Moominmama Performance November 2009

Another good month in which the MSCI World Index rose by 4.16%. Somewhat surprising given the negativity that seemed to be in the news for much of the month. Moominmama saw a more modest gain of 1.44%. US and European equities did best. Despite all the talk of the falling USD, Sterling actually fell against the USD this month. The Euro gained a little but we don't have Euro cash and only 15% of assets overall in Euro denominated investments.

Self-Service Checkout

Our local Woolworth's store has just introduced self-service checkout machines. I've used these before at Big-W (pictured) and in the US. After today's experience though it seemed to me that it would be so easy to rip the store of and steal stuff when using these machines:

1. The machine asked me how many mangoes I had. If I put one instead of the four I actually had, how would anyone know?

2. If I told the machine I had some cheap vegetable in place of the one I actually had how would anyone know?

Or are they planning on random audits of customers leaving the store? I didn't see any evidence of that.

Also I could just leave some stuff in the trolley/cart and not check it out as there doesn't seem to be an electronic security system in place. Or would I get caught if I tried to pull these tricks off?

My "Hedge Fund" Investments

I got a question on a recent post about our hedge fund investments. I count any fund that uses hedging instead of straight asset class investing as a hedge fund. Some of our investments in this class are traditionally classified as hedge funds, some as mutual funds, and some as closed end funds. Here is a list of what is included in this category in order of size of investment:

Platinum Capital: This fund is a global long-short (about 70% long, 30% short) stock fund that also uses currency hedging and is listed on the Australian Stock Exchange (ASX). Information here. We are also invested in this strategy through Snork Maiden's account with Colonial First State. 4.95% of net assets.


EAIT: This is an unlisted fund of hedge funds. You can get information on it here. I originally invested when it was listed on the ASX. The fund is invested in major US based hedge funds. It uses some leverage. 4.29% of net assets.

TFS Market Neutral Fund: This is a US mutual fund that uses a quantitative long-short investing style in US stocks. It is somewhat net long and net market exposure doesn't change much over time.
Info here. 2.91% of net assets.

Hussman Strategic Growth: This is another US mutual fund that is long US equities with a variable options overlay that alters the fund stance from market neutral to fully long. For info see here. 1.78% of net assets.


Aurora Sandringham Dividend Income Trust: This fund uses a dividend capture strategy on large cap Australian stocks. It holds shares for long enough to capture dividends and franking credits in a tax effective manner (there is a minimum holding period under Australian tax law in order to be able to claim the tax credit). It hedges much of it's market exposure. Info. 1.78% of net assets.

Acadian Global Long Short Fund: We invest in this through Snork Maiden's account with Colonial First State. It's a 130/30 fund. 0.74% of net assets.

PSS(AP): 0.58% of net assets are in hedge funds that the PSS(AP) superanuation fund invests in.

We are also invested in Man-AHL but I count that under "commodities" rather than "hedge funds".

Overall we have 17% of net assets and 12% of gross assets invested in hedge funds. I'm happy with the gross level rising back to 14%. I wouldn't want to invest more than 5% in any one fund, so Platinum Capital is capped pretty much at the current level. I'd be happy to see our TFSMX investment grow in size and our allocation via PSS(AP) will inevitably grow. I'll be happy to allocate more to Aurora too. Down the road we might invest in a new fund, but I don't have any compelling choices in front of me right now.

Initial Hedge Fund Returns for October 2009

HFRX shows global hedge funds were more or less flat in October. Convertible arbitrage continued its strong outperformance this year.

Moominvalley October 2009 Report

This report is based on the available data as a couple of funds as usual won't report till near the end of the month. As usual everything is in US Dollars unless otherwise stated. There are some numbers I still can't reconcile and I can't see where my mistake is but here is the report anyway.

After a strong rally for stocks globally for the last 6 months, October saw losses in World equity indices. The MSCI World Index lost 1.53% in USD terms and the SPX lost 1.98%. But the Australian Dollar continued to appreciate, this time gaining by about 3 US cents. This meant that we gained 0.78% in USD terms but lost 2.93% in AUD terms and 2.09% in currency neutral terms. So we beat the market by more than 2 percentage points.

Our spending was pretty normal at $3,896 ($A4,252):



Almost half our monthly spending is going to rent ($A1,955 and $A1,988 from this month). Net worth reached $392k ($A428k), which is a decline in AUD terms. Asset allocation moved slightly towards our target with the biggest gain in Australian small cap stocks (now above target):



The following is estimated performances for this month (net of forex movements) by asset class:



Only Australian small caps had a positive performance. The above market returns this month boosted estimated alpha and reduced estimated beta. Alpha measured against the USD MSCI was 7.6% with a beta of 1.24 currently. Beta remains very high and will have to come down at some point. Performance in AUD terms is similar.

After record falls in net worth we are now seeing a record gain for the last 12 months:



The gap between earning and spending computed in this way is the gain in net worth. In terms of investment returns, total return is back to the levels of early 2005:



Accumulation index is Australian lingo for "total return index" in American. Net worth is back at mid 2006 (or mid 2008) levels:



Retirement accounts are near the all time highs, non-retirement accounts (medium term balance) have not rebounded as well. That is where the trading losses were concentrated.

I think that's enough charts for this time :)

Leverage Can Be Used to Reduce Risk

A point I've made in the past is made again in an article on AllAboutAlpha.

What Gets the Most Comments in the New York Times?

An article on what waiters should and mostly shouldn't do. I find the article and comments pretty amusing. The only things that annoy me are waiters grabbing my plate before I've finished or barely finished eating and keeping coming back and asking questions about how everything is and whether there is any more they can do for us. At cheaper restaurants in the US sometimes it gets very annoying as you keep getting interrupted by the waiter. Of course they are trying to sell more stuff to get a bigger tip and trying to turn over more customers as the individual bills are low. I found as the price went up a bit this was less of a problem. The constant asking of questions isn't much of a problem in Australia where tips are usually a question of rounding the bill off if anything (at least traditionally and in my experience (certainly not an expected percentage).

Moominmama Performance October 2009

Despite the MSCI World Index losing 1.53% this month, Moominmama gained 1.04%. Part of the gain is due to the decline in the USD (though the MSCI World Index is also in USD) and her US and European equities underperformed the index. Despite the introduction of a tax on foreign capital in Brazil her Brazilian fund did best of all. Over in Moominvalley, though not all the final prices are in yet, it looks like we gained too in USD terms.

Income of American Retirees

Interesting discussion in the comments on a Krugman post on retirement income based around this pie chart of income sources of Americans of 65 and older in the 75% to 50% quartile (second from top):



The chart shows that only 9% of this group's income comes from assets - i.e. 401k's, taxable accounts, rental housing etc. But some major caveats are needed in order to understand the results:

1. The asset income does not include capital gains or drawdowns of principal. In reality this group is far more reliant than this on assets they own for their income.

2. The data is for 2008 when interest rates were hitting record lows and dividends were being cut. Income in previous years would have been higher.

3. Defined benefit pensions rely on underlying investments in capital assets, usually the retirees are not exposed to the fluctuations in the underlying investments unless the plan ends up collapsing due to underfunding...

By the way, here is the income sources for the top quartile:



They do get a greater share of their income from assets but they are also working more or more of them are working.

Global Housing Market Trends of the last 40 Years

A nice chart from McKinsey of real house prices over the last forty years in a wide range of countries:



The UK saw the largest rise in prices. The US housing bubble was really quite moderate by comparison. By contrast, house prices just don't go up in Germany ever (but they seem high).

First Look: Credit Suisse Tremont Hedge Fund Index for September 2009

Preliminary figures from Credit Suisse Tremont show a 2.62% return for hedge funds for September. Macro returns are pretty strong and not bad for the year, in contrast to HFRX and to a lesser degree HFRI. There are other differences too. Credit Suisse Tremont shows nice returns for Distressed Securities for the year, for example.

HFRI Reports a 3.02% Hedge Fund Gain in September

HFRI, which covers a larger sample of hedge funds than HFRX, has come in with a larger gain for September. And unlike HFRX, with the exception of "short bias", every style of fund gained including Macro. HFRX's sample is designed to be representative but only includes funds that report daily NAVs.

Moominmama Performance September 2009

Moominmama's portfolio gained 1.98% this month compared to the 4.62% gain in the MSCI World Index and a 3.73% gain in the S&P 500. That's not surprising as beta is only 0.47 - only one quarter of the portfolio is in unhedged stocks. Brazilian stocks were the strongest performer this month. The portfolio value is 12% below the all time high recorded in May 2008. The rate of return over one year is now 1.65%. Moom is also showing a positive one year return of 1.76% while the MSCI remains down 4.77% and the SPX down 6.91% over the same period. Moom's and Moominmama's portfolios are very different from each other. Moom has 60% or so in Australian stocks while Moominmama has no intentional Australian investments. So this is likely to just be a coincidence.

September 2009 Report

This report is based on the available data as a couple of funds as usual won't report till near the end of the month. As usual everything is in US Dollars unless otherwise stated.

It was yet another good month month. The MSCI World Index gained 4.62% in USD terms and the SPX gained 3.73%. The Australian Dollar continued to appreciate, this time gaining by 4 US cents. We gained 9.88% in USD terms (4.91% in AUD terms and 6.92% in currency neutral terms). I'm feeling a little bit superstitious about saying too much about how great things are going. But it is a relief that we're bouncing back towards our former position faster than my most optimistic expectations. Some more good news today, was that UniSuper have refunded the retirement contributions that they mysteriously deleted.

Our spending was quite low when some refundable business expenses are deducted: $3,167 ($A3,588):



Non-investment income was high because we each received 3 biweekly salary payments and received Moom's tax refund. All other categories of net worth accumulation were strong. Net worth reached $380k ($A431k). Asset allocation moved away from our target but there were no dramatic changes this month:



Rather than selling stocks I will be adding to investments outside the large cap Australian stock category as much as possible. The following is estimated performances for this month (net of forex movements) by asset class:



Sorry for the missing labels - they are in the same order as the allocation above... Australian stocks again performed strongly and hedge funds are estimated to have gained reasonably well too. The above market returns this month boosted estimated alpha and beta. Alpha measured against the USD MSCI was 6.5% with a beta of 1.27 currently. Beta remains very high and will have to come down at some point. Performance in AUD terms is similar.

Moom's Tax Assessment

I didn't get as much of a tax refund as I was expecting for two reasons:

1. You can only claim the low income tax offset to the extent that tax is payable on your income in the first place. The offset can be as much as $A1,200 but if tax payable is, say, $A573.75 as in my case then that is as much as you can claim.

2. Foreign tax credits can only be claimed if after the low income tax offset you have some tax liability. Mine was zero and so I couldn't claim $A251 in foreign tax paid.

But I could claim $A1,606.68 in franking credits on Australian dividends and I'd already paid $A3,706 in tax and so my refund was $A5,312.68.

HFRX up 2.22% for September 2009

In general, those strategies that have been doing well this year, like Convertible Arbitrage, continued to do well and those that haven't, like Macro, continued to underperform. There were some exceptions such as Distressed Securities which performed OK this month for a change.

Tax Refund

I got my tax refund credited to my account (amazingly fast) but it's about $A800 less than I was expecting. I'll have to wait for the letter to find out why.

Henry Seems to "Get It"

I recently commented on leaks from the Australian government's Henry tax review that seemed to be heading in the direction of just grabbing revenue wherever possible from Australians while reducing taxes on foreigners on the basis that they could invest somewhere else instead. But this speech by Ken Henry to an economics conference is much more subtle and nuanced. He does seem to not only a command of the issues in this speech but sympathy for some of the more radical ideas. He leaves us in suspense about which way he and his team will jump in their advice to the government - tax savings more heavily (but uniformly) than now, or tax savings less (but again uniformly)? If I can read between the lines this seems to be favoring lighter but some taxation on capital?

Snork Maiden's Tax Assessment

Just got the tax assessment and the amount payable is less than half of what I expected: $A301.45. not payable till 23 November either and conveniently payable by BPay too.

I had the wrong tax free threshold (too low) and maybe other mistakes in computing the tax payable. I did have the correct taxable income and offsets. I calculated these things correctly on my own tax calculation.

Another Job Opportunity?

My chairman told me today that they'll finally be able to readvertize soon a position that might be relevant to me. The position has been frozen for about a year while a "reorganization" has been proceeding. Any potential opportunities are welcome news. Especially as both Snork Maiden and I would like to stay here in Canberra if possible.

Other news: We're planning a trip to the Northern Territory for a conference and some travel to national parks. We haven't decided whether to head to Kakadu, which is a world heritage area or whether to head south from Darwin to Litchfield and Katherine Gorge National Parks. Any recommendations?

In the annoying but weird department our car was crashed into in a shopping mall car park last week while we were shopping. The damage does not appear to be too bad - the window still goes up and down OK in the door which was damaged. It turns out that the person who ran into us was the wife of the Iranian ambassador.

More Leaks from the Henry Tax Review

Needless to say almost that I don't like any of these proposals personally except the pay as you drive road tax perhaps and I don't like the privacy implications of that.

Company Tax A lower rate might sound good, but for Australian taxpayers who receive "imputation credits" for corporation tax paid it doesn't change their inclusive tax burden and it increases the personal income tax they have to pay on dividends and reduces the franking credits that some people manage to use to offset other tax liabilities or like me even end up with a negative net tax burden.

Higher Resource Taxes Something I think makes sense nationally. but of course will reduce the value of shares in Australian resource companies...

Abolishing the Long-Term CGT Discount The discount makes sense for two reasons - it reduces the double taxation on reinvested profits - if companies pay out dividends we get the credits for the corporation tax but not if they reinvest profits; and second - with no discount we end up paying tax on purely inflationary gains in asset values.

Stamp Duties These are very inefficient transaction taxes. As a potential first time home buyer we would be exempted from the tax anyway.

Inheritance and Wealth Tax Of course, I am opposed to these on a personal basis though from the discussion in this article it's likely the exemptions would be set very high (an inheritance tax obviously would be worse news to me than an estate tax). I think they are unfair taxes as again they are double taxation. I would support a final capital gains tax being levied on estates though to cover asset value increases that weren't previously taxed. At the moment, Australians are meant to pay CGT when selling assets that they inherited using the original cost basis of their benefactor. OTOH estate taxes are probably pretty economically efficient as taxes go. They don't interfere with incentives to work or invest (at least in the short-term) and in the US at least encourage lots of donations to the public good. And those who bear the taxes are going to inherit some of the money and thus be relatively wealthy and have a low marginal utility of wealth.

Payroll Taxes I don't have a strong opinion here. Unemployment doesn't seem to be a big issue here in Australia so the taxes don't seem to be having a detrimental impact on employment.

Raising the Superannuation Access Age From 60 to 67 is a huge jump. The previous government allowed people to get their money out of super tax free from age 60. Rather than reversing that decision this government is heading to increasing the age dramatically to reduce the reduction in taxes that resulted. I think that is a bad move.

Pay as You Drive We don't drive much so I don't have a problem with this :)

In summary the goal seems to be to improve the playing field a bit for foreign investors and raise the tax burden incrementally on Australians. It is disappointing that they didn't take the opportunity to do something dramatic like a consumption tax. Of course that is unlikely politically under a supposedly left-wing government. The government of course is unlikely to take everything on board from this review. So we should expect fairly little tax reform. I'm more and more likely to vote Liberal at the next federal election (I voted Green with second preferences * to Labor at the last Federal election and Green with second preference to Liberal at the last Territory election). Of course it will make no difference to anything what any of us vote. Since time immemorial the ACT has been represented by Labor in the lower house and by one Liberal and one Labor senator in the upper house of parliament.

* Here in Australia we have preferential voting - you list candidates or parties in order of preference. If your first choice doesn't get in your vote is transferred to your second choice and so forth. Voting is also compulsory.

More Details on Moom's Taxes

I now submitted my tax return and as promised here are all the details. You can compare these numbers to last year's too. The main differences are that I earned a salary for four months this tax year and no salary last tax year (in Australia our tax year ends on 30th June). But this year my net capital gain for tax purposes was zero versus almost $10k last year (1 AUD = 0.80 USD on 30th June). And dividend income declined due to selling stocks and companies cutting dividends. Deductions were a bit bigger. Supplement deductions are foreign margin interest and derivative losses by the way. Australian dividend deductions are Australian margin interest and depreciation costs on my computer etc. So I actually ended up earning less for tax purposes than last year.

Adjusting income to actual income rather than taxable - the main change is due to the fact that you can't deduct capital losses against other income - I really lost a pile of money. I end up getting a net 4.5% of my loss back from the ATO (Australian Tax Office). This is due to ending up with surplus franking credits - credits for corporation tax paid by Australian companies - which you can then claim back as cash. $3,700 was withheld from my wages. I get all of that back too. So we're expecting a $6,000 refund.

As I've got a salary for at least 8 months this year I may even end up paying some tax this year :)

August 2009 Report

This report is based on the available data as a couple of funds as usual won't report till near the end of the month. As usual everything is in US Dollars unless otherwise stated.

It was another good month month. The MSCI World Index gained 3.62% in USD terms and the SPX gained 3.61%. The Australian Dollar again appreciated a little against the USD. We gained 7.90% in USD terms (6.76% in AUD terms and 7.02% in currency neutral terms). Our spending was normal. Returns in annualized terms over various periods:



We have weaker performance than the indices in the 12 months to 3 years time frame but better at longer and shorter time frames as I recently showed in a chart.

We spent $3,492 ($A4,145):



All other categories of net worth accumulation were strong. Net worth reached $336k ($A399k). It feels good to be above $A400k again now early in September. Asset allocation moved away from our target but there were no dramatic changes this month:



Australian stocks moved further above target while foreign stocks remain considerably below target. The target is a very long term target, I don't plan on selling Australian stocks soon, but I do plan to keep adding to foreign stocks as much as possible. The following is estimated performances for this month (net of forex movements) by asset class:



Private equity and Australian stocks continued to peform strongly. The above market returns this month boosted estimated alpha and beta. Alpha measured against the USD MSCI was 5.3% with a beta of 1.23 currently. Beta remains very high and will have to come down at some point. Performance in AUD terms is similar. Performance against the S&P 500 is ridiculously strong...

Moom's Australian Taxes 2008-9

I just did my tax return. It only took 2 1/4 hours because I prepared a spreadsheet last year when I did our first tax returns after returning to Australia. The numbers aren't final because my employer never sent me my "PAYG Payment Summary" (equivalent to U.S. W2) and so I requested that today. Anyway, it looks like I should pay negative tax of about $A2,500 (due to the low income offset and surplus franking credits). About $A3,700 was withheld from my salary, so I should get a refund of about $A6,200. My taxable income was around $A10,000. Of course I really lost about $A50,000 but capital losses have to be carried forward to be set against capital gains in future years. I'll do a detailed analysis and comparison to last year when I have the final salary information.

What I'm confused about now is how the government will know I contributed $A1,000 to superannuation and so pay me a $A1,500 co-contribution? There wasn't anything on the tax return to mention that. Do they just get the info from my fund manager and then check that against my tax return? I guess so.

Credit Suisse/Tremont Early Returns for August 2009

Are 1.68% with a very similar overall picture to HFRI. I'll post more detail with the final numbers.

Optimism Hits a Record High in Australia

It's probably hard for my American readers to imagine this is possible. I guess because we missed out on any kind of recession really (so far), just had a bit of a slowdown, when most of the rest of the world went into recession, has made Australians ultra-optimistic. We haven't had a recession for 19 years now...

HFRI August Numbers are in

About a week earlier than normal:
They confirm the general picture shown by HFRX but the overall index came in stronger as did many styles such as macro.

Initial Hedge Fund Performance for August 2009

First off the blocks HFRX reports a 1.25% gain for hedge funds in August. The distribution across "styles" is pretty similar to that in July:

More Unisuper Glitches

I was actually sent a statement by Unisuper yesterday, but the glitches continue. I noticed that my account was about one month behind where it should be given the contributions that have gone in. In July, I just assumed they were behind a bit in crediting things. In preparing this month's accounts I noticed the same thing and went in to examine the transactions in detail. I found negative transactions exactly cancelling all my June contributions! They told me that they will investigate this. The average person who ignores their superannuation statement (as people have told me) would never catch this kind of thing. We can't assume that this will be automatically corrected at some stage. That this whole company seems so "buggy" I think is a sign of lack of competition. They have a monopoly over providing superannuation services in the university sector.

Carbon Planet

More details of the scandal. I'm glad I didn't invest in it.

There's Been No Recession in Australia

According to the official data.

Snork Maiden's Investment Account

It's doing pretty well (in AUD):



Most of the gains are savings of course but net profit is now $A1,166. Against the MSCI World Index in Australian Dollars beta is 1.23 and alpha 2.2%. The allocation is as follows:

Moominmama Performance August 2009

Equities, bonds, and hedge finds had positive returns. The MSCI World Index was up 3.62% this month and the S&P 500 seems to have had a similar gain, so all but Moominmama's Brazilian fund underperformed the markets, which is a bit disappointing.

Moominmama hasn't been feeling well recently, but tomorrow she is scheduled for a cataract operation. Hopefully, it will go smoothly and then when she can see properly again she'll feel a lot better.

Long-Term Under- and Out-Performance

As things continued this month to bounce back from the depths of the GFC I thought it was time for an update on how we're performing relative to the market:



The chart shows the average annual rate of out- or under- performance relative to the MSCI World Index of money we invested in the month given. This is the rate of return of the entire portfolio since that month relative to the market. So investment from mid-2004 to mid-2008 has underperformed the market. Investments since the the the peak of the crisis last northern Autumn have strongly outperformed the market. The 1998 to 2004 period also was one of out-performance in retrospect. We've slightly underperformed the market (-1.31%) over the entire almost 13 year period.

Annoying Changes to Australian Immigration Rules

After the previous government raised the residency requirement in Australia to 4 years from 2 for those seeking to become Australian citizens, this government has now lowered it, but only for athletes it seems. Travel rules might have been relaxed more generally for other potential migrants - details aren't clear. I'd like Snork Maiden to become an Australian citizen as fast as possible. The change to travel rules is sensible, but why should athletes wait less than others just so Australia can win more medals. It's a cynical move. They should just slash the period back to what it was for everyone who qualifies to be an Australian citizen.

OpenOffice

Following EnoughWealth's suggestion I downloaded OpenOffice. Well, at least it lets me manipulate the shape of the charts in my old Excel files. If you doubleclick on the chart it pops up and the spreadsheet pattern behind it disappears. I could manipulate some but not all of the features of these old charts. Printing to a pdf also resulted in nice images. There are some gains over Excel 2008 but looks like more losses, so I won't be switching, though I really didn't spend much time looking at it. As soon as I found something I couldn't do that I wanted to do, I stopped.

Snork Maiden's Team Gets Another Year of Funding

Good news - the research team that Snork Maiden is part of got some more funding but less than they asked for, so either:

1. They need to find more money from other sources.

2. They have to cut out part of the team.

3. They can use the funding for one year instead of two.

But at least that is a very good start. At the moment I'm thinking it is unlikely that I am going to get a job for the first half of 2010 unless I go outside academia but that will reduce my momentum in getting research done and reduce my chance of getting an academic position. The grants I'm planning on applying for won't provide funding until the beginning of 2011 if I get them. No-one knows whether our current project will get any continuation funding. The whole research centre was funded for 3 years upfront. It looks like I can get expenses to work in Sweden for a month in early 2010 but not clear if I can get any salary. I still have a chance to get an academic position starting in the second half of 2010 which would work out well.

A "Solution"

I have found a temporary solution to my Microsoft Excel woes. I moved Excel 2008 into a folder I labeled "disabled applications" leaving the rest of Office intact. I set my account up things so that Excel 2004 opens on login. This means that if I click on an Excel file it will open in Excel (unless Excel is open already clicking on the file just fails to open anything) and then I instructed Firefox to open downloaded Excel files in Excel 2004. This restores my functionality except I must always have Excel 2004 open or otherwise open it before opening a file. This is all on my laptop. I'm seriously thinking of getting my IT guy to reinstall Office 2008 on my office computer without Excel and get him to reinstall just Excel from Office 2004? Will that work seamlessly? I'll keep my copy of Excel 2004 at work on my own personal external hard-drive in order not to violate the university's licencing issues (they are being audited by Microsoft right now).

The chart problem is not so bad with new charts but it is a total disaster with all charts I previously created in Excel 2004. They just appear as small images in the middle of a big grey area and can't be resized.

I just tried Apple's Numbers spreadsheet program and it also screwed up charts in an old file I opened. So it's not a solution.

P.S.
"Zoom to selection" in Excel 2008 kind of does something similar to "View Sized with Window" in Excel 2004, but I still can't find a way to reshape the the dimensions of the chart created - the grey area on the left and right sides of the chart stays there and covers the extra area of your chart so now you have to scroll backwards and forwards with your mouse to see the whole thing...

Microsoft Office 2008

Because the equation feature in Word 2004 wasn't entirely compatible with with Macintosh OS 10.5 (some notation appeared incorrectly though it is fine using OS 10.4) I "upgraded" today on my university computer to Office 2008. Wo"rd seems to be fixed and looks manageable, but I found that Microsoft have completely mangled the charts feature in Excel. When you want to create a chart you no longer get a dialog box but instead the "elements gallery" expands from the top of the window you are working in. It seems that the default now is to insert the chart into the worksheet that is currently open (something I never do, I always put the chart in its own sheet). So then you have to move it to its own sheet. That is still tolerable though annoying. But then I found that Microsoft have disabled the "size with window" command. The menu item is still there but does nothing and is slated to be removed. Trying to expand the chart myself by dragging its border resulted in a mangled mess. I'm going to have to go back to Excel 2004. Seems I'm stuck with Entourage 2008 though and I may as well use Word 2008 on my laptop and office computer. So I'm going to have to run Office 2004 and 2008 together. Trouble is my laptop is not recognizing my Office 2004 CD and unfortunately I already (stupidly) deleted it from my laptop. Hopefully, my office computer has no issues with the disk (my laptop has a temperamental CD drive).

Snork Maiden's Taxes 2008-9

I just completed Snork Maiden's tax return. As it is pretty straightforward and I have a spreadsheet set up from last year as well as last year's return to refer to it only took me 3/4 hour to do. See last year's figures for a comparison.



Last year's salary was much lower due to us only moving to Australia after the tax year started. Snork Maiden's non-salary income increased as her savings built up. Unfortunately, for the first time ever she owes money on her tax return :( I don't understand how this can be. 2/3 of the way through the year we started making salary sacrifice contributions to superannuation which should have lowered our total tax bill for the year. That means that tax should have been withheld at too high a rate for the first eight months of the year. I expected that to roughly cancel out with the tax due on investment income. But apparently her employer withheld too little tax all year.

Her average tax rate was 23.56%. Her marginal tax rate is 31.5%. This covers all taxes as there are no state income taxes in Australia.

Asset Class Update

Time for an update on recent asset class and target portfolio performance:



This chart is in USD terms with all investments as they would appear to a US investor without any currency hedging. Australian and international shares have seen the nicest rebound as might be expected. The Australian Dollar has also risen (this series includes interest as well as exchange rate movements) and hedge funds and bonds have performed positively albeit a lot weaker than stocks. Managed futures, real estate, and gold have seen a negative performance in this period. The levered portfolio consists of:

17% MSCI
30% Australian stocks
14% Hedge funds
14% Managed futures
10% US Real Estate
10% International Bonds
5% Cash

Then it is hedged so that 63% of the portfolio is exposed to the Australian Dollar and then 50% is borrowed against the equity to lever up the portfolio. That is our target portfolio. It has also bounced back nicely and is currently at the levels of late 2006.

This is what things look like for an Australia based investor. The hedge funds and managed futures are hedged into Australian Dollars but the other asset classes are unhedged. The target portfolio is the same levered portfolio exposed 63% to the Australian Dollar:



The impact of the GFC was offset by the fall in the Australian Dollar. The subsequent rise in the Australian Dollar has resulted in a loss in the foreign bonds, accentuated falls in foreign real estate and gold, and slowed the rise in foreign stocks. As a result the target portfolio that declined gradually into the GFC hasn't recovered much either yet. This is why I wanted to have only 50% exposure to the AUD but haven't managed to keep things that low.

Dividend Imputation to Continue

The head of the Australian Treasury Department, Ken Henry, said that his tax review will not abolish dividend imputation. Dividend imputation passes on credits for corporation tax paid by companies on profits earned in Australia to shareholders. Only New Zealand still has a similar scheme. Foreign shareholders are not supposed to be eligible for the credits and profits earned outside of Australia don't generate credits. The system ensures that there is no double taxation of profits as long as those profits are paid out as dividends. But if the company reinvests them and shareholders end up with capital gains then double taxation does result. Dividend imputation, therefore, introduces several distortions:

• Discouraging foreign investment in Australian companies as long as share prices reflect the credits that foreigners don't get.
  
  
• Discouraging investment overseas by both Australian companies and shareholders.
  
  
• Encouraging the payout of dividends instead of reinvestment in the business. Or encouraging debt as a source of investment after paying out the profits.

Despite all this I like dividend imputation as an investor, especially when using margin loans. Margin interest can be deducted from the value of dividends resulting in surplus credits that can be used to offset tax on other income. If you had enough investments that paid "franked" dividends you could avoid paying any income tax at all.

Final Hedge Fund Performance for July 2009

HFRI: 2.62%
Credit Suisse/Tremont: 2.54%

Inefficient Markets

With all the talk about the supposed negative effects of the "efficient market hypothesis" that supposedly caused the GFC it's worth pointing out how the markets are often blatantly inefficient. Oceania Capital Partners (previously Allco Equity Partners) has a big stake in iSOFT (ISF.AX). Based on my calculations it is currently worth $A3.10 per share. The company also had 43 cents per share of cash as at 30th June and 24 cents of "realisable securities". Liabilities were 7 cents per share. That totals $A3.70 per share. Yet the stock trades for $A2.77. We'd have to believe that their two private equity holdings have a negative value of almost a dollar a share instead of the $A1.25 per share that they claim for that to be a rational price. Yeah, we should probably take something out for the cost of future management fees but still the stock trades at a ridiculous discount.

I've persuaded myself not to sell any yet :)

Fund Purchases

I just put in a bid to buy 2000 shares in the Challenger Infrastructure Fund (CIF.AX). The annual results came out and they seem OK to good to me. This will take our holding to 5000 shares which is 2% of net worth. The NAV is $A2.89 per share and the share price is $A1.59. This will reduce our borrowing capacity by less than the cost as the fund is marginable with CommSec. I'm also thinking of adding to our holding in the Aurora Sandringham Dividend Income Fund (AOD.AX). I received a letter to buy more units as an existing shareholder without paying commission direct from the fund. Their strategy has held up well through the GFC. The fund has a low correlation with my portfolio (0.14). I'd look to move that one towards 2% as well. Eventually, some of our other alpha oriented single-manager funds are going to have to come down towards the 2% mark I think. OCP.AX, CAM.AX, TFSMX, and PMC.AX are all above 2% of net worth currently. I'll be prepared to keep TFSMX and PMC.AX at 3% or so or more as these managers have proved themselves through the GFC to be pretty robust. I'm also thinking of doing some buying in my US based account soon too.

What People are Looking for on Moomin Valley?

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EAIT Withdrawal Offer

In the ongoing Everest Financial Saga the next event is the EAIT withdrawal offer. Everest will allow investors to withdraw part of their investment in the EAIT fund of hedge funds that was once listed on the ASX. Like many unlisted hedge funds you cannot redeem units any time you like from the fund but only at specific windows and only then in specified amounts. This is due to lock-ups in the underlying funds. This is an additional early withdrawal offer in addition to the previously announced December 2009 withdrawal. However, any withdrawal you make now in September will be deducted from your December 2009 maximum withdrawal allocation. The maximum number of units you can withdraw is 22% of your holding. A decision must be made by 7 September. The September offer is at a 5% discount to NTA while the December offer is at a 7.5% discount.

EAIT is currently our biggest hedge fund holding as shown in this table of shares of gross assets:



Any fund that engages in hedging exposure to the stock market is classified as a hedge fund here whether the manager classifies it as such and whether the manager receives performance incentives or not. Our total hedge fund allocation is below our 14% target. Whereas TFS, Hussman, and Platinum are all single manager funds, EAIT is a fund of hedge funds invested in a variety of strategies. Our biggest exposure to a single manager is Platinum. Given that the stock market is beginning to recover and we don't have a need for cash I'm inclined to at least wait till December and probably longer. I don't see why we should redeem units below NTA. Offers in coming years will be at NTA.

There is also a 7.6 cent a share income distribution to be paid in September. I'm really not going to be able to do my 2008-9 taxes until the last minute I think.

P.S.
EAIT has reduced there leverage to 31% and so our exposure is lower than in the above table and our total hedge fund exposure is down to 12.6%. It's time to look for new hedge fund investments :)

Spendthrifts and Tightwads

Snork Maiden and I are complementary in spending attitudes to some degree. I am more "tightwad" and she is more "spendthrift". On the other hand, she is more frugal in some areas where I am willing to pay for convenience. Overall though I don't think our attitudes are that far apart - generally we can compromise.

Research Discussions

I had the meetings with the potential collaborators and they went well though there are no definitive outcomes yet. The first meeting I found that though we are both interested in similar questions our approaches to how to address them seem a long way apart. We'll continue to discuss things but not sure if much practical will come out of it in the long term. The second meeting with the more senior (in position) person I think went well. Most of the time it seemed like he was telling me about his research. He's happy for me to use his model and for a student in his unit to work with me on it potentially. Looks like I can get involved with his research network and maybe down the road submit a proposal (to the government research agency) to be located in his unit which is where really the only program in my area in the country really is located. This seems to make sense, but I'm not sure about the politics of the whole thing. I'll have to continue to take it step by step. In the next couple of days I want to improve my proposal further and then I really need to get back to work on the project I'm supposedly being paid to do. I'm going to have to do that as full time as possible from now on.

Psycho-Economic Environment in Australia

Following up on the comments on a recent post things feel a lot different here than in the US.

EDIF

In the ongoing Everest Financial saga, the "direct investments" in the EAIT fund of hedge funds is being separated out into a standalone fund as of 31 July. 62% of this new fund is invested in Babcock and Brown European Ports Investments and the other investments are also in infrastructure or real estate. Therefore, I'm classifying this as a real estate investment as well as a "passive alpha investment" and as the investment is in my understanding hedged I'm going to continue to count it as an Australian Dollar investment.

July 2009 Report

It was a great month. The MSCI World Index gained 8.84% in USD terms and the SPX gained just 7.56%. The Australian Dollar again appreciated against the USD from 80.54 US cents to 83.36 US cents. We gained 13.00% in USD terms (9.38% in AUD terms and 10.57% in currency neutral terms). Our spending was at the baseload level.

The following is based on the available data as a couple of funds as usual won't report till near the end of the month. As usual everything is in US Dollars unless otherwise stated.

We spent $3,173 ($A3,806), which is approximately our "baseload" level of spending:



Net worth reached $308k ($A370k). Asset allocation moved away from our target but there were no dramatic changes this month:



Australian stocks moved further above target while foreign stocks remain considerably below target. The target is a very long term target, I don't plan on selling Australian stocks soon, but I do plan to keep adding to foreign stocks as much as possible. We added to private equity investments (3i) during the month. The following is estimated performances for this month (net of forex movements) by asset class:



Oceania Capital Partners (formerly Allco Equity Partners) performed very nicely driving the private equity return. All stock classes did well. The above market returns this month boosted estimated alpha and beta. Alpha measured against the USD MSCI was 4.3% with a beta of 1.22 currently. Beta remains very high and will have to come down at some point:

Meetings Lined Up

I have meetings lined up now to discuss my research and potential for collaboration on grants with a couple of people next week. One of them is one of the top economists in Australia by any measure. Hopefully, something productive will come of it.

Hedge Fund Performance for July 2009

The HRFX gained 1.59% in July. Convertible arbitrage continued to outperform with a more than 6% gain:

The Recession Must be Over :)

Both of Snork Maiden's investment accounts - retirement and non-retirement - are now showing a profit. Given that the former started in November 2007 and the latter April 2008, that's not too shabby. The effect of dollar cost averaging... And Commonwealth Bank sent us a letter suggesting we increase our credit card credit limit from $A6,000 to $A10,000! Of course, I * took the opportunity, I can't see a downside (?).

* The account is officially in Snork Maiden's name but I do all the financial management in our household.

Unisuper Still Not Quite Right

So Unisuper finally managed to put me into the accumulation plan (defined contribution) but for some unknown reason 54.51% of the account is in the "Balanced" option and the remainder in the "Growth" option. I originally requested to be in the "Growth" option. Well actually it depends on which page on the website you look at. On a different page it says 100% of my account is in "Growth"

Another Paper Rejection

Had a paper rejected again today - this was the second attempt on this one. The good thing is that they only took 1 1/2 months to reject it, which is lightning speed in the economics world. One of the reviewers was clearly one of the same people who reviewed it at the first journal. His comments really don't make sense as everything he wants is already in the paper. The other reviewer was this time someone who seemed very knowledgable about the methods, which is good. Hopefully this will make the paper, which I am about to start revising, somewhat stronger. The first two journals I submitted to were in my specialised subfield of economics. After ending up with the same obtuse reviewer twice I am this time going to submit to a more general journal. It might help that one of the editors (based in NZ) is a coauthor of two of the papers I cite. Unfortunately, the journal is lower down the ranks in terms of how often its articles get cited, but that should increase my chances.

So, since trying to get back into academia since last November I've made six journal article submissions (five distinct papers). I've had three rejections and three are still in process. At this rate I'm going to be lucky to get anything published in 2010 even :(

Moominmama Report July 2009

July was another great month in the World's stock markets with the MSCI World Index gaining 8.84%. Moominmama gained 4.3% overall with the best gains coming in non-US equities. The US Dollar declined and these returns are measured in USD so it's not surprising. As you can see Sterling Cash gained 1.67%. The portfolio beta is estimated at 0.47 so this result is right in line with expectations. After losing 31% from peak net worth in June 2008 to the low in February 2009, net worth has bounced back by 23% which results in being exactly half way back to the top in Dollar terms.

On the other side of the world in Moomin Valley we gained something around 12.5%. A full report coming in the next few days. Our net worth fell 62% from the peak in May 2008 to the low in February 2009 in USD terms. We've now bounced back 68% from the bottom. In this case we're not quite half way back yet...

Canberra is Like Tuscany with Nicer Weather :)

Most Australians seem to hate Canberra and think it is terribly cold. They'd probably be surprised to learn that the average temperatures (daily high and low) in the coldest winter month are pretty much exactly the same in Canberra as in Florence (Firenze) in the heart of Tuscany, Italy. Our hottest summer month has about the same temperatures as Firenze's June, so we miss out on the hottest extreme. We also get less rain, particularly in the winter.

I was just writing an e-mail to someone in Italy who wished me good holidays (they were going on holiday for all of August) noting it was winter here. I said it was probably like northern Italy but I was wrong. It's cold there. Here it is more like Tuscany

Challenger Infrastructure Fund Removes FX Hedging

Challenger Infrastructure Fund (CIF.AX) announced today that it has closed its foreign currency hedges yielding a profit. As it is now unhedged and invested entirely outside of Australia (mainly in the UK) I will now regard this investment as part of my "global currency" investments (not AUD or USD). This is good as our AUD exposure is rising (though the investment is just 1.3% of net worth). The investment is included in our "real estate" investments and under the "passive alpha" category as I don't expect it to be highly correlated with the stock market in the long run.

Fellowship Program in Stasis

I just heard today that the fellowship program I was planning to apply to may not actually run again. If it doesn't I wouldn't be too surprised. Last November was the first year it ran and they won't announce the results till this September (Many grant programs here have similarly long processing times). They planned on giving out a surprisingly large number of fellowships over the next five years. So they may be rethinking that commitment of funding and maybe the quality of the first round of applicants wasn't as high as they had hoped for. I was told that the government minister responsible hasn't decided whether to run another round of applications or not. I'm going to meet with my research officer as soon as possible to discuss what opportunities I have.

Shopping my Proposal

We accidentally bumped into a former colleague who is now a professor in another department at my university while shopping. Actually, this guy was originally hired to replace me after I didn't re-apply for my job back in 2001. We then overlapped for a year as I searched for the position that eventually took me to upstate New York. Anyway, he agreed to take a look at my proposal. He already got back to me and says it has all the elements needed for a successful proposal: "It's in a key area, you clearly have published on the topic and there are important gaps that you identify that should be funded." I agree that these are the key things a proposal needs. They want to give money to people with good track records of doing research in the areas that are of interest to the funders. The bit about identifying gaps refers to discussing recent top level research on the subject and pointing out where it could be extended. A weak proposal would come from someone who doesn't have a strong track record in the area, shows that they aren't really up to speed on the debates in the area, and is anyway in an area that is somewhat peripheral to what the funders are interested in.

I still don't know if I am actually eligible to apply for grants in these areas. I'm having a hard time tracking down the liasion guy.

Anyway, I now have more confidence in approaching a big name person who might be able to collaborate and/or provide feedback. Hopefully, I can raise awareness that I am doing research in areas of interest whether I am eligible for a specific grant or not.

Some Funds in the Black

This month is shaping up as another good one with three trading days to go. Several of the funds we invested in in Snork Maiden's Colonial First State account have now returned to profitability:

CFS Geared Share Fund: $A190
Platinum International: $A131
Souls Small Australian Companies: $A72
Generation Global Sustainability: $A30
CFS Diversified Fixed Interest: $A80

Overall the account is still down $A260 but it is now worth $A15,291. So that's not too much of a percentage loss given what we've been through. We started investing in April 2008. I guess it's the power of dollar cost averaging.

I just got the annual tax statement from CFS, so soon I should be able to do Snork Maiden's taxes.

OK, I Exaggerated a Little...

When I wrote in yesterday's post that I'd need to have enough cash to buy a house to be happy to do so if my income was very uncertain. On a single slightly above average salary it's a bit of a stretch to afford to pay rent and live a nice lifestyle here for two people. At least we found that to be the case until I started my current job. You have to be reasonably frugal. Forget international travel and the like (remember our parents and most other relatives all live in the neighboring large continent). Paying a typical mortgage is out of the question. To get your housing costs down to the same level as paying rent you need to put down a downpayment of 50% approximately. So you do need $A250k for that purpose and after that you're living paycheck to paycheck more or less. So I don't really think this is still a very wise financial decision.

Of course if you have secure employment consisting of either two average salaries at least or one salary at twice the mean (say a full professor) then you can go for homeownership without too much concern. It might not be good economics, but if that's what you want to do you can. I'd still put down the traditional 20% and have cash reserves for repairs etc.

Houses are really expensive in major cities in Australia.

How Long Can We Live without Working?

Asked Snork Maiden today (at our current standard of living). If we don't make any big expenditures like buying couches or travelling we spend about $A4,000 per month. Half of that goes on rent. Our net worth outside of superannuation and retirement accounts is $A156,000. $A10,000 of that is our car. So the rough answer is 3 years. A couple of years ago it was nearer 5 years. I don't believe in the idea of a 6 month or whatever "emergency fund". The more savings we have the better. If we wanted to buy a house we'd need to make a $A100,000 downpayment probably (as houses cost at least $A500,000 around here). That's only leave us with $A40k in savings. As neither of us has a long term employment contract. We couldn't maintain the mortgage payments for long if either one of us didn't work or we both worked at lower salaries than today. Our salaries are near the mean for Australia, temp work or whatever will pay less. So we either need to have permanent contracts or really in my opinion enough is savings up front to buy a house outright, though we'd still buy it with a mortgage. The latter would make me feel much more comfortable with such a purchase...

Pension Funds, Endowments, and Us

I've been thinking whether anything needs to be done with Moominmama's portfolio and benchmarked the broad asset allocation against a bunch of pension and endowment funds:



UniSuper Balanced and PSS(AP) are the default choices for two Australian superannuation funds. The Future Fund is an Australian Sovereign Wealth Fund. CALPERS is of course the California Public Retirement system and then there is the average US university endowment and three Ivy League endowments. Excepting the Ivy's the average for the two US funds is very close to that for the three Australian funds: 42% equity, 23% bonds and cash, and 35% alternatives (hedge funds, real estate, private equity etc.). Retrospectively the Ivy's had too much in alternatives and too little in cash to meet their needs. Nobody though has as much as Moominmama has in bonds and cash. As I've often said, it's hard to imagine bonds performing as well in the future as they have in the past when they were boosted by capital gains due to declining interest rates since the early 1980s. She receives government pensions and even if she didn't she has many years worth of expenses in cash alone let alone bonds. Even if her medical costs rise I still think there is plenty of cash. Long term I think it'd make sense to head to say 30% in bonds and cash. Some time soon I think it would make sense to sell some shares in bond funds and increase other investments.

What am I Doing on the Investment Front?

I haven't posted much on investments recently. We're in recovery mode from the GFC and will likely be for a couple of years before making any really major moves or changes. The last new investment we made was AOD. We continue to invest $A500 per month in each of Snork Maiden's and Moom's Colonial First State accounts. These are diversified investments across Australian and foreign stocks, real estate, fixed interest, and in Snork Maiden's case hedge like funds. We also invest in our superannuation funds - Unisuper and PSS(AP). Again these are very diversified investments. Otherwise I have added some extra money to Snork Maiden's CFS account and paid down some of my margin loan with CommSec. I also have bought back a couple of investments that I had to sell in margin calls for less than I sold. One is 200 shares of 3i - the UK private equity firm and the other is a $A5,000 in CFS's Global Resources Fund. The latter isn't quite all the units I sold but good enough for the moment. We are underweight foreign stocks so these investments make sense. I expect there'll be a little more of this kind of thing going forward. Our automatic investments are increasing out foreign stock exposure in any case.

Wikinvest Data Platform

Wikinvest have a new finance data platform. It looks pretty nice in terms of graphics etc. though they exaggerate how much this improves things over platforms like Yahoo. Yahoo does have a competitors analysis as well as an industry page that provides some context of how a company compares to others in the industry. To tell the truth though I mainly have used it just to find alternative potential investments.

1 July 2010 Planned Start Date for Post-FIF Regime

The Australian government hopes to have new foreign investment rules in place by 1 July 2010. This will include new more targeted anti-tax-avoidance rules to replace the abolished FIF rules.

Final Hedge Fund Performance for June 2009

Final hedge fund returns are now in for the month and they largely confirm the earlier HFRX results. In other words, performance was flat overall. HFRI returned 0.23% and Credit Suisse/Tremont 0.43%. Managed futures and systematic trading did poorly (as did short-bias). Convertible and related arbitrage strategies did best.

Next Steps in Job Search/Creation

As I commented on the last post, I didn't get the job I interviewed for on Monday in a major Australian city. The chairman already phoned me on Tuesday to tell me. They decided to go with people who could cover their areas of particular need in teaching (at the graduate level). At first he said they liked everything else about me. But when I said I wasn't surprised because I think I messed up the presentation he then said that I was right that it was rushed and confused people and they didn't get a strong idea of what I was doing though they were impressed that I was energetic, enthusiastic, and knowledgable.

Back here a friend/colleague has been talking with someone in a position of authority to see what can be done about creating a position for me or extending my current position. This would be on the basis that I could raise money from students or grants in this position. While junior teaching positions are almost always advertised in academia that isn't true of research positions (including my current position) and to some degree more senior positions. As in other industries, if you know the right people you have some opportunity to be creative in this regard.

I'm sitting in the airport terminal on my way back from my interview here today. The process was very traditional on the British model of academic interviews - presentation, lunch with other candidates, and panel interview. The American model has no panel interview and involves many one on one meetings with faculty or groups of graduate students over a two day period. My previous interview in Canberra was a hybrid of the two models. Those guys recruit heavily on the American market. I met a new faculty member at lunch who just completed a PhD at a US university, but the department can't be systematically trying to recruit new PhDs from the US. Three candidates were interviewed today. The other two both came from New Zealand. As they told me they will complete the interview process today that probably means, given how fast this process has moved, that there are only three candidates for two positions, unless there are also internal candidates. The reason for the huge rush is that they have two more searches to conduct this semester.

My presentation was OK-ish - I tried to cover too much stuff and due to a misunderstanding on the timing we ran out of time for questions at the end. There were questions along the way though, as is usual for economics seminars. People seemed skeptical which wasn't surprising as I tend to do unorthodox things. And I had maybe the top guy in the field in Australia sitting in the front row and a specialist in some of the techniques I use in the back row (and on the selection panel). The panel interview went better. I didn't have any problems answering their questions or asking them questions.

I should hear today or tomorrow. If I get an offer we'll have to figure out how to move Snork Maiden workwise. I didn't raise that at the interview because I don't want to put any obstacles in their way before they make a decision.