Bottom in Real Estate?

Fundrise have come out and said that they think the bottom is in in the commercial real estate market. Coincides with my assessment that maybe the bottom is close for a diversified portfolio. This graph shows monthly percentage returns of the TIAA Real Estate Fund and a twelve-month moving average:

So, I am switching some of my US 403b account back to the TIAA Real Estate Fund. My mistake in the last couple of years was not switching enough out of this fund to CREF Social Choice, though I did switch a lot. I was at 43% Real Estate, 57% Social Choice last month and now am at 70% Real Estate, 30% Social Choice. As a result of the switches I managed to roughly maintain the balance of the account in the last couple of years:

I was actively saving in this account up to June 2007, after which the trend is solely due to investment returns.

Second Australian Unity Merger Plan Scuttled

Australian Unity and Cromwell announce that their fund merger plan is cancelled. I wasn't very enthusiastic about the merger and so am happy it has been called off. Cromwell's fund only included offices, so while the deal was diversifying for Cromwell unitholders it was not so for Australian Unity unitholders. I invested in the fund to get diversified property exposure, not just offices.

Good News from Pershing Square

The SEC finally approved the registration of Pershing Square SPARC Holdings. I bought PErshing Square Tontine Holdings (PSTH) around $23. We got $20 back when the SPAC was wound up. It's great to see that it will now be resurrected. Hopefully some good deal will come out of this. I wasn't that inspired by the Universal Music deal, which fell through, anyway. We ended up being invested in that all the same through PSH.L.

Got a Call from Australian Unity

I blogged recently about the proposed merger between the Australian Unity Diversified Property Fund and a Cromwell office fund. Today, I was called by a representative who told me about the plan and timeline and asked if I had questions and whether I would support the proposal So, I told him that I understood the reasons for seeking a merger and that I thought this merger was better than previous proposal but also that I invested in the fund to get exposure to a diversified portfolio and now it was going to be a office dominated fund, a sector that's not doing too well. So, I wasn't really sure which way to vote. He sounded disappointed and said he understood my thinking...

New Australian Unity Merger Proposal

Australian Unity Diversified Property Fun has a new merger proposal on the table following the failed merger in 2021-22. This is a merger with the unlisted Cromwell Direct Property Fund. This seems like a fair deal unlike the previous one. It has various advantages. The only downside is that the merged fund will have 70% of its assets in offices. The attraction of AUDPF was that it was truly diversified and not dominated by offices. 

I expect I will stay in the fund (there is only a limited near term opportunity to withdraw) and think about withdrawing in 2025 when a full liquidity event is promised. The main risk is that office properties are downvalued in 2024 and 2025 after the merger happens. I am seeing a decline in value in the TIAA Real Estate Fund even though only a quarter of their assets are in offices. I reduced my holdings near peak value, should have reduced them more. So, maybe I should try to withdraw some of our investment when allowed later this year...

Fixed My Margin Loan Interest Rate

I fixed my margin loan interest rate for the next year at 7.69% instead of a variable rate 9.15%. I am paying the interest in arrears. At the moment I can't see the RBA really cutting interest rates by an average of 1.5% over the next year. It's the first time I have done this. One reason for that is that my balance is relatively low at the moment and I expect it will increase, so I won't have the problem of early termination. I am withdrawing AUD 15k every quarter to invest in the Unpopular Ventures Rolling Fund.

New Investment or Trade

I sold some Pengana Private Equity (PE1.AX) shares as they are trading above NTA and bought some Cordish Dixon Private Equity Fund III (CD3.AX) shares, which are trading more than 30% below NTA. Of the three traded Cordish-Dixon funds, I selected this one as it is youngest and so I figured has the most potential. Maybe the oldest fund maybe has only more problematic companies left in it, which are harder to sell? It is also the biggest of the three funds because it has made fewer distributions to date.

This was spurred by news that PE1 has made offers to acquire the CD funds, though these have been rejected to date.

In other updates, I have been tied up in other projects and haven't had time to reconcile the accounts for the last couple of months. When I do, I will post reports.

Domacom Reinstated to ASX Quotation

On the last trading day before Christmas, Domacom has been reinstated to quotation. I wonder where the price will end up?

7:27pm

It went up! Closing at 7 cents a share. It was last quoted at 6.5 cents before being suspended. There were more shares on the buy side than the sell side most of the day.

Regal Funds Adds Private Credit

After recently adding a resource royalties strategy, Regal Funds (RF1.AX) are now adding a private credit strategy. They also announced a placement and rights issue to help implement the new strategy. The fund started primarily as a listed hedge fund with some private equity. But it is increasingly becoming a diversified alternatives fund. I suppose all these new strategies are supposed to reduce the correlation of the fund to the stockmarket. The fund has had a beta of 1. However, this looks like it will come at the expense of performance. You can't do 20% a year in strategies like private credit. Well, I guess you can lever up...

In any case, performance wasn't good in November, especially relative to the stockmarket which rose strongly. I sold 10,000 shares this week to increase my holding of URFPA. The rights offering is at AUD 3.01 a share (current NAV) with a maximum of AUD 30k per holder. I decided not to bother as I can't buy more than 2,000 shares without selling something else.

Regal Investment Fund Implements Resource Royalties Strategy

 

Regal Investment Fund (RF1.AX) is continuing to diversify their portfolio. Recently, they added a water strategy through Kilter Rural. Now they are adding a resource royalties strategy through the Gresham Resource Royalties Fund. While the water strategy is only 2% of the fund, the resource royalties strategy will be 17% of the fund initially. I am categorizing both of these in the real assets class. From the announcement:

"A resource royalty is a right to receive payment usuallyreflecting the value of a percentage of revenue derived from the production from a mining, oil and gas or renewable project. A commodity stream is an agreement conferring a right to purchase all or a portion of the production produced from a mining, oil and gas or renewable project at a pre-set price. Royalties and commodity streams are often used interchangeably. Royalties and commodity streams are typically acquired for an upfront payment. They can provide investors with the upside potential of increased commodity prices, increased production and extended mineral reserves (and sometimes new discoveries) with no or limited exposure to variable operating costs and future capital calls to fund exploration or other capital costs."

Gargantua by George Condo Sold

Masterworks sold the third painting that I invested in, Gargantua by George Condo. The original offer price to investors was $1.65 million and they sold it for $2.55 million. After performance fees, sales costs etc. the proceeds are probably within 5% of the most recent estimate they provided.

Classic Case of Bad Market Timing

 

At the beginning of the 2020-21 financial year the Macquarie Winton Global Alpha Fund (managed futures) had AUD 1.27 billion in assets. It only returned AUD 1 million that year and had been performing weakly for a while. In the 2020-21 financial year there were net redemptions of AUD 829 million. Then in 2021-22 it made AUD 80 million. There were still net redemptions of AUD 194 million this year and the fund is down to AUD 324 million in assets.

HSBC Everyday Global Account

Back at the beginning of 2021 I opened an HSBC account for Moominmama because Plus 500 refused to send money to an account in our joint names. Moominmama has just been using it for shopping getting 2% cashback some months. I just realised that it can hold foreign currencies. So, instead of using OFX to convert and transfer money to the US to invest in Unpopular Ventures and Masterworks I could convert the money at Interactive Brokers at the best exchange rate, transfer it to HSBC and then transfer it to the recipient from there for an AUD 30 fee. OFX have about a 1.4% exchange rate cost plus an AUD 15 fee for small orders. And one day when there are distributions from Unpopular Ventures we could transfer the money back to HSBC without converting it.

How I Made AUD 2,900 Instantly

A couple of days ago, I went on the Domacom platform just to see if anything was new. I found an offer to sell about 10,000 units in a semi-rural property near Sydney for AUD 1.0156 placed on 30th May. But the property was revalued on 18th July by around 30%!. Almost instantly I bought the units. One downside is that I already own about AUD 10k of units in the neighboring property. Of course, I can't realize this profit, so it is just on paper. The market is very illiquid, which is why I managed to get this bargain in the first place. Both properties have a vote next March on whether to sell the properties and wind up the funds or whether to continue to hold. Recently, my first investment at Domacom held a vote and sold for a big profit.

 

To get the funds, I had to cancel my pledge to a campaign to buy rural property. My money has been tied up in the campaign for a year while they have made almost no progress on raising money. I think that in future I won't make pledges to campaigns and only engage in the secondary market. The additional advantage of that is that I avoid paying big fees for the purchase of the property and the often huge upfront cut (c. 10%) taken by the promoters of the campaign. It would be much better if they were paid by performance fees instead...

Some Good Financial News

  

Masterworks sold Lured by Cecily Brown for USD 1 million. The initial offer price was USD 605k. We are supposed to get the money within a month. I think this is the third painting they have sold, two of which were ones I invested in. 

Domacom reported to the ASX that their private placement was over-subscribed! They hope to be reintstated in the ASX soon.

Portfolio Planning

I won't post June accounts for quite a while. There doesn't seem much point until we have all valuations for private assets for the end of the financial year and that won't happen till some time in August probably.

I did a bit of a portfolio planning exercise again with some moves planned. I tweaked the portfolio allocation a little as a result to meet the various constraints. Target allocation to Australian large cap is down from 8% to 7%, hedge fund allocation down from 25% to 24% and bonds and futures both up from 5% to 6%. Other allocations remain unchanged (real assets 15%, private equity 15%, international shares 11%, gold 10%, and cash 1%). Back in 2017, our Australian large cap allocation was 35-36%!

In theory, the new allocation does increase the historical portfolio Sharpe ratio. 

So here is the current allocation where I break down by asset class and type of holding:

You are going to need to click on this to see any detail. The names at the bottom are most of the relevant investments in that category. Employer super includes my US retirement account as well. I originally developed this spreadsheet when we were planning the SMSF. Then the future allocation tries to move more towards the long run allocation while taking into account the amount of money in each pot and what the employer super is invested in etc.

It also reflects that we are probably going to get the cash back from our investment in PSTH, which is then reinvested in the SMSF. I want to move my holding of Aspect Diversified Futures into the SMSF  I will sell and buy again rather than actually move it as I plan to buy a class with lower fees. With the proceeds from selling Aspect we invest in Australian small cap and international shares. We then use the proceeds from PSTH to buy Aspect in the super fund. Plus a $20k concessional contribution for Moominmama I just made. Otherwise, the allocation says we need to increase holdings of real assets outside of super a lot. I don't know what those investments would be...

New Investment: Regal Partners

Regal Partners just merged with VGI to create a new larger alternative fund manager that will be known by the former name. The company still trades under the VGI.AX ticker but is expected to switch to RPL.AX. It seems undervalued to me at a PE of 6 and so I bought some shares. Especially, as that is based on VGI's inferior track record to date.

Invested in Another Startup

Unpopular Ventures offered a syndicated investment in the seed round of a start-up based in Europe. I can't give any details of the investment. Based on their projections, which I think look pretty unrealistic, it would be a fantastic investment but they have been growing very rapidly so far, have a lot of experience, and the valuation doesn't seem too crazy.

The investment is basically in a separate fund, where the general partners get 20% carry. They suggested investing USD 2,500 (minimum was USD 1,000) and I did that, following Meb's advice to invest a little in lots of different start-ups. I'm used to investing 1-2% or as little as 1/4% of the portfolio in an investment and this is more like 1/16%. On the one hand, I don't want to make too many different investments because of information overload. On the other hand, I can't do anything about this investment unless there is an exit or opportunity to invest more, so I don't really need to pay much attention to its performance.

Got Out of URF

After reading the most recent quarterly report I decided to get out of URF. I'm not optimistic that even if the shareholders vote against the sale deal we will eventually realize more for the investment and there is a big risk it is approved and we get less than the current market price. I exited yesterday and today at 27 cents per share for a net loss on the investment of AUD 2,300, which isn't too bad, I guess. Obivously, there are a lot of people thinking differently to me who want to buy in.

Two New Investments

 I invested in another painting at Masterworks, No Hopeless by Yoshitomo Nara:

This takes my investment back up to 12 paintings again, given that Doppelbild by Albert Oehlen was sold and should pay out soon. I was a bit nervous this was overvalued but after a bit of research took the plunge anyway and invested USD 10k.

I also started buying units in a property on Domacom: 60 Devonshire Road, Rossmore, which is a market garden near the planned Badgery's Creek Airport. After the initial investors paid up big fees for the establishment of the investment, it trades below par but at the last valuation saw an uptick in value. I am thinking now it makes more sense to buy in the secondary market on Domacom instead of joining "campaigns" that seem to go nowhere. 

So far, I only invested AUD 920, but have a bid open waiting for sellers.