Integrated Portfolio Solutions Acquired

Back in 2021, I co-invested alongside Aura AUD 100k in Integrated Portfolio Solutions, a private company. At the time, I thought there wasn't a lot of downside risk as an acquirer would be willing to pay to obtain the client accounts they were advising. The company didn't manage to execute on the expansion plans that they touted at the time. In the wealth management/advisory/platform business there are economies of scale needed to achieve profitability. Today it was announced that the company is being acquired for roughly the value at the point when we invested. Various closing costs are going to result in about an 8% loss. Part of the consideration for the acquisition is going to be in terms of equity of the acquirer, DASH Technology Group, but now my position will be a much more reasonable amount for an investment in a non-profitable private company. I feel lucky I didn't lose more!

Longwave Small Australian Companies

Recently, what used to be the First Sentier Developing Companies Fund became the Longwave Small Australian Companies Fund. In other words, First Sentier dropped managing the fund and transferred it to Longwave. I checked Longwave's track record and it wasn't that great. So, I decided to close our holdings of this fund. I withdrew part of Moominmama's holding to fund her concessional superannuation contribution for this financial year. Then I wanted to withdraw half of my holding and switch the rest to the FS Imputation Fund that does manage to beat its benchmark. 

As my holding of this fund is under my CommSec margin loan, I had to send the Colonial First State forms requesting the transaction to CommSec. Then CommSec sent me back their own withdrawal form, which was super unclear. Turns out that they have switched 50% of my Longwave holding to FS Imputation. But then instead of withdrawing the rest, they have withdrawn 50% of the rest! I can't be bothered to fill out another set of forms to submit right now as I don't need to withdraw the money...

Superannuation Returns for the 2023-24 Financial Year

The Australian reports on the performance of superannuation funds for the just completed financial year. This year, retail funds tended to perform better than industry funds because of their higher allocation to public stock markets rather than private assets. How did our SMSF do by comparison? I don't actually compute comparable after-tax performance figures, which are how superannuation returns are reported.* Public offer funds make an allowance for future tax payable, which includes capital gains tax if the assets are sold. This means that members who withdraw funds don't push tax liabilities onto those that stay. This is unlike a regular unlisted managed fund where tax is at the investor level and attached to distributions... 

So, instead I estimate what the performance of our employer funds might be pre-tax. This probably over-estimates the performance of the employer funds, but reconciling tax expected with tax actually paid on our SMSF would be hard work. On that basis, the SMSF returned 9.54%. Unisuper returned 10.89% and PSS(AP) 10.55%. Both the latter are balanced funds. Even though we underperformed for the year, we are still ahead overall since inception:

PSS(AP) has, however, inched ahead in risk-adjusted performance. It now has an information ratio (Sharpe ratio with zero risk free rate) of 1.02, versus 0.96 for the SMSF. Unisuper is on 0.83. 

Since inception, the SMSF has returned an annualized 7.9% pre-tax versus 6.44% for Unisuper and 6.63% for PSS(AP).

* Reported performance does deduct administration, audit, ASIC fees etc. As an example, for the year to 31 December 2023, Unisuper report a return of 10.3%, while I estimate a pretax return of 11.15% for the fund.

Spending 2023-24

For the last seven years I've been putting together reports on our spending over the Australian financial year, which runs from 1 July to 30 June. This makes it easy to do a break down of gross income including taxes that's comparable to many spending reports you'll see online, though all our numbers are in Australian Dollars. At the top level, we can break down total income (as reported in our tax returns plus employer superannuation contributions) into the following expenditure categories:

The gross income for this year (bottom line), and so also "Other Saving", is just an estimate. It is based on the gross income we expect to report in our tax returns (before investment expenses etc.) plus employer superannuation contributions. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending here (though usually I consider them to be an investment cost), while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Other saving is then what is left over. This is much bigger than our saving out of salaries because gross income includes investment returns reported in our tax returns. Spending increased by 4% this year in line with inflation. Gross income, especially in real terms, has been slowly declining since the peak in 2020-21. This is partly because I moved high-tax investments into superannuation. Expected other saving is the lowest it has been. The latter includes the AUD 20k concessional contribution we made for Moominmama to our SMSF in each of the last three years. Graphically, it looks like this:

We break down spending into quite detailed categories. Some of these are then aggregated up into broader categories:

Our biggest spending category, if we don't count tax, continues to be childcare and education, which declined slightly this year as the youngest moved out of daycare and the older one changed schools. Both are now in the same private school since the beginning of this calendar year. As mentioned above, the income, tax, and other savings numbers for this year are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions (we don't do any salary sacrifice contributions) but not the concessional contributions we paid into the SMSF.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This includes tax on our concessional contributions to the SMSF. It does not include taxes on SMSF earnings as the superannuation earnings are not included in income here.

Franking credits: Income reported on our tax returns includes franking credits (tax paid by companies we invest in). We need to deduct this money which we don't receive as cash but is included in gross income in order to get the numbers to add up.* Foreign tax paid is the same story.

Income tax paid is one category that has fallen since 2017-18! Franking credits rose fourfold.

Life and disability insurance: I have been trying to bring this under control and the amount paid has also fallen since 2017-18 as a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). Rising interest rates have pushed up spending this year again as has replacement of our central air-conditioner, which will cost more than AUD 11k.

Transport: About half is spending on our car and half is my spending on Uber, e-scooters, buses etc. I tried to spend less on Uber this year. I reduced my transport spending by 22% as a result. Also, the value of our car rose, contributing AUD 1,700.

Utilities: This includes water, gas, electricity, telephone, internet, and online storage etc.

Subscriptions: This is spending on all online services that aren't basic infrastructure. After rising strongly during the pandemic we brought it back under control this year with an 8% reduction.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets. Spending has been stable in nominal terms for the last three years.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low in 2020-22 because of the pandemic. It then jumped as life got more back to normal and rose 11% as prices are climbing I feel particularly in this area. I just paid more than AUD 7 for a large coffee this morning in Queensland, which is a record for me.

Cash spending: This has collapsed to almost zero. I try not to use cash so that I can track spending. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. Has been falling since 2019-20.

Mail order: This continued to decline since the pandemic peak in 2020-21. Down another 15% this year.

Childcare and education: We are now paying for private school for both children plus music classes, swimming classes...

Travel: This includes flights, hotels, car rental etc. It was very high in 2017-18 when we went to Europe and Japan. In 2020-21 it was down to zero due to the pandemic and having a small child. This year it almost reached the nominal level of 2017-18. We paid to rent a house in Bondi Beach in Sydney because my brother and his wife were supposed to visit. That was very expensive. In the end, they couldn't visit because of the war in the Middle East. And now we took a second vacation in Winter in Queensland.

Charity: Continues to fluctuate around my goal of AUD 1k. When I think I am really financially independent and my children are grown up I'd plan to increase it.

Other: This is mostly other services. It includes everything from haircuts to fees for tourist attractions. I don't include the latter in travel because we might also pay to go to a museum or paid play place when we are home.

This year's increased spending was mainly driven by increased housing and travel costs, while most other categories declined despite inflation. Both housing and travel included one-off costs. I paid the second half of the air-conditioner bill a few days ago in the new financial year, so I expect housing costs will remain similar in 2024-25. Travel is hard to predict, but I expect that spending will remain high as we begin to spend more on airfares again. We were still paying for daycare in the first half of the financial year, so I expect education costs to fall a little in 2024-25. 

* Moominmama has negative income tax and gets some of her franking credits paid out as cash. This is accounted for here as a reduction in the net income tax category.

Revisiting Inflation vs. Investment Returns

In January, I posted about how much of investment returns were being taken up to cover the effects of inflation. I fitted a quadratic curve to monthly investment income to smooth it out and compared that to the current inflation rate multiplied by our net worth. It didn't look good. How are things looking now that inflation has come down a bit?

On this graph, I have also added fitted saving and an alternative calculation of expected investment returns. To calculate this one, I fitted a linear trend to the monthly percentage rate of return and multiplied that by net worth. It doesn't include any gain in the value of our house, and turns out to be relatively more conservative. On the other hand, the "boiling point" where investment returns exceeded saving was still around 2012.

The picture has improved in the last few months as inflation has declined. Using the more conservative measure of projected investment income we have a surplus above inflation of around AUD 15k per month, which is in the ballpark of our current spending not counting taxes. If inflation stayed low, retirement should be feasible. But there is still huge uncertainty around future inflation, investment returns, and spending, which continues to make me cautious.

Coinsnacks Issues Negative Report on Defi Technologies

Coinsnacks issues a negative article on Defi Technologies. The stock fell 25-30% in Tuesday trading as a result. The article is very selective. The company has issued statements suggesting that their financial position has improved radically since the end of Q1 in March. We will have to wait till the end of the current quarter to fully understand that. The current rise in stock price is as much about that as the promotional efforts that the company has made to raise its stock price. The company issued a statement claiming that the report may be connected to short sellers, which is pointedly not denied by Coinsnack's report which says they do not own shares in the company... If I understand the Defi's statement, they were approached to sell new shares to an investment bank, which they suspect would be used to cover a short position. But that was back on 10 June, when stock price was lower. So, I am confused. Anyway, in today's trade in Europe and Canada (US market was closed) the price stabilized for now.

Getting a Bit Crazy

Crazy to see an investment up by more in a day than any of my investments have been up in a month before in terms of dollars.... So far it is up about four times this month what any individual investment has done before. Of course, no guarantee that this will hold, so thought I'd post while it lasts. If you are puzzled, then you haven't read my recent posts. Let's see where we're at a the end of the month.

No, it's not bitcoin, which has been doing nothing. Still I saw this really nice chart of bitcoin's price path to date:

The x-axis is log days since the inception of Bitcoin, while the y-axis is the log price. With this transformation, bitcoin has followed a linear path. Yes, the growth rate has slowed over time, but now we see that it hasn't been an arbitrary rate of slowing. This is called the Bitcoin Power Law Theory. Of course, this is based on econophysics and might not continue to hold in the future.

P.S.

After being up 25% in European trade we closed up "only" 6% in North American trade.

L1 Long-Short Fund

The L1 Long-Short Fund (LSF.AX) is a closed end hedge fund listed on the ASX. It has had a very strong performance, beating the ASX 200 by threefold since its inception in 2014. But is it worth investing in now? The fund trades at a premium of about 9% to net asset value, as we might expect from a fund that has historically outperformed the market. So, that is a negative but not too large a premium. I plotted the fund's total return index (NAV not market price) against the ASX 200. The pattern looked familiar. It was a lot like that of Regal Funds' RF1.AX listed fund:

I set all three total return indices to 1000 in May 2019 when Regal Investments debuted on the ASX. What are the performance statistics of the two funds relative to the ASX? Since mid-2019, LSF had a beta of 1.066 and RF1, 0.80. The monthly alpha of the two funds have been 1.05% and 1.07%. RF1's alpha is a little more precisely estimated. The betas of the two funds using market price instead of NAV are much higher. RF1 has been around 1.3.

At this stage, I am not that inclined to invest in LSF given I am invested in RF1, but I might add it in the future.

Regal Partners Thesis

Regal Partners (RPL.AX) – the listed management company of Regal Funds – has increased rapidly in price recently:

I have doubled the size of my holding from 10k to 20k shares. I think both the Merricks acquisition and the private placement by the Pershing Square management company at a high valuation have been positives that have helped push the price higher. I am now back in profit on this investment. The IRR has hit 7.7%, which is pretty decent all things considered. The chart looks bullish for now, especially given the large volume associated with the green candles.

In other news, Defi Technologies (DEFI.NE) briefly hit double my initial entry point on Friday at CAD 1.88 before pulling back to close at 1.76. My average price is higher than CAD 0.94 due to subsequent additional purchases, including another 5,000 shares on Friday. I now have 70k shares.

Relative Wealth

Take all the bitcoin in the world and divide by the number of people - how much is an equal share? About 0.0025. Similarly, an equal share of the world's mined gold is about 0.8 ounces. Our family of four people has about 400 times its equal share of bitcoin and 50 times its equal share of gold currently. The dollar value of our gold holding is about 1.5 times our bitcoin holding.

Cambria Funds Launches a New Managed Futures ETF: How Will it Perform?

Cambria Funds have launched a new managed futures ETF – MFUT – managed by Chesapeake - Jerry Parker's (one of the turtle traders) firm. I compared the historic performance of the Chesapeake Diversified Plus managed futures program to the Winton Global Alpha Fund since 1996:

Clearly, Winton has outperformed Chesapeake and with substantially less volatility. The average return of Chesapeake has been 11.6% p.a., while Winton achieved 15.0%. Chesapeake's information ratio (Sharpe ratio with a zero percent hurdle) was only 0.44, while Winton's was 0.96.

It seems that Chesapeake's volatility decreased after about 2012. So let's focus on the period since then. Since the beginning of 2012 Chesapeake has outperformed Winton with an average annual return of 8.8% vs. 7.3%. However, Winton was still less volatile with an information ratio of 0.77 vs. Chesapeake's 0.52.

The full period, the correlation between the monthly returns of the two funds was only 0.44. Since 2012 it was 0.54. So, there it would seem there is a potential diversification case for investing in both funds. However the information ratio of an equal weight combination of the two funds is lower than that of Winton alone. This is true for both the full period and the post 2011 period. So, based on this, I won't be investing in MFUT.

Defi Technologies Announces a Stock Buyback

The news is pushing the price up strongly again today, though they won't start buying till next week.