Winter in Queensland.

Charity: Continues to fluctuate around my goal of AUD 1k. When I think I am really financially independent and my children are grown up I'd plan to increase it.

Other: This is mostly other services. It includes everything from haircuts to fees for tourist attractions. I don't include the latter in travel because we might also pay to go to a museum or paid play place when we are home.

This year's increased spending was mainly driven by increased housing and travel costs, while most other categories declined despite inflation. Both of housing and travel included one-off costs. I paid the second half of the air-conditioner bill a few days ago in the new financial year, so I expect housing costs will remain similar in 2024-25. Travel is hard to predict, but I expect that spending will remain high as we begin to spend more on airfares again. We were still paying for daycare in the first half of the financial year, so I expect education costs to fall a little in 2024-25. 

* Moominmama has negative income tax and gets some of her franking credits paid out as cash. This is accounted for here as a reduction in the net income tax category.

Individual Investment Performance 2023

 

To better understand our investment underperformance in 2023 let's dive into the returns on each individual investment. If we'd managed to avoid all the losing investments in the table we would have roughly matched the return on the target portfolio. So, as usual it is the losers which hurt. In particular, the Cadence, Cadence Opportunities, and Tribeca listed hedge funds all did poorly. The worst of all though was the Aura VF2 venture capital fund. One of their companies - Lygon - went bankrupt and was then restructured. Once you are in a venture fund you can't really get out and I invested in this fund because VF1 has done well over time.

When I reviewed the hedge fund investments two years ago, these funds were all doing well. I did mention that I wanted to reduce exposure to Cadence Capital, which I failed to do. Tribeca has turned out to be a very volatile investment. Sometimes they have big wins and some times big losses. I failed to get out when it traded above NAV at about the time of the review. I thought then they had reformed, but apparently not. 

The other two main losers are Domacom and the China Fund. I really should have gotten out of Domacom when it relisted on the ASX. Now it does look like they will turn things around, but dilution from new investors means we might never make any money. There's no real excuse for remaining in the  China Fund, as I have been bearish on the long-term prospects of China under Xi Jinping. It is hard to explain.

On the other hand, I lost on the TIAA Real Estate Fund, but correctly reduced my exposure. Not by enough. My gains in the CREF Social Choice Fund just balanced my losses in the Real Estate Fund in 2023.

I have much less to say about the winners. 3i and Pershing Square Holdings have turned into big winners. I could have done even better on 3i if I had not sold 20% of the position. Half of the fund is in one company - Action - which made me a bit nervous. Gold did well and the other two big winners are our employer superannuation funds. With gold, these are our three biggest investments. Pershing Square is now our fourth biggest investment.

Annual Report 2023

In the second half of 2023 I stopped writing monthly reports on this blog because each month's accounts had large errors.* But now I have got the errors down to not more than $500 in any one month and 0.01% of the portfolio for the year as a whole. Our private investments have all also reported their results for the year. So, now we can compute reasonably accurate annual and monthly accounts for the year.

Overview 
Investment returns were positive and net worth again increased. But I was disappointed that we underperformed the target portfolio and were far behind the gains in stock indices. So, we also fell short of the net worth projection I made in the 2022 report. In the first half of the year, I spent quite a lot of time on my new hobby of researching my family tree. In the second half of the year I was working hard on teaching. I do all my teaching in the second semester now. In the second half of the year I also took on a new editorial role that will keep me busy over the next three years. We took a vacation at Coogee Beach in Sydney in January and I made a couple of short business trips to Melbourne in March and the end of November. Maybe in 2024 we will finally travel overseas again...

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.  

Investment Return
In Australian Dollar terms we gained 5.6% for the year while in USD terms we gained 5.9%. The Australian Dollar didn't move much over the year. The MSCI gained 22.8% and the S&P 500 26.3% in USD terms while the ASX 200 gained 14.4% in AUD terms. The HFRI hedge fund index gained 7.3% in USD terms. Our target portfolio gained 10.8% in AUD terms. So, we under-performed all benchmarks. 

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

 

This is really not good. The following chart shows monthly returns in Australian Dollar terms:

 

We beat the target portfolio in four of the twelve months, but the eight months where we under-performed dragged down returns for the year.

 

Here are annualized returns over various standard periods:

We beat the HFRI over 5 to 20 year horizons but otherwise we under-perform, though we are quite close to the target portfolio over 3 and 5 year horizons.

Here are the investment returns and contributions of each asset class in 2023 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. Not surprisingly, US stocks did best followed by gold, Australian large cap, and private equity. The latter contributed the most to total return mainly due to the stellar performance of 3i (77.8% for the year). Australian small cap and rest of the world stocks had negative returns. Thankfully, they take up small shares of the portfolio. Returns from hedge funds were particularly disappointing despite a strong performance by Pershing Square Holdings (24.4% for the year), which is our largest hedge fund allocation.

Investment Allocation 

There were no large changes in asset allocation over the year:

 

Mainly, relative exposure to hedge funds fell, as exposure to private equity and real assets rose.

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 $178k after tax in salary etc. Total non-investment earnings including retirement contributions were $210k, up 14% on 2022. The result is likely driven by lower net tax. We gained (pre-tax including unrealized capital gains) $154k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We gained $130k on retirement accounts with $31k in employer retirement contributions. The value of our house is estimated to have risen by $33k. As a result, the investment gains totaled $317k and total income $527k.

 

Total spending (doesn't include mortgage payments) of $151k down 1.3% on last year. It looks like my efforts to cut spending are working. We saved $28k from salaries etc. before making a concessional contribution of $20k to the SMSF. So, current net worth increased by $132k.

$31k 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. Taxes on superannuation returns are just estimated because, apart from tax paid by the SMSF, all we get to see are the after tax returns. I estimate this tax to make retirement and non-retirement returns comparable. The total estimated tax on superannuation was $40k. Net worth of retirement accounts increased by $141k after the transfer from current savings. With the gain in the value of our house, total net worth increased by $306k.

Projections
Last year my baseline projection for 2023 (best case scenario) was for an 11.2% investment rate of return in AUD terms, an 11% nominal increase in spending, and about a 3% increase in other income, leading to an $550k increase in net worth to around $6.5 million or a 9% increase. Net worth only increased by just over half of this due to much lower than predicted investment returns. On the other hand, spending actually fell despite high inflation and non-investment income rose.

 

The best case scenario for 2024 is flat spending at $151k, an investment return of 10%, and probably a 3% increase in non-investment income, resulting in a 8% increase in net worth of $500k to $6.7 million.

 
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.... 

 

For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, I didn't bother to note these, which amounted to about $1,000. "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.

 

* The error is the difference between two different ways of computing the profit or loss from changes in exchange rates for the month. The two methods should give the same result, but they don't when there are errors in the accounts.

Contributions to Annual Return

I haven't formally finalized the accounts for 2023 yet. I will need to wait to get investment returns on illiquid investments that report with a long time lag. But I do have a preliminary estimate of 6.38% in AUD terms (6.64% in USD terms). This is rather disappointing as the MSCI returned 22.81%, the S&P 500 26.27%, and the ASX 200 14.45%. Our target portfolio returned 10.84%. So, why did we underperform the target by so much? The following tables analyze the returns of each portfolio:

RoR is the rate of return of the asset class and contribution is the rate of return multiplied by the share of the portfolio. The sum of contributions gives the portfolio return. The returns for the Moom portfolio are in currency neutral and unlevered terms and, so, differ slightly from the Australian Dollar return for the portfolio. The asset classes don't quite match, but it's close enough. 

The target portfolio got 2.48% returns from international stocks. The return I got from US stocks at 15.8% was less than the MSCI index at 22.5% but more importantly, my allocation to other countries resulted in a negative return and so the total contribution from international stocks was only 0.89%. 

The target portfolio got 1.73% returns from Australian stocks. Again, my return from Australian large caps was a bit lower than that of the ASX 200 but my allocation to small cap stocks had a negative return and so the overall contribution was only 0.49%.

The target portfolio represents managed futures using the Winton Global Alpha Fund. This gave a contribution of 0.59%. I also allocated to the Aspect Diversified Futures Fund and Australian Dollar futures. These dragged down returns resulting in a contribution of only 0.18%.

The target portfolio obtained a 1.61% contribution from hedge funds (based on the HFRI index), while I only got 0.25%. Though some funds like Pershing Square did very well, other Australian hedge funds under-performed.

Real Assets is the area where I outperformed. I represent this in the target portfolio using the TIAA Real Estate Fund. My allocations to other real assets resulted here in a small gain rather than a large loss.

Bonds and gold made a similar contribution to each portfolio. Finally, venture capital made an outsized contribution to the target portfolio of 4.38%. My venture capital investments lost money overall in 2023. I did much better than the target portfolio in buyout investments like 3i. But this wasn't sufficient to match the target portfolio's overall private equity contribution.

I think there is some luck here. In a different year, non-US stocks or Australian small caps might perform well. On the other hand, I also need to eventually reduce some of my allocations to Australian hedge funds that have under-delivered.

Update on the Children's Portfolios

I was calling our children Moomin and Baby Moomin on this blog. But the latter is no longer a baby, so let's call them Big and Little Moomin :) My brother reported to me that Big Moomin's portfolio only returned 4% in USD terms in 2023. He put that down to not trading enough because the bank has made it harder to trade on this trust account...  Obviously it's down to being in the wrong things. I have tried to get him to stick with a diversified portfolio. He manages this one and the accounts for two of his children who all inherited money from our mother. The will stated that they couldn't access the money till they were 23 years old. I manage Little Moomin's portfolio, because he was born after my mother died and so wasn't included in the will. My brother and I each contributed from our inheritances to his account. I invested his money in an investment bond with Generation Life. His account returned an estimated pre-tax 14% in AUD terms in 2023.* The target portfolio benchmark made about 10.8% for the year. So, finally, this portfolio outperformed the benchmark after under-performing so far:

The graph also shows how the target portfolio has matched the ASX 200 while experiencing lower volatility over this period.

Anyway, my brother says that he is going to try to transfer the money to me. Initially, he was advised that the money had to stay in his country, where my mother lived, but now apparently he has reason to think otherwise.

* It is estimated, as 30% tax is deducted inside the investment bond. You can reduce this tax eventually if the child "breaks the bond" by adding an additional investment and they are in a lower tax bracket when withdrawing the money.

Spending 2022-23

For the last six years I've been putting together reports on our spending over the Australian financial year, which runs from 1 July to 30 June. This makes it easy to do a break down of gross income including taxes that's comparable to many you'll see online, though all our numbers are in Australian Dollars. At the top level we can break down total income (as reported in our tax returns plus superannuation contributions) into the following categories of spending:

The gross income for this year (bottom line) is just an estimate. It is based on the gross income we expect to report in our tax returns (before investment expenses etc) plus employer superannuation contributions. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending, while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Current saving is then what is left over. This is much bigger than saving out of salaries because gross income includes investment returns reported in our tax returns. The latter number depends on capital gains reported for tax purposes, so is fairly arbitrary. Spending increased substantially, though we also expect income to hit a high though it's been fairly constant over the last five years. Graphically, it looks like this:

We break down spending into quite detailed categories. Some of these are then aggregated up into broader categories:

Our biggest spending category, if we don't count tax, is now childcare and education, which continues to trend upwards. As mentioned above, the income and tax numbers are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions (we don't do any salary sacrifice contributions) but not concessional contributions we paid to the SMSF this year.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This includes tax on our concessional contributions to the SMSF.

Franking credits: Income reported on our tax returns includes franking credits (tax paid by companies we invest in). We need to deduct this money which we don't receive as cash but is included in gross income. Foreign tax paid is the same story.

Income tax is one category that has fallen since 2017-18!

Life and disability insurance: I have been trying to bring this under control and the amount paid has also fallen since 2017-18 a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child. It is up this year because I had an operation early this calendar year.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). Rising interest rates have pushed up spending this year.

Transport: About half is spending on our car and half is my spending on Uber, e-scooters, buses etc.

Utilities: This includes water, gas, electricity, telephone, internet, and online storage etc.

Subscriptions: This is a new category this year, split out from utilities. It's been trending up strongly.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets. Seems crazy that it has almost doubled in five years and is now our third biggest spending category.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low in the last two years because of the pandemic but doubled this year as life got more back to normal and prices are climbing I feel particularly in this area.

Cash spending: This has collapsed to almost zero. I try not to use cash so that I can track spending. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. No real trend here.

Mail order: This seems to have leveled out in the last three years and actually came down this year,

Childcare and education: We are paying for private school for one child, full time daycare for the other, plus music classes, swimming classes...

Travel: This includes flights, hotels etc. It was very high in 2017-18 when we went to Europe and Japan. In 2020-21 it was down to zero due to the pandemic and having a small child. This year we went to Sydney for a week and this is mostly how much the accommodation cost.

Charity: Not sure why this is trending down.

Other: This is mostly other services. It includes everything from haircuts to professional photography.

This year's increased spending was mainly driven by increased childcare and education costs and higher mortgage interest. I expect education to fall a little next year as private primary school is cheaper than daycare.

Annual Report 2022

Overview 
This was the first year that our net worth fell since 2008. Investment returns were negative but the value of our house increased a bit and we did save some money.* We were far short of the best case projection I made at the beginning of the year of a net worth of AUD 6.7 million. In my academic career, I spent a lot of time this year working on preparing and then teaching a new course, though I did get at least one newish research project completed. I was supposedly on long service leave for the first three months of the year but didn't really get to take any time off. This year, I plan on taking it a bit easier in the first half of the year before focusing on teaching in the second half of the year. Teaching was more in person this year and so a bit more enjoyable. I didn't leave the Canberra region all year since getting back from the coast right after New Year's Day.

 

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

 

Investment Returns 
In Australian Dollar terms we lost 3.7% for the year but in USD terms we lost 9.6% because of the fall in the Australian Dollar over the year. The MSCI lost 18.0% in USD terms but the ASX 200 gained 0.9% in AUD terms. The HFRI hedge fund index lost 1.5% in USD terms. Our target portfolio lost 4.2% in AUD terms. So, we beat the MSCI and the target portfolio benchmarks this year but not the ASX 200 or HFRI Index. 

 

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

 

We tracked the target portfolio quite closely. It acted as a less volatile weighted average of Australian and international equity markets. Here are the same indices in US Dollar terms with the target portfolio replaced by the HFRI hedge fund index:

 

The HFRI had very low volatility and the strongest relative performance. In USD terms, our portfolio was much more volatile than in Ausrtalian Dollar terms as intended.

 

Here are annualized returns over various standard periods:

Benchmark returns have now mostly decreased over time. We have similar performance to the ASX 200 over ten years but much worse over twenty. We beat the HFRI over all the longer time horizons. We had particularly good relative performance over the three year horizon. Whether you think our performance is good or bad depends on what you think the default alternative investment is. If it is an ASX 200 index fund, then we are doing in the last ten years. If it is a global stock index fund then not so good over horizons longer than three years. If you think it is our target portfolio then we are doing well.

Here are the investment returns and contributions of each asset class in 2022:

The contributions to return from each asset class sum to the total portfolio return in gross asset and currency neutral terms. I then add on the contributions of leverage and the Australian Dollar to get the AUD net worth return. The portfolio shares are at the beginning of the year. Futures and gold did best and contributed most to the return. Private equity and real assets had small positive returns. Australian small cap stocks and foreign equities all did very badly.

Investment Allocation 

There weren't large changes in asset allocation over the year:

 

Mainly, real assets fluctuated with our exposure to URF.AX, which is a very levered (effectively) US residential real estate fund.

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 $153k after tax in salary etc. Total non-investment earnings including retirement contributions were $183k, down 9% on 2021. This was due to increased tax payments, fewer non-salary earnings, and fewer employee contributions to Moominmama's employer superannuation fund. We lost (pre-tax including unrealized capital gains) $166k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We lost $15k on retirement accounts with $30k in employer retirement contributions. The value of our house is estimated to have risen by $133k. As a result, the investment loss totaled -$45k and total income $139k.

 

Total spending (doesn't include mortgage payments) of $152k was again up 12% for the year. Spending was almost exactly equal to after-tax non-investment income. We saved just $488 from salaries etc.

$25k 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 $120k into retirement accounts the SMSF from existing savings. This included $20k as a concessional contribution for Moominmama. Therefore, looking at just saving from non-investment income, we dissaved $120k. The change in current net worth, was therefore -$306k.

Taxes on superannuation returns are just estimated because apart from tax paid by the SMSF all we get to see are the after tax returns. I estimate this tax to make retirement and non-retirement returns comparable. The total implicit tax on supernnuation was a negative $1k because we lost money. Net worth of retirement accounts increased by $136k after the transfer from current savings.

 

Finally, total net worth fell by $37k.

Projections
Last year my baseline projection for 2022 was for a 16% rate of return, no increase in the value of our home, flat other income, and 6% growth in spending. This resulted in projected net worth increasing by $800k to around $6.7 million. Obviously, we came nowhere near this projection.

 

This year the baseline projection (best case scenario) is for an 11.2% investment rate of return in AUD terms (assuming the Australian Dollar rises to 75 US cents), inflation of 7.6% and an 11% nominal increase in spending, and about a 3% increase in other income, leading to an $550k increase in net worth to around $6.5 million or a 9% increase. This would be very little gain in real terms after inflation. But, again, 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 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.... 

 

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.

 

* Venture capital returns haven't been reported yet for the December 2022 valuation, but I don't expect them to make a big difference.

Moominmama's 2021-22 Taxes

I also did Moominmama's taxes for this financial year. The post about last year's taxes is here. Here is a summary of her tax return for this year:

Her salary was up steeply this year, as last year large superannuation contributions were deducted from it. This year, we redirected those to our new SMSF. Australian dividends were up dramatically as I tried to get more investments in her name. Gross income fell by 15% though because of reduced capital gains.

Total deductions rose by 66%, mainly because of the $20k in contributions to the SMSF. As a result, net income fell 32% mainly I think because of the reduced capital gains this year. 

Gross tax applies the tax bracket rates to taxable income. Most of this nominal tax was eliminated by the 208% increase in franking credits. As a result, she should be assessed for only $1.4k in tax. As this is much less than the tax withheld from her salary, I expect she will get a refund of around $4k.

Moominpapa's 2021-22 Taxes

This year, I've prepared our tax returns earlier than usual as I have already received all the required information. Here is a summary of my taxes. Last year's taxes are here. To make things clearer, I reclassify a few items compared to the actual tax form. Of course, everything is in Australian Dollars. 

On the income side, Australian dividends and franked distributions from managed funds are again up strongly. My salary still dominates my income sources but only increased by 3%. 

A big chunk of foreign source income is from the distribution from Aspect Diversified Futures Fund.  As a result, I am moving that holding into the SMSF. Net capital gain is zero due mainly to some strategic sales ton generate losses. I am carrying forward $99k in capital losses, which is double what was brought forward from last year.

In total, gross income grew 8%.

Deductions fell 47% because last year they included the loss on Virgin Australia bonds. Most deductions are interest including the $14k in other deductions.

Net income rose as a result by 26%.

Gross tax is computed by applying the rates in the tax table to the net income. In Australia, you don't enter the tax due in your tax return, but I like to compute it so that I know how big or small my refund will be.

Franking credits (from Australian dividends), foreign tax paid, and the Early Stage Venture Capital (ESVCLP) offset (none this year as there were no capital calls from Aura) are all deducted from gross tax to arrive at the tax assessment. 

Estimated assessed tax rose 47%.

I estimate that I will pay 28% of net income in tax. Tax was withheld on my salary at an average rate of 31%. I already paid $6,546 in tax installments and so estimate that I need to pay an additional $2,829 in tax.

Spending 2021-22

For the last five years I've been putting together reports on our spending over the Australian financial year, which runs from 1 July to 30 June. This makes it easy to do a break down of gross income including taxes that's comparable to many you'll see online, though all our numbers are in Australian Dollars. At the top level we can break down total income (as reported in our tax returns plus superannuation contributions):

The gross income for this year (bottom line) is just an estimate. It looks like falling quite significantly. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending, while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Current saving is then what is left over. This is much bigger than saving out of salaries because gross income includes investment returns reported in our tax returns. The latter number depends on capital gains reported for tax purposes, so is fairly arbitrary. Spending also recommenced its increase this year. Graphically, it looks like this:

We break down spending into quite detailed categories. Some of these are then aggregated up into broader categories:

Our biggest spending category, if we don't count tax, is now childcare and education, which has again risen steeply. As mentioned above, the income and tax numbers are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions and salary sacrificed contributions but not concessional contributions we paid to the SMSF this year.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This year it includes tax on our concessional contributions to the SMSF.

Franking credits: Income reported on our tax returns includes franking credits (tax paid by companies we invest in). We need to deduct this money which we don't receive as cash but is included in gross income. Foreign tax paid is the same story.

Life and disability insurance: I have been trying to bring this under control and the amount paid has fallen as a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child and continues to decline.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). We haven't spent much on maintenance this year, so spending is down.

Transport: About 2/3 is spending on our car and 1/3 my spending on Uber, e-scooters, buses etc.

Utilities: This includes spending on online subscriptions etc as well as more conventional utilities. I need to cut back on spending on video games as this category continued to climb strongly.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets. Seems crazy that it has almost doubled in five years and become our second biggest spending category.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low last year because of the pandemic and this year because of a seeming permanent behavior change.

Cash spending: This has collapsed to zero. I mainly use cash to pay Moomin pocket money and he pays me back if we buy stuff online for him. That's how it ended up negative for the year. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. No real trend here.

Mail order: This seems to have leveled out in the last three years/

Childcare and education: We are paying for private school for one child, full time daycare for the other, plus music classes, swimming classes...

Travel: This includes flights, hotels etc. It was very high in 2017-18 when we went to Europe and Japan. Last year it was down to zero due to the pandemic and having a small child. This year we went to the nearby coast for a week and this is mostly how much the accommodation, booked at the last minute, cost.

Charity: Not sure why it's down this year.

Other: This is mostly other services. It includes everything from haircuts to professional photography.

This year's increased spending was mainly driven by increased childcare and education costs. I expect these to be about the same next year and then fall for a while in subsequent years - private primary school is cheaper than daycare with the low level of subsidy we get - before beginning to rise again.

Annual Report 2021: Contributions of Individual Investments

I think all investment valuations for 2021 are now in. So, as I promised here is the profit or loss on each individual investment. We didn't hold all of these at the same time. Currently we have about 37 investments.* This doesn't account for investment costs, the most important of which is interest, or other investment returns like interest on bank accounts, of which there is very little.

Of course, this doesn't control for the size of each investment. Generally, the losing investments were smaller, with the exception of Hearts and Minds. Still even that investment was not as bug as the two top investments in terms of performances or the really large investments in the two superannuation funds. This means our capital allocation made sense and helped generate strong returns this year.

* Counting all 12 paintings at Masterworks as a single investment, for example.

Annual Report 2021

Overview 
The biggest development this year at Moomin Valley is that we set up the SMSF. We also finished investing the money we inherited in late 2018. I also reviewed all our existing investments to decide which to drop. Investment returns were again very strong. We exceeded the net worth projection in last year's report, which at the time I thought was crazy. In my academic career, I didn't feel very productive. Mainly I worked on completing research projects started in previous years, though there was one project that started right at the end of last year that we have already submitted for publication. I was frustrated with online teaching in the first half of the year and then with the second lockdown in Canberra in the second half of the year. Luckily, we could send our younger child to daycare throughout the lockdown this time. The estimated value of our house rose sharply in line with market trends and we closed some of the lag to the general housing market that we have experienced since buying here. At the end of the year, we went for our first trip outside our local region since the pandemic started, to South Durras, NSW:

 

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

 

Investment Returns 
In Australian Dollar terms we gained 18.8% for the year and in USD terms we gained 11.7% because of the decline in the Australian Dollar over the year. The MSCI gained 19.0%  in USD terms and the ASX 200 only 19.5% in AUD terms. The HFRI hedge fund index gained 12.4% in USD terms. Our target portfolio  gained 17.4% in AUD terms. So, we only beat the target portfolio benchmark this year. This is expected in a strong bull market.

 

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

We tracked the target portfolio quite closely and ended the year with a similar return to the ASX 200 but less volatility. This is the goal of our investment strategy. We had no down months. The ASX tracked the MSCI till the middle of the year and then lagged. The S&P 500 was strong throughout. Here are the same indices in US Dollar terms with the target portfolio replaced by the HFRI hedge fund index:

The ASX 200, HFRI and to some degree MSCI, all stagnated in the second half of the year. I ended up with a similar performance as the median hedge fund, but with more volatility because of the translation into US Dollars. If we targeted low volatility of US Dollar returns we would need to short non-US Dollar currency, whereas going long foreign currency achieves low volatility for Australian Dollar investors. US based investors are, therefore, more likely to hedge out foreign currency exposure, while we seek it.

 

Here are annualized returns over various standard periods:

Both our returns and the benchmark returns have increased over time. We have a better performance than the ASX 200 over the last two years and similar over 5-10 years. We beat the HFRI over all the longer time horizons. We had a similar performance to the MSCI over the last two years, but much worse over longer horizons. Whether you think our performance is good or bad depends on what you think the default alternative investment is. If it is an ASX 200 index fund, then we are doing OK. If it is a global stock index fund then not so good. If you think it is our target portfolio (not in the table) then we are doing a bit better than that over 10 years and about the same over shorter horizons.

Here are the investment returns and contributions of each asset class in 2021:

 

The contributions to return sum to the total portfolio return in gross asset terms. These returns are currency neutral and because of leverage are lower than the returns reported above for net assets. The portfolio shares are at the beginning of the year. Hedge funds and private equity again had the highest returns. Hedge funds had by far the largest contribution to total return. Gold was the weakest performer. The rate of return on bonds was surprisingly good. Returns to long-only stocks were surprisingly poor compared to market indices.

Investment Allocation
The main changes in allocation over the year were that we continued to reduce our bonds allocation while increasing real assets and private equity mostly:

 

The blip in the early part of the year is when we transferred funds from Colonial First State to the SMSF. The CFS funds were all converted to cash.

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 $166k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. This was up 17% on 2020 because Moominmama went back to work. We earned (pre-tax including unrealized capital gains) $485k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We gained $278k on retirement accounts with $37k in employer retirement contributions (more details below). The big difference to last year, is that instead of the value of our house falling, I estimate it rose by $246k. As a result, investment income totalled $1.008 million and total income $1.211 million.

 

Total spending (doesn't include mortgage payments) was up 12% on 2020, which saw a fall in spending. Combining the two years, spending is rising at 3% per year.

$19k 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 $374k into retirement accounts (ultimately the SMSF) from existing savings.

 
The change in current net worth, was therefore $1234k. Looking at just saving from non-investment income, we dissaved $344k. So, before the transfer to retirement accounts we saved about $31k (19%) from salaries etc.

We made $37k in pre-tax contributions to retirement accounts (after the 15% contribution tax) and made an estimated $278k in pre-tax returns. $20k 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 apart from the SMSF 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 $668k.

 

Total net worth increased by $1.038 million,  which was up 218% on last year. $67k of this was from saving from non-investment sources, up 95% on last year. Thanks to employer superannuation contributions this was 33% of our total after tax non-investment income.

How Does This Compare to My Projection for This Year?
Last year my baseline projection for 2021 was 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. This just seemed like too much to me so I also made a "more sensible projection" of an increase of $400k to around $5.3 million. Investment returns matched the baseline projections very closely. The additional gain in net worth is mainly due to the estimated increase in the value of our house. Using the same methodology, the baseline projection for 2022 is for a 16% rate of return, no increase in the value of our home, flat other income, and 6% growth in spending. This results in net worth increasing by $800k to around $6.7 million. Again, 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 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.... 

 

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.