January 2022 Report

In January, stock markets rebounded. The MSCI World Index (USD gross) gained 7.19% and the S&P 500 6.28% in USD terms, and the ASX 200 gained 6.23% in AUD terms. All these are total returns including dividends. The Australian Dollar rose from USD 0.6816 to USD 0.7113. We gained 2.21% in Australian Dollar terms or 6.66% in US Dollar terms. The target portfolio rose 1.45% in Australian Dollar terms and the HFRI hedge fund index around 2.8% in US Dollar terms. So, we out-performed the S&P 500, the HFRI, and our target portfolio and under-performed the others.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I have added in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return.

All asset classes had positive returns. Private equity was the largest contributor to returns Followed by hedge funds, while RoW stocks had the highest return.

Things that worked well this month:

• 3i (III.L) rose strongly, gaining AUD 22k. Tribeca (TGF.AX 18k), Unisuper (15k), PSSAP (14k), China Fund (CHN, 13k), and Hearts and Minds (HM1, 10k) all contributed more than AUD 10k.
  

What really didn't work: 

• Three managed futures funds all lost money, with Winton Global Alpha losing the most (AUD 4k).
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The MSCI is reported in USD terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture and positive alpha against the ASX200 and the MSCI but not against the hedge fund index. We have a higher Sharpe Index than the ASX200 but lower than the MSCI in USD terms. We are performing about 2.6% per annum worse than the average hedge fund levered 1.75 times. Hedge funds have been doing well in recently.

We are now very close to our target allocation. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• I bought 1,000 shares of the China Fund, CHN.
• I bought 3,000 shares of Ruffer Investment Company, RICA.L.
  

New Investment or Trade

I sold some Pengana Private Equity (PE1.AX) shares as they are trading above NTA and bought some Cordish Dixon Private Equity Fund III (CD3.AX) shares, which are trading more than 30% below NTA. Of the three traded Cordish-Dixon funds, I selected this one as it is youngest and so I figured has the most potential. Maybe the oldest fund maybe has only more problematic companies left in it, which are harder to sell? It is also the biggest of the three funds because it has made fewer distributions to date.

This was spurred by news that PE1 has made offers to acquire the CD funds, though these have been rejected to date.

In other updates, I have been tied up in other projects and haven't had time to reconcile the accounts for the last couple of months. When I do, I will post reports.

Rates of Return Over 20 Years

 

The graph shows the average annual rate of return over the previous 20 years up to that date. Our target diversified portfolio has had a very consistent 20 year return, as has the ASX 200. The MSCI World stock market index and the S&P 500 have been less consistent. My own performance was not good up to 2020 when seen from a 20 year perspective. By January this year, though, it's almost matching the target portfolio and is near the MSCI World Index (which doesn't deduct management fees). One reason for this, is I did really badly in 2000-2003 in the dot.com crash or tech wreck and so performance is now measured from the low point of March 2023. The chart is measured in Australian Dollars.

Annual Report 2022

Overview 
This was the first year that our net worth fell since 2008. Investment returns were negative but the value of our house increased a bit and we did save some money.* We were far short of the best case projection I made at the beginning of the year of a net worth of AUD 6.7 million. In my academic career, I spent a lot of time this year working on preparing and then teaching a new course, though I did get at least one newish research project completed. I was supposedly on long service leave for the first three months of the year but didn't really get to take any time off. This year, I plan on taking it a bit easier in the first half of the year before focusing on teaching in the second half of the year. Teaching was more in person this year and so a bit more enjoyable. I didn't leave the Canberra region all year since getting back from the coast right after New Year's Day.

 

All $ signs in this report indicate Australian Dollars. I'll do a separate report on individual investments. I do a report breaking down of spending after the end of the financial year.

 

Investment Returns 
In Australian Dollar terms we lost 3.7% for the year but in USD terms we lost 9.6% because of the fall in the Australian Dollar over the year. The MSCI lost 18.0% in USD terms but the ASX 200 gained 0.9% in AUD terms. The HFRI hedge fund index lost 1.5% in USD terms. Our target portfolio lost 4.2% in AUD terms. So, we beat the MSCI and the target portfolio benchmarks this year but not the ASX 200 or HFRI Index. 

 

This chart compares our portfolio to the benchmarks in Australian Dollar terms over the year:

 

We tracked the target portfolio quite closely. It acted as a less volatile weighted average of Australian and international equity markets. Here are the same indices in US Dollar terms with the target portfolio replaced by the HFRI hedge fund index:

 

The HFRI had very low volatility and the strongest relative performance. In USD terms, our portfolio was much more volatile than in Ausrtalian Dollar terms as intended.

 

Here are annualized returns over various standard periods:

Benchmark returns have now mostly decreased over time. We have similar performance to the ASX 200 over ten years but much worse over twenty. We beat the HFRI over all the longer time horizons. We had particularly good relative performance over the three year horizon. Whether you think our performance is good or bad depends on what you think the default alternative investment is. If it is an ASX 200 index fund, then we are doing in the last ten years. If it is a global stock index fund then not so good over horizons longer than three years. If you think it is our target portfolio then we are doing well.

Here are the investment returns and contributions of each asset class in 2022:

The contributions to return from each asset class sum to the total portfolio return in gross asset and currency neutral terms. I then add on the contributions of leverage and the Australian Dollar to get the AUD net worth return. The portfolio shares are at the beginning of the year. Futures and gold did best and contributed most to the return. Private equity and real assets had small positive returns. Australian small cap stocks and foreign equities all did very badly.

Investment Allocation 

There weren't large changes in asset allocation over the year:

 

Mainly, real assets fluctuated with our exposure to URF.AX, which is a very levered (effectively) US residential real estate fund.

Accounts
Here are our annual accounts in Australian Dollars: 

 

Percentage changes are for the total numbers. There are lots of quirks in the way I compute the accounts, which have gradually evolved over time. There is an explanation at the end of this post. 

We earned $153k after tax in salary etc. Total non-investment earnings including retirement contributions were $183k, down 9% on 2021. This was due to increased tax payments, fewer non-salary earnings, and fewer employee contributions to Moominmama's employer superannuation fund. We lost (pre-tax including unrealized capital gains) $166k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We lost $15k on retirement accounts with $30k in employer retirement contributions. The value of our house is estimated to have risen by $133k. As a result, the investment loss totaled -$45k and total income $139k.

 

Total spending (doesn't include mortgage payments) of $152k was again up 12% for the year. Spending was almost exactly equal to after-tax non-investment income. We saved just $488 from salaries etc.

$25k of the current pre-tax investment income was tax credits – we don't actually get that money so we need to deduct it to get to the change in net worth. We transferred $120k into retirement accounts the SMSF from existing savings. This included $20k as a concessional contribution for Moominmama. Therefore, looking at just saving from non-investment income, we dissaved $120k. The change in current net worth, was therefore -$306k.

Taxes on superannuation returns are just estimated because apart from tax paid by the SMSF all we get to see are the after tax returns. I estimate this tax to make retirement and non-retirement returns comparable. The total implicit tax on supernnuation was a negative $1k because we lost money. Net worth of retirement accounts increased by $136k after the transfer from current savings.

 

Finally, total net worth fell by $37k.

Projections
Last year my baseline projection for 2022 was for a 16% rate of return, no increase in the value of our home, flat other income, and 6% growth in spending. This resulted in projected net worth increasing by $800k to around $6.7 million. Obviously, we came nowhere near this projection.

 

This year the baseline projection (best case scenario) is for an 11.2% investment rate of return in AUD terms (assuming the Australian Dollar rises to 75 US cents), inflation of 7.6% and an 11% nominal increase in spending, and about a 3% increase in other income, leading to an $550k increase in net worth to around $6.5 million or a 9% increase. This would be very little gain in real terms after inflation. But, again, anything could happen.

 
Notes to the Accounts
Current account includes everything that is not related to retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. However, property taxes etc. are included in the current account. Since we notionally converted the mortgage to an investment loan, mortgage interest is counted in current investment costs. So, the only item in the housing account now is increases or decreases in the value of our house. This simplified the accounts a lot but I still keep a lot of cells in the spreadsheet that might again be used in the future.

 

Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... 

 

For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, there are none of those one-off expenditures. "Saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.

 

* Venture capital returns haven't been reported yet for the December 2022 valuation, but I don't expect them to make a big difference.

December 2022 Report

Venture capital returns won't be reported for another month, but I expect them to be flat, so that the final numbers are not far from what they are now. In December, stock markets fell. The MSCI World Index (USD gross) lost 3.90%, the S&P 500 5.76% in USD terms, and the ASX 200 3.13% in AUD terms. All these are total returns including dividends. The Australian Dollar rose from USD 0.6788 to USD 0.6816. We lost 1.24% in Australian Dollar terms or 0.83% in US Dollar terms. The target portfolio is expected to lose 2.43% in Australian Dollar terms and the HFRI hedge fund index around 1.3% in US Dollar terms. So, we out-performed all benchmarks.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I have added in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return.

Only gold and private equity had positive returns. Gold was the biggest contributor to returns and hedge funds the greatest detractor.

Things that worked well this month:

• Gold gained AUD 14k and Pengana Private Equity (PE1.AX), 9k.
  

What really didn't work: 

• Regal Funds (RF1.AX) lost AUD 12k followed by Hearts and Minds (HM1.AX) and Tribeca Global Resources (TGF.AX), which each lost 10k.
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The MSCI is reported in USD terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture and positive alpha against the ASX200 and the MSCI but not against the hedge fund index. We have a higher Sharpe Index than the ASX200 but lower than the MSCI in USD terms. We are performing about 2.5% per annum worse than the average hedge fund levered 1.7 times. Hedge funds have been doing well in recently.

We are now very close to our target allocation. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• I bought 1,000 shares of PMGOLD.AX.
• I tried to do a trade with around 12k shares of Regal Funds (RF1.AX). It wasn't successful.
• I closed a tiny position of WLS.AX shares pending the merger of WLS into WCMQ.AX.
• The remainder of our WLS shares will convert to WCMQ and our URFPA shares will convert to URF at the turn of the year.
  

How Can They Afford It?

One of Moominmama's friends (from undergrad days in the world's most populous country) told her they have bought a house in one of the most expensive neighborhoods here. They plan to knock it down and build their dream home including a swimming pool. It is in walking distance of their two children's school, the most expensive private school here.  Her reasoning is that it costs AUD 4 million to buy an existing house like they want, and this will be cheaper. Still, a crappy house there costs almost AUD 2 million. They haven't sold their existing town house in our neighborhood yet and they apparently also bought her parents an apartment here. She is an administrator at my workplace on probably AUD 100-110k a year and her husband was an associate professor (AUD 150-158k). He recently moved to Moominmama's employer.

 

AUD 3.5 Million House

My immediate reaction was: "How can they afford to do that?" I think Moominmama gets a lot of her aspirations from following this family, including sending our children to private school. 

Subscriptions

Our utilities spending category had been rising strongly over time and so I decided to split out the "subscriptions" component:

The graph is in Australian Dollars per year. Data for 2022-23 is for calendar year 2022 and previous years are 1 July to 30 June to match the Australian tax year. Back in 2017-18, subscriptions were less than AUD 1k and so I included them together with phone and internet access bills in a "phone and internet" subcategory that got then bundled into "utilities". But they underwent a step change in 2020-21. Now I am only including "infrastructure" costs - phone bills, internet access, data storage etc. in the phone and internet subcategory. All the subscriptions and payments for electronic services are now in "subscriptions". I moved web-hosting to the "professional" category.

At least "subscriptions" aren't increasing much since the pandemic step change took place. Utilities have increased 36% since 2017-18, which is less than our overall 58% increase in spending. So, there isn't really a problem there. Childcare and education has increased most, by 483%. It was AUD 55k in the 2022 calendar year compared to only AUD 9k in the 2017-18 financial year. Calendar year 2022 spending was AUD 170k (USD 115k).

Domacom Reinstated to ASX Quotation

On the last trading day before Christmas, Domacom has been reinstated to quotation. I wonder where the price will end up?

7:27pm

It went up! Closing at 7 cents a share. It was last quoted at 6.5 cents before being suspended. There were more shares on the buy side than the sell side most of the day.

November 2022 Report

In November, stock markets continued their rebound and the Australian Dollar rose strongly increasing US Dollar returns relative to Australian Dollar returns. The MSCI World Index (USD gross) rose 7.80%, the S&P 500 5.59% in USD terms, and the ASX 200 6.78% in AUD terms. All these are total returns including dividends. The Australian Dollar rose from USD 0.6387 to USD 0.6744. We gained 3.05% in Australian Dollar terms or 8.81% in US Dollar terms. The target portfolio is expected to gain 1.23% in Australian Dollar terms and the HFRI hedge fund index around 1.0% in US Dollar terms. So, we out-performed all benchmarks apart from the ASX. 

Our SMSF hit a new high in terms of cumulative returns, exceeding the previous high in September 2021. It is now up more than 15% since inception and well ahead of our employer superannuation funds:

 

These are all in pre-tax terms - franking credits are included but no tax deducted. This will be a bit over-generous to the employer superannuation funds on the way up and the opposite on the way down. The increase in my US retirement account (TIAA) is to a large extent because of the fall in the Australian Dollar. It fell this month as the Australian Dollar rose. But the TIAA Real Estate Fund also performed extremely well over this period until recently.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I have added in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return.

Only futures had a negative return. RoW stocks were the best performer partly because of the rebound in the China Fund and hedge funds were the largest contributors to the month's return.

Things that worked well this month:

• Tribeca Global Resources was again the top performer in terms of dollars gained (TGF.AX, AUD 25k). Coming in second and third were the China Fund (CHN, 18k) and Australian Dollar Futures (17k). Also gaining more than AUD 10k were 3i (III.L, 17k), Unisuper (16k), PSS(AP) (12k) Pershing Square Holdings (PSH.L, 12k), and gold (10k). With the exception of the China Fund and AUD futures, this is very similar to last month.
  

What really didn't work:

• Winton Global Alpha Fund (-12k), Aspect Diversified Futures (-6k), and WAM Alternatives (WMA.AX, -4k) were the greatest detractors.
  

The investment performance statistics for the last five years are:

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The MSCI is reported in USD terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture and positive alpha against the ASX200 and the MSCI but not against the hedge fund index. We have a higher Sharpe Index than the ASX200 but lower than the MSCI in USD terms. We are performing more than 3% per annum worse than the average hedge fund levered 1.79 times. Hedge funds have been doing well in recent years.

We are now very close to our target allocation as Regal Funds diversifies its holdings. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• I sold 5000 shares of WAM Leaders (WLE.AX) and bought 1000 shares of the China Fund (CHN).
• I sold USD 17.5k of the TIAA Real Estate Fund and bought the Social Choice Fund instead.
• I bought 4000 shares of Regal Partners (RPL.AX).
• I sold the 2000 shares I held in Fortescue Metals (FMG.AX). We made about AUD 4k on this trade.
• I sold 10k shares of Regal Funds (RF1.AX) and bought 500 shares of URFPA.AX - the US Masters Residential Fund converting preference notes.
• I sold 1,000 shares of Ruffer (RICA.L) to get money for our next subscription payment for Unpopular Ventures.
  

Regal Funds Adds Private Credit

After recently adding a resource royalties strategy, Regal Funds (RF1.AX) are now adding a private credit strategy. They also announced a placement and rights issue to help implement the new strategy. The fund started primarily as a listed hedge fund with some private equity. But it is increasingly becoming a diversified alternatives fund. I suppose all these new strategies are supposed to reduce the correlation of the fund to the stockmarket. The fund has had a beta of 1. However, this looks like it will come at the expense of performance. You can't do 20% a year in strategies like private credit. Well, I guess you can lever up...

In any case, performance wasn't good in November, especially relative to the stockmarket which rose strongly. I sold 10,000 shares this week to increase my holding of URFPA. The rights offering is at AUD 3.01 a share (current NAV) with a maximum of AUD 30k per holder. I decided not to bother as I can't buy more than 2,000 shares without selling something else.

October 2022 Report

In October, stock markets rebounded and the Australian Dollar ended close to flat. The MSCI World Index (USD gross) rose 6.06%, the S&P 500 8.10% in USD terms, and the ASX 200 6.06% in AUD terms. All these are total returns including dividends. The Australian Dollar fell from USD 0.6399 to USD 0.6387. We gained 2.85% in Australian Dollar terms or 2.66% in US Dollar terms. The target portfolio gained 3.07% in Australian Dollar terms and the HFRI hedge fund index is expected to be almost flat at 0.08% in US Dollar terms. So, we under-performed all benchmarks apart from HFRI, though we were not far from the target portfolio.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I have added in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return.

Only rest of the world stocks had a negative return, which was because of the poor performance of China. US stocks were the best performer and hedge funds the largest contributors to the month's return.

Things that worked well this month:

• Tribeca Global Resources (TGF.AX, AUD 18k), Unisuper (15k), Pershing Square Holdings (PSH.L, 12k), and PSS(AP) (10k) were the largest contributors.
  

What really didn't work:

• The China Fund (CHN, -9k) and Fortescue (FMG.AX, -4k) were the greatest detractors.
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture and positive alpha against the ASX200 but not against the hedge fund index nor the MSCI. We have a higher Sharpe Index than the ASX200. We are performing more than 3% per annum worse than the average hedge fund levered 1.76 times. Hedge funds have been doing well in recent years.

We moved towards our target allocation mainly by reducing exposure to hedge funds and gold. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• We received the payout from the sale of Gargantua.
• I sold 5k shares of Cadence Capital (CDM.AX) to get some cash.
• I sold 11k shares of Regal Funds (RF1.AX) that I bought in September.
• I sold 1000 shares of PMGOLD (PMGOLD.AX) as the Australian Dollar gold price peaked a little. I'm now feeling that we are at a much more comfortable debt level in our margin accounts given the rise in interest rates and volatility.
  

Real Salary

 

I was wondering whether we were getting worse off over time at my employer and so plotted my real and nominal pre-tax salary for the time I have been in my current position. Halfway along there was a blip where I was department head and got paid more. In real terms I am now about $2000 below where I started in 2011. The union is asking for a 15% increase in the latest bargaining round. After tax that is a about an 11% increase (because of progressive tax rates).