Concentration in the Mag 7

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 I can't put an exact number on our exposure, as Unisuper and PSS(AP) do not publish their asset allocation at the individual stock level and other funds also have partial or no information.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

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

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

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

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

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

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

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

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

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

A More Realistic Target Portfolio

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

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

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

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

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

MSCI All Country World Index Gross in AUD 9%  

ASX 200 Total Return Index 11%

HFRI Fund Weighted Hedge Fund Index 20%

Net FTSE Venture Index 10% 

Net FTSE Buyout Index 10%

Gold Spot Price in AUD 10% 

TIAA Real Estate Fund 12%

CREF Bond Fund 10%

Winton Global Alpha Fund 5%

Australian Dollar Cash 3%

Short Australian Dollar Futures 31% 

The index is effectively rebalanced monthly.

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

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

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

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

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

 

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

Update to the Target Portfolio

Time to tweak the target portfolio we use for benchmarking and asset class allocation. I am lowering the allocation to futures from 7.5% to 5% and increasing the allocation to hedge funds from 15% to 17.5%. This better reflects current reality.

Another Tweak to Target Portfolio

Minor update to the existing allocation. Am combining cash with bonds and private equity and giving it a 10% allocation. Previously bonds alone were at 7.5% and cash was not included in the allocation. Reducing the target allocation to real assets as a result from 15% to 12.5%.

Update to Target Portfolio

It's time to update the target portfolio again. The last time I posted about this was here I think. The main change is that it is getting harder to find good quality accessible hedge funds. Our allocation to Pershing Square Holdings (PSH.L) is 6.3% of net worth, so I don't really want to increase that. Regal Investment Fund (RF1.AX) keeps reducing the share of hedge funds in their allocation. Tribeca Global Resources (TGF.AX) and to some degree Cadence Opportunities(CDO.AX) have been poor performers. The L1 Long-Short Fund (LSF.AX) is a possibility, as it has outperformed RF1 over 5 years. It didn't perform well in 2023 and 2024, but is doing well so far in 2025.

Also, managed futures have done poorly in the latest crisis, though often they perform better after a crisis. So, we are cutting allocations to these asset classes and increasing the allocation to long-only shares. This also reflects that I am planning on allocating more to our employer superannuation funds - Unisuper and PSS(AP). We also suddenly have a lot of cash. Reasons for these two things will come in a later post.

The following does not include cash in our regular bank accounts, which is around 3% of total assets currently. 

At the top level 60% is allocated to equity and 40% to other.

Equity: 27.5% long-only, 20% private equity, 12.5% hedge funds. 

Long-only: 10% Australian large cap, 5% Australian small cap, 8% US, 4.5% ROW.

Private equity: 10% venture, 10% buyout, SPACs etc.

We will try to balance private equity and hedge funds between Australian and foreign too.

Other: 15% real assets (real estate, art etc.), 10% gold, 7.5% futures (managed futures, bitcoin, direct futures, cash in trading accounts), 7.5% fixed income (bonds and private credit). 

At the moment we are overweight gold, cash (classified as futures), and private equity, and underweight the other asset classes.

SMSF Portfolio Allocation

As there has been a lot of recent change in the SMSF portfolio allocation, I thought I would have a detailed look at it. The last time I updated this spreadsheet was in August 2022, when the portfolio was quite different.

We also are long two Australian Dollar futures contracts. The asset classes are where each investment is classified for my reporting based on asset classes. PBDC is equity of private credit lenders, Defi Technologies is a crypto asset manager, and bitcoin isn't mostly actually futures. So, their designated asset classes are a bit to a lot misleading. Regal is actually only about 50% hedge funds now, with real assets (water and royalties), private credit, and venture capital in the mix. In my reporting on asset classes I break it down along these lines.

So there is about 30% managed futures exposure, 21% crypto exposure, about 17% private equity, 16% property, 15% hedge fund with some real assets thrown in, and 1% cash.

There wouldn't be much point in having an SMSF if the portfolio looked like a typical industry fund 😊. 

We pay only 0.26% per year in admin fees to SuperGuardian.

Updating Target Asset Allocation

 

Not sure when I last posted about our target asset allocation, as I have tweaked it since this 2021 post. I am tweaking it again to reflect continuing new allocations to private equity (venture capital, buyout funds, and SPACs).

Overall we still have a 60% equity allocation. Now 20% of that will be the target for private equity, 20% hedge funds, and 20% long equity. Among the latter, 11% allocated to Australia and 9% to foreign shares. Within Australia, 6% is allocated to large cap and 5% to small cap. Within foreign equity, 5% to the US and 4% to the rest of the world. 

Among the 40% allocated to other assets, 15% is allocated to real assets including real estate, art, water rights etc., 5% to bonds (including private credit), 10% to managed futures, 10% to gold.

The benchmark target portfolio splits the private equity component 50/50 between venture capital and buyout. It also allocates all the Australian exposure to the ASX200 and all the real asset allocation to a specific (mainly US) real estate fund. All the managed futures is allocated to Winton in the benchmark. Maybe I should try harder on this benchmark, but this seems good enough for my purposes.

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...

Changing Target Asset Allocation Again

 I still think it is useful to have one...

Reducing the bond allocation and moving it to the equity allocation including hedge funds.

Coinvestment, Revised Target Allocation, and Rights Issue

I'm making an investment in a pre-IPO company alongside a venture capital fund and other investors. I valued the company based on their forward projections for EBITDA and the multiples similar companies listed on the stock exchange have. Of course, the company could fail and so it is sensible to take a middle valuation between the extremes of zero value and the value if the company succeeds as planned. This still gave a good gain on the current valuation. In reality, total loss is unlikely as the company is already approaching profitability. The funding is for expansion. The worst outcome is more likely a sale for the current valuation or something less to a competitor. I am planning to invest about 2% of our portfolio in this company.

This means I will have to raise my target allocation to private equity and reduce my allocations to hedge funds and long-only equities. To also take into account my future commitment to a venture capital fund I am increasing the private equity allocation of gross assets from 10% to 15%. I am reducing the hedge fund allocation from 24% to 22%, Australian large cap from 9% to 8%, US stocks from 6% to 5%, and rest of the world stocks also from 6% to 5%. I would be happy to have an even higher allocation to private equity if I had access to enough diverse good quality opportunities. So, changing the target allocation isn't just like the US government raising its debt ceiling every time they hit it :)

By contrast, I am an investor in listed company Domacom (DCL.AX), which has been suspended from the ASX for a while, pending completion of a deal to effectively acquire a company called AustAgri. The ASX instructed them to raise more capital before relisting. I don't intend to participate in the rights issue, especially as the issue price is slightly above the last traded price of the shares on the ASX. Success of the company in the short-run really depends on this AustAgri transaction and it is still hard to be certain why it is so delayed and what will happen. Even after that transaction, the company will not be in anywhere near as good a position as this pre-IPO company.

Adjusting Estimated Real Estate Exposure for Leverage

I realized that because the URF.AX fund, which is invested in New York and New Jersey real estate, is highly levered, my exposure to real estate is much greater than I previously estimated. The market value of this investment is AUD 51, but the underlying value of the real estate assets is almost AUD 1/2 million.

Based on this, the share of real assets in the portfolio is 17.28% currently, which is above the target share of 15%. The asset allocation pie chart now looks like this:

 In recent months the share of real estate increased a lot:

Tweaking the Target Portfolio

I've decided to slightly tweak the target portfolio weights to reflect a larger allocation to hedge funds. The top level allocation is 59% to equity and 41% to everything else. Then there is 10% to private equity (split between venture and buyout) and 49% to public equity. Within that 25% to long-only and 24% to hedge funds (was 21.5%) (also split 50/50 to Australian focused and foreign focused funds). And within the long-only 13% to Australia and 12% to the rest of the world. Within Australian 9% to large cap and 4% to small cap and within foreign 5% to the US and 7% to other countries. Within the "everything else category", 10% to gold, 10% to bonds, 10% to real estate, 5% to art, 5% to futures, and 1% to cash and everything else. So:

9% Australian large cap

4% Australian small cap

5% US stocks

7% ROW stocks

12% Australian focused hedge funds

12% Foreign focused hedge funds

5% Venture capital

5% Buyout PE

10% Gold

10% Real estate etc.

10% Bonds

5% Art

5% Futures

1% Cash etc.

Overall the whole portfolio is levered by about 20% (assets are 120% of equity). This 20% is roughly the value of our house, which isn't included in the above. We also try to maintain a 50:50 allocation to Australian Dollar exposure vs. foreign currency exposure. My job is mainly to choose funds and a couple of stocks and do a little trading in part of the futures allocation.

We are still overweight hedge funds after this change.

Restructuring Baby Moomin's Portfolio

About one and a half years ago I opened an account for baby Moomin with Generation Life to invest the money he inherited from my mother. For this calendar year, the account made about 6.6% on a pre-tax basis.* 

 

This wasn't as good as our portfolio, which returned about 12% in Australian Dollar terms. So, I felt that it was time to make some changes. I decided to switch out of the Dimensional World Allocation 50/50 Fund and the PIMCO Australian and Global Bond Funds. I am switching into the Dimensional World Allocation 70/30 and Vanguard Growth Funds, 50% in each. This is my first time investing in a Vanguard fund! The Vanguard fund is better tax optimized, while Dimensional has more of a tilt to value stocks, which are maybe back in favor. This will result in a total portfolio that is 60% stocks, 20% bonds, 10% infrastructure, and 10% hedge funds.

* This assumes that 30% tax was deducted. Actually, the tax was lower due to franking credits and offsets for foreign taxes. The post-tax return was 4.65%.

2020 Update on the Yale Endowment

Inspired by Financial Samurai's latest post, I am updating my post on the Yale Endowment. They have released preliminary results for the 2019-20 financial year (ends 30 June) and so we can update with three years of data. They returned 6.8% for the 2019-20 financial year, which is just below the S&P500's 7.5%. On the other hand, HFRI lost 0.6% and I lost 0.1% in USD terms. In the long run, since the financial crisis they have tracked the MSCI index with a little extra return and a little less volatility:

Their asset allocation continues to evolve, with domestic equity now only 2.5% and private equity now 41% of the portfolio:

Natural resources are now down to 4.5%. This is much more extreme than the typical family office portfolio, which has 49% of assets in alternatives including rela estate and commodities vs. 78% of the Yale portfolio.

Adjusting the Target Portfolio

Given the continued underperformance of managed futures, I think I am going to again lower my allocation to this asset class to 5% from 10%. I've never gotten above 5% in managed futures funds anyway. In place of this, I could raise the allocation to real estate to 15% or raise both real estate and gold to 12.5%. Or is there something else I should allocate capital to?

Asset Allocation Since October 2018

Since October 2018 when we nominally received the inheritance, the total allocated to cash, futures, gold, and bonds has remained fairly constant at 50%. There have been big shifts into bonds and to a lesser degree gold and I have bought Australian Dollars and sold US Dollars. But on net I haven't deployed money into real estate, private equity, hedge funds, and shares. Again, there has been some change in the mix of those "risk assets". Some of my bonds have also turned out to be quite risky...

Now it is looking more and more likely that there will be a recession and opportunities to buy risk assets cheaper. Though, if I really knew that I would have sold a lot of risk assets or shorted the market. So, I don't really know. Mainly I'll be watching the yield curve. The long-run target allocation to all these risk assets is around 70% and 30% in gold, bonds, and futures.

I am planning to increase purchases of Australian Dollars from AUD 10k per week to maybe AUD 15k per week in the short term.

Why Not Just Invest in Stock Index Funds?

Financial Independence recently asked in the comments why I don't just invest in a portfolio of stock index funds. I answered that I am more interested in protecting against the downside now than getting richer. But basically I think you can do better than that. This is the simulated performance of our target portfolio against the MSCI All Country World Index and ASX200 in Australian Dollar terms:

Notice what happened during the 2000-2002 Tech Wreck and 2007-2009 Global Financial Crisis? The target portfolio more or less flatlined, while Australian shares dropped 40% in 2007-9 and the MSCI fell around 20% in AUD terms. Over this whole period the portfolio also outperformed the MSCI index, though not in recent years.

New Target Portfolio Allocation

Following up on my post on the best portfolios for Australia, this post will lay out the new target portfolio allocation. The basic idea is to reduce the allocation to managed futures from 25% in my previous target portfolio to 10%. This is because I plan to do little active trading going forward and futures funds have had lacklustre performance for several years. Maybe they will come back, but we should see them more as a potential hedge than as a main asset class at this point I think.

At the top level the portfolio is 60% in stocks and 40% in other assets. The other assets are allocated equally between bonds, futures, gold, and real estate. The stocks allocation is roughly equally divided between Australian and international stocks. 10% of the portfolio is allocated to private equity and 50% to public. Then the public allocation is divided between long only and hedge fund strategies. Within the long only Australian allocation, 1/3 is devoted to small cap stocks. The full allocation is:

10% Australian large cap
5% Australian small cap
12.5% International stocks
10.75% Australian oriented hedge funds
10.75% International oriented hedge funds
10% Private equity
10% Bonds
10% Real estate
10% Gold
10% Managed futures
1% Cash

We will also usually use some leverage or gearing. 1% in cash seems sufficient given the ability to borrow.

The Best Portfolio for Australia

The portfolio charts website, I wrote about before, now lets you do analysis using Australian assets, inflation etc! It turns out that the best portfolio for Australia isn't the same as the best for the US... The following table shows the average and standard deviation of real returns, the maximum drawdown, and the safe and permanent withdrawal rates (preserves capital) for a 30 year retirement horizon:

This is based on data since 1970. Based on the permanent withdrawal rate the Ivy Portfolio developed by Meb Faber is best. The 100% Aussie stocks portfolio (TSM) has a slightly higher return, but the lowest permanent withdrawal rate. So, I think Aussie investors should start to think about portfolio design from something similar to the Ivy Portfolio. It's no surprise that I have been a fan of Meb Faber and endowment style portfolios...

Using ETFs, this portfolio recommends putting 20% into each of Australian stocks, international stocks, intermediate term bonds, commodities, and REITs.

Using the build your own portfolio tool you can see what tweaking this beginning portfolio can do. For example, replacing half the commodities allocation with gold and half the bond allocation with extra international stocks, increases the return to 6.1% and the SWR and PWR to 5.2% and 4.4% with almost no increase in drawdowns.

Going to 60% stocks divided equally between Australia and the rest of the world and 10% in each of bonds, gold, commodities, and REITs, is actually quite similar in return profile to the Ivy Portfolio. The key thing is to hedge Australian stocks with international and real assets. This latter portfolio is probably going to tbe basis of my own new target portfolio.

Designing a Portfolio for Baby Moomin

I decided that the best provider of investment bonds is Generation Life. This is mainly because they seem to be scandal free, not about to be sold off to an overseas manager, and have lower fees than other providers. Next I needed to pick an investment portfolio from their investment options. I decided on the following rules and criteria:

1. 50/50 equities/fixed income and alternatives
2. 50/50 passive and active management
3. 50/50 Australian and international assets
4. Pick the best fund from alternatives in each of these niches - focusing on long-term "alpha" and in particular their performance during the Global Financial Crisis and the recent December 2018 mini-crash.

This is the resulting portfolio:

50% Dimensional World Allocation 50/50 Trust. Here I compared a Vanguard balanced fund with this fund. In the long run, DFA have done much better than Vanguard:

Here, Portfolio 1 is a DFA stock fund and Portfolio 3 the Vanguard equivalent. The equity curves are for someone withdrawing 5% per year in retirement. Portfolio 2 is a DFA 60/40 stock/bond portfolio. The difference is stunning. Recently, DFA hasn't done as well as value stocks are out of favor. I am betting on them coming back. If there is a major market correction we might shift this core holding to a more aggressively equity focused fund.

10% Ellerston Australian Market Neutral Fund. Ellerston has done horribly in the past year, but prior to that it did very well for a market neutral fund. It now seems to be rebounding. This fund manager originally managed James Packer's money and then branched out.

10% Magellan Global Fund. This has been one of the best Australia based international equity funds. It did particularly well during the GFC.

10% Magellan Infrastructure Fund. This fund seems better than the other real estate options. It didn't do very well during the GFC, but all the others were worse.

10% Generation Life Tax Effective Australian Share Fund. This fund is managed by Redpoint Investments. The idea is to tilt a bit towards tax effective Australian shares given the high taxes on this investment bond overall. The manager is pretty much an index hugger, but the other options for actively managed Australian shares seem worse.

5% PIMCO Global Bond Fund. PIMCO is the gold standard for actively managed bonds. I decided to split my allocation to PIMCO between international bonds and

5% PIMCO Australian Bond Fund, as Australian bonds have actually done very well recently.