May 2024 Report

In May, the Australian Dollar rose from USD 0.6494 to USD 0.6650 so US Dollar returns are much stronger than Australian Dollar returns this month. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 4.12%

S&P 500: 4.96%

HFRI Hedge Fund Index: 1.87% (forecast)

Australian Dollar Indices

ASX 200: 0.75%

Target Portfolio: 0.56% (forecast)

Australian 60/40 benchmark: 0.36%. 

We gained 1.22% in Australian Dollar terms or 3.62% in US Dollar terms. So, we beat all the Australian Dollar benchmarks and the HFRI index but not the MSCI or S&P 500 indices.

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 and so are larger than the Australian Dollar returns on net assets mentioned above. Returns for most asset classes were positive. Futures had the highest rate of return and made the largest contribution to returns while gold had the lowest return and private equity detracted the most from returns.

Things that worked well this month:

• The top 3 investments this month were: Bitcoin (AUD 49k), Pershing Square Holdings (PSH.L, 13k), and Tribeca Global Resources (TGF.AX, 9k).
  

What really didn't work: 

• Nothing was particularly bad this month.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give results for three indices. Compared to the ASX200 we have a lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.92 vs. 0.64. But as we optimize for Australian Dollar performance, our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. We do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 of 3.61% with a beta of only 0.45.

We are fairly close to our target allocation. We are most underweight private equity and Australian large cap stocks and overweight real assets and hedge funds. 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. This was a bit quieter month than April. We made the following additional moves this month:

• I sold all 1,000 shares of PBDC and all 350 shares of the Bendigo Bank hybrid security. I expected to keep these longer, but new opportunities came up. Made AUD 356 on the Bendigo trade or about 1% in a month and USD 725 or about 2% on PBDC so it was better than holding cash.
  
• I bought 65k shares of Defi Technologies (DEFI.CA). I ended up buying 35k on the Canadian CBOE exchange and 30k on the US OTC market, as there was a public holiday in Canada. Brokerage is lower for buying in Canada.
  
• I bought another 5k shares of Platinum Capital (PMC.AX).
• I bought 3k shares of Regal Partners (RPL.AX).
  
• I bought another 100 shares of FBTC and six bitcoin futures trades, all of which made money (total of USD 1,645).
  
• I invested USD 7.5k in three new investments syndicated by Unpopular Ventures. This may seem like very small investments but I have now invested USD 32.5k in their syndicated investments. I am treating this like gradually buying into a fund that holds these different investments. These are in addition to our rolling fund investments. It's just random chance that three investments that met my criteria were offered in a single month. My last syndicated investment was in September 2023.
  

Sold 500 Shares of 3i

I sold another 500 shares of UK private equity firm 3i. At the peak I had 5,000 shares and a net investment of around £41k. Now I have 3,500 shares and a net investment of £2k. So, I have taken out almost all my original investments. The holding is worth £103k, which, therefore, is almost all profit. The firm has a very oversize position in Action, a chain of European discount stores and so I am reducing my exposure to this single firm risk. Of course, I also have ideas about what to do with the money instead...

3i has been an excellent investment to date, so I plan on holding the remaining shares till something fundamental changes. The IRR has been 21.8% and has been a 23-bagger. I haven't multiplied my investment 23 times though, as for the longest period I had only 600 shares. My original investment in 2008 was a purchase of 200 shares and at the low point I had only 100 shares. I reached 5,000 shares only in 2022. Still it is the highest notional multiple on any of my investments ever. The second best of those I currently hold is Platinum Capital at about 10x.

Regal Partners Acquires Merricks Capital

Regal Partners announced that it is acquiring Merricks Capital, a private credit manager. The performance of their main fund is quite remarkable:

The rate of return is high and there was only one down month. It reminds me of Bernie Madoff's fund. I am not saying there is anything wrong here, but this kind of performance shouldn't be possible according to efficient market theory! The fund is way outside the envelope of the other assets on this risk-reward graph:

We are investors in Regal Partners (13k shares).

Pershing Square Sells Stake in Management Company

Pershing Square has sold a 10% stake in its management company for USD 1.05 billion. Last year, Pershing Square Holdings, its listed hedge fund that makes up most of its assets under management (we have 5k shares in it), made around USD 400 million in management and performance fees. Even if we assume that most compensation of employees is through dividends and share appreciation rather than salaries, that makes the P/E of the management company around 25, which is very high for an asset management company, especially one depending on variable performance fees. Regal Partners - an Australian listed hedge fund manager that I am invested in (13k shares) - has a forward P/E of about 15. Rather, Pershing Square's high P/E is predicated on raising a new USD 25 billion listed fund in the US. At 2%, this would produce management fees of USD 500 million per year! The fees of the existing Pershing Square fund listed in London will be reduced by part of the management fees on the new fund, so the $500 million isn't purely accretive. Previously Ackman said that they planned to raise USD 10 billion for the new fund.

Defi Technologies Announces More Trading Profits in May

Defi Technologies put out a press release announcing another USD 40 million in trading profits in May. If this is sustainable, the company would be worth billions. On the other hand, it makes me worry that it is another FTX - the crypto exchange that blew up. We will just have to wait and see if it can also generate losses. So, I am going to be very conservative on position sizing for now. I have 65,000 shares.

Alternative Way to Value Our House

 

Based on recent sales at our development of 96 "townhouses" and the neighboring development built by the same developer, I estimate the value of our house at AUD 1.246 million. Now I've come up with an alternative way to value it. We recently had the annual meeting of the body corporate (condo association), which included details of the complex's insurance policy. The buildings are insured for AUD 71.1 million. According to the local government, the unimproved value of the land is AUD 17.2 million. You can get this data from the AllHomes website as shown in the image above. Our share of body corporate fees is 1.32% as this varies by property value. So, the value of our house based on these three numbers is AUD 1.165 million. Our share of the land value is only AUD 227k, which seems very low for a 400 square metre block in this area. As you can see a standalone house block in the top right of the map is valued at AUD 699k. On the other hand, our share of the structure value is AUD 938k, which seems high to me.

SMSF Portfolio Allocation

As there has been a lot of recent change in the SMSF portfolio allocation, I thought I would have a detailed look at it. The last time I updated this spreadsheet was in August 2022, when the portfolio was quite different.

We also are long two Australian Dollar futures contracts. The asset classes are where each investment is classified for my reporting based on asset classes. PBDC is equity of private credit lenders, Defi Technologies is a crypto asset manager, and bitcoin isn't mostly actually futures. So, their designated asset classes are a bit to a lot misleading. Regal is actually only about 50% hedge funds now, with real assets (water and royalties), private credit, and venture capital in the mix. In my reporting on asset classes I break it down along these lines.

So there is about 30% managed futures exposure, 21% crypto exposure, about 17% private equity, 16% property, 15% hedge fund with some real assets thrown in, and 1% cash.

There wouldn't be much point in having an SMSF if the portfolio looked like a typical industry fund 😊. 

We pay only 0.26% per year in admin fees to SuperGuardian.

Chosing a Fixed vs. Variable Interest Rate Again

I fixed the rate of my CommSec margin loan over the last year. I now have a choice for next year. The variable rate is 9.65% while the fixed rate is 7.79%. For the variable rate to pay off, the Reserve Bank would have to cut its interest rate by more than 1.86% on average over the course of the next year. So, for example, if they don't start cutting interest rates till the middle of the year they would need to cut by 3.75% in total. I can't see that happening and so it makes sense to choose the fixed rate again.

Defi Technologies Seeking Formal US Listing

The company announced that it is actively seeking a listing on a US exchange and has hired Liquid Advisors to work on their case. It's currently an OTC or "pink sheets" stock in the US.

Zacks Report on Defi Technologies

Get the report here. Bottom line is: "Unsustainably Low Valuation". They have a valuation target of USD 3 vs. the current price of USD 0.80. This seems quite conservative. Still, I am being very cautious and invested 1.1% of the portfolio.

Apparently, chances of a US Ethereum ETF being approved are growing. But as a result, the price of Ethereum rocketed, which is good news for Defi.

P.S.

Zacks issued another report after the conference call today. They upped their price target to USD 7.

Keith Haring Painting in Exhibition

 I am an investor in the painting on the left. Hopefully no-one will throw soup at it or something!

New Investment: Defi Technologies

Anthony Pompliano recommended Defi Technologies in his daily newsletter, the Pomp Letter. He is heavily invested as his research firm was acquired for shares in DEFI. So, you wouldn't take this tip at face value but he might know what he is talking about. I checked out the company. Basically, they are forecasting around CAD 30 million in profit in 2024, when the market capitalization was about CAD 200 million. So, based on that it seems undervalued. If crypto prices rise, then assets under management and profit rise automatically. They also have a bunch of venture capital investments on their balance sheet. The management team looks good. Main threat is that competing products like a US launch of an ethereum ETF could take investors away from their exchange traded products that trade in Europe. But the SEC is not looking like they will approve this. So, I made a small investment (0.4%) yesterday. Made the mistake of buying shares on the Canadian CBOE exchange where the brokerage fee turned out to be 0.5%!

P.S.

The reason the brokerage turned out so expensive is that it is CAD 0.01 per share with a maximum fee of 0.5%. As I bought 20,000 shares trading at about CAD 0.94 each, I ended up paying 0.5%. For trading in the US it is USD 0.005 per share with a maximum of 1% and minimum of USD 1. So, I would have ended up paying more buying in the US! I'm not used to buying such low priced shares in North America.