APSEC Update

I invested in the APSEC hedge fund back in 2020 just after they outperformed strongly in the COVID19 crash. They have managed to about match the ASX 200 over time with somewhat lower volatility:

They tend to outperform in bear markets and under-perform in bull markets. Since investing, I have only gotten a 5.9% internal rate of return, which is below average. The median IRR of my current investments is 9%. I would have done better by investing more in the Aspect Diversified Futures Fund instead, which has similar hedging properties, where I have had a 22% IRR. We have 2.47% of net worth in the fund all of it within the SMSF. I submitted a redemption notice for all of our holding today.

... and The China Fund

Also sold out of The China Fund (CHN) at a huge loss for this account (SMSF) though we only lost a little (USD -1.7k) in the long-term as we previously had positions in other accounts that did well. Should have gotten out a long time ago, of course. Internal rate of return to date was -0.75%.

Sold Berkshire Hathaway

I sold my 100 shares of BRK/B. The last earnings report raised questions about the performance of several major Berkshire businesses. My target asset allocation said I could reduce my exposure to US shares and I wanted to do something else with the money. Yeah, I bought more bitcoin. Munger would have been horrified.

Total profit on Berkshire to date was USD 18k and the internal rate of return was 11.09%.

Investments Review: Part 8, Managed Futures

Managed futures have not performed well in recent years, but I am betting that they will make a bit of a comeback.

Macquarie Winton Global Alpha Fund. Share of net worth: 3.53%. IRR: -0.3%. This is a Macquarie Bank fund that provides access to the Winton fund management firm. Winton, Aspect, and Man AHL are all offshoots of the same original Adam, Harding, and Lueck team. Our profits in this fund peaked in August 2019 at AUD 29k and then fell to a minimum of AUD -19k in November 2020. Since then they have recovered to near break even.

Aspect Diversified Futures. Share of net worth: 2.04%. IRR: n.a. We hold this recent investment via the Colonial First State platform. It has performed better than Winton recently:

Investments Review: Part 7, Bonds

MCP Income Opportunities Fund (MOT.AX). Share of net worth: 1.75%. IRR: 14.8%. This fund invests in Australian private credit. It yields around 7% per annum. It performed better than other similar listed funds during the COVID crash. We use this to park cash that we don't need immediately as it pays more than our margin loans cost.

Ford. Share of net worth: 1.46%. IRR: 2.1%. We own two Ford bond issues that mature later this year. This is the tail end of the bond investments we made with the inherited money while we decided how to deploy it.

Ready Capital (RCB). Share of net worth: 0.77%. IRR: 5.3%. This is a so-called baby bond. These trade on US stock exchanges and usually have an issue and redemption price of $25. The distributions are considered to be interest but they have none of the other peculiarities of actual bond issues. They usually have high yields. This issue matures in July 2022 and has a "coupon" of 6.2%.

Investments Review: Part 6, Real Assets

In my usual reporting, gold is a separate category from real assets. I plan to put 10% of gross assets into gold and 15% into real assets. 10% would be in real estate and 5% in other assets, such as art.

Gold (PMGOLD.AX). Share of net worth: 12.10%. IRR: 15.2%. This is one of the more cost and tax effective ways to hold gold. The fund reflects rights to gold held by the Perth Mint. This is much more tax effective than using futures and less hassle than owning real gold, though Perth Mint provide some fairly easy options there. The IRR reflects our total gains on gold ETFs. The management fee is taken by the manager cancelling some shares each year. That means the price exactly tracks the Australian Dollar price of 1/100 of an ounce of gold.

WAM Alternatives (WMA.AX). Share of net worth: 4.32%. IRR: 16.9%. About 10% of this fund is in real estate and half in real assets, mainly water rights. The rest is in venture capital and cash. This fund was started by the failed Bluesky group and has now been taken over by Wilson Asset Management. The fund has traded deep below NAV. It has closed some of the gap but is still below NAV. I'm holding the fund mainly in the hope that eventually it trades at a premium to NAV. The underlying performance is not that good. In 2020 it lost 3 cents per share in NAV to $1.08 per share while paying out 4 cents in dividends. This year, so far it's gained 6 cents per share, which I guess is OK.

TIAA Real Estate. Share of net worth: 2.78%. IRR: 4.8%. This fund invests in US real estate - offices, retail, apartments, and industrial. It is in my US retirement account (403b). The IRR for this fund is low, but its returns are very smoothed and so it has a nominally high Sharpe ratio and a low correlation to my other assets. Based on my analysis, I'm hoping that the coming period is one of higher returns than average for this fund. It is easy to market time this fund due to the lag in revaluations.

Masterworks. Share of net worth: 2.63%. IRR: -0.28%. This fund provides fractional access to paintings, mostly works from the last few decades. I have now invested in nine paintings through the platform, investing USD 10k in each. Not much to report so far regarding performance. The downside of the platform I think, is that it isn't worthwhile for the manager to buy a painting for $100k or even $1 million. Buying a $10 million painting has a huge economy of scale for them. They are incentivised to make profits, but they could make it either by getting a lot of appreciation or less appreciation but more assets under management faster. Less expensive paintings that have a larger potential for gain cost them too much to offer.

US Masters Residential Property Fund (URF.AX). Share of net worth: 1.25%. IRR: -1.85%.This is an Australian fund that invests in residential real estate in metropolitan New York. The fund has had a quite disastrous history and now trades at less than 50% of NAV. The fund's underlying exposure to real estate is much larger than the value of the shares on the ASX. The fund has stabilized after refinancing its debt. Previously, it had assets in US Dollars and a lot of debt in Australian Dollars. My bet is that house prices rise in the New York area, that fund costs are now lower after the restructuring, and that the fund eventually trades nearer NAV.

Australian Unity Diversified Fund. Share of net worth: 1.17%. IRR: 28.2%. A recent investment in our SMSF. Invests in Australian office, retail, and healthcare real estate. This is unlisted property and so the price reflects the actual net asset value. Listed real estate provides much less diversification from stock market risk.

Domacom Investments. Share of net worth: 1.12%. IRR: 0.16%. Another recent investment in our SMSF. Fractional investing in Australian real estate. So far, I bought a small share in a farm, but the platform is very slow moving regarding new investments and most existing investments that are trading don't look like good bets.

Investments Review: Part 5, Private Equity

The private equity category includes both venture capital, buyout funds, and SPACs, which acquire private companies to take them public.

WAM Alternatives (WMA.AX). Share of net worth: 4.32%. IRR: 16.9%. About a quarter of this fund is allocated to venture capital (one quarter is in real estate and half in real assets, mainly water rights). This fund was started by the failed Bluesky group and has now been taken over by Wilson Asset Management. The fund has traded deep below NAV. It has closed some of the gap but is still below NAV. I'm holding the fund mainly in the hope that eventually it trades at a premium to NAV and for exposure to real assets like water rights. The underlying performance is not that good. In 2020 it lost 3 cents per share in NAV to $1.08 per share while paying out 4 cents in dividends. This year, so far it's gained 6 cents per share, which I guess is OK.

Aura Venture Fund I. Share of net worth: 3.05%. IRR: 20.0%. This is an early stage venture capital fund run by Australian/Singaporean company Aura. It invests in Australian start ups. This fund actually has a negative tax rate – fund earnings are tax free and you get a 10% tax offset on your investment contributions. This is part of the Australian government's policy to encourage start-up companies. None of its investees has failed, though some are now valued below the fund's initial investment price. Some have done really well. Shippit is the star. Some investees have already been exited or are on the way there. The latest is Superestate, which is a residential real estate super fund acquired by Raiz. Superestate has been struggling due to the incompetence of the ATO. The fund is receiving shares in Raiz, which is listed on the ASX, which value the company below the carrying value. Hopefully, Raiz will do well and the shares will gain in value.

Pengana Private Equity (PE1.AX). Share of net worth: 2.40%. IRR: 15.3%. This fund invests in mostly North American private equity (but also in Europe) via funds managed by its partner Grosvenor Capital Management. There are a LOT of fees in this structure, but when I attended the pre-IPO presentation I was persuaded that there was still upside for investors. Initially the share price performed very well and I made money trading the stock. But then the firm issued more shares and the price has settled at NAV. It has struggled to make headway due to the rise in the Australian Dollar negating the gains on the underlying funds. So, the IRR mostly reflects my earlier trading.

3i (III.L). Share of net worth: 2.06%. IRR: 13.8%. This is my oldest private equity investment. I first invested in 2008, during the GFC. By investing in this company, you invest in the business itself, but also in its investments. The firm invests its own capital as well as managing outside funds. When I first invested, the firm invested in venture and buyout. It has pivoted to invest in buyout and infrastructure. It also manages far less outside money than it did. I haven't really been following the company in detail recently until I had to write this report. The proprietary capital is mostly invested in private equity. The fund invests mostly in Europe (but also in North America).

Aura Venture Fund II. Share of net worth: 1.40%. IRR: n.a. Based on the success of Aura VF I, I invested 2.5 times as much money in their next fund. It has not yet made any investments. The initial investment is 25% of the total. So, this would be about 5% of our current net worth when fully invested (not counting any returns on top of that).

Pershing Square Tontine Holdings (PSTH). Share of net worth: 1.35%. IRR: n.a. My newest investment. Pershing announced that they are going to acquire a 10% stake in Universal Music (UMG), which Vivendi is taking public in the next couple of months. But that will leave cash in PSTH and Ackman has a convoluted plan for keeping the company going as a private equity company, acquiring private companies and taking them public. Investors didn't like the UMG deal, but I think it is worth being in on the potential upside of future deals.

Investments Review: Part 4, Hedge Funds

Regal Funds (RF1.AX). Share of net worth: 5.63%. IRR: 45.7%. This is a multi-strategy hedge fund listed on the ASX that has performed very well since the COVID crash:

It has a beta of one to the stock market but has added a lot of alpha. The downside is that it has a trust structure and, therefore, pays out all profits in the form that they were earned in. So, it is not very tax-effective. We have now moved our holding to our SMSF. The stated focus is on Australian stocks, but they hold a lot of foreign stocks too.

Tribeca Global Natural Resources (TGF.AX). Share of net worth: 5.57%. IRR: 19.2%. This a global resource sector focused hedge fund listed on the ASX. From launch the price collapsed from $2.50 to under $1. They also lost a lot of money on a large loan to a US based coal mining company. They now have revised the investment guidelines to prevent a recurrence. The NAV is now above the IPO price and the stock price is almost there. We have gained a lot by buying when the price was depressed as well as in after-tax terms by selling when the price was depressed to take a tax loss.

Pershing Square Holdings (PSH.L). Share of net worth: 5.33%. IRR: 39.8%. This fund is listed on the London stock exchange but managed by Bill Ackman, a famous US hedge fund manager. The fund is very focused. They invest in around 10 large cap mostly US stocks at any one time. It is mostly a long fund. But they gained during the COVID crash by putting on a credit -ased hedge. Almost perfect market timing. The history of Pershing Square Holdings has been a bit erratic but since we invested it has been very good. The fund is still trading a lot below net asset value. Pershing Square Tontine Holdings has been in the news recently following its deal to buy 10% of Universal Music. I'm still not clear what will be the pay-off for PSH.L holders from this deal. Both PSTH and PSH fell on the news.

Cadence Capital (CDM.AX). Share of net worth: 3.80%. IRR: 10.2%. This is a long-biased long-short fund that mostly invests in Australian stocks. I invested in this fund when it had been performing well. Then, soon enough, it started to perform badly. Since the COVID crash it has done well. They also invested in a private investment in DeepGreen Minerals, which will be taken public by a SPAC for a huge gain on Cadence's investment price. I am thinking to trim my exposure to this fund once the price has built in the value of the DeepGreen Investment. There is no reason to hold both this and the Cadence Opportunities Fund, and this is also the worst performing of the hedge funds that I have held for at least a few years.

Cadence Opportunities Fund. Share of net worth: 2.76%. IRR: 41.6%. This fund was launched recently by the managers of Cadence Capital. This fund has performed extremely well. It is a long-biased long-short fund that trades more actively than CDM.AX. It was supposed to be listed on the ASX but the IPO failed and it became a private company. At the time I didn't invest. That was a bad decision. When a second opportunity to invest came up, I took it. Our IRR so far shows that was a good move.

Platinum Capital (PMC.AX). Share of net worth: 2.67%. IRR: 13.0%. I first invested in Platinum Capital back in 2001. Over time, we also held various unlisted versions of the fund. I have gained by trading the fund depending on whether the share price was above or below NAV. The fund's best performance was during the dot.com crash when I first invested in it. Most of the time since then it has underperformed the market but has also had lower volatility. In the last year, value investing has come back into favor and the fund has again been outperforming the market.

APSEC. Share of net worth: 2.07%. IRR: -7.5%. This is an unlisted Australian stocks focused hedge fund. They did very well in the COVID crash:

So, I invested in them, and then they haven't done so well since then.

Contango Income Generator (CIE.AX). Share of net worth: 1.41%. IRR: -11.9%. This is a very new investment, so the IRR likely is pretty meaningless. This listed fund recently changed strategy to a global equity long short portfolio managed by WCM Investment Management. This is supposed to be their track record:

This was the result of an activist campaign by Wilson Asset Management. It is supposed to be hedged into the Australian Dollar.

In summary, a bit more than half of our hedge fund exposure is to the Australian Dollar but there is definitely quite a lot more international than Australian equity exposure.

More Investment Review Actions

 Following up on Parts 1 and 3 of the Investment Review I am making the following changes:

1. Switching from CFS Future Leaders to CFS Developing Companies

2. Closing investment in CFS Diversified Fund and switching one third to CFS Imputation Fund and 2/3 to Aspect Diversified Futures. 

The latter is a bet that trend-following will become more profitable again than it's been in recent years.

Investments Review: Part 3, Small Cap Australian Equities

CFS Developing Companies. Share of net worth: 2.14%. IRR: 12.86%. This is one of my oldest investments. I originally invested in May 1997. However, I sold out again in 1998 and bought back in in 2001. Until recently, when I closed my CFS superannuation account, we had a larger position. It's performance relative to CFS's "custom benchmark" has been erratic. It has strongly outperformed over 10 years but underperformed over horizons up to 5 years. Still it gained 80% in the year up to March 2021 but that was less than the benchmark's 104% gain. However, I don't see any reason to change this investment, unless someone knows a better small cap Australian fund. Wilson Microcap (WMI.AX) is such a fund but trading at a big premium to NAV.

WAM Strategic Value. Share of net worth: 2.04%. IRR: Too new. We have applied for shares in this listed investment company that is in the process of IPO-ing and is managed by Wilson Asset Management. The fund's goal is mostly to invest in undervalued closed-end funds in Australia with the aim to closing the gap. It doesn't qualify as a hedge fund as far as I am concerned because it won't go short or use puts etc. As most of these funds are small caps, I'm categorizing it as a small cap investment.

CFS Future Leaders. Share of net worth: 1.00%. IRR: 10.37%. This is the oldest investment I still have. I originally invested in December 1996. This fund invests in somewhat larger companies than Developing Companies does. It has not performed as strongly in the long run. Like Developing Companies, it outperformed its benchmark over 10 years, though not as strongly, and has underperformed in recent years. I'm inclined to roll this into Developing Companies, despite nostalgia.

Domacom (DCL.AX). Share of net worth: 0.73%. IRR: -3.04%. This is a company rather than a fund and its business is fractional property investment. The company has developed a series of innovative products but has struggled to increase funds under management and so continues to make large losses. My thesis for investing was that they would likely get acquired by a larger financial player who could put a lot more funds into their products. Really it is surprising that this is a listed company rather than a venture capital sponsored investment. Now the company has "voluntarily suspended" its shares because ASIC is investigating its merger/takeover of a company called AustAgri that has made all kinds of wild claims the most solid of which was it was buying Cedar Meats in Melbourne. Why they would want to become a Domacom managed fund, paying management fees to Domacom was not clear. In return they were supposed to receive Domacom shares. Whatever the outcome of this is I don't think this will be a complete loss, because again I think they could sell the platform. I don't have any choice but to hold at the moment.

TIAA Real Estate Fund

I haven't gotten around to reviewing the TIAA Real Estate Fund yet, but have decided to buy more of it. There are two reasons. First, after reviewing the CREF Social Choice Fund, I'm a bit concerned that it is 40% bonds even though it has been a pretty decent fund relative to benchmarks. Second, it looks like timing is good to switch into TIAA Real Estate. The following chart shows its monthly returns and a 12 month moving average:

The fund does well after recessions but with a lag compared to the stock market. The moving average has just turned the corner again and monthly returns are above anything seen in recent years. In March I switched out of this fund as I was worried about the pandemic and into Social Choice and Money Market. Then in December I switched back into Real Estate. Now I just switched most of my remaining holding of Social Choice.

Already Making Changes Based on the Investment Review

I've only done the first two parts of the Investments Review, but am already making changes to our portfolio based on it. I switched our holding of the Platinum International Fund for more units in the Generation Global Fund. The internal rate of return of the latter is twice that of the former and the alpha of the former is about zero, while the latter is around 3%. We still have a holding in the listed investment company Platinum Capital (PMC.AX). I also cancelled the automatic investment plan for Moominmama's account that holds the Generation Global Fund. Now that we are trying to get more money into superannuation, it doesn't make sense to keep putting AUD 2k per month into these accounts. Her account now holds the Generation investment (now 2.45% of net worth) and holdings in CFS Imputation (0.98% of net worth) and CFS Developing Companies (not reviewed yet).

Investments Review: Part 2, Long-only Large Cap Equities

For the second part of the investments review, I am looking at our long-only large cap equities funds. Usually, I would divide these into Australian large cap, U.S., and rest of world equities, but Hearts and Minds spans all of these and Generation the last two. The funds all have strong IRRs. Note that the IRR of an investment depends both on its underlying performance and our trading and timing.

Hearts and Minds (HM1.AX). Share of net worth: 4.13%. IRR: 27.52%. This fund invests across Australia and global markets by picking the best ideas of a set of fund managers. 35% of the portfolio is allocated according to the stocks pitched at the annual Sohn Hearts and Minds Conference. 65% is allocated according to the best ideas of six core fund managers: Caledonia Investments, Cooper Investors, Magellan Financial Group, Paradice Investment Management, Regal Funds Management, and TDM Growth Partners. Instead of charging management fees, the fund contributes 1.5% of NAV to charity every year. Since inception, this fund has performed very well. On the other hand, it has been weaker this year as the conference stocks this time are mostly high growth stocks, which are now falling out of favor:

The China Fund (CHN). Share of net worth: 1.77%. IRR: 16.00%. This is a closed-end fund investing in Chinese stocks. There have been changes of manager over time and the latest manager seems to be doing well:

The reason to hold this fund is to tilt towards exposure to emerging markets. I think our diversified funds have a relatively low exposure to emerging markets, though it's impossible to get that information for most of them. OTOH, one of our "hedge funds", Platinum Capital has a 17% allocation to China and Hong Kong and 2% to India. So, this seems a good fund to get that exposure through. But is almost one third of our allocation to "rest of the world stocks" too much?

Generation Global Fund. Share of net worth: 1.60%. IRR: 16.50%. This fund is hosted on the Colonial First State platform and is closed to new investors. We are automatically adding AUD 400 to this fund every month. The question is whether to raise that or stop contributing to funds outside of super altogether. The fund is managed by Generation Investment Management, who are an ESG fund manager. Compared to the MSCI World Index it has a beta of 1.11 and annual alpha of 3.2% over the last five years. So, this is a good long-only fund.

Fortescue Metals (FMG.AX). Share of net worth: 1.60%. IRR: Too new. I very recently switched out of Treasury Wines and into this stock, which so far has been a very bad move. I guess I just like to do some trading with a small part of the portfolio. I am hoping this will pay nice franked dividends and that I at least won't lose capital value in the long term.

Colonial First State Imputation Fund. Share of net worth: 0.99%. IRR: 18.00%. This fund invests in large cap Australian stocks with strong "franked" dividends. There is little logic to hold both this fund and Argo Investments... Argo has a much lower management fee. On the other hand, this fund has outperformed the benchmark on many time scales despite the high management fee (0.96%):

So, if we retain this account, then I think this fund makes sense as one of the investments.

Berkshire Hathaway (BRK/B).  Share of net worth: 0.87%. IRR: 9.80%. My thesis for investing in Berkshire is here. Berkshire is providing more exposure to the US market in the SMSF.

Argo Investments (ARG.AX). Share of net worth: 0.79%. IRR: 23.03%. This is a closed end fund (listed investment company) investing in mainly large cap Australian shares. The expense ratio is only 0.15%! Timing has boosted our IRR for this fund... The fund has outperformed the benchmark recently and over 20 years, but not over the interim time frames:

So, maybe this isn't such a good idea? I recently invested again in this fund to get more exposure to the Australian market after rolling over my Colonial First State superannuation fund into the SMSF. Note that the share price performed poorly recently as the premium to NTA fell, after which we purchased the fund.

Investments Review: Part 1, Diversified Funds

After noting that we had at a conservative count, 40 different investments, I thought it'd be a good idea to do a review of all of them to see what makes sense and what doesn't. Maybe my readers will learn about some interesting investments too. Or about what not to invest in. Each post will look at one type of investment starting with diversified funds. Shares of net worth don't include our house in net worth.

Unisuper Balanced Fund. Share of net worth: 10.02%. IRR: 10.64%. This is my employer superannuation fund. I think in theory we could have contributions made to another fund instead but then they would only pay the 9.5% (of salary p.a.) superannuation guarantee instead of 17%! What I do have an option to do is to switch to other investment options within Unisuper. I also think I could rollover the investment into another fund such as our SMSF. The balanced fund is diversified across Australian stocks (33%), international equities (27%), bonds (30%), property (5%), and infrastructure and private equity (5%). It is one of the better performing balanced super funds in Australia. I used to invest more aggressively by investing in the growth option instead. Unless our SMSF outperforms strongly, I'm inclined to leave this as it is.

PSS(AP) Balanced Fund. Share of net worth: 9.16%. IRR: 9.41%. This is Moominmama's employer superanniation fund. It's not quite as well-performing as Unisuper. They only offer four investment options now. There used to be more. They provide even less information about their investments than Unisuper do. Generally, it's amazing how little information most Australian fund managers provide compared to U.S. fund managers. The fund is allocated across equities (56%), bonds (18%), hedge funds (15%), and real assets (11%). I think there is a similar condition on fund choice.

Colonial First State Diversified Fund. Share of net worth: 3.12%. IRR: 10.31%. I contribute automatically AUD 500 into this fund each month. Before rolling over my CFS superannuation account into our SMSF we had a lot of superannuation invested in this fund too. There isn't really a strong justification for holding this fund, especially given the 20% of net worth that we have invested in the two superannuation funds above. Selling would mean a capital gains tax bill, but I'm really not sure why I am continuing to put money into the fund. The CGT bill would actually not be that big as the distributions have been taxed all along the way. The fund is allocated 30% to Australia shares, 20% to global shares, 30% to bonds, 5% to property securities, 5% to infrastructure securities, and 10% to "real return". It has returned 7.78% p.a. in the last ten years to March, which is less than our portfolio return.

CREF Social Choice. Share of net worth: 1.66%. IRR: 13.33%. This fund is 40% U.S. stocks, 20% rest of the world stocks, and 40% bonds with an ESG overlay. I use this as the core fund in my former U.S. employer retirement fund (403b account). Apparently, my market timing since 2002 when I first invested in this fund has paid off to boost the IRR. I have been both more aggressive and more conservative in the allocation in this account. It has returned 8.33% in the last ten years and outpaced the relevant Morningstar benchmarks. The question is whether to be more aggressive in this account and shift to the Global Equities option instead.

Ruffer Investment Company (RICA.L). Share of net worth: 0.97%. IRR: Too new. This is an extremely new investment that plays more of the role of a hedge fund in the portfolio. But as it doesn't use shorting or charge a performance fee I've classified it as a diversified fund. The allocation is 9% U.S. stocks, 31% rest of the world equities, 39% bonds (mostly index linked), 8% gold, and 13% in what they describe as "illiquid strategies" and options. The illiquid strategies seem to be hedge funds specialising in mitigating tail risk. I'm counting this part of the fund towards our hedge fund allocation.