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.
  

August 2020 Report

The US stock market continued to rise as the US dollar fell. The Australian Dollar rose from USD 0.7159 to 0.7380. The MSCI World Index rose 6.16%, the S&P 500 7.19%, and the ASX 200 3.09%. All these are total returns including dividends. We gained 3.03% in Australian Dollar terms and 6.03% in US Dollar terms. The target portfolio is expected to gain 1.89% in Australian Dollar terms and the HFRI hedge fund index 2.46% in US Dollar terms. So, we outperformed the latter two benchmarks and almost matched the stock market indices. Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Small cap Australian stocks performed best and hedge funds contributed the most to overall return.

 
Things that worked well this month:

• Regal Funds (RF1.AX) was the top performer, up AUD30k, closely followed by Bluesky Alternatives (BAF.AX, 22k), and Hearts and Minds (HM1.AX, 19k).
  
• Domacom (DCL.AX) doubled in price from 4 to 8 cents. Half my position was bought at 2 cents a share. But then the company voluntarily suspended its quotation pending an announcement about a major transaction. The trading halt started on 19 August and there is still no news, though the company did release its annual report.
  
• The Aura Venture Fund reported that it performed very well in the June quarter. In retrospect, it was easily the best performing investment that month.
  

What really didn't work:

• Winton Global Alpha Fund continued to lose money. The fund announced that a special meeting of unitholders will consider broadening the strategy and lowering the fees.
  

We moved further towards our long-run asset allocation. The share of hedge funds rose most while the shares of bonds fell the most:

 

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:

• I bought small positions in URF.AX, CDM.AX, RF1.AX, TGF, AX, and PE1.AX in my Commsec account (for a total of 1% of net worth roughly) with the aim of getting better tax information on distributions than provided by Interactive Brokers.
• I bought 13,719 shares of Platinum Capital.
• I bought 25,000 shares of Bluesky Alternatives and 1000 shares of 3i to increase our private equity position a little.
• I opened an account with Masterworks and bought 500 shares in my first painting for USD 10k.
• USD25k of Goodyear bonds, USD25k of Safeway bonds, and USD28k of Xerox bonds matured.
• I bought net AUD 60k and GBP 14k and sold net USD 61k.
• I closed the 2 year-10 year US treasuries September futures spread and shorted 1 contract of December 10 year bonds  futures.
  

What is my Best Investment?

I was just listening to a pod-cast where the host asked the guest (Karsten Jeske) what their best investment was and they could give an answer in annual percentage terms. Up to now, I have tracked returns of individual investments in absolute dollar terms. I can easily say which has been my best and my worst on that basis. The best was the Colonial First State Geared Share Fund and the worst has been the Tribeca Global Resources Fund. But dollar returns depend on the amount invested. I do have average monthly percentage returns for many investments, but properly taking into account transactions is hard. So, I thought that I could compute the internal rate of return. This does take all transactions properly into account. You need to compute each monthly net cashflow into the investment (which I already have in individual spreadsheets I keep on each investment) and then for the current month assume that the investment is sold at the current price. Excel has an IRR function that can be applied to the column of cashflows.

I plan to do this slowly as I have invested in around 200 different things. The first three I did are gold (34% p.a.), China Fund (14% p.a.), and 3i (6% p.a.). 3i was surprising as this is a lot less than the average annualized monthly return of almost 14%, that I previously computed.

Masterworks

Masterworks are a fairly new firm offering securitized investments in artworks. They buy paintings by recent and living artists and then sell shares to investors. They charge a 1.5% per annum management fee and plan to charge 20% of profits when an artwork is sold. They also get a markup on the price that they pay, presumably to cover acquisition and offering costs. I am interested in investing a small amount and have scheduled an interview to talk to them. They interview all new clients. One thing that interests me is our family connection to art. My father's family were antique and art dealers before the Second World War in Germany. My brother is an amateur artist who has sold a couple of paintings, I think, and my mother painted as well. But this doesn't give me any particular insight on the financial side of the art market. I'd aim to diversify across the paintings they are offering.

This investment is more equivalent to private equity buyout rather than venture capital. It doesn't make sense for the firm to buy a painting for $10k or $100k by an unknown artist hoping that it will appreciate because they make a separate special purpose vehicle filed with the SEC for each of their offerings. So they are buying paintings at around $2 million or so a piece.

P.S. 25 August

I had my interview today with a representative from Masterworks and was approved to start investing. I learnt that there is a USD10k minimum investment for the primary offerings. I now made my first purchase and have transferred the money using OFX. Based on the spot exchange rate, it cost 1.45%. I tried using my US bank but couldn't work out an online method that works.

Aura Venture Fund

The value of shares in the Aura Venture jumped from AUD 0.75 to AUD 1.28 in the June quarter. This turned our performance for June from a negative Australian Dollar return to a positive 0.84%.

The 75 cents price reflects that only 75% of the capital was called at that point. Since then there was a further 10 cents call. This big increase moves this investment from a losing investment to our 7th best of all time in dollar terms. And the gains are tax-free. Of course, all such valuations are somewhat theoretical until they actually exit the investments, but it makes me feel better about this investment and my commitment to invest in their next fund. On the other hand, the portfolio value was upvalued based on the announced acquisition of one investee company at around 2 times the entry price and a funding round at another that reflected a valuation 109% premium over the fund's entry point.

Adjusting the Target Portfolio

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

Investing During the Pandemic

Financial Samurai's blogpost got me wondering how much I had taken advantage of the decline in asset prices earlier this year to add to my investments. So, I put together a table of all my exchange traded investments that aren't bonds plus the APSEC fund I recently invested in.  Not included are bonds, other unlisted funds such as Winton Global Alpha,  Aura Venture Capital, our Colonial First State Funds, the Everest Fund that recently wound up, and all our superannuation funds. The idea is to capture where I have made deliberate rather than automatic investments. 

The table presents snapshots on 1 February, before the pandemic had effects in Western countries, and today. The number of shares held is self-explanatory. Investment is the net cash invested in that investment. So, making an investment increases the number and withdrawal reduces it, but dividends and distributions that aren't re-invested also reduce it. All the numbers are in Australian Dollars and so the numbers also declined for 3i, Boulder, China Fund, and Pershing as the Australian Dollar rose. Investment per share is the investment number divided by the number of shares.

In total, I added $334k to these investments over this period. Most of this money came from maturing bonds. There are a lot of different patterns though. I might have made a mistake in investing the most in funds that were trading at the biggest discount to net asset value rather than what turned out to be the strongest funds. I didn't invest anything in Hearts and Minds and not much in Regal. I got a lot of extra shares in Cadence and Tribeca, which is a bet that they'll do better in the future. I increased my Pengana investment mostly because I thought I needed to invest more in private equity and because the fund had been trading at a big premium to net asset value. It's partly a bet that the premium will come back.

In general though, I have been cautious investing during this period because I invested a lot in early 2008 after the initial fall in the market, only to lose big later in the year. 

July 2020 Report

The US stock market continued to rise as the US dollar fell. The Australian Dollar rose from USD 0.6884 to 0.7159. The MSCI World Index rose 5.33%, the S&P 500 5.64%. The ASX 200 only rose 0.50%. All these are total returns including dividends. We gained 1.76% in Australian Dollar terms and gained 5.82% in US Dollar terms. The target portfolio gained 1.57% in Australian Dollar terms and the HFRI hedge fund index 3.24% in US Dollar terms. So, unusually, we outperformed all benchmarks. Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Gold performed best and futures worst. Gold contributed most to the total return.

Things that worked well this month:

• Gold gained AUD 39k as the metal hit a record high. It is now our fourth best investment ever in dollar terms. Only the CFS Geared Share Fund and the Unisuper and PSS(AP) superannuation funds have made us more money.
• Tribeca was the next best performer gaining AUD 15k.

What really didn't work:

• Pengana Private Equity lost AUD 4k.
• My Virgin Australia bonds lost AUD 3k. In the coming month we'll find out how much they are really worth.

We moved further towards our long-run asset allocation. The share of private equity rose most while the shares of bonds and futures/cash fell:

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:

• We participated in the Pengana Private Equity (PE1.AX) rights issue buying 18,000 shares.
• I bought AUD 50k of Australian Dollars and used 40k to reduce my margin loan at CommSec.

It was a fairly uneventful month.

 

P.S. 8th August

I just realized we hit a new high net worth in US Dollar terms this month, exceeding the previous high in December. Details are at NetworthShare Quite remarkable given the circumstances. In Australian Dollar terms we are 3% below the January high.

2019-2020 Spending

Here is our spending for the Australian financial year 2019-2020. The shaded areas are sub-categories of the main categories above them. The table also shows the spending shares in the previous financial year and the change in share. These numbers include some spending that we don't include in our usual monthly reports to make the report more comparable to others you might see online. This includes mortgage interest and life insurance. Health insurance and medical expenses are net of reimbursements by the health insurer and the government. All numbers are in Australian Dollars.

Monthly spending increased from $10.7k to $12k (USD 8,250). This is more than my after-tax salary... Housing was again the largest spending category but supermarkets overtook health as the second largest. Spending on mail order and childcare and education are now both ahead of health. The shares of health and housing fell the most due to reduced mortgage interest and medical spending. Our second child was born 26 June 2019 and expenditure around that was mostly incurred in the previous financial year but we got some reimbursements in this financial year. Mortgage interest was down because we had a lot of money in our offset account leading up to the "mortgage inversion" and because the loan is just getting smaller and interest rates are falling.

I spent a lot more on taxis and Uber (I don't have a driving licence). A lot of this was because in the early months of Moominmama's maternity leave I took Moomin to daycare at her workplace before going on to my work. But also, I am getting less patient with the time it takes to get around on public transport when I have increased childcare duties. When it's convenient I get a bus, when it's not I get an Uber or taxi.

Childcare expenditure rose because we now have two children and because we got a lot less subsidy as our income rose. On the other hand, after the pandemic started we got free childcare, so this category will rise even more next year, probably. Mail order spending was up 86% on last year. This is partly because after Moominmama went on maternity leave she did a lot more mail order. But department store (all non-supermarket goods retail) and supermarket spending were also up. Across the three categories, spending was up 47%. Cash spending fell further to just $1,600, though some of the supermarket spending includes cash withdrawals by Moominmama.

I'm also tracking income, tax, and savings in the same spreadsheet. But these numbers are all still really uncertain until we are ready to submit our tax returns in a few months time. Very roughly, half our income goes to spending, a quarter to tax, and a quarter to saving.

June 2020 Report

The stock market continued to rise, though at a slower pace. Things gradually edged towards normality here in this part of Australia. Our spending bounced back to near pre-crisis levels at AUD 10.2k for the month. About AUD3k of that were dental costs for Moomin. Hopefully, all fixed up now.

The Australian Dollar rose from USD 0.6647 to 0.6884. The MSCI World Index rose 3.24%, the S&P 500 1.99%, and the ASX 200 2.66%. All these are total returns including dividends. We lost 0.65% in Australian Dollar terms and gained 2.91% in US Dollar terms. The target portfolio is expected to have gained 0.59% in Australian Dollar terms and the HFRI hedge fund index 1.26% in US Dollar terms. So, we came close to the MSCI return and outperformed HFRI but underperformed the Australian Dolar benchmarks. Despite my attempts to diversify, returns during this crisis have closely matched the MSCI World Index:

Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Gold and rest of the world stocks performed best and private equity worst. Gold contributed most to the total return.

Things that worked well this month:

• Regal Funds gained AUD 17k. We are now back in the black on this investment.
• Gold gained AUD 12k.

What really didn't work:

• Tribeca Global Resources lost AUD 20k, though it's still above the March low...
• Pengana Private Equity lost AUD 10k. It was at an unsustainable high level and then a rights issue at a much lower level was announced. So, this is actually OK I think.

We moved further towards our new long-run asset allocation. The share of hedge funds rose most while the shares of bonds and futures/cash fell:

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:

• I sold USD 5k of Tupperware bonds. I probably acted too quickly on that one.
• I bought 12,000 shares of Tribeca Global Resources. Probably a mistake too.
• I bought AUD 35k of Australian Dollars.
• I sold 20,000 shares of Pengana Private Equity (PE1.AX) and then bought back 40,000 shares at lower prices. I also subscribed to the rights issue.

Some Updates

Today I met on Zoom the accountant who has agreed to certify me as a wholesale investor. There are two reasons I want this certification. First, Interactive Brokers will only lend me AUD 25k as a retail investor. Second, I want to invest in a new Aura Venture Fund. The accounting firm is Nexia.

Before the Great Financial Crisis I invested in the ill-fated Everest Babcock and Brown fund of hedge funds. We finally got the final payout from this fund last week. In the end we lost AUD 12,348 from this and related investments.

Employees at my university narrowly voted in favor of freezing pay, which was scheduled to rise 2% next month. I won't be surprised if they soon try to get me to retire, though at this stage we don't have a good idea of what will happen to student demand going forward. Clearly, fewer people will want to study abroad for a long time. But one hypothesis is that Australia will rise in preference relative to the US and UK as a destination. Moominmama decided to not go back to work for another 3 months. On the spending side we decided to send Moomin to a private school. He has been going 2 days a week to their pre-school this year (and 2.5 days to the local public school). So, spending on childcare and  education is only going to ramp up....

Aura Venture

I wrote a post when I first invested in the Aura Venture Fund but have only mentioned it briefly since then.  I committed to invest AUD 100k in the fund and to date AUD 85k has been called. Venture capital funds only ask investors to put in money when they have new investments to make. My pre-tax return is a loss of AUD 750. But there is a tax offset equal to 10% of your investment for investing in early stage venture capital and so I am ahead after tax. There is no Australian tax on fund earnings or gains. Some of the firms in the portfolio have done quite well and have been revalued upwards. Others have not done so well, but the worst is worth 80% of the value at initial investment. Most of the invested companies are software/web based services and so should do well in the current environment. So, I am hopeful that this will turn out to be a successful investment.

Now, Aura are launching a second Australian venture capital fund. This fund is bigger and the minimum investment is bigger (AUD 250k). The initial investment is 25% of the committed capital. So, I am thinking to also invest in this fund. I think that the first fund will begin to make distributions during the time that the new fund is investing, so that my total invested capital wouldn't hit AUD 350k. All the same, it feels a bit risky investing so much with one manager, as my usual guideline would be to invest a maximum of 5% of net worth. We do have three funds with more than 7% of net worth but they are all quite diversified.