Temple Food

We went to a restaurant in the Insadong neighborhood that claimed to serve "temple food". This meant that the food was vegetarian and made of locally available ingredients and featured some things that Buddhist monks might have traditionally eaten. Lunch was a fixed menu for W22k per person (about $20) with a large number of small dishes. As my friends commented, this was pretty lavish for monks. The first set of courses looked like this:



At top left and bottom right are crunchy cracker, at top right pancake, and at bottom left tofu-like. In the middle was very salty peppercorns. The next round looked like this:



Top right is tempura vegetables (mushrooms and capsicum) and in the wicker basket mostly greens/herbs of various slightly different varieties surrounded by kimchi, tofu, and other dishes, soup etc. There was also rice (not in the picture). The dessert course featured some sweet stuff and crispy puffy things that seem to be popular in Korea:

Yoyo Tackles Korean Food

Yoyo takes on a Korean melon:

Yes, they are really small. Snork Maiden thought that the skin was edible. I wasn't so sure. Yoyo wasn't much happier with this box of sushi:

Each piece was individually wrapped in plastic. It wasn't that good. On the other hand I went to a high end Japanese restaurant. I haven't got the pictures from that yet. Yoyo looks happier with this almond liquor and salted almonds:

The liquor was really sweet. We didn't finish it.

Yoyo en Route

Traditional pictures of food coming up soon.

No you can't actually take a train to Pyeongyang from this station. 50m down the tracks there are stop signs:



Though until 2007 there were trains to the industrial area just across the border.

Tax Changes as Part of Climate Package

The government announced its climate policy package today. It's expected to get through parliament. The carbon price will apply to only the biggest 500 companies by emissions but they'll pass on the costs to a large extent to consumers. There are also tax cuts as part of the package including tripling the tax free threshold to over $18k a year. If we multiply that increase by the 16.5% lower tax bracket that is a tax cut of $2,000 per year. But media reports are saying the cut is much smaller than that - $600 for people earning $20k p.a. and zero for people earning more than $80k per year. So apparently there are some other changes which haven't been discussed. I guess the low income tax offset will be abolished and that might explain the $600 number. But something else must increase to remove the benefits from higher income households.

HFRX Index Performance June 2011

The HFRX hedge fund index lost another 1.59% in June and is down for the year by 2.12%. By comparison, the MSCI World stock index was down by 1.54% in June but is up 4.99% for the year. All strategies but equity market neutral lost money in June. The latter is also the best performing strategy YTD.

India

It looks like I'll be going there soon too. Two new countries this year then. It's going to be an even crazier year, travelwise.

P.S. Next year I'll be going to New Zealand. I've never been there as you can't really go there on the way to somewhere else (well maybe some Pacific islands). It really is the end of the world :)

End of the Financial Year

The Australian financial year ends on June 30. Investment results for June are always delayed due to this. But here are the preliminary accounts for June in USD terms:



This was a crazy month in terms of income and expenditure. Income was inflated by travel refunds (for the trip to Cloud Cuckoo Land and one to Sydney (Snork Maiden went on business and I went along for fun and we drove there and back) and an advance for travel expenses (a per diem rate of $A275 per day!). Maybe I should count these things as income but the latter two really are. We didn't spend $A587 in getting to Sydney and back and I'm not going to spend $A1,100 on my trip. And I did somewhat enjoy myself on the CCL trip.

This month seemed to be a non-stop shopping trip. Snork Maiden was buying presents for people when she visits China. I bought a new watch, got my glasses fixed (more than 400 dollars), bought a new drive of sorts for my computer, had some largish medical and dental bills, went to Ikea in Sydney etc.

In USD terms we lost 1.64% this month on a preliminary basis. We lost money investing for the fourth month in a row in Australian Dollar terms. It's a slow decline but pretty depressing all the same. We're now down 4% for the year in AUD terms and up 0.66% in USD terms. The MSCI though has gained 4.99% for the year so far. The Australian stock market has been underperforming on a global basis.

As a result net worth fell $A755 despite all the income coming in and rose by USD 2,961.

Couldn't Buy GTAA for my Mom

I blogged that we wanted to buy shares in the Cambria GTAA ETF for my Mom among other investments we were making in the portfolio. But the bank (one of the biggest global banks) which has custody of the portfolio (they don't manage it really, we (my brother and I) do so that's why I put it this way) said that they couldn't buy the shares because a US Partnership was involved in this stock and the "security settings" blocked them from buying these shares for non-residents. I was able personally to buy shares in GTAA through Interactive Brokers. So this is weird. I contacted the GTAA portfolio manager and he thinks it's weird too and passed the info on to the relevant people. After the changes we did make - we were allowed to buy shares in the China Fund on the NYSE - the portfolio looks like this:



The rate of return for June was -1.11% overall, whereas the MSCI World Index lost 1.54%. You can see that we managed to reinvest some of the Sterling cash but not even the majority of it. We got rid of most of the USD cash and about half the Euros. We need to retain some cash to possibly pay taxes including on the capital gains on the bond funds we sold. The reinvestment in bonds is in a convertible bond fund rather than straight bonds. Otherwise we invested in a real estate fund and tried to increase holdings in non-US stocks and alternative investments. The long-run picture of asset allocation looks like this:



The breakdown is much cruder and we don't have observations for every month. The main thing to notice is the increase over time in the allocation to equities and the reduction in cash. We are now at 31% equities, which is close to where we want to be I think. The real estate share has mostly increased due to the increase in the value of my Mom's apartment. The portfolio is now more similar to the allocation in endowment portfolios. It is particularly close to the Australian Future Fund allocation and the Harvard allocation. The main difference with Harvard is that they have 13% in private equity and this portfolio has zero in that class. Instead, the portfolio has 27% in fixed income vs. Harvard's 13% in that category. There is also more in cash and less in "real assets" in my Mom's portfolio. This makes sense for a "small" investor. Small relative to Harvard though big relative to most personal finance bloggers :)

Non-concessional Superannuation Contributions

Does it make sense to make non-concessional superannuation contributions? These are after tax contributions to a retirement account in Australia. In other words, the money is taxed at your marginal rate and then put into a retirement account and locked up until you are least 60 (if you are born in 1964 or later as I am). The advantage is that the tax rates on earnings are lower than in non-retirement accounts for high income earners. Instead of a 38.5% marginal tax on regular income (interest, unfranked dividends, and short-term capital gains) there is a 15% rate and the long-term capital gains rate is 10% instead of 19.25%. Of course, for so called "franked dividends" the effective tax rate is 8.5% outside of super and 0% in super. So, do the lower tax rates make it worth locking up the money for 14 years at least (in my case)? I'm expecting to pay zero capital gains tax for a while given accumulated losses and after interest and expense deductions I don't pay any tax on dividends anyway. So, I think the answer is no in my case, for the moment. My employer will be putting almost the maximum pre-tax contribution allowed into my super anyway.

When I get nearer retirement age I expect to stuff the maximum allowed non-concessional contributions into my super account for a few years. This is because there is zero tax on earnings once the super account is paying out distributions.

My First Professional Salary

Back in 1989 I got my first full-time professional job after I completed my master's degree. The salary was initially £10,500 p.a. I was a property market researcher/analyst. At a rough guess that would translate to about £18-19k today. At today's exchange rate that would be around AUD 28k p.a. which is about the minimum wage in Australia. Does this mean that I was really badly paid? Or that economic growth has resulted in all wages rising in real terms? Or that the Australian Dollar is really over-valued at the moment? Or have I underestimated inflation?

I don't think I was really badly paid as that was roughly the amount that a government department was willing to pay me at the time. I soon got a rise though to £12,500 p.a. when I found out that one of my colleagues was earning that higher amount while doing the same job. That's the reason that private employers don't like people to discuss salary. I've assumed an average of 2.7% p.a. of inflation. So I think it is a bit of a mixture of the effects of economic growth and the overvaluation of the AUD when I look at current UK salaries.

In my new job my salary will be AUD 144k. It's a pretty crazy number when translated into Sterling (£95k). Though I'm only at mid-career I don't think I will earn much more than this in real terms for the rest of my career, though there are a couple of pay points above this level on the academic pay scale. The only ways up would be to either go into a very high level admin role in the public sector, switch to private industry or get a similar job at a top US private university. I'm not at all keen on the first and doubt the latter is going to happen. At the moment, I'm not interested in the middle option either unless it was for a limited period of time.

But actually it is pretty typical for salary to peak at this point in life. People with a high level of education typical plateau from here on while this is the summit for people with lower levels of education.

Health Insurance

In Australia, individuals who earn more than $A75k a year and households who earn more than $A150k per year need to pay an extra 1% of tax on their total income if they don't have private health insurance. Assuming my new job all works out as planned we'll need the insurance to avoid about $A2,200 in extra tax (1% of our joint income). I'm thinking about this already because the new financial year here is about to start on 1 July. I quickly looked up a quote calculator online and found that taking into account the 30% rebate offered by the Federal Government we could get health insurance for $A1,800 year though it doesn't cover much. For example, if you need to go to hospital you have to pay $A500 out of pocket. I need to understand a bit more about how this works and how it interacts with the government's Medicare service. Does this really pay off? Or does it add more complications for not much gain? Or would it be worth it even if it cost more than $A2,200? I don't know the answers at this stage.

Job Offer

I got an offer of a continuing/permanent job. It's only an informal offer at this stage but a formal offer is guaranteed pretty much. We don't have to move either. Let alone to Cloud Cuckoo Land :)

New Watch

The bracelet on my old watch kept breaking - it was made of aluminium - getting it fixed cost $5 a time. So I gave up and bought a new watch made of steel instead. Both are Swiss watches - the new one was AUD 265, which is a bit more than twice what the old one would cost now (it was a metal Swatch). The new one is pictured here. I guess this is my take on frugality. I don't buy a new thing until the old one is effectively bust but I'm happy to spend a decent amount of money to get something of reasonable quality. I don't care at all what other people think of it, that's not a motivation at all. I'm only mentioning the latter because some personal finance blogs seem to argue that that is almost always the motivation to spend more than the minimum possible.

North Korea, Not Really

Been trying to book a trip to visit the DMZ/JSA while I'm in Korea. I was too late for the USO tour. So now I'm trying with this operator. Chris Guillebeau says he can claim to have been in North Korea because he visited the JSA, so I think I will too :) He will try to visit North Korea for real later in his attempt to visit all countries in the world before his 35th birthday. But if he doesn't manage that he'll count this trip. I could claim I've been to Egypt (I was in an Israeli controlled area that is no longer controlled by Israel), Palestine (ditto, but then Palestine probably isn't on Chris' list either as it is not a UN recognised state), Syria (still under Israeli control)... *

Anyway, I have just been invited to a very real country I haven't been to - India - but don't know if I'll go, given my heavy travel schedule already.

Monday, I have another job interview. My chances are very high, but I could still blow it.

* My real list of countries so far: Canada, USA, Mexico, Ireland, UK, France, Belgium, Netherlands, Denmark, Sweden, Germany, Switzerland, Italy, Vatican (that's a stretch as a real country), Austria, Hungary (only at the airport), Tunisia, Greece, Israel, Thailand, Singapore, Malaysia, Australia, China, and Hong Kong (is that really a country too?).

Further Portfolio Changes

Following up on the post on changes to my Mom's portfolio. The bank suggested some more investments. Two funds of REITs:

UBS Global Real Estate Securities. This fund is very new and as far as I could work out has an expense ratio of 1.92%. As there isn't much of a track record one can't know if the high expense ratio is worthwhile. So I passed on this one.

AXA WF Frm Europe Real Estate. This fund also invests in REITs and has a high expense ratio but its track record shows that it has outperformed the relative index with less volatility. So I am recommending to invest in this one.

Then they recommended a bunch of long-only commodity funds. I do like the look of a UBS CMCI Composite Index fund. It invests in futures across a wide range of commodity markets and of different maturities. The track record is good relative to conventional indices and the expense ratio is low. This is a risky bet, so we won't bet much on this.

Bottom line is I am now recommending these two funds, as well as the convertible bond fund and the UK equity fund I discussed last time and GTAA and CHN. As a result, we won't invest all the available cash right away. The AXA fund is the only slightly attractive real estate investment I've come across through this process, so we won't go big into real estate. If we make these moves the cumulative effect on the portfolio will be:



A large move out of cash and a smaller one out of bonds and into mainly non-US equities, commodities, and real estate. This moves the portfolio closer to typical endowment style portfolios.

Non-Retirement Savings

Following on from yesterday's post on retirement savings, here is the chart of our non-retirement savings:



Again, it's not adjusted for inflation and does not include any investment returns or losses and is in Australian Dollars. These savings differ in several ways from our retirement savings:

1. It's much more volatile. Not only does the positive scale cover twice the distance there are also negative numbers - dissaving. The same overall ups and downs are apparent though.

2. In yesterday's post I found our current retirement savings were not a lot higher than in various periods in the past. Here we see that 2003-2007 and 2009-2011 have a higher rate of saving than the 1990s.

The biggest period of dissaving was when I didn't have a job in 2001-2. I was travelling a lot and then I moved to the US. Together with the stock market crash this really depleted my net worth at the time. I was down to AUD 36k outside retirement accounts at the worst point. The all time peak monthly saving that immediately preceded this period was the redundancy payout I got when my job ended.

The more recent two big negative spikes are in 2007 out move to Australia and in 2010 booking our trip to Europe. We got some comments then about how we shouldn't spend beyond our means. As you can see from the chart, though our saving did dip during this period, the 12 month moving average never dipped below $1400 per month. So I think these expenditures were definitely something we could afford.

In 2008 we did hit negative saving briefly. But we are just able to live on one income.

Retirement Savings Over the Years

I was curious how our current retirement saving rate compared to past years. Digging into my account spreadsheets I came up with this. This is just contributions. It doesn't include investment gains or losses. The bars are the monthly amounts in Australian Dollars. They're not adjusted for inflation. The dark green line is the 12 month moving average.

The first few years I was in a steady job in Australia and the contributions are very consistent with a slight upward trend. Then I was unemployed for a while and there are no contributions. I moved to the US and the amounts now fluctuate more, partly because of changes in the exchange rate (I was now paid in USD but the chart is in AUD) and partly because of various extra earnings I made, typically in the summers when professors in the US can make extra money typically. In the final year there are consistently higher levels. I decided to max out my 403b contributions in this period plus I open a Roth IRA.

Then in 2007 I merged my accounting with Snork Maiden and we moved to Australia. For the first year or so after that the contributions are all Snork Maiden's alone. Then we both had jobs and the rate rises to $2,000-$3,000 a month. Following that there are another several months of contributions from just Snork Maiden and finally the last 5 months of around $2,500 a month as we were both working again.

The two of us together though are only managing to contribute what I contributed when I maxed out my 403b in 2007. The Australian Dollar was not that weak in that period (about 82 US cents, so that doesn't explain it). And back in the 1990s I managed to make more retirement savings myself in Australia than Snork Maiden on her own now. Certainly, when adjusted for inflation that is the case.

Next time, we'll look at non-retirement savings.

Credit Suisse Broad Hedge Fund Index: May 2011

The broad Credit Suisse/Dow Jones Hedge Fund Index did not perform as badly as the more narrow indices in May:

Exchange Traded Actively Managed Funds - the Big Deal is that Foreign Investors Can Buy Them

This Wall Street Journal article goes on about how an exchange traded managed fund like the proposed PIMCO Total Return ETF is not big deal. It is, however, a big deal to foreign investors. Only US residents can buy units in unlisted US mutual funds. But anyone can buy US stocks in the secondary market. It would be nice if there were more of these.

Early Hedge Fund Report: May 2011

According to the Credit Suisse/Dow Jones Core Index, hedge funds performed almost as badly as stocks in May:



The MSCI World Index lost 2.06% by comparison. Managed futures almost exactly reversed the previous month's gain and everything else went down too. The story was very similar at HFRX:



The flash update of the HFRI monthly indices shows a little more green still in come fixed income strategies.

How Much Money Do You Need for Retirement?

I went to a seminar by our superannuation (retirement fund) provider at my employer today. The presenter referenced a recent Australian survey that tried to define how much income retirees need based on surveying actual retirees. They found that for a "comfortable" retirement a couple need after tax $A54k ($US58k) per year after tax, assuming that they own a house 100%. In Australia there is no tax on retirement accounts once they are in pay out mode after age 60 and so the before and after tax numbers are the same. The presenter said: "That means you need $1 million. If you want to take a bit more risk or run down your capital then you could get away with less than that." The article I linked above says you need $A815k to provide that level of income. The presenter at today's seminar was assuming a withdrawal rate of 5.4% p.a. and the article is assuming 6.6%. But it is a well-known rule of thumb that 4% of the initial amount (adjusted upwards over time by inflation) is the most you can withdraw annually without risking running out of money. And that rate assumes a moderate amount of risk (like 60% stocks and 40% bonds). Also, the advice by the presenter today made no allowance for inflation between now and the date you retire (the linked article does note that the $A815k is in today's money).
Why is this dangerous advice being given out in Australia?

Based on current expenditure we could live OK on less than $A54k a year if we didn't pay rent. $A42k would be enough - halfway between the modest and comfortable levels. But then there are property taxes and house maintenance so we can't just take our rent away to find the comparable number. So I think $50k a year is a reasonable number. But to find the required net worth you need to multiply by 25 and then adjust for inflation. If I retired at age 60 and prices rise by 3% p.a. between now and then I will need 51% more capital than now. The lump sum I get is $A1.89 million + a house. A house costs currently about $A700k near where we live. Adding the same inflation adjustment to the house gives a total required net worth of $A2.9 million ($US3.2 million) in 2024.

Something I learned which I didn't know about the tax rules for Australian Superannuation. If a non-dependent (not spouse or child under 18) inherits your superannuation account they will have to pay 15% tax on funds derived from concessional contributions (contributions taxed at 15% from pre-tax income) but no tax on non-concessional contributions (contributions from after tax income). I knew that tax could be payable in these circumstances but didn't know the details. This is a reason that you don't want your superannuation to be paid to your "estate" in the case of your death. 15% tax will be charged on the concessional contributions.

Outrageous Offer for EAIT Shares

Holders of units in the EAIT fund of hedge funds recently received an offer to buy their shares for $0.70 a share:

As you can see, the units are currently valued at $1.37 each. The units are not liquid because the underlying hedge funds have lock-up periods. Even if the value of the underlying funds does not increase until we receive our distributions you'd need a pretty high discount rate to accept this offer. Of course, I won't be doing so.

Buying a Few Shares

On Friday I bought about 5000 shares in Platinum Capital (PMC.AX) at $1.21 which is close to the net asset value. Usually this closed-end fund trades at a premium to NAV, so seemed a good idea. I probably will buy some shares in my US account too in the near future. When I buy shares it isn't direct saving, of course, as I use a margin loan and then gradually pay down the margin loan with savings afterwards.

We continue to put $A1,000 into each of our accounts with Colonial First State here in Australia each month as well as investing in our superannuation on top of the employer contribution. Snork Maiden adds $A225 every two weeks and I add $A431 (my salary is higher and my employer only contributes 9% of salary (the legal minimum) whereas her's contributes 15.4%). On top of that I added another $A2,000 to Snork Maiden's account last month.

More Adjustment to my Mom's Portfolio

We have now made a bunch of moves in my Mom-s portfolio. First we sold down two bond funds and increased our investment in the Man-AHL diversified futures fund. And we moved £100k to her home country and invested in a bunch of stuff there. That reduced the allocation to Sterling investments. But we still have a lot of money left over from the bond sales.

The bank suggested various funds including some Swiss real estate funds (including this one), the Jefferies Global Convertible Bond Fund, a UK stock fund, and a fund invested in the Rogers Commodity Index. I don't feel like taking a long only bet on oil and other commodities (Rogers is 40% petroleum) and the problem with the Swiss real estate funds was that they are very concentrated on residential property in Zurich and are trading at around a 25% premium to NAV. So I ruled all of these out. But I think we will invest some money in the other two funds. Convertible bonds are interesting because they provide some potential inflation protection compared to a regular bond by being potentially convertible to equity.

I have now suggested to invest the rest in ETFs and closed end exchange traded funds. As an investment in real estate I propose VNQ and DRW. VNQ is a US REIT ETF managed by Vanguard, which means it has a lower management expense ratio than other funds. DRW is a non-US fund from Wisdom Tree which is based on a dividend weighted index. It seems to be the best performer of various international REIT ETFs I checked out. I think we should increase our overall exposure to stocks and particularly to Asian and emerging market stocks, where we are probably underweight. So I'm recommending VWO and DGS- again one Vanguard and one Wisdom Tree fund. Finally, two stocks that I own personally - GTAA and CHN (The China Fund). I think these are two well-managed actively managed funds.

Another asset class that isn't in the portfolio is private equity, but it is a challenging asset class to invest in as a small investor in an effective way. I personally own shares in Leucadia National (LUK) and 3i (III.L), which I think are somewhat better than average exchange traded approximations to this asset class. I'm not impressed by the available ETFs, which I did just check out. So, I think we'll pass on this for now.

When we have all these changes in place I plan to report back on how we have transformed the portfolio. One result is that it is more similar to typical endowment and pension fund portfolios, which has been my long-term goal here.

Moominvalley May 2011 Report

As usual everything is in USD. The AUD fell for a change to 106.6 US cents from 109.4 US cents. This reduced our returns in USD terms and increased them in AUD terms. World stock markets fell a little in USD terms with the MSCI World Index losing 2.06% for the month. Here is the summary account for May:



As you can see about a third of the investment loss in USD terms was because of the rise in the US Dollar. Expenditure was $7,753 because we spent about $A2,500 on a plane ticket to China for Snork Maiden. We spent about $A4,700 not counting the ticket which is OK. Net worth fell in USD terms by $24k (fell by $A9k in AUD terms) to $551k ($A517k). The rate of return was -5.27% in USD terms strongly underperforming the market. The return was -3.39% in currency neutral terms, and -2.80% in AUD terms. Almost all asset classes lost money with a particularly strong decline in private equity. allocation saw a small increase in private equity due to gains in OCP.AX. and a small reduction in Australian stocks due to market movements. Investment allocation saw a decline cash as well as large cap Australian stocks and private equity due to market movements and a shift towards all other asset classes.

Moominmama Portfolio Performance May 2011

Lot of moves this month reflected in these figures. World stock markets fell and the US Dollar rose negatively affecting Moominmama's returns and the portfolio fell by 2% in value. We increased the allocation to bonds again by transferring Sterling currency and converting it into the local currency and buying into four separate local bond funds and a balanced local bond fund. Also a local stock fund invested in European shares (my brother did all this). Some of these bonds are inflation-linked and some not. Some are short term, I don't know if any are long term. This is really the living/emergency fund for my mother. We also increased our investment in the Man-AHL managed futures fund by about 150%. As a result with have a lower allocation to both Sterling and Dollar cash this month than less. The local real estate market is very strong and so we uprated the value of Moominmama's apartment by 19%. At $276k it is still a bargain by Australian standards :). It is still cheaper than Snork Maiden's parents' apartment, though theirs is bigger but they live in a supposedly much poorer country which has really crazy real estate prices.

I noticed that the UBS A&Q hedge fund that we bought early in the financial crisis in April 2008 is finally worth more than we paid for it. We also bought a UBS agribusiness certificate which is almost back to its purchase value. It more than halved at the worst point in November 2008. The hedge fund never lost more than a quarter of its value.

More Hedge Fund Returns for April 2011

Like HFRI vs. HFRX the broad Credit Suisse index shows stronger gains than the narrower core index this month, with the index rising 1.8% overall:



And though Managed Futures did extremely well in both the Core and Broad indices there are some substantial differences in the other strategies such as Global Macro. The core index may be then mainly an indicator of direction of change alone and not a good proxy to the performance of a broader basket of hedge funds? Looking at global macro HFRX showed a 0.89% increase in April, Credit Suisse Core a 0.44% gain, Credit Suisse Broad a 2.46% gain, and HFRI a 3.36% gain.

BTW, at mid-May the HFRX indices are showing declines across almost all hedge fund strategies and a 1.8% loss for the global hedge fund index.

Heavy Travel Year

I just booked my trip to Korea. Later in the year I may go to the US. And I already visited Cloud Cuckoo Land (CCL). It will be my busiest flying year since 2002 when I did two round the world trips, a trip to Israel and back, and moved to the US from Australia. A total of 95,000 miles. This year is heading to 50,000 + miles but will still be only the third heaviest traveling year for me unless I exceed 2001's 60,000 miles (Two trips to the US and one to Britain). The next couple of years are going to involve a lot of flying too. I do actually have data on all the flights I have ever taken:



I started the file some time in the early 1990s when I was curious how far I had flown so far and there weren't that many flights yet to remember. The first time I flew was when I was 18 in 1983. It was also the first time I left my home country.

I didn't get the job in CCL and today put in another application for a permanent job at my current employer. This is fifth the since since we moved back to Australia. Some important people want to hire me and so the chances look very good. But I have had department chairs wanting to hire me before only to be over-ruled by other faculty members when they got to compare me with the other candidates.

Hedge Fund Report: April 2011

There is a trend to earlier and earlier reporting each month of the results of the various hedge fund indices. Credit Suisse, now has a "Core Hedge Fund Index" along the lines of the HFRX. It gained 1.44% in April:



Managed futures did particularly well, but they did particularly badly in March. HFRX reported qualitatively similar results:



However, they estimate that hedge funds only gained 0.47% in April. Preliminary HFRI results show generally stronger performance than both these indices, with an overall gain of 1.86%:

Moominvalley April 2011 Report

As usual everything is in USD. The AUD rose yet again to 109.4 US cents. This improved our returns in USD terms and reduced them in AUD terms. We again can no longer just say "dollars" without thinking about whether we mean US or Australian Dollars. World stock markets rose in little in USD terms with the MSCI World Index gaining 4.15% for the month. Here is the summary account for March:



As you can see almost all the investment gain came from foreign exchange gains with just $928 of underlying returns. Of course, we lost money in terms of Australian Dollars. Non-investment income of $11,000 a month is the new normal... Expenditure was $5,533. We had to spend about $600 on car repairs/service. But apart from that it's hard to say where the money went... (It's AUD 5,058 and $4,500 without the car expenses is pretty normal).

The rate of return was 4.10% in USD terms narrowly underperforming the market, 0.17% in currency neutral terms, and -1.43% in AUD terms.

Net worth rose in USD terms by $31k (rose by $A0k in AUD terms) to $573k ($A524k) another all time high in USD terms.

Investment allocation saw a small increase in private equity due to gains in OCP.AX. and a small reduction in Australian stocks due to market movements.

Moominmama Portfolio Performance April 2011

The portfolio had nice gains in April, though largely due to the fall in the US Dollar. The MSCI World Index rose 4.15% and the portfolio 3.46%. As you can see we made a few large changes in the portfolio - selling bonds - in preparation for both buying new investments and another possible major move (actually quite literally) in possible progress. We are also making some progress in sorting out the probate situation in the UK regarding one of my Dad's investments (he died in 2002 so this has been a long-term problem). We also closed my Mom's remaining UK offshore bank account and consolidated that account into her main fund manager. Generally, we are trying to simplify her affairs, diversify investments further, and deal with her living situation.

Reporting from Cloud Cuckoo Land

I'm at the airport in Cloud Cuckoo Land on my way home. The internet at the airport is free as is university education in this country. And any student who graduated high school can go to any university in the country and study any subject they like. There are no caps on enrolments. It really is Cloud Cuckoo Land :) Of course, a lot of those students fail the exams in the courses they pick and choose another subject or drop out of Uni. EU students can also get to study free here. The town is beautiful and everyone I met at the university was friendly. However the job involves teaching a lot of courses in a technical area which is a skill I have but not my research focus. I'm not so confident of teaching that subject at the graduate level. The hours of teaching per week required is similar to what I taught in the US but I would have to teach twice as many courses for half the time each. At my current university (where I don't have a permanent position yet but things are again looking up in that regard) there is an exceptionally low teaching load. And then there is the question of whether we would want to live in a foreign country learning a new language, though I do know quite a bit of the local language already and think I could learn fairly easily. On the upside there is a very good possibility of a job for Snork Maiden too.

Well, there were 6 candidates interviewed over the last two days in a non-stop marathon of presentations and interviews. The decision on the ranking of the candidates is supposedly being taken now as I am writing.

Asset Allocation of US Estates

More interesting statistics from the US IRS. 34,000 estates needed to pay estate tax in 2009 and the average value of these estates was $5.7 million. Assets were allocated as follows:



Of course, this is the allocation of assets at death and does not necessarily indicate the allocation of typical wealthy people. But it is interesting how it reflects on certain myths floating around in the personal finance world. One meme is that the wealthy invest most of their money in real estate, another would be that retirees should have most of their wealth in safe investments - i.e. cash and government bonds. Neither is true here. There is quite good diversification with a likely 35% or so allocation to stocks directly and via pensions and 401(k)s. We don't know what is in "other" but can assume that that includes direct business ownership and alternative investments. By comparison, my Mom's portfolio is allocated to 29% stocks, 29% bonds, 16% cash, 17% alternatives, and only 9% real estate is a little conservative. Of course, the portfolio is quite a bit smaller than the typical one represented here :)

Tax Returns of the 400 Highest US Taxpayers

The US IRS puts out an annual report on the top 400 US taxpayers. In 2007, the average federal tax rate paid on adjusted gross income was only 19% despite the existence of the alternative minimum tax and a top US marginal tax rate of 35%. This is because 2/3 of their income came from capital gains.

This table shows the effect of the Clinton tax increases and the Bush tax cuts:



From 1993 to 2002 significant numbers of the top tax payers paid an effective tax rate of greater than 35% but none did before or after. The numbers paying less than 15% increased significantly in the later Bush years. Warren Buffett famously said that he paid a lower tax rate than his secretary. At least I'm not paying a higher rate than these billionaires :) Though Snork Maiden is :( Of course, those US figures don't include state taxes, which don't exist in Australia. But they'd likely only add an extra 5 percentage points at most despite so many wealthy people living in high tax California and New York.

Dow Jones/Credit Suisse Hedge Fund Index for March

The Dow Jones/Credit Suisse Hedge Fund Index rose slightly in March in contrast to the
HFR indices which fell. There were some similar patterns of relative returns across strategies with managed futures doing poorly and equity market neutral doing well.

Hedge Fund Report: March 2011

The HFRX index fell 0.88% for March whereas the MSCI World Index rose by 0.72%. Equity market neutral, macro, event driven, and special situations saw gains. Equity market neutral saw the best gains, but equity hedge the second worst losses!



HFRX is a daily priced index in contrast to HFRI which only provides monthly results but covers a much wider selection of funds as a result. Dow Jones Indexes and Credit Suisse are launching of the Dow Jones Credit Suisse Core Hedge Fund Index, which will also be a daily priced index. The existing Dow Jones/Credit Suisse index is a monthly index. The index includes 40 component funds diversified across seven style-based sectors: event driven, long/short equity, global macro, emerging markets, managed futures, fixed-income arbitrage and convertible arbitrage. It is an asset-weighted hedge fund index, whereas the HFR indices are not I believe.

Early results for HFRI show a loss of 0.17% for the month:



By contrast to HFRX, HFRI shows losses for macro strategies and gains for equity hedge. Generally, I'd expect HFRI to be more representative of the broader reality for these individual strategies due to the larger number of funds included.

The Really Long Term

I don't know if any other personal finance bloggers have more than twenty years of data, but I haven't seen it posted. Now and then I like to update what the really long-term picture has looked like.



The graph has networth (blue) and the split into retirement accounts (green) and non-retirement (brown). The record starts when I first arrived in the US in 1990. The early years I was a grad student and then a post-doc and visiting assistant professor and in debt. Then I got a better job as a researcher in the late 1990s and savings began to accumulate. Unemployment and a stock market crash lead to a decline in 2002. Then an even better job in the mid 2000's followed by our move to Australia, merger of finances with Snork Maiden and a worse financial crisis saw net worth plummeting from near $500k to less than $200k. Since then the market rebounded and I've had a couple of jobs where we have largely saved my salary and we are now at a new high in US Dollar terms. The path seems a little smoother when measured in Australian Dollars:



I don't know whether this stuff might be useful to people just starting out to give an idea of how things might look in your future. If you don't dramatically expand your standard of living, higher paying jobs in the future can have a big effect on savings (countering the idea of the importance of starting early). And there can be some big deviations along the path. This one charts spending versus total income including market returns:



The big bumps are usually associated with international moves. Now with two of us in expensive Australia, our spending has bumped up to a new plateau but this graph isn't adjusted at all for inflation so the escalation in living costs is not so great, really. This is very roughly the inflation adjusted numbers (2008 US Dollars):

Fund Distributions Begin to Return

Distributions from managed funds (Australian mutual funds) fell dramatically in the wake of the financial crisis. Some funds are now beginning to again pay significant distributions. More generally, dividends are rising.

For the January-March quarter, I got a $2035 distribution from the Colonial First State Developing Companies Fund, which is more than the sum of distributions received in 2008, 2009, and 2010. On the other hand, CFS Future Leaders paid out just $23 and CFS Diversified $71, and my other CFS funds seem to only be paying annual distributions. CAM.AX, CIF.AX, AOD.AX, and PMC.AX are all paying a reasonable level of regular dividends. IPE.AX hasn't paid a dividend since 2008 and EFG.AX since 2007 (no surprise there).

Snork Maiden got $236 from Celeste Small Companies and smaller amounts from property and fixed interest funds.

In the US TFS Market Neutral made its biggest distribution to date at the end of 2010 and there was a decent distribution from the China Fund. Other dividends are small or non-existent.

Receiving distributions is not necessarily a good thing as it means you have to pay tax (though it is the only way to get tax credits attached to company profits in Australia). But it is a sign that funds are doing well when they have to pay out money. I wonder how a strategy that sold funds that made big payouts and bought ones that didn't would do?

Moominvalley March 2011 Report

As usual everything is in USD. The AUD rose again to 103.6 US cents. This improved our returns in USD terms and reduced them in AUD terms. World stock markets rose a little in USD terms with the MSCI World Index gaining 0.72% for the month. Here is the summary account for March:



Non-investment income and retirement contributions were very high as this was a 3 pay month (we are paid every 2 weeks). Expenditure was $7,114 but a large part of that was the ticket to Cloud Cuckoo Land. Without that expense, core expenditure was a reasonable $4,061.

Investment return was $4,770 but taking out the effect of exchange rate movements was a loss of $2,722. The rate of return was 0.91% in USD terms, -0.52% in currency neutral terms, and -0.89% in AUD terms.

Net worth rose in USD terms by $16k (rose by $A7k in AUD terms) to $542k ($A524k) another all time high in USD terms.

Investment allocation saw a reduction in hedge funds and Australian stocks and a rise in other asset classes due to market movements, the return of capital from EAIT, and the investment in GTAA.

As a follow up to yesterday's post I've added our own rates of return to the table:



(well I dropped some of the timeframes as I couldn't be bothered to compute them). Moominmama's more conservative portfolio performed better over the 3 year period that included the global financial crisis but underperformed us across the other horizons. Over a 5 year horizon we have matched the MSCI World Index and over ten years beaten it. Over the ten year period our beta to the index has been 1.22 with an alpha of 2.11% p.a. Over 5 years, 1.22 with an alpha of 0.88% p.a. Over 3 years beta was 1.27 and alpha -2.29% and over 2 1.24 and 0.40%. So we have taken on more risk than the index but added more return than just the risk alone would provide except over the period around the global financial crisis.

The following graph shows the rolling estimates of alpha and beta using a 36 month window:



Alpha is much more volatile than beta. The high values of alpha achieved around the middle of the decade inspired over confidence and subsequent fall in alpha to negative values. Assuming no major setbacks in the next few months, I forecast the 36 month alpha will again rise to 6% by the end of this year.

Moominmama Portfolio Long-Run Performance

We now have enough data to compute the rate of return over 8 years on Moominmama's portfolio. This table compares it to the MSCI World Index:



All rates are annualised. In general the portfolio has about half the performance of the MSCI World Index. This isn't surprising given the conservative nature of the portfolio. I estimate beta at 0.47 and alpha at -2.31%. The latter is not very good. The standard deviation of monthly returns is 5.91% for the MSCI for the months for which we have data on the portfolio and 3.3% for the portfolio. So it seems there is a bit over half the risk for less than half the average return and, therefore, a worse Sharpe ratio. So we have sacrificed return for a less than proportionate reduction in risk. Obviously, we could be doing worse than this too. I guess it depends on what your expectations are.

Career Update

I bought the ticket for the interview in Cloud Cuckoo Land - $2947. That's a bit over the budget they gave me of Euros 2000. A direct flight to the capital seemed to come out even worse and then I'd need to get a train for 2 1/2 hours. So I'm flying to Frankfurt and then flying to the city in question.

In the meantime in Australia I am making progress on getting a permanent job despite some setbacks. It looks like a position I can apply for will again be advertised soon and there are various developments I am pushing which would provide a course for me to teach and collaborations with other areas in the university.

P.S. I took my suit to be altered to fit my new smaller size. It was big when I bought it but for some reason I believed the salesman that that was OK. Since then I lost a few kilos in weight. The alteration cost is less than a new suit of that quality and I think it will look better than when I first bought it when this guy is done with it. He altered a suit for me once before many years ago and also adjusted Snork Maiden's wedding dress.

Buffett Advises Against Long-Term US Bonds

Buffett speaking in India

In a recent post I referenced the Credit Suisse report that argues quite reasonably that long-term bonds are unlikely to be a good investment going forward. Of course, if you believe in efficient markets the prices of long-term bonds should already reflect that interest rates will rise in the future and, therefore, buying long-term bonds now should still be an OK investment. US short-term government bond interest rates remain near zero, but interest rates on 30 year bonds have risen significantly since the depths of the financial crisis:



History suggests though that the adjustment is insufficient. The Credit Suisse Report shows that there are long periods where bonds do not beat inflation in most countries with the partial exception of Switzerland. Now Warren Buffett warns against owning long-term US government bonds. His concern is both that inflation will reduce the real value of the bonds and that the dollar will fall in value against other currencies due to inflation in the US. It's hard to imagine the US Dollar falling in value a lot against the Euro, Pound, or Australian Dollar given how cheap things are in America but against developing country currencies such as the RMB that is possible.

My mother has a short-term USD bond fund and a longer-term Sterling related bond fund. We do want to reduce both of these and especially the latter. Snork Maiden and I have a variety of exposures to bonds though the total is only a small apart of our portfolio. The exposure is only 5.7% of net worth in total. The most significant types of bonds are Australian fixed interest and US corporate and mortgage related bonds. The latter are the main holdings of the CREF bond market fund, which did surprisingly well through the financial crisis (we should have had more of it):



This small level of exposure should be safe I think and I don't intend to lower it.