Two More New Investments

We're still in the process of reinvesting after the most recent reorganization, which centred on rolling over my Colonial First State superannuation fund into the SMSF. I bought the first "tranche" of a position in Fortescue Metals (FMG.AX) replacing the just closed Treasury Wines position. By the way that position made around AUD 15k in profit with an internal rate of return of around 90%. Fortescue is expected to pay out an enormous franked dividend very soon. The interim dividend was AUD 1.47, which was double that in the previous year. Brokers expect the final dividend to be around AUD 2.50 per share plus franking. This is around a 16% annual yield. The reason the share price isn't higher is that brokers also expect profits to fall in the following years. The thinking is that the iron ore price can't remain this high for long. My thesis is that retail investors will continue to buy the stock to get the dividend and that maybe future profits won't fall as much as expected. In the last 90 days they have increased their forecasts of 2022 profits but the share price is below where it was a the beginning of the year.

The second investment is in Contango Income Generator (CIE.AX). This is a listed investment company (closed end fund). It has been a failure, losing money since inception. Wilson Asset Management got involved, buying up shares and agitating for change. The company switched to a new strategy managed by WCM Investment Management who are based in California. This is a global long-short equity strategy, which supposedly has performed extremely well:

Of course, it is trading below net asset value. It's not that liquid, and so getting a full position will take a little while.

We now have 40 different investments not including cash in various currencies, our house etc. And that's counting the eight paintings at Masterworks as one investment. I still have a couple more investments in mind.

And in to Ruffer

 

I invested most of the remaining cash in the SMSF into Ruffer Investment Company. This is a closed end fund trading on the London Stock Exchange. It is a diversified fund invested 40% in stocks, 40% in bonds – mostly inflation indexed – and the remainder in gold, options etc. They are betting on inflation. It has done very well during market crises. The fund:  "has a simple aim – consistent positive returns, regardless of how the financial markets perform. We try not to lose money in any 12 month period, and to grow the value of our investors’ wealth over the long haul. If we can do this, we should outpace inflation, protecting and increasing the real value of our investors’ income and capital."

Got Out of Treasury Wine

Was getting bored of Treasury Wine (TWE.AX) so I exited the position. Probably now there will be a takeover announced :) Previous rumours about takeovers didn't eventuate so far.

First Investment through Domacom

 

 

I made my first investment using the Domacom platform. I bought some shares in a cattle grazing property in Victoria. Mostly, I just want to see how the platform works, so this is a very small investment. I also have made "pledges" for three "campaigns". Activity seems low on the platform in terms of either trading or crowdfunding campaigns. It's not surprising that the company seems to be focusing on other ways to generate funds under management. The platform provides quite a bit of information but I think deals mostly are a bit too nebulous to commit a lot of money to any one. For example, these are the financials for another farm property in Victoria:

What exactly are the outgoings? If there are finance costs, then how big is the mortgage on this property? The "position" has no loan listed. Was the loan paid off? But last year there were no finance costs. It's hard to understand the financials of most properties I looked at.

What farming activity is generating the rent? The pds says: "It is intended that this property will be used to derive income from mixed agriculture use including the farming of sheep and the growing of trees producing nuts." I'm doubtful about the latter. Is it happening? 

Most residential property listed on the site has fallen in value since the initial investment was made. Are initial valuations over-valuing the properties?

I think if this platform is going to be successful it needs to have much more transparent information.

April 2021 Report

This month we completed the initial investments in our self-managed superannuation fund (SMSF). I stopped systematic trading for the moment. We also reached a big round net worth number in  Australian Dollar terms. But once I raised the value of our house to reflect a recent sale in our neighborhood, I realised we would have actually reached that number in February.

The Australian Dollar rose from USD 0.7612 to USD 0.7725. It was another month of increases in world stock markets. The MSCI World Index rose 4.41%, the S&P 500 by 5.34%, and the ASX 200 rose 3.48%. All these are total returns including dividends. We gained 2.54% in Australian Dollar terms or 4.06% in US Dollar terms. The target portfolio is expected to have gained 1.76% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 2.07% in US Dollar terms. So, we outperformed these benchmarks and did OK vs. the MSCI. Here is a report on the performance of investments by asset class (currency neutral terms):

Hedge funds added the most to performance and only Australian small cap had a negative return. Things that worked well this month:

• Tribeca Global Resources was the largest contributor in dollar terms contributing AUD 21k. Gold bounced back, contributing AUD 15k. Unisuper, Cadence Capital, and Pershing Square Holdings all also contributed more than AUD 10k. Other notable strong performers were URF.AX (NY/NJ residential real estate), 3i (UK private equity), and soybeans.
  

What really didn't work:

• The worst performers were Hearts and Minds (HM1.AX) and Domacom (DCL.AX).
  

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. Against the MSCI World Index we could be doing better and we are doing a little worse than the median hedge fund levered 1.6 times.

We moved decisively towards our desired long-run asset allocation again as I implemented our SMSF investments. In October 2018, when we received the inheritance we were 48 percentage points away from our target allocation at the time. Now we are less than 6 percentage points away. We compute this by calculating the Euclidean distance between the target and actual allocation vectors. This is the square root of the sum of squared differences between the actual and target allocations for each asset.  Real assets is the asset class that is now furthest from its target allocation (4.6% of total assets too little):

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. This was a very busy month. I'm only recording net changes here:

• Australian large cap: I invested in Argo Investments again.
  
• Hearts and Minds (HM1.AX): I bought back 20k shares I had sold a while ago at higher prices. This is a long only global equities fund.
  
• Hedge funds: I increased our holding of Regal Funds (RF1.AX). This wasn't intentional, but I didn't get the price I wanted in exiting part of our holding in a regular brokerage account while also establishing a position in the SMSF.
  
• Private equity: I increased our holding of the Pengana private equity fund (PE1.AX).
  
• Bonds: Our Medallion Financial baby bond matured and we bought shares in Scorpio Tankers,  Star Bulk Carriers, and Ready Capital baby bonds, increasing our net holdings of US corporate bonds by USD 50k. We also bought shares in the Australian MCP Income Opportunities Trust (MOT.AX).
  
• Art: I invested in another painting at Masterworks.
  
• Real estate: I invested in the Domacom and Australian Unity Diversified Funds. I also doubled our holding of URF.AX (NY/NJ residential property).
  
• Futures: I successfully closed a calendar spread trade in soybeans and stopped systematic trading of ASX futures.
  

Career Decision-Making

My university has a big deficit currently and one money-saving move has been to ask people who are eligible to take long-service leave. Every pay period money is put into a long-service leave account. The university can't access this money unless the employee takes long-service leave. When they take long-service leave, the university stops paying their regular salary thus reducing the current deficit. I haven't yet been eligible as you need to have 10 years of service, and I started in 2011 in my current position. But I was thinking of taking long service leave in the first half of next year. I was vaguely thinking about retiring by the end of next year.

According to standard criteria we are financially independent. 3% of our net worth is AUD 150k and our annual expenditure is around AUD 120k. However, I expect our expenses to rise faster than the rate of inflation. We have two young children who my wife is determined to send to private schools (I tend to think that public schools are fine). We are spending on one private school and daycare right now. We don't get much childcare subsidy from the government because our income is high. But high school is more expensive than this.

My wife (Moominmama) is working (2 days a week), though I told her she doesn't need to if she doesn't want to. She said that holding on to the job has option value. Which I kind of agree with. Things feel very uncertain.

Now I was asked whether I could again take on a leadership position in my school (school = very large academic department in US terms - our school has 4 departments within it - think something like a business school of a university). This is probably the best of the leadership positions. I think it is kind of unfair because I spent five of the last ten years holding such positions, which are a lot of extra work, and some full professors have never done even one. The argument is that I am good at it and they're not... 

So if I started this in January, I couldn't take long service leave and it would be for two years probably. Usually, you get AUD 10-20k a year extra pay. After tax, that is half that, of course. After discussing with Moominmama she said that I should ask instead to reduce my teaching. This has happened in the past and the incoming director might be more open to this than the current school director. Moominmama also think I should hold onto my job for the "option value" and not retire. So, I suggested to her that after doing the leadership position for two years maybe I would switch to half time, which means I could keep the low teaching load. The truth is that without leadership duties my job is a very easy way to earn AUD 200k a year (including the superannuation contibutions). AUD 100k a year is also good money. So, I think I will tell the incoming director that I will do it, but only if I can teach less. I would still earn the AUD 200k a year for the next two years. I won't tell her about dropping to half time after that. Or should I just say no, because others haven't done their fair share of the work?

Argo Investments Again

  

Back in 2012 I invested in Argo Investments for a while. I don't know why I sold it. There were no new investments that month and I didn't comment on it on this blog. Maybe I put the money towards our house buying fund.

Anyway, I just reinvested in the fund in a regular brokerage account. After selling some things which we were buying in the SMSF we now need to reinvest in those accounts. The target allocation says that we are underweight large cap Australian stocks and so that is what I bought. This is a managed fund with a tilt towards value and a very low expense ratio of 0.15%. It has performed pretty well I think. 

By the way, I recently tweaked the target portfolio slightly to give the US and rest of the world equities equal weights instead of a slightly smaller weight for the US. Each is now allocated 6% of assets. This doesn't include hedge funds and private equity, just long-only investments. Australian large cap is supposed to be 9% of the total.

Bond Investments and Overall SMSF Allocation

I made three bond investments and have completed the initial investments for the SMSF. I bought two US baby bonds - Scorpio Tankers (SBBA) and Star Bulk Carriers (SBLKZ). These are both companies that make money, pay dividends and whose stock has good analyst opinions. They also mature soon or are subject to potential call, which means their price doesn't deviate too far from the redemption price usually. I also invested in the MCP Income Opportunities Trust (MOT.AX). This is a listed private credit fund, which has a high yield and performed better than other listed credit funds in Australia through 2020's market crash.

Here is the overall allocation of investments in the SMSF at this point:

The cash and bonds are to take advantage of shorter and longer term future opportunities.

I plan to benchmark the SMSF against Unisuper and PSS(AP) in future performance reports. After all, if it doesn't perform better than our employer superannuation funds, there isn't much point in doing this. As these are both strong performers, it will be a tough hurdle to beat.

Second New Property Investment: Domacom

I made a second property investment application today. This one is to Domacom which is a fractional property investment or crowdfunding platform. I have been an investor in the company itself for a while.  It is now looking quite a bit more stable than it did when I wrote about it before. It's still one of my most speculative investments. The way it works is that you put cash into an interest paying account and then bid on various crowd-funded projects. You can also get a syndicate together to invest in a property using their platform. They have a variety of other products like housing equity release for seniors – selling part of your house, rather than doing a reverse mortgage – Islamic financing for buying houses etc. Their model is supposed to allow SMSFs to invest with leverage because you buy units in a fund rather than buying a property directly. 

The focus is on residential property, but there are also more unusual opportunities like solar power and rural farmland.

New Investment: Australian Unity Diversified Property Fund

This is the first new investment in our SMSF. Real estate is the area where we are most underinvested relative to our target allocation. The SMSF already has an investment in US residential real estate via URF.AX. I sold our existing investment for a capital loss and bought a larger holding in the SMSF. So, this investment covers Australian commercial property. This fund has a very good track record (better than Charter Hall in my opinion) and is diversified across industrial, retail, and office properties. Coles and Woolworths are the biggest tenants. We are investing AUD 50k in this fund.

I have a definite preference for direct investments in property rather than listed investments. REITS tend to move up and down with the stock-market and so don't provide as much diversification as direct investments. On the other hand, actually buying property myself is not something I want to do as the required size of investment is too large. Well, we could easily buy an apartment to rent but we couldn't access commercial property easily. So pooling investments with others makes sense. 

If a REIT is trading a lot below NAV, like URF is, then I am interested in buying. URF is a pretty risky investment, though US residential property seems to have turned the corner. Financial Samurai even said he wanted to buy Manhattan Real Estate.

We already have exposures to US and Australian commercial real estate through our employer superannuation funds, the Wilson Alternative Assets Fund (WMA.AX) and the TIAA Real Estate Fund.

Stopping Systematic Trading Again...

Of course, bitcoin went straight down after I got in and I have now closed that trade. There was no real basis to that trade. I just went in because Oscar Carboni was getting bullish on bitcoin again. But I have also decided to stop my attempts at systematic trading. I thought I could come up with something which my personality could handle. But it's not the case. I just can't get detached when there is an order out there that may or may not trigger, needs attention to close etc. My anxiety and lack of sleep has been getting worse again this week, despite not actually trading and last night I decided to pull the plug. I still have a soybean calendar spread trade open, which maybe I was most anxious about. But it is actually making money now. I had increased the size of the trade. That was a bad idea. I have now gone back down to two contracts instead of three. These moves should reduce the overall cognitive load. If this still doesn't work, I'll have to close that trade too.

This seems to have happened every time I really get into trading, but each time I think it will be different. Moominmama was concerned when I said I was trading again, saying that I always end up stressed as a result. She was right.

P.S. 9 April

I still had difficulty sleeping, so I closed the soybean calendar spread too. At least that one made some money.

Bitcoin

 I'm finally back into Bitcoin. The position I could get was tiny. Margin requirements are crazy. On IB they are something like twice the actual BTC position. I took a small position on Plus500.