Challenger Infrastructure Fund Removes FX Hedging

Challenger Infrastructure Fund (CIF.AX) announced today that it has closed its foreign currency hedges yielding a profit. As it is now unhedged and invested entirely outside of Australia (mainly in the UK) I will now regard this investment as part of my "global currency" investments (not AUD or USD). This is good as our AUD exposure is rising (though the investment is just 1.3% of net worth). The investment is included in our "real estate" investments and under the "passive alpha" category as I don't expect it to be highly correlated with the stock market in the long run.

Fellowship Program in Stasis

I just heard today that the fellowship program I was planning to apply to may not actually run again. If it doesn't I wouldn't be too surprised. Last November was the first year it ran and they won't announce the results till this September (Many grant programs here have similarly long processing times). They planned on giving out a surprisingly large number of fellowships over the next five years. So they may be rethinking that commitment of funding and maybe the quality of the first round of applicants wasn't as high as they had hoped for. I was told that the government minister responsible hasn't decided whether to run another round of applications or not. I'm going to meet with my research officer as soon as possible to discuss what opportunities I have.

Shopping my Proposal

We accidentally bumped into a former colleague who is now a professor in another department at my university while shopping. Actually, this guy was originally hired to replace me after I didn't re-apply for my job back in 2001. We then overlapped for a year as I searched for the position that eventually took me to upstate New York. Anyway, he agreed to take a look at my proposal. He already got back to me and says it has all the elements needed for a successful proposal: "It's in a key area, you clearly have published on the topic and there are important gaps that you identify that should be funded." I agree that these are the key things a proposal needs. They want to give money to people with good track records of doing research in the areas that are of interest to the funders. The bit about identifying gaps refers to discussing recent top level research on the subject and pointing out where it could be extended. A weak proposal would come from someone who doesn't have a strong track record in the area, shows that they aren't really up to speed on the debates in the area, and is anyway in an area that is somewhat peripheral to what the funders are interested in.

I still don't know if I am actually eligible to apply for grants in these areas. I'm having a hard time tracking down the liasion guy.

Anyway, I now have more confidence in approaching a big name person who might be able to collaborate and/or provide feedback. Hopefully, I can raise awareness that I am doing research in areas of interest whether I am eligible for a specific grant or not.

Some Funds in the Black

This month is shaping up as another good one with three trading days to go. Several of the funds we invested in in Snork Maiden's Colonial First State account have now returned to profitability:

CFS Geared Share Fund: $A190
Platinum International: $A131
Souls Small Australian Companies: $A72
Generation Global Sustainability: $A30
CFS Diversified Fixed Interest: $A80

Overall the account is still down $A260 but it is now worth $A15,291. So that's not too much of a percentage loss given what we've been through. We started investing in April 2008. I guess it's the power of dollar cost averaging.

I just got the annual tax statement from CFS, so soon I should be able to do Snork Maiden's taxes.

OK, I Exaggerated a Little...

When I wrote in yesterday's post that I'd need to have enough cash to buy a house to be happy to do so if my income was very uncertain. On a single slightly above average salary it's a bit of a stretch to afford to pay rent and live a nice lifestyle here for two people. At least we found that to be the case until I started my current job. You have to be reasonably frugal. Forget international travel and the like (remember our parents and most other relatives all live in the neighboring large continent). Paying a typical mortgage is out of the question. To get your housing costs down to the same level as paying rent you need to put down a downpayment of 50% approximately. So you do need $A250k for that purpose and after that you're living paycheck to paycheck more or less. So I don't really think this is still a very wise financial decision.

Of course if you have secure employment consisting of either two average salaries at least or one salary at twice the mean (say a full professor) then you can go for homeownership without too much concern. It might not be good economics, but if that's what you want to do you can. I'd still put down the traditional 20% and have cash reserves for repairs etc.

Houses are really expensive in major cities in Australia.

How Long Can We Live without Working?

Asked Snork Maiden today (at our current standard of living). If we don't make any big expenditures like buying couches or travelling we spend about $A4,000 per month. Half of that goes on rent. Our net worth outside of superannuation and retirement accounts is $A156,000. $A10,000 of that is our car. So the rough answer is 3 years. A couple of years ago it was nearer 5 years. I don't believe in the idea of a 6 month or whatever "emergency fund". The more savings we have the better. If we wanted to buy a house we'd need to make a $A100,000 downpayment probably (as houses cost at least $A500,000 around here). That's only leave us with $A40k in savings. As neither of us has a long term employment contract. We couldn't maintain the mortgage payments for long if either one of us didn't work or we both worked at lower salaries than today. Our salaries are near the mean for Australia, temp work or whatever will pay less. So we either need to have permanent contracts or really in my opinion enough is savings up front to buy a house outright, though we'd still buy it with a mortgage. The latter would make me feel much more comfortable with such a purchase...

Pension Funds, Endowments, and Us

I've been thinking whether anything needs to be done with Moominmama's portfolio and benchmarked the broad asset allocation against a bunch of pension and endowment funds:



UniSuper Balanced and PSS(AP) are the default choices for two Australian superannuation funds. The Future Fund is an Australian Sovereign Wealth Fund. CALPERS is of course the California Public Retirement system and then there is the average US university endowment and three Ivy League endowments. Excepting the Ivy's the average for the two US funds is very close to that for the three Australian funds: 42% equity, 23% bonds and cash, and 35% alternatives (hedge funds, real estate, private equity etc.). Retrospectively the Ivy's had too much in alternatives and too little in cash to meet their needs. Nobody though has as much as Moominmama has in bonds and cash. As I've often said, it's hard to imagine bonds performing as well in the future as they have in the past when they were boosted by capital gains due to declining interest rates since the early 1980s. She receives government pensions and even if she didn't she has many years worth of expenses in cash alone let alone bonds. Even if her medical costs rise I still think there is plenty of cash. Long term I think it'd make sense to head to say 30% in bonds and cash. Some time soon I think it would make sense to sell some shares in bond funds and increase other investments.

What am I Doing on the Investment Front?

I haven't posted much on investments recently. We're in recovery mode from the GFC and will likely be for a couple of years before making any really major moves or changes. The last new investment we made was AOD. We continue to invest $A500 per month in each of Snork Maiden's and Moom's Colonial First State accounts. These are diversified investments across Australian and foreign stocks, real estate, fixed interest, and in Snork Maiden's case hedge like funds. We also invest in our superannuation funds - Unisuper and PSS(AP). Again these are very diversified investments. Otherwise I have added some extra money to Snork Maiden's CFS account and paid down some of my margin loan with CommSec. I also have bought back a couple of investments that I had to sell in margin calls for less than I sold. One is 200 shares of 3i - the UK private equity firm and the other is a $A5,000 in CFS's Global Resources Fund. The latter isn't quite all the units I sold but good enough for the moment. We are underweight foreign stocks so these investments make sense. I expect there'll be a little more of this kind of thing going forward. Our automatic investments are increasing out foreign stock exposure in any case.

Wikinvest Data Platform

Wikinvest have a new finance data platform. It looks pretty nice in terms of graphics etc. though they exaggerate how much this improves things over platforms like Yahoo. Yahoo does have a competitors analysis as well as an industry page that provides some context of how a company compares to others in the industry. To tell the truth though I mainly have used it just to find alternative potential investments.

1 July 2010 Planned Start Date for Post-FIF Regime

The Australian government hopes to have new foreign investment rules in place by 1 July 2010. This will include new more targeted anti-tax-avoidance rules to replace the abolished FIF rules.

Final Hedge Fund Performance for June 2009

Final hedge fund returns are now in for the month and they largely confirm the earlier HFRX results. In other words, performance was flat overall. HFRI returned 0.23% and Credit Suisse/Tremont 0.43%. Managed futures and systematic trading did poorly (as did short-bias). Convertible and related arbitrage strategies did best.

Next Steps in Job Search/Creation

As I commented on the last post, I didn't get the job I interviewed for on Monday in a major Australian city. The chairman already phoned me on Tuesday to tell me. They decided to go with people who could cover their areas of particular need in teaching (at the graduate level). At first he said they liked everything else about me. But when I said I wasn't surprised because I think I messed up the presentation he then said that I was right that it was rushed and confused people and they didn't get a strong idea of what I was doing though they were impressed that I was energetic, enthusiastic, and knowledgable.

Back here a friend/colleague has been talking with someone in a position of authority to see what can be done about creating a position for me or extending my current position. This would be on the basis that I could raise money from students or grants in this position. While junior teaching positions are almost always advertised in academia that isn't true of research positions (including my current position) and to some degree more senior positions. As in other industries, if you know the right people you have some opportunity to be creative in this regard.

I'm sitting in the airport terminal on my way back from my interview here today. The process was very traditional on the British model of academic interviews - presentation, lunch with other candidates, and panel interview. The American model has no panel interview and involves many one on one meetings with faculty or groups of graduate students over a two day period. My previous interview in Canberra was a hybrid of the two models. Those guys recruit heavily on the American market. I met a new faculty member at lunch who just completed a PhD at a US university, but the department can't be systematically trying to recruit new PhDs from the US. Three candidates were interviewed today. The other two both came from New Zealand. As they told me they will complete the interview process today that probably means, given how fast this process has moved, that there are only three candidates for two positions, unless there are also internal candidates. The reason for the huge rush is that they have two more searches to conduct this semester.

My presentation was OK-ish - I tried to cover too much stuff and due to a misunderstanding on the timing we ran out of time for questions at the end. There were questions along the way though, as is usual for economics seminars. People seemed skeptical which wasn't surprising as I tend to do unorthodox things. And I had maybe the top guy in the field in Australia sitting in the front row and a specialist in some of the techniques I use in the back row (and on the selection panel). The panel interview went better. I didn't have any problems answering their questions or asking them questions.

I should hear today or tomorrow. If I get an offer we'll have to figure out how to move Snork Maiden workwise. I didn't raise that at the interview because I don't want to put any obstacles in their way before they make a decision.

Another Interview

I just got an e-mail inviting me to interview on Monday for the job I applied for last week. This is one of the top departments in the country. The university is on this list. I've never seen an academic job search move that fast. It probably won't be much work to update one of my presentations. I've asked for more details of what kind of presentation I need to give. I also want to be back home for a local one day conference on Tuesday. We'll see what can be worked out.

HFRX Performance for June 2009

The HFRX Global Hedge Fund Index was flat for June, returning 0.04%. Macro and 'Systematic Diversified" did poorly losing more than 3%, while convertible arbitrage and event driven strategies did relatively well. HFRX is, however, based on a small sample and may not reflect the performance of the broader indices which will be available around mid-month.

Phoned Unisuper

So I phoned Unisuper and told them I'd sent the form in twice to switch to defined contribution (or "accumulation" as they're calling it) and I'm wondering why I'm still in the defined benefit scheme. The guy I got on the phone told me that everyone starts in Defined Benefit (so they just ignore the initial membership form despite it asking which plan you want to be in) and that they got my switch form in May but "it takes a long time for the switch to happen" and he doesn't know why that is.... He said it was "fair enough" that I was wondering what was happening. So I suggested I'll check in another month whether the switch has happened. Which he said "makes sense".

June 2009 Monthly Report

The following is based on the available data as a couple of funds as usual won't report till near the end of the month and as 30th June was the end of the financial year here in Australia we're waiting for the final reports from Australian mutual funds which should improve a bit the data reported here due to the distribution of tax credits - even though there were big capital losses this financial year most large companies continued to pay dividends with the attached "franking credits" for Australian profits or "foreign tax credits" from non-Australian firms. As usual everything is in US Dollars unless otherwise stated.

The MSCI World Index lost 0.52% in USD terms and the SPX gained just 0.20%. The Australian Dollar appreciated at a slowing rate against the USD from 79.91 US cents to 80.54 US cents. So foreign exchange rate changes did not have a big impact on this month's results. At one point during the GFC the Aussie fell to 60 US cents. That was probably undervalued and today's exchange rate is likely a little overvalued. We gained 3.67% in USD terms (2.85% in AUD terms and 3.07% in currency neutral terms).

Performance was strongest in Australian stocks both small cap (ror = 6.09%) and large cap (3.86%). Commodities (estimate = -3.7%) and real estate (-3.27%) probably performed worst - I only have very partial data on hedge funds at this point. Alpha measured against the USD MSCI was 3.6% with a beta of 1.14 currently. Though performance for the month was above the risk-adjusted expectation.

We spent $5,843 ($A7,255). Major expenditures were new couches ($A3,054) and a suit ($A683). The couches arrived today and they are very nice. So apart from that we only spent $A3,500 which is good (as our rent is $A1,955):



After a month where Snork Maiden's employer managed to stuff five contributions into her retirement account this month they only managed one. They are very erratic.

Net worth reached $270k ($A336k). Asset allocation moved away from our target but there were no dramatic changes this month:



Hedge fund allocation increased due to buying AOD and private equity allocation fell due to the AEP capital return.

Sorry that there are again no pretty charts in this month's report. I don't fell like posting them until we have a substantial rebound in net worth to report or something dramatic happens. At this point we're making a nice but moderate rebound from the worst of the GFC inflicted damage. In AUD terms net worth is currently 36% below its all time high in August 2007. That turns out to be exactly the average financial loss suffered by Australians from the GFC.

Update on Carbon Planet

Last year I wrote about a company called Carbon Planet that was raising funds. I didn't like the look of the information provided and decided not to invest. Now an anonymous commenter has updated me on Carbon Planet and it still doesn't look good. What kind of CEO just says "he isn't having this conversation"?

Unisuper "Fail" (so far)

They still haven't switched me to defined contribution despite me requesting this on my initial application and then sending the switch form in again, weeks ago. I'll phone them tomorrow and investigate.

Moominmama Performance June 2009

Moominmama had a 1.06% gain in June while the MSCI all country stock index fell 0.52% (beta to this stock index is estimated at 0.47). US stocks were the worst performer closely followed by commodities while bonds and hedge funds did well. Part of the bond performance is due to the rise in Sterling, which along with Asian and Brazilian stocks were solid performers. The loss in USD cash is due to investment management fees being charged in US Dollars on one of the accounts.

Moom and Snork Maiden's rate of return is currently looking to be about 3.7% due to the strong performance of Australian stocks this month.

Career Update

Am applying for another academic position here in Australia. I only saw it advertised this morning and the deadline is Friday! The rank is Associate Professor which is I believe the appropriate rank for me (I'm currently at the equivalent of Senior Lecturer level) and they are looking for two people. The preferred specializations are not in my area but they encourage all areas of economics to apply and the economist I most admire in Australia is on the faculty there.

I'm still also working on developing a grant proposal but the deadline is still way off on that and it still isn't clear if I'm even eligible to apply. Also I have started a professional blog with the aim of attracting more traffic to my professional website and getting more people to download and read and cite my papers... As a result there'll be a bit less general economics content on this blog. But I'll still post personal finance and investment stuff on this blog.

Endowments Update

Barrons' has updated the portfolio allocations for Yale, Princeton, and the average US educational endowment:



Compare these to a previous table they produced. Yale's allocation has shifted very little so maybe it isn't very up to date. Princeton and the average endowment has been forced to increase the allocation to private equity and real assets and reduce the allocation to stocks due to the moves in the markets.

Income Replacement Rates of Mandatory Retirement Schemes

The table is from a paper by Richard Disney presented at a conference on taxation held as part of the Australian tax policy inquiry. It shows the percentage of income replaced by mandatory retirement programs at different levels of average earnings. The Australian data includes both the means tested age pension and the 9% superannuation guarantee! The two together are estimated to replace only 52% of average earnings. Australia's outcomes are very similar to those of the US which only has one mandatory program: social security. With Australia's government worrying about the tax benefits provided to superannuation and raising the age of eligibility of the age pension to 67, you can see just how unsustainable the US program must be. I won't even talk about some of the European schemes :)

Bottom line: You probably need to save more than the 9% superannuation guarantee.

Couches

Today, after much searching, we finally bought a couple of couches - a two and a three seater. Yes, they are leather but not the ones in the picture - I couldn't find a picture of exactly the ones we got. Over the last month we've seen the price decline from a deal of about $A4,000, through $A3,500, to $A3,000 today for the two couches from the showroom floor. We could still have ordered some at $A3,500 but decided that these two suited us. They are some of the more comfortable couches we've tried. They won't actually fit in our apartment in a traditional L-shape configuration - not with room for other furniture or for people to get through, but we won't always live here and we've figured a couple of different set ups that will work. Up till now, we've only had the one futon sofa we brought with us from the U.S. It's quite nice but not so great for sitting on for extended periods and it'll be good to have more seating for guests.

We'll Call You (or Not)

I haven't heard back from the headhunter so I guess I wasn't shortlisted for an on-campus interview. The department I interviewed at before here just advertised four senior positions. I doubt it makes sense to apply after I was rejected for a more junior position but I guess that means the local hiring freeze is off.

George Friedman Thinks the Iranian Election was Fair!

My opinion of him and Stratfor sank even lower.

Conspicuous Blogging

An interesting article about changes in the ways people are signalling status - a switch from conspicuous consumption of material goods to online signalling through the number of Facebook friends say. I'm not sure quite how important this is as a trend in quantitative terms but there is certainly something in it. It fits in with similar news from Japan. Of course those of us in academia have long signalled our status through publication, citation, winning research grants etc. and the same has been true of other professions such as art or music. Conspicuous production rather than consumption. The paradox is I'd love to tell you right now about an article I wrote where I referred to this issue 12 years ago. But I can't without revealing my identity. An anonymous blog is very unconspicuous production in it's nature. Maybe I should go down the road of other non-anonymous academic bloggers :)

TFS Market Neutral Fund Closes to New Investors

The TFS Market Neutral Fund which I've often blogged about and am invested in, is closing to new investors. The fund's assets stand at around $US600 million. It's not a complete closure. Financial advisers and 401k, 403b plans etc. who have clients already in the fund will be allowed to open accounts for new clients. And, of course, existing investors will be allowed to add to their accounts. So the aim is to slow down the influx of capital. The fund has doubled in size in the last year I believe.

You have till 30th June to invest in the fund if you are not already invested.

HFRI Performance May 2009

HFRI came in with a 5.58% return for May - one and a half percentage points more than Credit Suisse's estimate - and positive returns for all sub-categories.

Face to Face Interview

So I went out to the airport today to meet the partner of the recruitment firm at the Qantas Club (=Lounge). I think the interview went well and that there is a good chance he'll put my name forward at the meeting with his client on Monday where the short-list of candidates to be interviewed on campus will be composed. The taxidriver on the way there told me he studied accounting but the economics part was hard. I told him I found it hard the first year or two as well, the concepts took a while to sink in.

Credit Suisse/Tremont Returns for May 2009

Credit Suisse/Tremont hedge fund indices have now reported for May. They are reporting a 4.06% gain for the month, which they say is the best month for hedge funds since some time in 2000:



HFRX reported somewhat lower returns. HFRI is still to report. Most strategies did well apart from short bias. Managed futures were rather mediocre.

By the way, I just realised that my last post about the suit was my 1000th!

Suit

I bought a suit for my interview today. Only the second suit I've ever bought. We went to Myer because there are sales on. But the suit department was a bunch of racks behind the escalators there and nothing appealed to either Snork Maiden or me and there was no salesperson in sight. So we headed to David Jones next where there was a salesperson in the much larger suit department. I liked all the lighter colours and Snork Maiden darker ones with stripes preferably. She soon despaired of the process. So I phoned a friend who lives nearby whose taste I trust and I know has bought lots of suits. He came over and his first piece of advice was: "There are only two colors: Charcoal and navy blue". "What about lighter greys?" I asked. "You won't be taken seriously". Pretty soon I was trying on a couple of suits by Anthony Squires (the only ones in my size - I'm 6' 3" (1.9m) and around 108kg (240lbs)). They were both comfortable and both were originally priced around the $A1200 mark. The first one I didn't like so much and only had 10% off. I preferred the second one and it was going for $649. That's the one we bought. Alterations which should be done by Monday afternoon will cost an extra $34. We went and had some coffee with my friend and invited him to dinner this evening. Preparation now under way...

Coldest Day in 43 Years

A couple of nights ago it hit -6C here in Canberra which is near the coldest I've seen here (-7C). The record low for Canberra is -10C. And then today was the coldest day in 43 years with the temperature reaching just 4.1C at Canberra Airport and only 2.6C in Tuggeranong. I felt like I was back in America today :) Though of course the bad days in Troy NY were when it wouldn't get above -18C which was once or twice (and that was the coldest night time temperature I remember from Boston where I lived in 1990-93 and 1995-96).

The Phone Interview

The phone interview with the headhunter went well. It started with me asking questions about what the job really is. He said that they basically just posted a standard description for a full professor though this job is somewhat different. It is a research chair and may include teaching in a masters program. The direction of research sounds a lot more applied than I would really be comfortable with. If we go to another level of interview I think I will tell them that they need a mix of basic and applied research if they want to have a good research profile in terms of publication and citation and getting grants from more prestigious sources. If that's not their goal it probably doesn't match me well. The job sounds less daunting than the description that was sent to me which sounded like it would solve all of their problems.

After that he went through my CV and got me to expand on each item. That included explaining what I did in 2008 and more about the nature of my current position. He seemed to be OK with my explanations. "So if you had stayed with your Australian employer of 1996-2002 you'd probably be a full professor now". I said yes either Associate or Full and if I'd stayed with my US employer I would be seeking promotion to full professor about now. So he said he sees merit in me as a candidate and he might be in town in the next couple of weeks and would like to meet for a chat then. I should also send him Snork Maiden's CV...

Now I need to go buy a suit. My current one doesn't fit any more. I bought it in 1996 for an interview at Ohio State University. I had it reduced in size in 1999 after I lost a lot of weight. But now I've put most of that weight back on... I could get it let out again I suppose, but having more than one can't hurt?

Preparing for Interview

I've been preparing for my phone interview with the headhunter tomorrow morning. I'm not sure what to expect as I've always been interviewing with the people I will actually be working with before. I did some searching on the web about how to deal with such interviewers and came up with more tips from headhunters about how to interview with employers. The little I gleaned suggested headhunters are more likely to throw off the wall psychological questions and ask what you would do in different situations. Makes sense, because they can't ask you anything technical. Academic interviews at research universities are mostly technical discussions of your research with a few questions thrown in about what you would like to teach. At least at more junior levels. Anyway, I've done a quick analysis of the research weaknesses and strengths of the department in question as I've been told this position is to some degree to be a research coach/mentor/coordinator. They've mostly been pretty busy publishing research but generally they publish it in low ranked journals and don't get cited a lot. Maybe this is a product of the Australian government's past policy of rewarding research quantity over quality. When I worked here before in 1996-2002 universities received base research funding according to a formula that awarded one point to a refereed journal article and half a point to a book chapter in an edited book. It didn't matter how prestigious the journal was (the rest of the funding was based on how many PhD students they could graduate). This is still the case for the smaller part (10%) of research funding based on publications. The largest portion (60%) is now allocated on the basis of competitive research grants won. My impression is that in the near future the system will shift towards assessing research on the basis of citations. This is a positive direction.

Government Job?

I heard yesterday about a position in a government department here doing more or less on the public policy side what I do in academic research now. They want someone immediately as an internal transfer in the public service or on a contract basis, so my guess it is to replace someone. I have my current position till the end of February... The e-mail said that they may be wanting to hire more permanent positions in the near future. So I'm thinking to e-mail the guy in charge of the section who sent the e-mail and whom I know reasonably well and say I may be interested in those positions and that he should keep me in mind? My first preference is for an academic research oriented position. This would be a second best from my perspective as a long-term situation but it could be interesting as a shorter-term thing. In which case I should apply for the current position. But I don't need a job now and am in a contract to deliver something to my current sponsor. This whole job timing thing is a dilemma....

May 2009 Monthly Moomin Valley Report

I finally worked out the fault in my accounts: a minus sign instead of a plus sign in front of the gain for Platinum Capital for the month! The following is based on the available data as a couple of funds as usual won't report till near the end of the month, when I'll give a final asset class performance report. As usual everything is in US Dollars unless otherwise stated.

The MSCI World Index rose 10.08% in USD terms and the SPX rose 5.59%. We gained 8.84% in USD terms (-0.34% in AUD terms zand 2.73% in currency neutral terms). The Australian Dollar again appreciated strongly against the USD from 73.17 US cents to 79.91 US cents.

Performance was strongest in Australian small cap and foreign stocks and weakest in real estate and private equity. Alpha measured against the USD MSCI was 2.1% with a beta of 1.11 currently. Though performance for the month was good in USD terms it was below par in risk adjusted terms. The fitted rate of return from the model was 11.4% while we only returned 8.8%.

We spent $3,570, which is surprisingly low given that we and the Snorkparents went to Queensland in May. Most of the Queensland expenditures had already been incurred up front though. In Australian Dollars we spent $A4,468. Since Snork Maiden and I have lived together there have only been six months with lower spending (14 with higher spending). So it really is near the low end:



Non-investment income was boosted above our regular salaries by a $A900 stimulus payment from the Australian government and $A1,200 in cash that the Snorkparents insisted on leaving with us rather than taking back to China to exchange...

Net worth reached $261k ($A327k). Asset allocation moved away from our target but there were no dramatic changes this month:



I plan on trimming the allocation to Australian large cap stocks if and when the stock market recovers further while increasing allocations to managed futures etc. In the meantime we are trying to rebuild our allocation to foreign stocks from the bear market devastation we suffered. Leverage again reduced a little mainly due to paying off $A2,000 of my CommSec margin loan as well as bit of reduction in credit card debt and positive investment performance.

Tianjin Eco-City

We also visited the area of the planned Tianjin Eco-City on our trip to China last year. We saw even less of the site than these guys did. We did see lots of non-specifically Green development in neighboring Tanggu. Snork Maiden's father knows a bunch of people in the planning department there.

Aurora Sandringham Income Trust

I just bought 5000 shares in AOD.AX at $A1.10 a share. This used about half my available margin. The fund is not marginable with CommSec. I've long wanted to invest in this fund and brought forward the investment due to the CommSec offer of free brokerage. Eventually, I plan to reduce my holdings of other listed funds like Clime and Platinum Capital and this move is aimed at increasing diversification.

I'm classifying this as a hedge fund investment as the fund hedges its stock market exposure. I'll provide more details about this investment soon.

The picture is of the Queen's palace at Sandringham in Norfolk, UK.

From Croesus to Sirius

The news is coming thick and fast this morning. Croesus Mining is to be renamed Sirius Resources and become a base metal explorer rather than a gold explorer which once was a gold miner. There will be a capital raising via private placement. I own 2666 shares which were valued at less than 2 cents each prior to this announcement. The placement is at 0.85 cents - about half price and will increase the shares on issue by 200%. At the same time Croesus is acquiring the nickel assets of a company called Apex Minerals. Apex will receive 67 million shares and 600 million options with an exercise price of 3 cents. Mark Creasy (self-styled (?) "prospector of the century")who currently owns 45% of Croesus and some fraction of Apex will receive 267 million shares. The management of Croesus is also being changed.

The image shows the binary system of Sirius. Sirius A is the brightest star in the sky as seen from Earth. Sirius B is a white dwarf which can be seen at lower left.

IPE Placement and Rights Issue

IPE, a private equity fund of funds listed on the Australian Stock Exchange placed around 6 million new shares with a fund manager for 19 cents each and announced a 1:1 rights issue at 17 cents. The current share price is around 30 cents while net tangible assets are supposedly 84 cents per share. I had been looking to double my position anyway in order to recycle the capital return that Allco Equity Partners will be paying out and rebalance my private equity portfolio. It's good I didn't buy more shares at a higher price... on the other hand this announcement seems to have pushed up the share price, so maybe I should have... I will participate in the rights issue.

The equity raising will be used to pay down existing debt. The fund has negotiated a new $20 million line of credit with National Australia Bank contingent on the equity raising (which is underwritten). The new loan will be used to meet future expected cash calls from the private equity funds that have already been invested in. I suppose, originally they expected to meet these using distributions from other funds, which in the current environment have dried up.

Hidden in the announcement though is a plan to eventually liquidate the portfolio. Of course this is subject to shareholder approval. This would be a pity. I'd prefer them to delist as EAIT has.

P.S. 10:52am
IPE's price is now down on the announcement.

CommSec Special Offer

Commonwealth Securities are offering up to $A500 of free buy trades on a CommSec margin loan if you make the purchases before 30th June. The offer is a little odd, in that you won't be reimbursed until August. I only found out by reading the letter they sent me announcing the new portfolio LVR. As I already knew about portfolio LVR, I'd ignored the letter until today. Seems that the offer applies to existing loans as well as new ones.

I'm having a hard time reconciling my accounts this month and have put them aside for the moment. I can't figure what is wrong but a residual amount (the difference between two ways of computing investment profit), which should equal net interest and other investment fees for the month is out by more than a thousand dollars. There are a couple of other discrepancies. I'll come back to it sometime and report then.

Headhunting Progress

So I spoke with the "senior associate" from the headhunting firm that contacted me yesterday. She tried to downplay the rather ambitious job description and selection criteria, which make it seem like they want someone to solve all their problems, some of which I thought would be the role of the department head. She confirmed what I thought that there really aren't any people in Australia that specifically match the field they are interested in hiring in who have a sufficient academic track record. There are plenty of people working in industry in this area. The courses I can find online tend not to be offered by economics departments. They're in engineering schools. So while stating one area of interest they are trying to recruit people in related areas like myself. The next step is speaking to one of the partners of the recruitment firm next Friday.

HFRX up 3.15% for May 2009

HFRX - Hedge Fund Research's daily hedge fund indices based on a small sample of funds - was up 3.15% for May. By comparison, MSCI World Index was up 10.08% and the S&P 500 5.59%. As you'd expect, therefore, equity related strategies performed well. Macro and diversified systematic (which seems to include managed futures) performed poorly. As usual, these are the first hedge fund results for the month - other indices may produce different figures.

Headhunter Calls

I got a call from a "headhunter" today. That's a first for me, I think. The position is a full professor at an Australian University. They seem to think my profile fits the position though they'd need a pretty wide definition of the position if I'm going to fit in it. Well, it can't hurt to get more information. There are other academic jobs out there being advertised but I'm either under or over qualified or the fields within the discipline they have a preference for do not include mine. At this stage I don't plan to apply for jobs unless they are a good fit or are here at this university (where there are none at the moment). It's the same conundrum I faced in trying to relocate in the US. I'm overqualified for lecturer/senior lecturer positions (= assistant to junior associate professor in the US) which are most commonly advertised. But I'm probably underqualfied for full professor positions where they involve a signficant leadership/management role. And I'm not keen on that role. And those are the second most likely to be advertised. There aren't usually many ads for "Associate Professor" (=senior associate prof to junior full prof in the US).

Another Review of Taleb

I wrote a very short review of "The Black Swan" a little while ago. Here is a good but very long review of Nicholas Nassim Taleb. A summary would be: "Taleb is unoriginal when right, otherwise wrong (especially about option pricing), and a dilettante/crank".

Unisuper & Civic Video

Another two weeks on and Unisuper still haven't transferred me to the defined contribution scheme. Will I need to send in the form again?

Yesterday, I managed to lose a DVD we'd borrowed from Civic Video. I tripped over in the street and it ended up flying out of my coat pocket and down a storm drain! I phoned the store immediately and they told me to go buy one at JB HiFi in the next two weeks and bring it to them, "because that will be cheaper". There is something weird there economically, that it is cheaper for me to buy one in a retail store than for them to replace it themselves and charge me?

Luckily my wallet and keys were inside zipped/velcroed pockets on my cargo pants :)

Most Expensive U.S. Suburbs by State

Business Week has a list of the most expensive U.S. suburbs in each state. What's stunning from an Australian perspective is that in many states the most expensive suburbs are far cheaper than the median prices in all major Australian metropolitan areas.

Diversifying a China Oriented Portfolio

Glitzer asked me a little while ago to simulate a China oriented portfolio diversified with the Man-AHL managed futures fund. She specified two US listed stocks for the base portfolio - CHN - the China Fund and IFN - the India Fund with 80% allocated to CHN and 10% allocated to IFN and the remaining 10% in Man-AHL. If you invested a lump sum in these three securities at the beginning of October 1996 and rebalanced the portfolio monthly this is how they would have performed till now (ignoring transaction costs):



Everything has gone up very nicely. CHN gained 508%, IFN, 640%, and Man-AHL 724%. Glitzer's allocation would have gained 558%. But CHN and IFN have been very volatile with monthly standard deviations of 10.9% and 11.4%. Man-AHL's standard deviation is 5.2%, which is more than most developed country stock indices. Glitzer's portfolio would have had a monthly standard deviation of 9.4%. Can we improve on this?

Keeping the 8/1 ratio of CHN to IFN the allocation to Man-AHL that minimizes the portfolio standard deviation is 78% in Man-AHL (!), 19.6% in CHN, and 2.4% in IFN. This portfolio has a standard deviation of only 4.6% and ends up increasing by 805%. More than any of the funds due to the wonders of rebalancing!

Now Glitzer actually proposed dollar cost averaging - adding $1000 per month to the portfolio in the 80:10:10 proportions and not rebalancing. How would this have turned out since 1996?

We would have invested $153,000 and the current value of the portfolio would be $565,000. The current allocation would be: CHN, 80.1%, IFN, 11.4%. Man-AHL 8.5%. So there would have been a little drift from the original allocation. The total gain over the period would have been 490% and the monthly standard deviation is 9.1%. Dollar cost averaging a fixed allocation doesn't work here - it underperforms a lump sum investment with rebalancing. The optimal allocation to Man-AHL here is actually 83%. Investing a lump sum 80:10:10 in 1996 and not rebalancing would have resulted in a 463% gain with a 8.6% standard deviation. The current allocation would be 72:13:15.

The bottom line here is that based on historical performance very large allocations to managed futures are justifiable in order to improve volatility and return of equity oriented portfolios. Rebalancing helps a lot. Dollar cost averaging less so.

In the real world rebalancing costs money. But if you are investing regularly, adjusting your allocation to effect rebalancing might make sense. We don't know whether managed futures will perform as well in the future and I would not risk putting 80% of my portfolio in a single fund. I would use a smaller allocation to managed futures and distribute it across managers and use other asset types for additional diversification. And unless you live in Hong Kong like Glitzer or have your managed futures in a retirement account, you need to think about the tax implications of these funds.

Moominmama Performance: May 2009

Moominmama gained 9.21% for the month. The MSCI World Index was up 10.08%. Both gains were in large part due to the fall in the US Dollar over the month. The MSCI gained 6.51% in local currency terms and 3.06% in Euro terms. As you can see, Sterling rose about 9% against the USD. All the same, this is by far the biggest one month recorded gain Moominmama has had. Asian and Brazilian equities were the outstanding performers with commodities (including managed futures) and hedge funds lagging. Moominmama is now down 20% from the all time peak value in June 2008. We were down 31% at the worst point in February 2009. Beta to the MSCI is estimated at 0.47 with an annual alpha of -3.35%.

It's looking like Moom and Snork Maiden's gain for the month was a bit above 7.1% and a loss in Australian Dollar terms though net worth increased. The MSCI in Australian Dolalrs gained 0.8%.

April 2009 Performance Report

Now all the unlisted fund returns are in for April I can present the final performance numbers. Australian Large Cap stocks, mainly via the CFS Geared Share Fund, provided the largest returns in dollar terms while private equity mainly due to Allco Equity Partners (AEP.AX), IPE.AX, and Leucadia had very high percentage returns. The rise in the Australian Dollar over the month from 69 U.S. Cents to 73 U.S. cents caused exchange rate losses in AUD terms and exchange rate gains in USD terms.

Long-Term Returns in the Housing Market

This article from the Wall Street Journal seems pretty solid. Let me know if you can see any flaws. The bottom line is that you shouldn't pay any more to own than to rent a house (principal + interest) because the real capital gains about match the other costs including maintenance and property taxes. Of course, that ignores any utility you get from owning rather than renting...

George Friedman

If you've been around the investment blogosphere for a while, you've probably come across the writings of George Friedman, CEO of Stratfor, a "private global intelligence firm". Today, I heard George Friedman of Stratfor speak here in Australia. I guess it was part of his global book tour. His book - the next 100 years - was on sale. Usually, I don't read the stuff he writes as it seems very boring to me. I often rely on the spin a friend in Hong Kong puts on his stuff (usually negative). It was much better in person in that regard. He started out pretty well talking about the constraints that political leaders like Obama face and the lack of choice they have with some reference to Machiavelli. He then went on to say what one would have liked to predict about the 20th century and that covered three of the major points - decline of European powers, quadrupling of global population and rise of transport and telecommunications technology. After that, the stuff about Turkey or Poland as "great powers" that I've heard mentioned in regard to his book was OK but speculative when conditioned on "only because the US will invest in Poland like in S. Korea". But whenever he talked about my areas of expertise in economics and energy or to some degree about China he made little sense and sounded very clueless or flat out wrong. For example, he stated that space based solar is inevitable because land based solar would need so much land it would be an "ecological disaster". The latter is clearly not true and no-one I know who knows anything about energy thinks that the gains from 24/7 cloudfree solar could overcome the energy costs of launching a satellite. At least not with any current technology for the size of the solar collector. His other stuff about capitalism requiring a rising price of land which can only occur due to population growth made no sense to me either... and so forth. I didn't have a very high opinion of Stratfor going in - most bloggers like John Mauldin think he is great - and this didn't change my opinion.

Extended Family Update

The Snorkparents finally left on Friday morning. We had to wake up at 4am to take them to the airport. Since then we have been reorganizing and cleaning our apartment (including moving almost all the furniture to different rooms, back where it was). It's nice to have our space back to ourselves again. I'd say, that if you have a choice don't have your parent-in-law (or your own parents) live with you unless you can divide your house into two self contained apartments. I'm not talking about a short visit of course and even 3 months is on the edge of tolerable but beyond that is a major lifestyle change...

Portfolio LVR

From 1st June, Commonwealth Securities will introduce margin lending rules that allow more borrowing against securities for more diversified portfolios including raising the loan to value ratios from 0% to 40% for one hundred stocks. You need to have 5 or more securities in your portfolio to take advantage of the new rules. Anything that reduces the risk of a margin call is good news :)

Update on Repeal of FIF

There is already more information available on the web (e.g. here and here) about the repeal of the FIF rules proposed in the budget. "The government has announced that the current FIF rules will be repealed and replaced with a "specific, narrowly defined anti-avoidance rule". According to Malleson's it's possible that funds such as Man-AHL that don't make distributions (they don't mention it by name) will be targeted by the new regime. But at least it should make investing in foreign stocks more straightforward. We'll have to wait and see as more details won't be available until the government tables legislation.

Changes to Health Insurance and Superannuation

The recent Australian federal budget announced changes to arrangements for health insurance and superannuation. The former surprised me because it made me aware of a tax concession I didn't even know existed. I'll also comment on how easy it is to exceed the new superannuation contribution limits for some middle income people.

Health Insurance Australia has more or less free government health care under Medicare (with very hefty copays effectively) but also since the late 1990s has tax incentives to encourage people to take out private insurance. When the Howard government introduced the current tax incentives (I lived in Australia at the time) I was under the impression that people earning less than $A30k a year would get a 30% rebate on the cost of their health insurance while people earning more than $A50k a year (which was the top tax bracket when the Howard government came to power!) would be taxed 1% extra a year - the Medicare Surcharge - if they didn't have private health insurance. This 1% wasn't marginal but applied to your entire income. Earn $A1 over $A50k and you got hit by a $A500 charge. The surcharge was also raised higher for a while. I knew that the threshold for the surcharge had been raised to $A75k a year, but what I didn't know was that rebates for private health insurance appear to apply at every income level. I found this out only because of the Rudd government's decision to means test them. Did I misunderstand the original structure of the Howard scheme? Or were the rebates extended to higher incomes at some point?

Back when I lived in Australia in 1996-2002 I never found it worthwhile to get private insurance as mostly I got my income below $A50k and even if I hadn't the insurance seemed to cost about as much as the charge and I like to avoid this kind of hassle. And I had no idea what benefits private insurance might give me. Now both Snork Maiden and I will probably earn less than the $A75k threshold for the 2008-9 and 2009-2010 tax years. When we had to take out private cover for Snork Maiden it cost around $A1,000 per year. Australian Unity quote a rate of $110 per month for the most minimal coverage for the two of us together and I think that is after the rebate of 30%. So it would make sense if both of us earned more than $A75k per year but not before we hit that level...

Superannuation The government lowered the maximum limit for concessional contributions to superannuation (taxed at 15% instead of your marginal rate) from $A50k per year to $A25k per year. It's important to note that required employer contributions are included in this limit. If you exceed the limit you are hit by an extra 31.5% tax on the contributions. The Unisuper superannuation scheme in the higher education sector has extremely high contribution rates. Employers contribute 17% of salary to the fund (instead of the legally required 9%) and employees contribute 8.25% from pre-tax salary. Any academic earning more than $99k per year - i.e. the Associate and Full Professor levels at most universities - will exceed the new limit. You can instead pay the employee contribution post-tax. Then you'll need to earn $A147k to exceed the limit which covers all regular full professors. But anyone in those ranks needs to switch to post-tax contributions.

I'm sure most senior administrators come in above that level - e.g. a department head who is a professor will probably earn an administrative supplement on top of the professor's salary and deans must earn more than that. Also some professors earn more than this due to supplements for people in some areas like law or additional fellowships like the Federation Fellowships. John Quiggin, for example, has one of these and, therefore, has a salary close to $A 1/4 million. These people will need to get their employer contributions lowered and their salary raised (with larger post-tax contributions) to reduce tax. I don't know if that flexibility is available.

Hedge Fund Returns for April 2009

HFRI returned 3.74% for April while Credit Suisse/Tremont estimate that hedge funds only gained 1.68% which is very close to the HFRX estimate of 1.61%. Both providers agree that convertible arbitrage did very well (5.73% or 4.52%). Short bias of course did horribly, macro not very well, and hedged equity strategies OK to good.

For comparison the MSCI World Index gained 11.90% in USD terms, while Moom gained 12.76%. Our target portfolio would have gained 7.32% (in AUD terms: 5.89%, -1.29%, 6.75%). The AUD target portfolio suffered due to a loss in Australian shares and managed futures plus the rise in the AUD.

FIF Rules to be Repealed

Apparently, the Australian federal budget announced on Tuesday repeals the Foreign Investment Fund (FIF) rules which apply to investments in foreign domiciled managed funds and stocks. These rules are rather complex but essentially mean that with many exceptions you must pay tax on the annual change in value of your foreign investments whether you actually sold that investment or not. In essence they are all treated as trading assets and you do not have access to the lower rate of capital gains tax applicable to investments held for more than 12 months. These rules don't apply to funds based in Australia that invest in foreign assets.

If they are really repealed that would be very good news. One of the effects would be to advantage investing in Man Financial's managed future products over the alternatives. Man does not distribute income on a regular basis but instead accumulates it within the fund. However, Man funds are FIFs, while the competitors products are not. We'll have to see the exact details to know all of the implications.

Unisuper Member Pack Arrived

My membership certificate and other info finally arrived from my new superannuation fund, Unisuper. They completely ignored all the choices I made on my application form (apart from noting my tax file number - equivalent of the SSN in the US) and so now I need to submit them again. Including switching to the accumulation plan from the defined benefit plan. This seems to be par for the course for every retirement plan I or Snork Maiden have joined. No wonder people tend to stick in the default options provided by retirement plans!

I also added $A2,000 today to Snork Maiden's non-retirement account with Colonial First State and paid off another $A2,000 of my margin loan with CommSec. It's nice to have money to save again!

Back from Queensland

Got back last night from our trip to Port Douglas in Northern Queensland with the Snorkparents. Yes, we did see two cassowaries just like these crossing the road in the Daintree National Park. We'd already passed them as they came out of a "concealed driveway" when Snork Maiden spotted the flash of blue color from the corner of her eye. There was lots of other cool stuff. I tried snorkelling for the first time and saw some coral, a fish, a sea cucumber, and a sea slug kind of thing. I found it pretty challenging though. Sooner or later I made some mistake with breathing and had to surface to breath properly. I was managing longer stretches each time so think I need a lot more practice... The others didn't try it or get wet apart from the rain. It rained every day, but then it is a tropical rainforest, even if it was at the beginning of the dry season or end of the rainy season. On the other hand, I felt more comfortable than I ever have in a tropical climate due to the lack of sunshine. At times I even felt a little cold!

Back down south and back to "reality". Another paper I submitted for publication was rejected - par for the course - I still have two out there under review. One referee said they had no idea about the topic, the other said it was great, and the third actually had substantive criticism. So it shouldn't be too much work to get it ready to submit to another journal. OTOH, checking my citations for the week I found I have 8 new articles in the Web of Science citing me for a total of 11 citations. I'm up to about 90 citing articles year to date which is pretty good in my discipline. So getting a paper rejected is less upsetting than it might be if I was a beginning researcher. Of course, when I was a beginning researcher I expected to get rejected and so wasn't so upset by it. If you've ever heard that almost no-one reads any given scientific paper, that is incorrect - the distribution of papers by number of readers and citers is very unequal. Many are never cited and probably little read. Others are very highly cited and read.

Today, I did the "induction course" at my workplace. I did learn some things despite having worked at this university in the past. Some things have changed and some I never knew.

Hedge Fund Returns for April 2009 Begin to Trickle In

The HFRX is reporting a gain of 1.61% for April. Equity market neutral and macro strategies lost money while convertible arbitrage did well. HFRX is based on a sample of 55 funds with a proprietary weighting scheme.

Currency Allocation

Our currency allocation is getting really out of whack as the Australian Dollar rises and Australian shares perform well and we spend USD. We currently have 60% roughly in AUD associated investments and 20% in USD and 20% other. The goal was to be 50:50 exposed to the AUD and other currencies. It makes sense to try to find foreign investments and maybe stop spending USD, but the AUD seems near fair value, so despite the imbalance we won't be selling AUD investments and buying foreign exposed ones yet.

It's the same with our stock exposure. It's way above the long-term target, but with stocks probably still undervalued it doesn't make sense to sell, I think.

April 2009 Moominvalley Report

This month saw one of the largest gains in net worth in dollar terms USD 31,220 (second biggest after April 2008) and was the biggest percentage gain in USD terms (14.31%) since October 2001. Not so spectacular in Australian Dollar terms - a gain of $A26,968 (third biggest after August 2008 and October 2001). Only a 9.22% gain in USD. What happened in October 2001? I quit my job at the university I'm now again working at (well it was the end of my contract but I still got a substantial termination payment). And the stock market was rebounding from the September 2001 low. This time we are also in rebound mode, I got my first pay (2 months worth) for my new job, Snork Maiden got paid 3 times for the month and we got some refunds for trips from her employer (which we make money on effectively). The crisis feeling has certainly relaxed. But at this point in 2001 it looked like the bottom was in the stock market too...

The following is based on the available data as a couple of funds as usual won't report till near the end of the month, when I'll give a final asset class performance report. As usual everything is in US Dollars unless otherwise stated.

The MSCI World Index rose 11.90% in USD terms and the SPX rose 9.57%. We gained 12.33% in USD terms (6.30% in AUD terms). Performance was strongest in private equity (34.66%) followed by US stocks (10.42%) and the Australian Dollar gained. Leverage also helped for a change. Alpha measured against the USD MSCI was 3% with a beta of 1.16 currently. Beta has had some crazy fluctuations through the financial crisis:



We spent $6,153, which is very high. More than $2,000 was on flights for four people and accommodation in Queensland (upcoming trip). Actually, we spent $3,189 from Snork Maiden's U.S. accounts which have been designated for expenses on the Snorkparents visit. No idea what we spent the other $1000 on apart from some restaurant meals in Sydney. So cutting that out, expenditure was pretty normal:



Transfer to super is my after tax contribution to my super account in a bid to get the government's "co-contribution".

As you can see from these accounts our retirement accounts and non-retirement investments gained about the same this month. Net worth reached $233k ($A319k). Asset allocation moved away from our target as Australian stocks gained strongly and the shares of everything else in our portfolio fell:



The main move I made was to reduce hedge fund exposure by selling some shares of Platinum Capital and to consolidate our U.S. brokerage accounts with Interactive Brokers, in the process paying off two small margin loans in Euros and Pounds. So our leverage continued to decline this month. Paying off credit cards also helped. We are now borrowing just 12 cents for each dollar of equity (we hit 38 cents per dollar at the peak) and including borrowings by levered funds we are borrowing 51 cents per dollar of equity. This measure reached 90 cents at the worst point.

Sixteen (or twenty four) Accounts

I'm just checking all our bank accounts, credit cards, and loans at the end of the month to record the data in my monthly accounting exercise and pay any bills that need to be paid. I made a list on my computer to check off against and realised there were sixteen accounts to check. Of course we have more total accounts than that. Actually, another six investment and retirement that don't have cash or debt balances to check and then there is the apartment deposit and the car value. So twenty four accounts in total. And I just closed one this month (TD Ameritrade - I still have a Roth IRA with them).

Don't know if this is a lot. Some bloggers have reported higher numbers...

Moominmama Performance April 2009

Moominmama gained 3.91% for the month. Pretty nice, though not much compared to the MSCI World stock index. Brazilian stocks did very well, unfortunately we only had 0.60% of the portfolio in them. Equities and bonds generally did well and alternatives poorly.

MSCI World Index Up 11.9% for the Month

In USD terms. Currently I have us up 12.65% in USD terms and 6.62% in AUD terms - likely that the final numbers could be slightly higher - Snork Maiden's retirement account has a scheduled outage till Monday morning... Of course we won't have a real final number for April till the end of May when Everest and Man get around to reporting their unit prices for April...

The MSCI is up just 0.07% YTD. Been a bumpy path.

Got Our "Stimulus Payment"!

Checking our bank accounts in preparation for the monthly report I noticed a discrepancy in the numbers and realised that our $A900 stimulus payment arrived today (1 May) from the Australian government. As I explained only Snork Maiden will get a stimulus payment which was reduced to $A900 instead of $A950 following the bargaining process in the Senate.

I Got Paid!

Finally. It's two months worth of pay. I paid off the credit card bill which was around $A3,800. Now we have $A6,000 worth of borrowing capacity there. $A5,000 available on the Australian margin loan, and about $A4,000 in our Australian bank accounts. Of course there is more cash and borrowing capacity in our US accounts. We don't have an emergency fund as such. The goal now will be to build more borrowing capacity again. The money that is in the bank accounts that isn't spent in the next month will be allocated to investment and reducing the margin debt.

One of the things I want to do is take advantage of the Superannuation Co-contribution Scheme. Low income individuals (who get more than 10% of their income from employment or business) are eligible for a government contribution of up to $A1.50 per $A1 contributed from after-tax income to a superannuation (retirement) fund up to a limit of a $A1,500 government contribution. I should qualify for the full co-contribution I think as I'll only be employed for 4 months this tax year (which ends on 30th June).

Target Portfolio and Asset Class Performance: Australian Style

As promised this post looks at the performance of our target portfolio from the perspective of an Australian investor. As I did in a post in December I am representing foreign shares by the MSCI World Index converted into AUD and Australian shares by EWA converted into AUD. The other asset classes are as in the U.S. post but again converted to AUD. However, the managed futures fund and hedge fund index have the exchange rate risk hedged out as is standard for products of this type offered in Australia, but the foreign stocks, bonds, and real estate are not hedged. The target portfolio is modeled as:

EWA: 30%
MSCI: 17%
CREF Bond Fund: 10%
TIAA Real Estate Fund: 10%
Credit Suisse/Tremont Hedge Fund Index (hedged into AUD): 14%
Man AHL Managed Futures (hedged into AUD): 14%
AUD Cash: 5%

Again 20 cents is borrowed (in AUD) for each dollar invested.



The target portfolio performs pretty nicely - it doesn't manage to avoid losses in either bear market but it doesn't suffer a sharp drop in the current bear market, outperforming Australian shares since the market peak. The target portfolio has a mean monthly return of 0.78% and a Sharpe ratio of 0.69 vs. 0.65% and 0.28 for Australian shares. Again, a mix of hedge funds and managed futures would have done even better (ignoring tax implications).

March 2009 Final Performance Report

Now all the unlisted fund returns are in for March I can present the final performance numbers. Australian Large Cap stocks, mainly via the CFS Geared Share Fund, provided the largest returns in dollar and percentage terms.

Our foreign stocks appeared to perform poorly relative to the benchmark indices. But the numbers are confusing because there is an important distinction here between individual stocks and Australian based foreign stock funds. In the former, performance is computed as total return in USD, Euros, or Pounds. I then convert those numbers to Australian Dollars at the end of month exchange rate (and to USD too for the European investments). The effects of changes in the exchange rate on the value of these investments are then included in the foreign exchange item below the subtotal line in the table. The returns on these stocks should be compared with the MSCI in USD terms. By contrast an Australia based managed fund reports monthly returns in Australian Dollars and incorporates any effects of the exchange rate on asset values in that number. Therefore, those funds' returns need to be compared to the MSCI in AUD terms which only rose 0.39% for the month.

Real Estate had a negative impact on returns as did private equity and commodities (Man OM-IP fund).

The rise in the Australian Dollar over the month from 64 U.S. Cents to 69 U.S. cents caused exchange rate losses in AUD terms and exchange rate gains in USD terms. Either way we beat the market though time series estimates of our portfolio beta are around 1.2 so we should expect to outperform a rising market.

Asset Class Performance Through the GFC

This post follows up with the performance in the last 4 month of the asset classes I discussed in the context of endowment style portfolios in December. The chart shows a bunch of funds and indices and a simulation of my current "target portfolio" - the thick brown line - through the end of March. That's not the portfolio I have, which is heavier in stocks and lighter on managed futures but the one I am aspiring to in the next few years. The simulation uses:

47% MSCI World
14% Credit Suisse/Tremont Hedge Fund Index
14% Man AHL Managed Futures
10% TIAA Real Estate
10% TIAA Bond Market
5% AUD Cash

Then a 50% hedge into the Australian Dollar is applied and the portfolio is invested in with 120% of equity (i.e. borrowing an extra 20 cents for each dollar). Returns are in USD terms. The portfolio certainly does not escape the financial crisis and by following the path of the AUD you can see that the hedge into Australian Dollars exacerbates the bad performance.

The portfolio did well in the previous bear market but except for a portfolio constructed of bonds and managed futures this bear market has been too sharp for anything to do well.

The target portfolio has a beta of 0.86 and an annual alpha of 5.66% relative to the MSCI World Index. Not considering tax consequences, you could have constructed a smoother and better performing portfolio from managed futures, hedge funds, and real estate. Or really just managed futures and hedge funds...

Next up, I'll look at the problem from the Australian investor's viewpoint (i.e. in AUD)