Further Portfolio Changes

Following up on the post on changes to my Mom's portfolio. The bank suggested some more investments. Two funds of REITs:

UBS Global Real Estate Securities. This fund is very new and as far as I could work out has an expense ratio of 1.92%. As there isn't much of a track record one can't know if the high expense ratio is worthwhile. So I passed on this one.

AXA WF Frm Europe Real Estate. This fund also invests in REITs and has a high expense ratio but its track record shows that it has outperformed the relative index with less volatility. So I am recommending to invest in this one.

Then they recommended a bunch of long-only commodity funds. I do like the look of a UBS CMCI Composite Index fund. It invests in futures across a wide range of commodity markets and of different maturities. The track record is good relative to conventional indices and the expense ratio is low. This is a risky bet, so we won't bet much on this.

Bottom line is I am now recommending these two funds, as well as the convertible bond fund and the UK equity fund I discussed last time and GTAA and CHN. As a result, we won't invest all the available cash right away. The AXA fund is the only slightly attractive real estate investment I've come across through this process, so we won't go big into real estate. If we make these moves the cumulative effect on the portfolio will be:



A large move out of cash and a smaller one out of bonds and into mainly non-US equities, commodities, and real estate. This moves the portfolio closer to typical endowment style portfolios.

Non-Retirement Savings

Following on from yesterday's post on retirement savings, here is the chart of our non-retirement savings:



Again, it's not adjusted for inflation and does not include any investment returns or losses and is in Australian Dollars. These savings differ in several ways from our retirement savings:

1. It's much more volatile. Not only does the positive scale cover twice the distance there are also negative numbers - dissaving. The same overall ups and downs are apparent though.

2. In yesterday's post I found our current retirement savings were not a lot higher than in various periods in the past. Here we see that 2003-2007 and 2009-2011 have a higher rate of saving than the 1990s.

The biggest period of dissaving was when I didn't have a job in 2001-2. I was travelling a lot and then I moved to the US. Together with the stock market crash this really depleted my net worth at the time. I was down to AUD 36k outside retirement accounts at the worst point. The all time peak monthly saving that immediately preceded this period was the redundancy payout I got when my job ended.

The more recent two big negative spikes are in 2007 out move to Australia and in 2010 booking our trip to Europe. We got some comments then about how we shouldn't spend beyond our means. As you can see from the chart, though our saving did dip during this period, the 12 month moving average never dipped below $1400 per month. So I think these expenditures were definitely something we could afford.

In 2008 we did hit negative saving briefly. But we are just able to live on one income.

Retirement Savings Over the Years

I was curious how our current retirement saving rate compared to past years. Digging into my account spreadsheets I came up with this. This is just contributions. It doesn't include investment gains or losses. The bars are the monthly amounts in Australian Dollars. They're not adjusted for inflation. The dark green line is the 12 month moving average.

The first few years I was in a steady job in Australia and the contributions are very consistent with a slight upward trend. Then I was unemployed for a while and there are no contributions. I moved to the US and the amounts now fluctuate more, partly because of changes in the exchange rate (I was now paid in USD but the chart is in AUD) and partly because of various extra earnings I made, typically in the summers when professors in the US can make extra money typically. In the final year there are consistently higher levels. I decided to max out my 403b contributions in this period plus I open a Roth IRA.

Then in 2007 I merged my accounting with Snork Maiden and we moved to Australia. For the first year or so after that the contributions are all Snork Maiden's alone. Then we both had jobs and the rate rises to $2,000-$3,000 a month. Following that there are another several months of contributions from just Snork Maiden and finally the last 5 months of around $2,500 a month as we were both working again.

The two of us together though are only managing to contribute what I contributed when I maxed out my 403b in 2007. The Australian Dollar was not that weak in that period (about 82 US cents, so that doesn't explain it). And back in the 1990s I managed to make more retirement savings myself in Australia than Snork Maiden on her own now. Certainly, when adjusted for inflation that is the case.

Next time, we'll look at non-retirement savings.

Credit Suisse Broad Hedge Fund Index: May 2011

The broad Credit Suisse/Dow Jones Hedge Fund Index did not perform as badly as the more narrow indices in May:

Exchange Traded Actively Managed Funds - the Big Deal is that Foreign Investors Can Buy Them

This Wall Street Journal article goes on about how an exchange traded managed fund like the proposed PIMCO Total Return ETF is not big deal. It is, however, a big deal to foreign investors. Only US residents can buy units in unlisted US mutual funds. But anyone can buy US stocks in the secondary market. It would be nice if there were more of these.

Early Hedge Fund Report: May 2011

According to the Credit Suisse/Dow Jones Core Index, hedge funds performed almost as badly as stocks in May:



The MSCI World Index lost 2.06% by comparison. Managed futures almost exactly reversed the previous month's gain and everything else went down too. The story was very similar at HFRX:



The flash update of the HFRI monthly indices shows a little more green still in come fixed income strategies.

How Much Money Do You Need for Retirement?

I went to a seminar by our superannuation (retirement fund) provider at my employer today. The presenter referenced a recent Australian survey that tried to define how much income retirees need based on surveying actual retirees. They found that for a "comfortable" retirement a couple need after tax $A54k ($US58k) per year after tax, assuming that they own a house 100%. In Australia there is no tax on retirement accounts once they are in pay out mode after age 60 and so the before and after tax numbers are the same. The presenter said: "That means you need $1 million. If you want to take a bit more risk or run down your capital then you could get away with less than that." The article I linked above says you need $A815k to provide that level of income. The presenter at today's seminar was assuming a withdrawal rate of 5.4% p.a. and the article is assuming 6.6%. But it is a well-known rule of thumb that 4% of the initial amount (adjusted upwards over time by inflation) is the most you can withdraw annually without risking running out of money. And that rate assumes a moderate amount of risk (like 60% stocks and 40% bonds). Also, the advice by the presenter today made no allowance for inflation between now and the date you retire (the linked article does note that the $A815k is in today's money).
Why is this dangerous advice being given out in Australia?

Based on current expenditure we could live OK on less than $A54k a year if we didn't pay rent. $A42k would be enough - halfway between the modest and comfortable levels. But then there are property taxes and house maintenance so we can't just take our rent away to find the comparable number. So I think $50k a year is a reasonable number. But to find the required net worth you need to multiply by 25 and then adjust for inflation. If I retired at age 60 and prices rise by 3% p.a. between now and then I will need 51% more capital than now. The lump sum I get is $A1.89 million + a house. A house costs currently about $A700k near where we live. Adding the same inflation adjustment to the house gives a total required net worth of $A2.9 million ($US3.2 million) in 2024.

Something I learned which I didn't know about the tax rules for Australian Superannuation. If a non-dependent (not spouse or child under 18) inherits your superannuation account they will have to pay 15% tax on funds derived from concessional contributions (contributions taxed at 15% from pre-tax income) but no tax on non-concessional contributions (contributions from after tax income). I knew that tax could be payable in these circumstances but didn't know the details. This is a reason that you don't want your superannuation to be paid to your "estate" in the case of your death. 15% tax will be charged on the concessional contributions.

Outrageous Offer for EAIT Shares

Holders of units in the EAIT fund of hedge funds recently received an offer to buy their shares for $0.70 a share:

As you can see, the units are currently valued at $1.37 each. The units are not liquid because the underlying hedge funds have lock-up periods. Even if the value of the underlying funds does not increase until we receive our distributions you'd need a pretty high discount rate to accept this offer. Of course, I won't be doing so.

Buying a Few Shares

On Friday I bought about 5000 shares in Platinum Capital (PMC.AX) at $1.21 which is close to the net asset value. Usually this closed-end fund trades at a premium to NAV, so seemed a good idea. I probably will buy some shares in my US account too in the near future. When I buy shares it isn't direct saving, of course, as I use a margin loan and then gradually pay down the margin loan with savings afterwards.

We continue to put $A1,000 into each of our accounts with Colonial First State here in Australia each month as well as investing in our superannuation on top of the employer contribution. Snork Maiden adds $A225 every two weeks and I add $A431 (my salary is higher and my employer only contributes 9% of salary (the legal minimum) whereas her's contributes 15.4%). On top of that I added another $A2,000 to Snork Maiden's account last month.

More Adjustment to my Mom's Portfolio

We have now made a bunch of moves in my Mom-s portfolio. First we sold down two bond funds and increased our investment in the Man-AHL diversified futures fund. And we moved £100k to her home country and invested in a bunch of stuff there. That reduced the allocation to Sterling investments. But we still have a lot of money left over from the bond sales.

The bank suggested various funds including some Swiss real estate funds (including this one), the Jefferies Global Convertible Bond Fund, a UK stock fund, and a fund invested in the Rogers Commodity Index. I don't feel like taking a long only bet on oil and other commodities (Rogers is 40% petroleum) and the problem with the Swiss real estate funds was that they are very concentrated on residential property in Zurich and are trading at around a 25% premium to NAV. So I ruled all of these out. But I think we will invest some money in the other two funds. Convertible bonds are interesting because they provide some potential inflation protection compared to a regular bond by being potentially convertible to equity.

I have now suggested to invest the rest in ETFs and closed end exchange traded funds. As an investment in real estate I propose VNQ and DRW. VNQ is a US REIT ETF managed by Vanguard, which means it has a lower management expense ratio than other funds. DRW is a non-US fund from Wisdom Tree which is based on a dividend weighted index. It seems to be the best performer of various international REIT ETFs I checked out. I think we should increase our overall exposure to stocks and particularly to Asian and emerging market stocks, where we are probably underweight. So I'm recommending VWO and DGS- again one Vanguard and one Wisdom Tree fund. Finally, two stocks that I own personally - GTAA and CHN (The China Fund). I think these are two well-managed actively managed funds.

Another asset class that isn't in the portfolio is private equity, but it is a challenging asset class to invest in as a small investor in an effective way. I personally own shares in Leucadia National (LUK) and 3i (III.L), which I think are somewhat better than average exchange traded approximations to this asset class. I'm not impressed by the available ETFs, which I did just check out. So, I think we'll pass on this for now.

When we have all these changes in place I plan to report back on how we have transformed the portfolio. One result is that it is more similar to typical endowment and pension fund portfolios, which has been my long-term goal here.

Moominvalley May 2011 Report

As usual everything is in USD. The AUD fell for a change to 106.6 US cents from 109.4 US cents. This reduced our returns in USD terms and increased them in AUD terms. World stock markets fell a little in USD terms with the MSCI World Index losing 2.06% for the month. Here is the summary account for May:



As you can see about a third of the investment loss in USD terms was because of the rise in the US Dollar. Expenditure was $7,753 because we spent about $A2,500 on a plane ticket to China for Snork Maiden. We spent about $A4,700 not counting the ticket which is OK. Net worth fell in USD terms by $24k (fell by $A9k in AUD terms) to $551k ($A517k). The rate of return was -5.27% in USD terms strongly underperforming the market. The return was -3.39% in currency neutral terms, and -2.80% in AUD terms. Almost all asset classes lost money with a particularly strong decline in private equity. allocation saw a small increase in private equity due to gains in OCP.AX. and a small reduction in Australian stocks due to market movements. Investment allocation saw a decline cash as well as large cap Australian stocks and private equity due to market movements and a shift towards all other asset classes.

Moominmama Portfolio Performance May 2011

Lot of moves this month reflected in these figures. World stock markets fell and the US Dollar rose negatively affecting Moominmama's returns and the portfolio fell by 2% in value. We increased the allocation to bonds again by transferring Sterling currency and converting it into the local currency and buying into four separate local bond funds and a balanced local bond fund. Also a local stock fund invested in European shares (my brother did all this). Some of these bonds are inflation-linked and some not. Some are short term, I don't know if any are long term. This is really the living/emergency fund for my mother. We also increased our investment in the Man-AHL managed futures fund by about 150%. As a result with have a lower allocation to both Sterling and Dollar cash this month than less. The local real estate market is very strong and so we uprated the value of Moominmama's apartment by 19%. At $276k it is still a bargain by Australian standards :). It is still cheaper than Snork Maiden's parents' apartment, though theirs is bigger but they live in a supposedly much poorer country which has really crazy real estate prices.

I noticed that the UBS A&Q hedge fund that we bought early in the financial crisis in April 2008 is finally worth more than we paid for it. We also bought a UBS agribusiness certificate which is almost back to its purchase value. It more than halved at the worst point in November 2008. The hedge fund never lost more than a quarter of its value.

More Hedge Fund Returns for April 2011

Like HFRI vs. HFRX the broad Credit Suisse index shows stronger gains than the narrower core index this month, with the index rising 1.8% overall:



And though Managed Futures did extremely well in both the Core and Broad indices there are some substantial differences in the other strategies such as Global Macro. The core index may be then mainly an indicator of direction of change alone and not a good proxy to the performance of a broader basket of hedge funds? Looking at global macro HFRX showed a 0.89% increase in April, Credit Suisse Core a 0.44% gain, Credit Suisse Broad a 2.46% gain, and HFRI a 3.36% gain.

BTW, at mid-May the HFRX indices are showing declines across almost all hedge fund strategies and a 1.8% loss for the global hedge fund index.

Heavy Travel Year

I just booked my trip to Korea. Later in the year I may go to the US. And I already visited Cloud Cuckoo Land (CCL). It will be my busiest flying year since 2002 when I did two round the world trips, a trip to Israel and back, and moved to the US from Australia. A total of 95,000 miles. This year is heading to 50,000 + miles but will still be only the third heaviest traveling year for me unless I exceed 2001's 60,000 miles (Two trips to the US and one to Britain). The next couple of years are going to involve a lot of flying too. I do actually have data on all the flights I have ever taken:



I started the file some time in the early 1990s when I was curious how far I had flown so far and there weren't that many flights yet to remember. The first time I flew was when I was 18 in 1983. It was also the first time I left my home country.

I didn't get the job in CCL and today put in another application for a permanent job at my current employer. This is fifth the since since we moved back to Australia. Some important people want to hire me and so the chances look very good. But I have had department chairs wanting to hire me before only to be over-ruled by other faculty members when they got to compare me with the other candidates.

Hedge Fund Report: April 2011

There is a trend to earlier and earlier reporting each month of the results of the various hedge fund indices. Credit Suisse, now has a "Core Hedge Fund Index" along the lines of the HFRX. It gained 1.44% in April:



Managed futures did particularly well, but they did particularly badly in March. HFRX reported qualitatively similar results:



However, they estimate that hedge funds only gained 0.47% in April. Preliminary HFRI results show generally stronger performance than both these indices, with an overall gain of 1.86%:

Moominvalley April 2011 Report

As usual everything is in USD. The AUD rose yet again to 109.4 US cents. This improved our returns in USD terms and reduced them in AUD terms. We again can no longer just say "dollars" without thinking about whether we mean US or Australian Dollars. World stock markets rose in little in USD terms with the MSCI World Index gaining 4.15% for the month. Here is the summary account for March:



As you can see almost all the investment gain came from foreign exchange gains with just $928 of underlying returns. Of course, we lost money in terms of Australian Dollars. Non-investment income of $11,000 a month is the new normal... Expenditure was $5,533. We had to spend about $600 on car repairs/service. But apart from that it's hard to say where the money went... (It's AUD 5,058 and $4,500 without the car expenses is pretty normal).

The rate of return was 4.10% in USD terms narrowly underperforming the market, 0.17% in currency neutral terms, and -1.43% in AUD terms.

Net worth rose in USD terms by $31k (rose by $A0k in AUD terms) to $573k ($A524k) another all time high in USD terms.

Investment allocation saw a small increase in private equity due to gains in OCP.AX. and a small reduction in Australian stocks due to market movements.

Moominmama Portfolio Performance April 2011

The portfolio had nice gains in April, though largely due to the fall in the US Dollar. The MSCI World Index rose 4.15% and the portfolio 3.46%. As you can see we made a few large changes in the portfolio - selling bonds - in preparation for both buying new investments and another possible major move (actually quite literally) in possible progress. We are also making some progress in sorting out the probate situation in the UK regarding one of my Dad's investments (he died in 2002 so this has been a long-term problem). We also closed my Mom's remaining UK offshore bank account and consolidated that account into her main fund manager. Generally, we are trying to simplify her affairs, diversify investments further, and deal with her living situation.

Reporting from Cloud Cuckoo Land

I'm at the airport in Cloud Cuckoo Land on my way home. The internet at the airport is free as is university education in this country. And any student who graduated high school can go to any university in the country and study any subject they like. There are no caps on enrolments. It really is Cloud Cuckoo Land :) Of course, a lot of those students fail the exams in the courses they pick and choose another subject or drop out of Uni. EU students can also get to study free here. The town is beautiful and everyone I met at the university was friendly. However the job involves teaching a lot of courses in a technical area which is a skill I have but not my research focus. I'm not so confident of teaching that subject at the graduate level. The hours of teaching per week required is similar to what I taught in the US but I would have to teach twice as many courses for half the time each. At my current university (where I don't have a permanent position yet but things are again looking up in that regard) there is an exceptionally low teaching load. And then there is the question of whether we would want to live in a foreign country learning a new language, though I do know quite a bit of the local language already and think I could learn fairly easily. On the upside there is a very good possibility of a job for Snork Maiden too.

Well, there were 6 candidates interviewed over the last two days in a non-stop marathon of presentations and interviews. The decision on the ranking of the candidates is supposedly being taken now as I am writing.

Asset Allocation of US Estates

More interesting statistics from the US IRS. 34,000 estates needed to pay estate tax in 2009 and the average value of these estates was $5.7 million. Assets were allocated as follows:



Of course, this is the allocation of assets at death and does not necessarily indicate the allocation of typical wealthy people. But it is interesting how it reflects on certain myths floating around in the personal finance world. One meme is that the wealthy invest most of their money in real estate, another would be that retirees should have most of their wealth in safe investments - i.e. cash and government bonds. Neither is true here. There is quite good diversification with a likely 35% or so allocation to stocks directly and via pensions and 401(k)s. We don't know what is in "other" but can assume that that includes direct business ownership and alternative investments. By comparison, my Mom's portfolio is allocated to 29% stocks, 29% bonds, 16% cash, 17% alternatives, and only 9% real estate is a little conservative. Of course, the portfolio is quite a bit smaller than the typical one represented here :)

Tax Returns of the 400 Highest US Taxpayers

The US IRS puts out an annual report on the top 400 US taxpayers. In 2007, the average federal tax rate paid on adjusted gross income was only 19% despite the existence of the alternative minimum tax and a top US marginal tax rate of 35%. This is because 2/3 of their income came from capital gains.

This table shows the effect of the Clinton tax increases and the Bush tax cuts:



From 1993 to 2002 significant numbers of the top tax payers paid an effective tax rate of greater than 35% but none did before or after. The numbers paying less than 15% increased significantly in the later Bush years. Warren Buffett famously said that he paid a lower tax rate than his secretary. At least I'm not paying a higher rate than these billionaires :) Though Snork Maiden is :( Of course, those US figures don't include state taxes, which don't exist in Australia. But they'd likely only add an extra 5 percentage points at most despite so many wealthy people living in high tax California and New York.

Dow Jones/Credit Suisse Hedge Fund Index for March

The Dow Jones/Credit Suisse Hedge Fund Index rose slightly in March in contrast to the
HFR indices which fell. There were some similar patterns of relative returns across strategies with managed futures doing poorly and equity market neutral doing well.

Hedge Fund Report: March 2011

The HFRX index fell 0.88% for March whereas the MSCI World Index rose by 0.72%. Equity market neutral, macro, event driven, and special situations saw gains. Equity market neutral saw the best gains, but equity hedge the second worst losses!



HFRX is a daily priced index in contrast to HFRI which only provides monthly results but covers a much wider selection of funds as a result. Dow Jones Indexes and Credit Suisse are launching of the Dow Jones Credit Suisse Core Hedge Fund Index, which will also be a daily priced index. The existing Dow Jones/Credit Suisse index is a monthly index. The index includes 40 component funds diversified across seven style-based sectors: event driven, long/short equity, global macro, emerging markets, managed futures, fixed-income arbitrage and convertible arbitrage. It is an asset-weighted hedge fund index, whereas the HFR indices are not I believe.

Early results for HFRI show a loss of 0.17% for the month:



By contrast to HFRX, HFRI shows losses for macro strategies and gains for equity hedge. Generally, I'd expect HFRI to be more representative of the broader reality for these individual strategies due to the larger number of funds included.

The Really Long Term

I don't know if any other personal finance bloggers have more than twenty years of data, but I haven't seen it posted. Now and then I like to update what the really long-term picture has looked like.



The graph has networth (blue) and the split into retirement accounts (green) and non-retirement (brown). The record starts when I first arrived in the US in 1990. The early years I was a grad student and then a post-doc and visiting assistant professor and in debt. Then I got a better job as a researcher in the late 1990s and savings began to accumulate. Unemployment and a stock market crash lead to a decline in 2002. Then an even better job in the mid 2000's followed by our move to Australia, merger of finances with Snork Maiden and a worse financial crisis saw net worth plummeting from near $500k to less than $200k. Since then the market rebounded and I've had a couple of jobs where we have largely saved my salary and we are now at a new high in US Dollar terms. The path seems a little smoother when measured in Australian Dollars:



I don't know whether this stuff might be useful to people just starting out to give an idea of how things might look in your future. If you don't dramatically expand your standard of living, higher paying jobs in the future can have a big effect on savings (countering the idea of the importance of starting early). And there can be some big deviations along the path. This one charts spending versus total income including market returns:



The big bumps are usually associated with international moves. Now with two of us in expensive Australia, our spending has bumped up to a new plateau but this graph isn't adjusted at all for inflation so the escalation in living costs is not so great, really. This is very roughly the inflation adjusted numbers (2008 US Dollars):

Fund Distributions Begin to Return

Distributions from managed funds (Australian mutual funds) fell dramatically in the wake of the financial crisis. Some funds are now beginning to again pay significant distributions. More generally, dividends are rising.

For the January-March quarter, I got a $2035 distribution from the Colonial First State Developing Companies Fund, which is more than the sum of distributions received in 2008, 2009, and 2010. On the other hand, CFS Future Leaders paid out just $23 and CFS Diversified $71, and my other CFS funds seem to only be paying annual distributions. CAM.AX, CIF.AX, AOD.AX, and PMC.AX are all paying a reasonable level of regular dividends. IPE.AX hasn't paid a dividend since 2008 and EFG.AX since 2007 (no surprise there).

Snork Maiden got $236 from Celeste Small Companies and smaller amounts from property and fixed interest funds.

In the US TFS Market Neutral made its biggest distribution to date at the end of 2010 and there was a decent distribution from the China Fund. Other dividends are small or non-existent.

Receiving distributions is not necessarily a good thing as it means you have to pay tax (though it is the only way to get tax credits attached to company profits in Australia). But it is a sign that funds are doing well when they have to pay out money. I wonder how a strategy that sold funds that made big payouts and bought ones that didn't would do?

Moominvalley March 2011 Report

As usual everything is in USD. The AUD rose again to 103.6 US cents. This improved our returns in USD terms and reduced them in AUD terms. World stock markets rose a little in USD terms with the MSCI World Index gaining 0.72% for the month. Here is the summary account for March:



Non-investment income and retirement contributions were very high as this was a 3 pay month (we are paid every 2 weeks). Expenditure was $7,114 but a large part of that was the ticket to Cloud Cuckoo Land. Without that expense, core expenditure was a reasonable $4,061.

Investment return was $4,770 but taking out the effect of exchange rate movements was a loss of $2,722. The rate of return was 0.91% in USD terms, -0.52% in currency neutral terms, and -0.89% in AUD terms.

Net worth rose in USD terms by $16k (rose by $A7k in AUD terms) to $542k ($A524k) another all time high in USD terms.

Investment allocation saw a reduction in hedge funds and Australian stocks and a rise in other asset classes due to market movements, the return of capital from EAIT, and the investment in GTAA.

As a follow up to yesterday's post I've added our own rates of return to the table:



(well I dropped some of the timeframes as I couldn't be bothered to compute them). Moominmama's more conservative portfolio performed better over the 3 year period that included the global financial crisis but underperformed us across the other horizons. Over a 5 year horizon we have matched the MSCI World Index and over ten years beaten it. Over the ten year period our beta to the index has been 1.22 with an alpha of 2.11% p.a. Over 5 years, 1.22 with an alpha of 0.88% p.a. Over 3 years beta was 1.27 and alpha -2.29% and over 2 1.24 and 0.40%. So we have taken on more risk than the index but added more return than just the risk alone would provide except over the period around the global financial crisis.

The following graph shows the rolling estimates of alpha and beta using a 36 month window:



Alpha is much more volatile than beta. The high values of alpha achieved around the middle of the decade inspired over confidence and subsequent fall in alpha to negative values. Assuming no major setbacks in the next few months, I forecast the 36 month alpha will again rise to 6% by the end of this year.

Moominmama Portfolio Long-Run Performance

We now have enough data to compute the rate of return over 8 years on Moominmama's portfolio. This table compares it to the MSCI World Index:



All rates are annualised. In general the portfolio has about half the performance of the MSCI World Index. This isn't surprising given the conservative nature of the portfolio. I estimate beta at 0.47 and alpha at -2.31%. The latter is not very good. The standard deviation of monthly returns is 5.91% for the MSCI for the months for which we have data on the portfolio and 3.3% for the portfolio. So it seems there is a bit over half the risk for less than half the average return and, therefore, a worse Sharpe ratio. So we have sacrificed return for a less than proportionate reduction in risk. Obviously, we could be doing worse than this too. I guess it depends on what your expectations are.

Career Update

I bought the ticket for the interview in Cloud Cuckoo Land - $2947. That's a bit over the budget they gave me of Euros 2000. A direct flight to the capital seemed to come out even worse and then I'd need to get a train for 2 1/2 hours. So I'm flying to Frankfurt and then flying to the city in question.

In the meantime in Australia I am making progress on getting a permanent job despite some setbacks. It looks like a position I can apply for will again be advertised soon and there are various developments I am pushing which would provide a course for me to teach and collaborations with other areas in the university.

P.S. I took my suit to be altered to fit my new smaller size. It was big when I bought it but for some reason I believed the salesman that that was OK. Since then I lost a few kilos in weight. The alteration cost is less than a new suit of that quality and I think it will look better than when I first bought it when this guy is done with it. He altered a suit for me once before many years ago and also adjusted Snork Maiden's wedding dress.

Buffett Advises Against Long-Term US Bonds

Buffett speaking in India

In a recent post I referenced the Credit Suisse report that argues quite reasonably that long-term bonds are unlikely to be a good investment going forward. Of course, if you believe in efficient markets the prices of long-term bonds should already reflect that interest rates will rise in the future and, therefore, buying long-term bonds now should still be an OK investment. US short-term government bond interest rates remain near zero, but interest rates on 30 year bonds have risen significantly since the depths of the financial crisis:



History suggests though that the adjustment is insufficient. The Credit Suisse Report shows that there are long periods where bonds do not beat inflation in most countries with the partial exception of Switzerland. Now Warren Buffett warns against owning long-term US government bonds. His concern is both that inflation will reduce the real value of the bonds and that the dollar will fall in value against other currencies due to inflation in the US. It's hard to imagine the US Dollar falling in value a lot against the Euro, Pound, or Australian Dollar given how cheap things are in America but against developing country currencies such as the RMB that is possible.

My mother has a short-term USD bond fund and a longer-term Sterling related bond fund. We do want to reduce both of these and especially the latter. Snork Maiden and I have a variety of exposures to bonds though the total is only a small apart of our portfolio. The exposure is only 5.7% of net worth in total. The most significant types of bonds are Australian fixed interest and US corporate and mortgage related bonds. The latter are the main holdings of the CREF bond market fund, which did surprisingly well through the financial crisis (we should have had more of it):



This small level of exposure should be safe I think and I don't intend to lower it.

Job Interview on the Other Side of the World

Just heard. About one month's time.

Adjusting my Mom's Portfolio

We (my brother and I) are planning to reduce the allocation to bonds a bit. If you read the Credit Suisse Investment Returns Yearbook I think you'll understand why:

1. We definitely have too much in the Invesco Sterling Bond Fund. By my calculation it is 16% of her total net worth. This is a larger share than when I last blogged on it. This large share was all due to a mistake by Citibank... I plan to halve the allocation to this fund.

2. I plan to reduce the Janus Short Term Bond Fund by less. The two funds would each then each have about the same amount of money in them.

Also we want to:

3. More than double the investment in the Man-AHL fund. Visit these links to find out why I like managed futures.

4. We will ask for suggestions from the bank for new funds and asset classes to invest in. Including real estate and even alternative bond funds. Any recommendations from readers will be welcome. We can't buy US mutual funds but we can buy some international marketed variants.

Generally, we want to rebalance and diversify.

We also need to move some money around for my Mom's expenses and generally try to reduce the number of accounts she holds in different countries. We still have some problems left over from when my father died in 2002 with accounts still in his name that banks and government are being obstructionist about. You'd think that joint accounts would transfer automatically to the surviving spouse. But it isn't so simple always. If you are married I strongly recommend having some money in your own name in case you end up in a legal limbo too.

iSoft

iSoft (ISF.AX) suspended its shares pending an "announcement". I just wish companies would explain something about why they are halting trading. The Guardian has the story. Apparently a partner firm looks ready to buy them out. My interest is due to our holding of Oceania Capital Partners (OCP.AX) who made a disastrous large investment in iSoft. Most of the loss of value happened very quickly last June and as OCP is trading way below NAV I didn't sell. OCP is also in a trading halt. At the current share price we are making a small profit of a few hundred dollars on our investment in OCP. At the NAV we would be making a profit of several thousand dollars. And the company is in the mode of winding up and returning capital to shareholders. With all these companies returning capital we need at some point in theory to make new investments in the private equity and hedge fund asset classes. The question is whether we can find good investments of that sort.

Facebook

I thought I was just editing and improving my Facebook profile. It already said I was married but not to whom. So I updated that information. A bunch of Snork Maiden's "friends" now think that she just got married and sent her congratulations! Three years late. Only one of my 9 friends commented (on LinkedIn I have about 120 connections). Yeah, I don't understand Facebook much at all.

Over-reaction?

The Japanese stock market fell more than 16% in two days. If that reaction is rational it means that the net present value of the future profits of Japanese companies will be 16% lower than would have been without the earthquake/tsunami/nuclear accident. This seems to me to be an over-reaction. How much will Japanese GDP fall this year? The main economic impacts are damage to ports, oil refineries, and power stations on the east coast of Honshu. The impact of the tsunami damage and nuclear issues is unlikely to be very significant by comparison for the whole economy of Japan IMO. Some of these issues will be fixed fairly quickly (I'm guessing the oil refinery damage comes into that category) and others like the Fukushima nuclear power station cannot be fixed. I don't see why any of this should have pushed the German stock exchange 5% down at one point on March 15th. Anyway, I doubled my position in GTAA @ $25.11 using the money I transferred.

HSBC Gave Me a Lousy Exchange Rate

I did a wire transfer of AUD 10,000 from my Australian to my US HSBC bank account. The exchange rate turned out as USD 0.9808 per Australian Dollar. That's about 3 cents from where the official exchange rate was. That's really bad I think. Maybe I should have done the conversion to US Dollars at the Australian end. Would that have given me a better exchange rate?

More Hedge Fund Returns for February 2011

Credit Suisse-Dow Jones provide some preliminary results:



These show stronger overall performance and more variation among strategies than the HFRX results. HFRI is somewhere between the two:

HFRX Index Performance February 2011

The HFRX hedge fund index gained 0.73% for February compared to 2.16% for the MSCI World stock index. All strategies saw gains and it is hard to see any pattern in the variations across strategies.

Moominvalley February 2011 Report

As usual everything is in USD. The AUD rose a little from 99.8 US cents to 101.7 US cents. This improved our returns in USD terms. World stock markets rose with the MSCI World Index gaining 2.16% for the month. Here is the summary account for February:



Non-investment income and retirement contributions increased as I earned money for the first full month at my new job (I started 10th January). Retirement contributions are up too of course. 19% of my pre-tax salary is going into my retirement account - (% is a contribution by my employer on top of my nominal salary and 10% is a voluntary contribution by me from the stated salary). The numbers should look like this throughout this calendar year now. Expenditure was a little high at $4,608, though there are some good reasons for that. Underlying investment returns were good.

Net worth rose in USD terms by $28k (rose by $A18k in AUD terms to another post GFC high) to $526k ($A517k) and all time high in USD terms.

There was little change in investment allocation. Investment return was a gain of 4.07% in USD terms. In AUD terms we gained 2.05% and in currency neutral terms 2.66%. All asset classes gained. Australian small cap and US stocks were the best performers in currency neutral terms followed by private equity.

What am I Going to Do with the EAIT Money?

As I mentioned I just got paid out $A7,500 or so from EAIT. With that and my next paycheck I'm going to buy $10,000 worth of US Dollars. i.e. move the money to America. I'll probably end up investing some more in GTAA when the move is over.

Another Letter from the US IRS

I got a another letter from the US IRS. The good news is that they accept the tax return that I prepared and my payment of $30.10 in taxes for 2008. The bad news is that now want me to pay penalties and interest. A penalty of $30.10 for filing late, a penalty of $2.86 for paying taxes late, and interest of $4.01. So I'll send them a cheque for $36.97 and hopefully that will be the end of the saga.

Draft Outbound Foreign Investment Rules Released

The Australian government has finally released the draft of legislation intended to replace the FIF rules. From my reading of the information provided, only funds that invest in debt and do not distribute 80% or more of profits would be included in the new rules. More interpretation is available here.

Based on this, the kind of investments that I'm interested in should not be captured by the new rules and I will be able to invest overseas without worrying about complicated tax rules.

EAIT Terminated

Everest Financial is winding up. I should get a payout of $A800 next month as part of the run-down. Now I got a letter from One Managed Investments who took over the EAIT fund from Everest that they terminated the fund on 11 February and are now managing just to pay out the investors. We should get a return of capital of 88.2 cents per share (i.e. about $A7,500 for me) on 1 March and the rest over the next four years. The delay is because the underlying hedge funds have "lock-up" periods.

The question is whether I should look to reinvest my capital in other hedge fund opportunities. If all goes to plan I did actually make some money on the EAIT fund (about $A3,000). I lost a lot investing in Everest Financial, the management company. Logically, the latter shouldn't deter me from investing in hedge funds. But the drawn out saga of EAIT has certainly made me more wary.

HFRX Performance for January 2011

Overall hedge funds gained 0.56% in January according to the HFRX index. In comparison MSCI World Index gained 1.59%. Equity hedge and market neutral strategies and systematic diversified strategies had negative returns. The Man-AHL managed futures fund lost 3.74% in January so the latter is not surprising.

Moominvalley January 2011 Report

As usual everything is in USD. The AUD fell a little from 102 US cents to 98. This hit our returns in USD terms. World stock markets gained a little with the MSCI World Index gaining 1.59% for the month. Here is the summary account for December:



Non-investment income and retirement contributions increased as I earned my first paycheck at my new job. Expenditure was pretty reasonable at $4,193. Underlying investment returns were modest and a little negative in USD terms.

Net worth fell in USD terms by $3k (rose by $A10k in AUD terms to a post GFC high) to $498k ($A499k). Here is the net worth chart in AUD:



For USD see last month.

There was little change in investment allocation. Investment return was a loss of 1.36% in USD terms. In AUD terms we gained 1.20% and in currency neutral terms 0.70%. All asset classes gained with the exception of foreign non-US shares. Private equity was the best performer with a 5.01% gain.

Moominmama Portfolio Performance January 2011

The MSCI World Index gained 1.59% in January. Moominmama gained 0.98% but not because of equities performance. The gain is mainly due to the strong performance of Sterling this month. Most of those bonds are Sterling related bonds. Hedge funds also did well. Indian and Brazilian stocks and the local currency performed very badly.

The Importance of Going to a Good University

If you think it is not important to go to a good university then read this first. Some PF Bloggers recommend to just go to a cheap school.

There are some caveats though. I commented recently on Enoughwealth's post on high schools saying that if you are going to go to university then mostly it doesn't make sense to pay a lot of money to go to the most prestigious high school. But you do need to go to a good one. One that could get you into University of Sydney or UNSW in the Australian case or into one of the top US universities (any of those mentioned in this article). If you definitely plan on going to grad school then it's not necessary to get into the top US universities as an undergrad if it means shelling out big fees. But you do want to go to a good school. Somewhere like UCLA or NYU or Boston University or even Ohio State (Columbus campus). If you do well in places like that you can have a shot at top grad schools. But if you get an undergrad degree from Southern Cross U. or UCQ in Australia say or Cal State U. or somewhere in the US it will be a struggle to get into a good grad school. Likely they will just toss your application unless there is some compelling evidence of your brilliance. And if you get a grad degree from some low ranked university it might not help your employment prospects much at all.

Of course, all this depends on how ambitious you are. I didn't really understand the game fully when I was a student. I knew you needed to go to good universities and went to three good universities. The first two were top-ranked in their country. The third one was good but not in the top-rank. Now I regret somewhat * not trying for the top-ranked place that one of my professors at school #2 suggested. I just thought there was no way they'd consider me or give me any funding. But I could have tried for $50 or whatever the application fee was back then.

I had a job interview on Friday. The head of the department said to me: "I don't know why anyone would come do a PhD here if they could go to that other university across town". I agree with him on that. In economics at least, the name of the school matters.

* Only somewhat because if I had gone there (in the picture) rather than across the river I doubt I would have ever met Snork Maiden. And after all I have done pretty well in my academic career so far.

GTAA Lowers Fees

Cambria's GTAA ETF has raised $72 million so far and so is lowering the expense ratio to 0.99%.

In other news, hedge fund assets hit a new record:

"HEDGE FUNDS END 2010 WITH RECORD QUARTERLY ASSET INCREASE

CHICAGO, (January 19, 2011) – The hedge fund industry concluded 2010 with the largest quarterly increase in assets in its history, according to data released today by Hedge Fund Research (HFR). Total industry assets grew to $1.917 trillion, reflecting a quarterly increase of nearly $149 billion, topping the previous record increase of $140 billion in 2Q07.

The year-end figure approaches the historical asset peak of $1.93 trillion set in 2Q08 and represents an asset increase of 44 percent since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10."

Street View vs. 3D View

Google Earth has now added 3D trees in some parts of the world, including San Francisco. Here is a random street in SF in 3D view:


And in Street View:



hmmm Were some trees removed or has Google added some random ones in? When's 3D cables coming? :P BTW, Street View is much improved on the previous version and really easy to navigate around in. You can see what high speed internet is really for! :) I've always been amazed by Google Earth and it keeps getting more amazing.

Weight Loss

When I cam back from Europe I found I was 2-3kg lighter at least than when I left and I decided to try to keep losing weight. I had been trying half-heartedly for a while. I've now been keeping a daily weight record for almost three months. The results look like this:



The scale is in kilograms (multiply by 2.2 or divided by 0.454 to get pounds). I'm 1.90m (6' 3") tall so that should explain why the number might look big to you if you're not so tall. As you can see, my initial enthusiasm wore off but I still seem to be losing weight. I've averaged a loss of 34 grams (just over an ounce) a day. Initially though it was about 67 grams a day. Mainly, I've tried to eat less at each meal, especially less bread and less rice and cut out calories for the sake of calories in the form of alcohol etc. And eat fewer and lower calories snacks. There is nothing I stopped eating completely though and I don't measure how much I eat. I just try to moderate as much as possible. This has worked before for me and it seems to be working now. It will take about another 9 months at this rate to get me down to my real target of about 90kg. I'm pretty happy to be approaching 100kg again though.

Downside is that neither of my two suits fits me now. One is too big and one too small. I don't want to get the big one adjusted to my current size though... I'm thinking anyway a suit will be too hot for my next interview and I'll just do the shirt and tie thing. This is academia and though it is part of a business school I noticed the pictures on the website of people are not wearing suits and ties.

Career Update

I had a phone interview with one college in the US but I heard on Saturday that I'm not being invited to the on-campus interview unless they don't like any of the candidates they have invited. In other words, I'm a back up candidate again. Haven't heard from any other US jobs yet but I suspect we'll be staying in Australia for now. I scheduled my interview for a job in Sydney in less than 2 weeks time on Friday.

How Much Should I "Salary Sacrifice" into Superannuation?

I'm starting my new job and looking at the contract details. I was a bit surprised that my employer will only pay 9% of my salary (i.e. on top of my stated salary) into superannuation (retirement). That is because public sector employers in Australia normally pay more than that. But they can get away with this for a short-term contract. Usually, at this employer, when the employer pays 17% in, employees are required to pay in 8%. Snork Maiden's employer pays 15.4% and we salary sacrifice $225 every 2 weeks into her super account. The latter is about 7%. So what should I do here? There is a cap of $25,000 per year in super contributions of course, so I can't go beyond that. Should I go for:

1. Zero

2. The same % as Snork Maiden

3. The 8% level

4. Go to the maximum allowed level?

The downside of going to the max is of course that we can't then access those contributions for 14 years at least. The upside is the contributions face a lower rate of taxation - 15% going in instead of my marginal rate of 31.5% this financial year and possibly 38.5% next financial year. When in the fund, rates are also lower than I'd probably pay in the long term and when I retire I could get the money out tax free.

If I was 10 years older, I would for sure choose the maximum contribution level.

P.S.

As noted in the comments, I might not be able to do salary sacrifice in this position anyway. I'll ask about it tomorrow. I'll also be increasing our automatic savings contributions to non-retirement accounts. I think from $500 per month each to $1,000 per month each.

Annual Report 2010 Part IV Investment Returns

The MSCI All Country World Gross Index gained 13.21% for the year while we only gained 9.78% in USD terms. But over the last two years we gained almost double the index. Over 10 years we also outperformed the index but over the last 3 or 5 years we underperformed. Relative investment performance matters a lot depending on the period measured. In Australian Dollar terms we have lost over all but the 2 year time frame and even in currency neutral terms the long-run return has been about zero. It hasn't been a good period for investing.

HFRI Hedge Fund Index Performance December 2010

With the exception of short bias, all styles gained in December and for 2010 as a whole. Both the month and the year saw strong stock market performance globally in USD terms. The top performer for the year was funds that specialised in energy and basic materials. That's not too surprising.