All Time Contributions of Asset Classes

I was wondering how much each asset class has contributed to our total profits to date. It was easy to compute this number using the spreadsheet I use to compute monthly gains on individual investments and asset classes. The numbers are only estimates. For multi-asset class funds, I assume that each asset class in the fund has the same rate of return. So I multiply each asset class share by the total profit for the fund to get the contributions of that fund to total returns for that asset class. This is also how I compute asset class returns each month. Here are the results:

Private equity has contributed the most followed by Australian large cap and gold. Contributions of bonds and real assets are surprisingly large. They may be an artifact of how I compute the contributions from multi-asset funds like our employers' superannuation funds. Also, Commonwealth Bank is all attributed to bonds, when about half my return was from my investment in the Colonial IPO rather than my later investments in CBA hybrids. Finally, 17% of Regal Investment Fund (RF1.AX) is currently in private credit but most of my returns were made before they even invested in private credit! So, this is biased upwards.

Coincidentally, I am changing the name of the Bonds asset class to Credit. Private credit isn't bonds. It isn't even "fixed income". The category covers both private credit and bonds.

Investments Review 5: Mature Stock Investments

We usually classify the first of these investments as a hedge fund and the rest as stock investments, but here we can bundle them together as stock investments. The first two are very successful while the second two are questionable. 

We start with our fifth biggest investment currently, Pershing Square Holdings (PSH.L) managed by Bill Ackman:

Scale: Pounds Sterling

We gradually ramped our investment up to 5,000 shares and then have let our net investment decline with dividend payouts. In the meantime, profit continued to increase. The fund trades 28% below NAV. So, part of our investment thesis is that the gap to NAV will reduce over time. Pershing Square went through a period of under-performance in the years before we invested. Since then they revised their strategy and have done very well. Our IRR is 24%. The question here is whether we should add to the investment. On the one hand, it is 7% of net worth already. On the other hand, it has performed well, is below NAV, and our net investment is only about 1/3 of the total value.

Our sixth largest investment (6.1% of net worth) is Defi Technologies (DEFI.NE and DEFTF):

Scale: US Dollars

This shows that a mature investment is not the same thing as an investment held for a long time if you get lucky! Our IRR is a crazy 378%. We invested roughly 2% of net worth in this company.

We first invested in Generation Global Share Fund, which is a Colonial First State offering, back in 2008 when it was called the Generation Global Sustainability Fund. The fund is closed to new investors, which is one reason why I never sold out of it, but also it has performed well historically returning an above average 13% IRR. However, at the previous review in 2021 it had an IRR of 16.5%. So what happened since then? I ramped up our investment in 2021. This was good timing as you can see profit soared. However, it round-tripped back to 2020 values in 2022. We have let our net investment decline since then as distributions were paid out. But profit has rebounded to new highs.

Scale: Australian Dollars

This is now the only remaining investment in the Colonial First State account I set up for Moominmama in 2008 soon after we moved to Australia. We now have 1.8% of net worth in this investment. So how is this fund doing now compared to benchmarks?

While it outperformed the benchmark over the last 10 years, it has underperformed in more recent periods. So, this isn't a clearcut decision. We need to compare this to our other international share funds. One reason to hold would be to maintain diversity of managers.  Maybe this manager will increase performance in the future again while others will decrease... Because funds like this end up distributing most gains we don't need to worry about CGT.

Finally, we have Hearts and Minds (HM1.AX). This is an Australian listed investment company that invests globally using the highest conviction ideas of an array of fund managers. 35% of the holdings are based on stocks spruiked by fund managers at the annual Australian Sohn Investment Conference. The positions are then closed by the next conference. That is a good idea, but one year may be too short for all these investments to work out. And, sometimes, the conference has strayed off the path of sensible investments. Also, the management fees are donated to charity. I invested at the IPO.

Scale: Australian Dollars

I have been gradually reducing our exposure and moving the money to what I perceived as better opportunities. We have only 1.1% of net worth in this stock now. On the other hand, the fund has improved its performance in the last couple of years:Overall, our IRR has been 9%. Our net investment is now close to zero, so I am inclined to hold our position and see what happens. On the other hand, we could simplify things by eliminating this small position.

March 2021 Report

This month we took some big steps towards fully setting up our self-managed super fund. Trading didn't go well, but I persisted, following the rules exactly. We also reached a big round net worth number in  Australian Dollar terms. 

The Australian Dollar fell from USD 0.7737 to USD 0.7612. The MSCI World Index rose 2.72%, the S&P 500 by 4.38%, and the ASX 200 rose 2.74%. All these are total returns including dividends. We gained 1.46% in Australian Dollar terms but lost 0.17% in US Dollar terms. The target portfolio is expected to have gained 2.00% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 1.30% in US Dollar terms. So, we strongly underperformed all our benchmarks. Here is a report on the performance of investments by asset class (currency neutral terms): 

Hedge funds added the most to performance and gold detracted the most. Things that worked well this month:

• Three hedge funds: Cadence Capital (AUD 20k), Regal Funds, and Platinum had the largest gains this month in absolute terms. Cadence benefited from its investment in Deepgreen metals. Domacom gained 21% or AUD 7.5k.
  

What really didn't work:

• Gold lost the most in dollar terms (AUD 11k) with Hearts and Minds (HM1.AX) and the China Fund (CHN) following up. Trading the ASX200 lost the fourth largest amount AUD 6k.
  

I thought it'd be interesting to look at the twelve month performance since the end of March 2020 when the stock market bottomed:

Portfolio shares are as at the end of March and gains are the dollar gain since March divided by the value at the end of March. Hedge funds are again the star performer, but Aussie small caps did surprisingly well.

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index.

We moved sharply away from our desired long-run asset allocation. Rolling over my retail superannuation funds to the SMSF resulted in a big rise in cash. Cash is the asset class that is furthest from its target allocation (12% of total assets too much) followed by real assets (7% too little):

 

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• Our SMSF received all approvals, and I rolled over my Colonial First State super funds to the SMSF, made an AUD 15k contribution to the fund, and applied for a brokerage account.
• Ready Capital called their baby bonds early, reducing our bond exposure by another USD 25k.
  
• I continued systematically daytrading ASX200 CFDs and futures.... Daytrading experienced a strong drawdown. I lost as much (including slippage) as the algorithm did (not including slippage) despite using a smaller position size, mainly because of one bad trade where Plus500 got me into the opposite direction trade than I should have been in. The trade in the wrong direction triggered near the open, when in the futures market you would have got into a trade in the right direction later in the day.
  
• I started a calendar spread in soybeans futures. Soybeans are very strongly backwardated when usually they should be in contango. I am betting that the November and May prices will converge. They went the wrong way in March but on 1st April moved very sharply in my favor.
  
• I invested USD 10k in another painting at Masterworks. I now have USD 70k invested in 7 paintings.
• I bought 15,000 Cadence Capital shares (CDM.AX) @ $1.045 per share when they announced that their pre-IPO investment in DeepGreen Metals was being acquired by a SPAC and would list on the NYSE. The current share price of Cadence gives you this investment for free.
• I sold 10,000 shares of Hearts and Minds (HM1.AX) @ $4.78 a share. The shares are trading at a large premium to the NAV and I felt that some of their recent picks of growth and tech stocks perhaps peaked. I still hold 25k shares.
• I sold half our Treasury Wine (TWE.AX) position @ $11.15 a share. Now it is down to 1% of the portfolio again, which is the default allocation for an investment in a single company.
• I bought 2000 shares of Perth Mint Gold (PMGOLD.AX) @ $22.44 and 22.56 per share. Our allocation to gold fell below the long-term weight. It is now almost exactly at 10% of gross assets.
  

Internal Rates of Return

I have now computed the internal rate of return for 66 investments including all current investments. I excluded all trading involving futures, shorting etc and all names held for less than a month. There are still around a hundred closed investments that need to still be evaluated. In the meantime, here are the results:

• The top performer was held for under a year. Probably, I should drop everything held for less than a year...
• At the bottom are two investments that went to zero. 
• The median return is 6.25%, but most of our larger investments are above the median.
• I bought shares in Colonial in the demutualization and then it was taken over by Commonwealth Bank. This was my best investment in terms of rate of return.
• Pershing Square Holdings is looking very good at #3.
• AAPT was an Australian telecom that did very well and was acquired by Telecom NZ. I think I bought that in an IPO too.
• I only held Qualcom for a short time.
• Rounding out the top 10 are five recent investments that are strong performers.
• A lot of the entries in the right hand column are bonds.
  

Yellowbrickroad and Tribeca Natural Resources

Yellow Brick Road (YBR.AX) is an Australian mortgage broker and financial planning company. Mercantile Investment Company (MVT.AX), who took over IPE has made an offer to take over the company at 9 cents per share. However, the company has rejected the offer and the market is trading higher than 9 cents under the assumption that Mercantile will have to increase the offer. The company has net tangible assets of 13.4 cents per share, though much of that is future expected trail commissions. Regulators are clamping down on trail commissions and these might go away in the future, but I doubt that existing deals would be cancelled. The company just announced it made a small loss this year after a small profit last year. So, net tangible assets would seem to be the minimum reasonable price for the business.

I have started to make a small investment in the company. As it is risky to buy above the announced takeover price, this won't be a big position. The CEO and his brother own 19% of the company as does Nine Network. So, these big shareholders would have to get a price they are willing to accept for the takeover to actually proceed. MVT owns about 20% too, so smaller shareholders have 40% of the company.

Commsec announced the IPO of a listed investment company (closed end fund) managed by Tribeca. This will be a listed hedge fund. The managers have an extremely strong track record, though returns have fallen from the very high returns they made in 2015. I suspect that as money under management increased, returns fell. Still, they show the potential to perform very well going forward and I think this LIC should trade above net asset value. So, I plan to participate in the IPO. I also plan to redeem my units in the Colonial First State Janus Henderson Global Resources Fund, which has not performed that well in recent years.

Industrial Stocks

As I've mentioned many times, my investment style doesn't depend on being able to pick individual stocks which aren't in fact companies making other financial investments. I think is is hard for an individual investor to do this. Few mutual fund managers are any good at it. Which is why you have to be very selective about the managers you invest in. I'd love to get comments from people who are good at stock picking if you can back it up with a track record.

I only have four of these industrial stocks. Croesus Mining has been an unmitigated disaster. I was trying to trade it when the stock was halted and then the company declared bankruptcy. I'm still waiting for the situation to be finally resolved. I originally invested a small amount when I read about how it was undervalued and the most likely Aussie gold company to be taken over. Apparently not undervalued in fact and only taken over once bankrupt :) OTOH Ansell and Powertel have been good investments and Symbion a poor but at least moneymaking investment.

Before Telecom NZ announced the acquisition of Powertel, this investment returned to me an annualized 132% I invested in May 2006 @ $A1.20 a share and the buy out price is $A2.30 a share. We are now just waiting for the buyout to proceed. Unfortunately we are going to get cash but I'll just squeak into the holding period for the long-term capital gains rate. If we received Telecom NZ shares then there would be no tax to pay. But who wants them? I bought into Powertel on the recommendation of an online acquaintance in Hong Kong. He sent me the research reports by Goldman Sachs etc. I was very impressed when I looked over the accounts and decided to give it a shot. The story was here was a small telecom owning an important infrastructure asset that was just about to break into profitability. If they didn't become profitable an acquisition was then likely.

I originally bought into the then Mayne-Nickless when it was announced that Peter Smedley who had managed Colonial very successfully - I owned Colonial from the IPO to its acquisition by the Commonwealth Bank - was coming in as CEO. Initially Mayne's stock price rose, but then it eventuated that his management style wasn't working in the healthcare parts of the business. The stock price then plummeted again. It's been a long story. Eventually the company was dismantled and Mayne Pharma was spun-off and then acquired by Hospira. Symbion is the remaining Australia based healthcare businesses. There is ongoing talk of consolidation in this sector and Symbion's price goes up and down with the news and speculation. I'm still holding on to see if something eventuates. It looks like in the long-term my rate of return has been 9.7% which is OK I guess.

My rate of return on Ansell has been 18.2% annualized. My current cost basis is -$2965. So I have pulled out my initial investment and almost $A3000 in profit. Another restructuring, turnaround story. I invested in the then Pacific Dunlop in September 2001. I can't remember what the exact rationale was, but clearly it was cheap. Today Ansell makes, surgical and industrial gloves and condoms. It is a global player headquartered in the US but still listed in Australia. In fact they have dropped their US listing. Rising rubber prices have negatively impacted the company recently but I'm still willing to trust management but with a reduced position in the stock.

In order to buy into another industrial stock I'm going to need a good business case, plus a low valuation. Sure I'll miss out on some growth stocks that would be great investments. But I find it hard to tell ahead of time. That's not where my edge is and I'm happy to leave it to the fund managers.

Powertel

I bought into this Aussie telecom firm where the green arrow is on the chart. This was based on a tip from a Hong Kong based investor I know online and the research from investment banks he sent to me. My purchase price was $A1.20. It's been pretty volatile since I bought, but as I write it is now at $A1.35. Is it finally breaking out of the multiyear triangle I outlined on the chart? It recently declared its first ever profit (as predicted in the research) and then signed a wholesale access agreement on Friday with Telecom NZ's AAPT subsidiary. AAPT was my second individual shareholding, which I bought at the IPO in November 1997 (the first was Colonial - also an IPO buy). AAPT was acquired by Telecom NZ yielding me an eventual $A8600 in profit. I still hold Telecom NZ and it has yielded me an additional net $A100 in profit in the last six years! Sounds terrible, but on second thoughts that's about what the S&P 500 has made including dividends in the same time frame.