Income and Tax History

Reading one of ESI Money's millionaire interviews I was inspired to track our income from previous tax returns (all on this blog). While I was at it, I added the tax as well:

Moominmama's income has actually been more consistent. From 2015-16 there was a fall due to taking maternity leaves and a spike last year due to trading income in her account. My income was low at first after we moved to Australia as I didn't have a job and was trying to trade. My tax was actually negative in those years due to franking credit refunds. My income rose to the $50k zone when I got a part-time academic research job and then very steeply when I became a professor. Since then it has drifted slowly upwards.

2019-20 Taxes

I just completed our tax returns for this year. As usual they only took a few hours as I am very well-prepared with spreadsheets updated throughout the year. Preparing taxes is mainly a case of checking that all the spreadsheet links and calculations are correct and refreshing my memory about some of the details of what goes where on the tax form. Last year's taxes are here.

Here is a summary of my taxes (To make things clearer, I reclassify a few items compared to the actual tax form):

On the income side, Australian dividends, capital gains, and foreign source income are all up strongly. My salary still dominates my income sources but is not really growing and we have a pay freeze for next year.

Interest is Australian interest only and is up strongly due to interest on Macquarie, Woolworths, and Virgin Australia bonds.

Unfranked distributions from trusts is up strongly due to the huge distribution from the APSEC fund I invested in just before the end of the tax year. That was a bad move. Foreign source income is mostly dominated by foreign bond interest and losses on futures trading. Other income is gains on selling bonds. These aren't counted as capital gains.

After recording a net capital gain for the first time in a decade last year, I again have zero capital gains and I am carrying forward around $150k in losses to next year. Foreign source income is mostly from futures trading and bond interest. 

In total, gross income rose 6%.

Increased deductions are mostly due to losses on selling bonds. Interest rates are historically low and most bonds that you will be able to buy have higher nominal interest rates. As a result, these bonds are priced above par. If you hold them to maturity you have a loss that is more than offset by the interest received.

Dividend, foreign source income, and trust deductions are all mostly interest on loans.

Total deductions rose strongly, and as a result, net income fell 2%.

Gross tax is computed by applying the rates in the tax table to the net income. In Australia, you don't enter the tax due in your tax return, but I like to compute it so that I know how big or small my refund will be.

Franking credits (from Australian dividends), foreign tax paid, and the Early Stage Venture Capital (ESVCLP) offset are all deducted from gross tax to arrive at the tax assessment. I again expect to pay extra tax.

I paid 30% of net income in tax. Tax was withheld on my salary at an average rate of 32%.

Moominmama's (formerly Snork Maiden) taxes follow:

Her salary was down a lot because of maternity leave. Dividends and capital gains were up strongly due to investment in various listed investment companies and Commonwealth Bank hybrid securities. Foreign source income was down strongly due to losing on trading this year rather than gaining last tax year. As a result, total income fell by 23%.

Deductions rose dramatically, because of recording trading losses as deductions and starting to deduct interest against dividends. As a result, net income fell 42%. Tax was 15% of net income. Tax withheld on her salary was really high for this income level.

Because income was very high last year, Moominmama had to pay tax installments every three months over the last year. As a result, her expected tax refund is almost as large as my expected tax payment. On net, we need to pay about $500 in extra tax.

Completed Internal Rates of Return

I posted recently the internal rates of return for 66 of my investments. I've now completed the calculations for all 94 investments that were held for more than one year:

Shaded returns are investments that I currently hold. The median rate of return is 5.1%. Most of the larger investments are above the median as are the majority of current investments. The median return of current investments is 9.1%.

Powertel and Looksmart were some dotcom era investments that worked out. DeepSkyWeb one that didn't. I can't even remember what FTS was. I held it in 2007-8. Newcastle was a mortgage fund that blew up in the GFC. Legend was a Joe Gutnick mining company that went to zero and HIH an insurance company that was the worst bankruptcy in Australia's history.

August Investment Performance

As my performance statistics over the last 5 years are looking good again, I thought I would start posting them again :)

The first two rows give the average annual rate of return and the Sharpe statistic in the two currencies. These are the kind of numbers I would aim for... Until recently, I was performing better in Australian Dollar terms. Now it depends on which statistic you look at. 

The remaining four lines compare performance to the MSCI (global stocks), ASX200 (Australian stocks), and HFRI (Hedge fund) indices. The first two have all dividends and tax credits included. My portfolio has a subdued reaction to the first two indices (beta < 1) but is more volatile than HFRI. Alpha is the annual return after deducting the part explained by the index. It helps increase the upside and reduce the downside moves.

The final two rows show the same thing in a different way. Down capture divides the average return of the portfolio by the average return of the index in the months that the index went down. Up capture does the same in the months that the index rose. I have a positive asymmetry against all three indices.

Internal Rates of Return

I have now computed the internal rate of return for 66 investments including all current investments. I excluded all trading involving futures, shorting etc and all names held for less than a month. There are still around a hundred closed investments that need to still be evaluated. In the meantime, here are the results:

• The top performer was held for under a year. Probably, I should drop everything held for less than a year...
• At the bottom are two investments that went to zero. 
• The median return is 6.25%, but most of our larger investments are above the median.
• I bought shares in Colonial in the demutualization and then it was taken over by Commonwealth Bank. This was my best investment in terms of rate of return.
• Pershing Square Holdings is looking very good at #3.
• AAPT was an Australian telecom that did very well and was acquired by Telecom NZ. I think I bought that in an IPO too.
• I only held Qualcom for a short time.
• Rounding out the top 10 are five recent investments that are strong performers.
• A lot of the entries in the right hand column are bonds.
  

August 2020 Report

The US stock market continued to rise as the US dollar fell. The Australian Dollar rose from USD 0.7159 to 0.7380. The MSCI World Index rose 6.16%, the S&P 500 7.19%, and the ASX 200 3.09%. All these are total returns including dividends. We gained 3.03% in Australian Dollar terms and 6.03% in US Dollar terms. The target portfolio is expected to gain 1.89% in Australian Dollar terms and the HFRI hedge fund index 2.46% in US Dollar terms. So, we outperformed the latter two benchmarks and almost matched the stock market indices. Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Small cap Australian stocks performed best and hedge funds contributed the most to overall return.

 
Things that worked well this month:

• Regal Funds (RF1.AX) was the top performer, up AUD30k, closely followed by Bluesky Alternatives (BAF.AX, 22k), and Hearts and Minds (HM1.AX, 19k).
  
• Domacom (DCL.AX) doubled in price from 4 to 8 cents. Half my position was bought at 2 cents a share. But then the company voluntarily suspended its quotation pending an announcement about a major transaction. The trading halt started on 19 August and there is still no news, though the company did release its annual report.
  
• The Aura Venture Fund reported that it performed very well in the June quarter. In retrospect, it was easily the best performing investment that month.
  

What really didn't work:

• Winton Global Alpha Fund continued to lose money. The fund announced that a special meeting of unitholders will consider broadening the strategy and lowering the fees.
  

We moved further towards our long-run asset allocation. The share of hedge funds rose most while the shares of bonds fell the most:

 

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• I bought small positions in URF.AX, CDM.AX, RF1.AX, TGF, AX, and PE1.AX in my Commsec account (for a total of 1% of net worth roughly) with the aim of getting better tax information on distributions than provided by Interactive Brokers.
• I bought 13,719 shares of Platinum Capital.
• I bought 25,000 shares of Bluesky Alternatives and 1000 shares of 3i to increase our private equity position a little.
• I opened an account with Masterworks and bought 500 shares in my first painting for USD 10k.
• USD25k of Goodyear bonds, USD25k of Safeway bonds, and USD28k of Xerox bonds matured.
• I bought net AUD 60k and GBP 14k and sold net USD 61k.
• I closed the 2 year-10 year US treasuries September futures spread and shorted 1 contract of December 10 year bonds  futures.
  

What is my Best Investment?

I was just listening to a pod-cast where the host asked the guest (Karsten Jeske) what their best investment was and they could give an answer in annual percentage terms. Up to now, I have tracked returns of individual investments in absolute dollar terms. I can easily say which has been my best and my worst on that basis. The best was the Colonial First State Geared Share Fund and the worst has been the Tribeca Global Resources Fund. But dollar returns depend on the amount invested. I do have average monthly percentage returns for many investments, but properly taking into account transactions is hard. So, I thought that I could compute the internal rate of return. This does take all transactions properly into account. You need to compute each monthly net cashflow into the investment (which I already have in individual spreadsheets I keep on each investment) and then for the current month assume that the investment is sold at the current price. Excel has an IRR function that can be applied to the column of cashflows.

I plan to do this slowly as I have invested in around 200 different things. The first three I did are gold (34% p.a.), China Fund (14% p.a.), and 3i (6% p.a.). 3i was surprising as this is a lot less than the average annualized monthly return of almost 14%, that I previously computed.

Masterworks

Masterworks are a fairly new firm offering securitized investments in artworks. They buy paintings by recent and living artists and then sell shares to investors. They charge a 1.5% per annum management fee and plan to charge 20% of profits when an artwork is sold. They also get a markup on the price that they pay, presumably to cover acquisition and offering costs. I am interested in investing a small amount and have scheduled an interview to talk to them. They interview all new clients. One thing that interests me is our family connection to art. My father's family were antique and art dealers before the Second World War in Germany. My brother is an amateur artist who has sold a couple of paintings, I think, and my mother painted as well. But this doesn't give me any particular insight on the financial side of the art market. I'd aim to diversify across the paintings they are offering.

This investment is more equivalent to private equity buyout rather than venture capital. It doesn't make sense for the firm to buy a painting for $10k or $100k by an unknown artist hoping that it will appreciate because they make a separate special purpose vehicle filed with the SEC for each of their offerings. So they are buying paintings at around $2 million or so a piece.

P.S. 25 August

I had my interview today with a representative from Masterworks and was approved to start investing. I learnt that there is a USD10k minimum investment for the primary offerings. I now made my first purchase and have transferred the money using OFX. Based on the spot exchange rate, it cost 1.45%. I tried using my US bank but couldn't work out an online method that works.

Aura Venture Fund

The value of shares in the Aura Venture jumped from AUD 0.75 to AUD 1.28 in the June quarter. This turned our performance for June from a negative Australian Dollar return to a positive 0.84%.

The 75 cents price reflects that only 75% of the capital was called at that point. Since then there was a further 10 cents call. This big increase moves this investment from a losing investment to our 7th best of all time in dollar terms. And the gains are tax-free. Of course, all such valuations are somewhat theoretical until they actually exit the investments, but it makes me feel better about this investment and my commitment to invest in their next fund. On the other hand, the portfolio value was upvalued based on the announced acquisition of one investee company at around 2 times the entry price and a funding round at another that reflected a valuation 109% premium over the fund's entry point.

Adjusting the Target Portfolio

Given the continued underperformance of managed futures, I think I am going to again lower my allocation to this asset class to 5% from 10%. I've never gotten above 5% in managed futures funds anyway. In place of this, I could raise the allocation to real estate to 15% or raise both real estate and gold to 12.5%. Or is there something else I should allocate capital to?

Investing During the Pandemic

Financial Samurai's blogpost got me wondering how much I had taken advantage of the decline in asset prices earlier this year to add to my investments. So, I put together a table of all my exchange traded investments that aren't bonds plus the APSEC fund I recently invested in.  Not included are bonds, other unlisted funds such as Winton Global Alpha,  Aura Venture Capital, our Colonial First State Funds, the Everest Fund that recently wound up, and all our superannuation funds. The idea is to capture where I have made deliberate rather than automatic investments. 

The table presents snapshots on 1 February, before the pandemic had effects in Western countries, and today. The number of shares held is self-explanatory. Investment is the net cash invested in that investment. So, making an investment increases the number and withdrawal reduces it, but dividends and distributions that aren't re-invested also reduce it. All the numbers are in Australian Dollars and so the numbers also declined for 3i, Boulder, China Fund, and Pershing as the Australian Dollar rose. Investment per share is the investment number divided by the number of shares.

In total, I added $334k to these investments over this period. Most of this money came from maturing bonds. There are a lot of different patterns though. I might have made a mistake in investing the most in funds that were trading at the biggest discount to net asset value rather than what turned out to be the strongest funds. I didn't invest anything in Hearts and Minds and not much in Regal. I got a lot of extra shares in Cadence and Tribeca, which is a bet that they'll do better in the future. I increased my Pengana investment mostly because I thought I needed to invest more in private equity and because the fund had been trading at a big premium to net asset value. It's partly a bet that the premium will come back.

In general though, I have been cautious investing during this period because I invested a lot in early 2008 after the initial fall in the market, only to lose big later in the year. 

July 2020 Report

The US stock market continued to rise as the US dollar fell. The Australian Dollar rose from USD 0.6884 to 0.7159. The MSCI World Index rose 5.33%, the S&P 500 5.64%. The ASX 200 only rose 0.50%. All these are total returns including dividends. We gained 1.76% in Australian Dollar terms and gained 5.82% in US Dollar terms. The target portfolio gained 1.57% in Australian Dollar terms and the HFRI hedge fund index 3.24% in US Dollar terms. So, unusually, we outperformed all benchmarks. Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Gold performed best and futures worst. Gold contributed most to the total return.

Things that worked well this month:

• Gold gained AUD 39k as the metal hit a record high. It is now our fourth best investment ever in dollar terms. Only the CFS Geared Share Fund and the Unisuper and PSS(AP) superannuation funds have made us more money.
• Tribeca was the next best performer gaining AUD 15k.

What really didn't work:

• Pengana Private Equity lost AUD 4k.
• My Virgin Australia bonds lost AUD 3k. In the coming month we'll find out how much they are really worth.

We moved further towards our long-run asset allocation. The share of private equity rose most while the shares of bonds and futures/cash fell:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• We participated in the Pengana Private Equity (PE1.AX) rights issue buying 18,000 shares.
• I bought AUD 50k of Australian Dollars and used 40k to reduce my margin loan at CommSec.

It was a fairly uneventful month.

 

P.S. 8th August

I just realized we hit a new high net worth in US Dollar terms this month, exceeding the previous high in December. Details are at NetworthShare Quite remarkable given the circumstances. In Australian Dollar terms we are 3% below the January high.

2019-2020 Spending

Here is our spending for the Australian financial year 2019-2020. The shaded areas are sub-categories of the main categories above them. The table also shows the spending shares in the previous financial year and the change in share. These numbers include some spending that we don't include in our usual monthly reports to make the report more comparable to others you might see online. This includes mortgage interest and life insurance. Health insurance and medical expenses are net of reimbursements by the health insurer and the government. All numbers are in Australian Dollars.

Monthly spending increased from $10.7k to $12k (USD 8,250). This is more than my after-tax salary... Housing was again the largest spending category but supermarkets overtook health as the second largest. Spending on mail order and childcare and education are now both ahead of health. The shares of health and housing fell the most due to reduced mortgage interest and medical spending. Our second child was born 26 June 2019 and expenditure around that was mostly incurred in the previous financial year but we got some reimbursements in this financial year. Mortgage interest was down because we had a lot of money in our offset account leading up to the "mortgage inversion" and because the loan is just getting smaller and interest rates are falling.

I spent a lot more on taxis and Uber (I don't have a driving licence). A lot of this was because in the early months of Moominmama's maternity leave I took Moomin to daycare at her workplace before going on to my work. But also, I am getting less patient with the time it takes to get around on public transport when I have increased childcare duties. When it's convenient I get a bus, when it's not I get an Uber or taxi.

Childcare expenditure rose because we now have two children and because we got a lot less subsidy as our income rose. On the other hand, after the pandemic started we got free childcare, so this category will rise even more next year, probably. Mail order spending was up 86% on last year. This is partly because after Moominmama went on maternity leave she did a lot more mail order. But department store (all non-supermarket goods retail) and supermarket spending were also up. Across the three categories, spending was up 47%. Cash spending fell further to just $1,600, though some of the supermarket spending includes cash withdrawals by Moominmama.

I'm also tracking income, tax, and savings in the same spreadsheet. But these numbers are all still really uncertain until we are ready to submit our tax returns in a few months time. Very roughly, half our income goes to spending, a quarter to tax, and a quarter to saving.

June 2020 Report

The stock market continued to rise, though at a slower pace. Things gradually edged towards normality here in this part of Australia. Our spending bounced back to near pre-crisis levels at AUD 10.2k for the month. About AUD3k of that were dental costs for Moomin. Hopefully, all fixed up now.

The Australian Dollar rose from USD 0.6647 to 0.6884. The MSCI World Index rose 3.24%, the S&P 500 1.99%, and the ASX 200 2.66%. All these are total returns including dividends. We lost 0.65% in Australian Dollar terms and gained 2.91% in US Dollar terms. The target portfolio is expected to have gained 0.59% in Australian Dollar terms and the HFRI hedge fund index 1.26% in US Dollar terms. So, we came close to the MSCI return and outperformed HFRI but underperformed the Australian Dolar benchmarks. Despite my attempts to diversify, returns during this crisis have closely matched the MSCI World Index:

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

The returns reported here are in currency neutral terms. Gold and rest of the world stocks performed best and private equity worst. Gold contributed most to the total return.

Things that worked well this month:

• Regal Funds gained AUD 17k. We are now back in the black on this investment.
• Gold gained AUD 12k.

What really didn't work:

• Tribeca Global Resources lost AUD 20k, though it's still above the March low...
• Pengana Private Equity lost AUD 10k. It was at an unsustainable high level and then a rights issue at a much lower level was announced. So, this is actually OK I think.

We moved further towards our new long-run asset allocation. The share of hedge funds rose most while the shares of bonds and futures/cash fell:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• I sold USD 5k of Tupperware bonds. I probably acted too quickly on that one.
• I bought 12,000 shares of Tribeca Global Resources. Probably a mistake too.
• I bought AUD 35k of Australian Dollars.
• I sold 20,000 shares of Pengana Private Equity (PE1.AX) and then bought back 40,000 shares at lower prices. I also subscribed to the rights issue.

Some Updates

Today I met on Zoom the accountant who has agreed to certify me as a wholesale investor. There are two reasons I want this certification. First, Interactive Brokers will only lend me AUD 25k as a retail investor. Second, I want to invest in a new Aura Venture Fund. The accounting firm is Nexia.

Before the Great Financial Crisis I invested in the ill-fated Everest Babcock and Brown fund of hedge funds. We finally got the final payout from this fund last week. In the end we lost AUD 12,348 from this and related investments.

Employees at my university narrowly voted in favor of freezing pay, which was scheduled to rise 2% next month. I won't be surprised if they soon try to get me to retire, though at this stage we don't have a good idea of what will happen to student demand going forward. Clearly, fewer people will want to study abroad for a long time. But one hypothesis is that Australia will rise in preference relative to the US and UK as a destination. Moominmama decided to not go back to work for another 3 months. On the spending side we decided to send Moomin to a private school. He has been going 2 days a week to their pre-school this year (and 2.5 days to the local public school). So, spending on childcare and  education is only going to ramp up....

Aura Venture

I wrote a post when I first invested in the Aura Venture Fund but have only mentioned it briefly since then.  I committed to invest AUD 100k in the fund and to date AUD 85k has been called. Venture capital funds only ask investors to put in money when they have new investments to make. My pre-tax return is a loss of AUD 750. But there is a tax offset equal to 10% of your investment for investing in early stage venture capital and so I am ahead after tax. There is no Australian tax on fund earnings or gains. Some of the firms in the portfolio have done quite well and have been revalued upwards. Others have not done so well, but the worst is worth 80% of the value at initial investment. Most of the invested companies are software/web based services and so should do well in the current environment. So, I am hopeful that this will turn out to be a successful investment.

Now, Aura are launching a second Australian venture capital fund. This fund is bigger and the minimum investment is bigger (AUD 250k). The initial investment is 25% of the committed capital. So, I am thinking to also invest in this fund. I think that the first fund will begin to make distributions during the time that the new fund is investing, so that my total invested capital wouldn't hit AUD 350k. All the same, it feels a bit risky investing so much with one manager, as my usual guideline would be to invest a maximum of 5% of net worth. We do have three funds with more than 7% of net worth but they are all quite diversified.

May 2020 Report

This month the stockmarket rose at a slower pace.

This month, our spending was again low relative to pre-COVID-19. We spent AUD 5.3k which is up on April's AUD 4.6k.

The Australian Dollar rose from USD 0.6524 to 0.6647. The MSCI World Index rose 4.41%, the S&P 500 4.76%, and the ASX 200 4.42%. All these are total returns including dividends. We gained 2.49% in Australian Dollar terms and 4.40% in US Dollar terms. The target portfolio is expected to have gained 1.53% in Australian Dollar terms and the HFRI hedge fund index 1.69% in US Dollar terms. So, we strongly out-performed these latter two benchmarks and matched the MSCI return.

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

The returns reported here are in currency neutral terms. Small cap Australian stocks and hedge funds again performed best after a terrible performance in March and a strong performance in April. Hedge funds and bonds contributed most to the total return.

Things that worked well this month:

• Regal Funds and Pershing Square Holdings were the top performing assets in dollar terms. Some other listed hedge funds (Cadence, Tribeca) also did well.
• Gold.
• CFS Developing Companies Fund.
• Pengana Private Equity.
• Domacom continued to rebound from the lows of March.

What really didn't work:

• Winton Global Alpha managed futures fund lost 4.6%. I now have lost money overall from investing in this. Is trend-following really dead?

We moved further towards our new long-run asset allocation. The share of hedge funds rose most while the share of bonds fell most:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• Dish and Scorpio Tankers bonds matured, releasing USD 50k plus interest.
• I invested AUD 100k in the APSEC hedge fund.
• I bought 20,000 more shares of the Tribeca Global Resources Fund (TGF.AX). 
• I sold 20,000 shares of Pengana Private Equity (PE1.AX) when the price rose a lot above net asset value.

Margin Loan Limits

So, Interactive Brokers finally allowed Australian clients to again borrow money. I enabled margin borrowing on both Moominmama's and my account. I was surprised at how low the buying power was. Much, much lower than the standard FAQ suggested. It turns out that retail clients borrowing power is capped at AUD 25k! This is stated in the footnote on that page. This seems crazily low to me. I currently have a loan cap of AUD 500k with Commonwealth Securities. But their margin rates are far higher. If I can show I am a wholesale investor  I could get the cap lifted. If they require individual income of AUD 250k and/or net worth of AUD 2.5 million, that would be tough/impossible to show and would probably need to get an accountant to assess it... So, looks like I should keep more assets with Commonwealth Securities than I was planning on. I'm not planning on borrowing big to buy shares, but having borrowing power is useful.

PS

Actually, I easily qualify as a wholesale investor based on net worth. Turns out, I have 3/4 of our joint household net worth. My immediate thoughts are that this isn't optimal tax-wise and whether it is worth paying an accountant to certify it? On the other hand, borrowing in my name is a good tax move.

New Investment: Atlantic Pacific Australian Equity Fund

I made an investment in this unlisted hedge fund that is open to retail investors. Our long-term goal is to invest 10.5% of assets in Australia focused hedge funds. At the end of April we only had about 4.7% of financial assets (i.e. not including our house) invested in this category. This investment brings this up to about 7%.

The fund is long-bias equity market hedge fund buys and short sells, Australian listed securities and derivatives. It has performed particularly well in the current crisis:

It didn't perform very well in the previous 5 years, though it has always been good at avoiding downside in the market and so is a potentially good diversifier.

April 2020 Report

This month saw a rebound in the stockmarket and in Australia the rate of new COVID-19 infections and deaths fell to near zero (and zero in our city) after peaking in March. The local state government had said that schools will remain closed for all of the next term, which ends in early July. But yesterday, their resistance to re-opening weakened. I am working for home and our university campus also will be mostly closed over this period. So, it is hard keeping up with everything - full time job, co-parenting two small children, and keeping on top of our finances. At least I am already set up to work from home comfortably and have converted part of the office I share with Moominmama into a mini-classroom complete with whiteboard I brought home from my campus office...

My main scenario is still that the stock market lows will be at least be retested. Only in 1987 really was there such a steep fall in the market that did develop into a longer bear market. And even then there was more bouncing along the bottom than there has been so far. This is probably like the March-May 2008 rally. The bullish case is that government's and central banks are pouring so much money into the financial markets and broader economy that this time it will be different. On the other hand, though people are comparing this period to the Great Depression, I think there is no chance that stock prices will fall as much as they did then because of all the government action.

I don't usually talk about monthly spending, but this month we only spent AUD 4,300. This doesn't include mortgage interest, which is now treated as an investment expense. Still, it is the lowest monthly spend in a long time. Including mortgage interest it would be AUD 5,800, which is the lowest since July 2017.

The Australian Dollar rose from USD 0.6115 to USD 0.6524. The MSCI World Index rose 10.76%, the S&P 500 12.82%, and the ASX 200 8.78%. All these are total returns including dividends. We gained 4.02% in Australian Dollar terms and 10.98% in US Dollar terms. The target portfolio is expected to have gained 2.93% in Australian Dollar terms and the HFRI hedge fund index gained  4.79% in US Dollar terms. So, we strongly out-performed these latter two benchmarks and beat the MSCI by a little. Updating the monthly AUD returns chart:

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

The returns reported here are in currency neutral terms. Small cap Australian stocks and hedge funds performed best after terrible performance in March. Hedge funds and bonds contributed most to the total return.

Things that worked well this month:

• Gold
• Hedge funds rebounded. In particular, Regal Funds and Tribeca Global Resources.

What really didn't work:

• Virgin Australia. The company went into voluntary administration and unfortunately I'm still holding USD 25k in face value of their bonds. 
• Though it only lost AUD 142, I was surprised by the poor performance of the PSS(AP) superannuation fund (balanced option). This is the main public service superannuation fund for workers who joined the service in recent years. With stock markets and corporate bonds rebounding strongly and a roughly even balance between Australian and foreign assets it must have lost big in real estate or hedge funds to post this result. Unisuper (the universities superannuation fund) gained almost 7%.

We moved further towards our new long-run asset allocation. The share of hedge funds rose most while the share of bonds fell most:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• General Motors and Anglogold bonds matured, releasing USD 72k plus interest. I bought USD 15k of Woolworths (Australia) bonds, reducing net exposure by USD 57k.
• I shifted USD 16k from the TIAA Real Estate Fund to the TIAA Money Market Fund. I am concerned that the direct real estate investments the fund holds will be written down soon.
• I bought 4 September out of the money put options on the S&P 500 E-Mini futures as downside insurance in case the market lows are retested or worse.
• I bought AUD 25k by selling US Dollars.

March 2020 Report

This month the financial crisis following the COVID-19 pandemic intensified. Up to around the 20th of the month there was chaos in financial markets. Many bonds fell as much or more than stocks and gold fell too as everything was liquidated. Then there began to be some stability with gold and many corporate bonds rallying again. I am now thinking that Australia might come out of this better than countries like the US and so betting a bit on Australian recovery makes sense. I am only doing that though in terms of moving towards our long-run allocation. Not over-allocating to Australian assets yet.

I expect HSBC are now happy they didn't give us a mortgage. It's not worth chasing them any more I think. We are keeping our children out of daycare and school, though technically they are still open. There was some miscommunication about applying for the subsidy and only this weekend I completed the application. Now the government announced today that childcare will be free to parents during the pandemic. I was thinking about cancelling the service, but if it is free, of course I won't. It's not 100% clear yet whether it will be free.

I think I will keep paying for my 4 year old's private preschool as we are considering the school as a long term schooling option (it goes through to year 10). Also, we are receiving a government subsidy. It's unclear yet whether this pre-school qualifies for the free childcare deal. We want to have a school for him when this crisis hopefully ends later this year. He goes to that school 2 days a week and 2.5 days to the public preschool.

All stock markets fell sharply in response to the Coronavirus pandemic. The Australian Dollar fell from USD 0.6499 to USD 0.6115 and at one point reached USD 0.55. The MSCI World Index fell 13.44%, the S&P 500 12.35%, and the ASX 200 20.42%. All these are total returns including dividends. We lost 8.95% in Australian Dollar terms and 14.33% in US Dollar terms. This was the worst monthly investment return ever in terms of absolute Australian Dollars lost (AUD 319k). The target portfolio lost 5.05% in Australian Dollar terms and the HFRI hedge fund index is expected to lose 5.88% in US Dollar terms. So, we under-performed these benchmarks though did better than the ASX 200. The value of our house, which is not included in this investment return, increased. Well, the price of houses in our city went up. Updating the monthly AUD returns chart:

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

The returns reported here are in currency neutral terms. All asset classes lost money. Australian small cap stocks was the worst performer and gold the least bad. The biggest detractors from my overall return were bonds and hedge funds. These supposed diversifiers didn't work to mitigate losses in stocks. Hedge funds in general both lost from fund performance and from the fall in the price of listed closed end funds relative to their net asset value.

Things that worked well this month:

• Pershing Square Holdings - this hedge fund did perform as intended, with the share price rising. The manager Bill Ackman made a big bet on credit default swaps that hedged the losses in the stock portfolio. Subsequently, he has closed those positions and bought more stocks. I bought more shares in PSH, which are trading around 65% of NAV.
• Treasury futures - my bet on a steepening yield curve worked and I closed half the position. The remaining position has backtracked since then.
• China Fund - I bought back our position, which has since performed well.

What really didn't work:

• Regal Funds - this was our worst performing investment this month in dollar terms. It lost 45% for the month.
• The Unisuper and PSS(AP) superannuation funds were the next biggest losers in dollar terms. They lost 13% and 9%, respectively, which is about what would be expected given a 20% fall in the Australian stock market.
• Junkier bonds like Virgin Australia. The value of Virgin Australia bonds halved. It's not our only distressed bond at this point, but just the worst. I don't know what I was thinking, buying this in the first place.
• Domacom (DCL.AX) shares fell by 2/3.

There are plenty more losing investments... We moved a little towards from our new long-run asset allocation. The shares of gold, private equity, and rest of the world stocks rose most:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• Washington Gaslight and Lexmark bonds matured, releasing USD 60k plus interest. We didn't buy any new corporate bonds, so our exposure fell.
• We bought AUD 104k by selling US Dollars.
• I bought 25k Pengana Private Equity (PE1.AX) shares after the rights issue was cancelled. My timing could have been better as the shares then dipped before rebounding.
• I bought back our position in the China Fund (CHN). I figured that China is now rebounding. So far, that was good timing.
• I bought 25k Cadence Capital shares (CDM.AX). This fund has been a disaster, but the shares were trading at the value of cash that the fund has per share. So far, a good move.
• I bought 10k Tribeca Global Resources (TGF.AX) shares. Another disastrous investment in the long run, but the new shares have risen since buying them.
• I bought 25k Bluesky Alternatives shares (BAF.AX). They were trading at about 50% of NAV. I expect some of the fund's investments will be written down, but not that much overall.
• I shifted USD 4k from the TIAA Real Estate Fund to the CREF Social Choice Fund.
• I shifted about AUD 36k from the CFS Conservative Fund to the CFS Diversified Fund that has a higher risk allocation.

February 2020 Report

This month the whole family traveled to New Zealand for a week.This was baby Moomin's first international trip. He also started daycare two days a week. Moomintroll started going to free pre-school at the local public school 2.5 days a week and 2 days a week he is going to a private school where we can still get a childcare subsidy from the government.

It's been more than 3 months since we started trying to transfer our mortgage from Commonwealth Bank to HSBC. I went to the HSBC branch again, midmonth. The manager claimed that she had an incorrect email address for me and so I didn't get her message querying various things. They want to reduce the cash out component and the loan term length, both of which I was happy with. 

I also tried to raise our Commonwealth Bank credit card credit limit from AUD 15k to AUD 20k. I was unsuccessful :( I always think it's strange that they don't consider assets or net worth in these applications.

All stock markets fell sharply in response to the Coronavirus pandemic. The Australian Dollar fell from USD 0.6695 to USD 0.6499. The MSCI World Index fell 8.04%, the S&P 500 8.23%, and the ASX 200 7.46%. All these are total returns including dividends. We lost 3.8% in Australian Dollar terms and 6.61% in US Dollar terms. This was the worst monthly investment return ever in terms of absolute Australian Dollars lost (AUD 141k). The target portfolio lost 2.55% in Australian Dollar terms and the HFRI hedge fund index lost 1.67% in US Dollar terms. So, we under-performed these benchmarks though did better than equity indices. Updating the monthly AUD returns chart:

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

The returns reported here are in currency neutral terms.

Things that worked well this month:

• Strangely, the China Fund was the best performer, gaining USD 4k. I sold it at the right time.
• The TIAA Real Estate Fund rose a tiny bit for the month. Apart from those other gainers were all bonds.
• Though it did lose money, the PSS(AP) superannuation fund was very resilient, only losing 2.1%.

What really didn't work:

• Junkier bonds like Virgin Australia and Tupperware and even Commonwealth Bank hybrids lost big time. Baby bonds generally did OK, though.
• Winton Global Alpha fund fell by 2.86%, providing little diversification benefit.
• Listed hedge funds were crushed, including Pershing Square (down 8.6% for the month), Platinum Capital (-23.3%), Regal (-11.4%), Tribeca Global Resources (-33%), and Cadence Capital (-20.5%). In most cases the stock price has fallen much more than the net asset value. This chart compares the actively managed ETF, PIXX.AX and the closed end fund PMC.AX, which are invested in similar portfolios:

We moved a a bit away from our new long-run asset allocation. The shares of bonds, gold, and real estate rose and all others fell:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• We sold USD20k of Tupperware bonds and USD50k of Energy Transfer bonds and bought USD25k of Medallion Financial (MFINL) and USD25k of General Finance (GFNSL) baby bonds (i.e. 1,000 shares of each) and USD50k of Ford and USD25k of Virgin Australia bonds. USD40k of Kinder Morgan bonds matured. So, our corporate bond holdings rose by USD15k. Selling Tupperware was a good move. Buying Virgin Australia was not.
• We also bought 500 more CBAPI.AX Commonwealth Bank hybrid securities (convertible bonds). It wasn't a good idea.
• We bought AUD 50k by selling US Dollars.
• We exercised our rights to buy 50,000 Pengana Private Equity (PE1.AX) shares in the rights issue. The actual transaction will come in March.
• I Sold 2,000 China Fund (CHN) shares after they recovered from the initial coronavirus scare. I expect there to be further implications of coronavirus, though of course I could be wrong. 
• I bought another 2,000 IAU shares (a bit less than 20 ounces of gold). 
• I bought a net 10,000 shares in Tribeca Global Resources Fund (TGF.AX) when the price seemed particularly depressed after one of the companies they lent money to entered US Chapter 11 bankruptcy. Also, one of the two main portfolio managers quit recently. This is now our worst investment ever in terms of dollars lost. We did a tax loss harvesting sale as part of this transaction, buying back shares in our other account. Different people, so not a "wash sale". I was too early.
• I bought 20,000 more shares of Cadence Capital (CDM.AX) another depressed LIC (listed hedge fund). Too early here too.
• I bought 20,000 shares of US Masters Residential Property Fund (URF.AX) - an even more beaten down closed end fund. We previously held this and sold at a small loss before the price really dived.
• I bought 4,957 shares of Platinum Capital (PMC.AX).
  

Asset Allocation Since October 2018

Since October 2018 when we nominally received the inheritance, the total allocated to cash, futures, gold, and bonds has remained fairly constant at 50%. There have been big shifts into bonds and to a lesser degree gold and I have bought Australian Dollars and sold US Dollars. But on net I haven't deployed money into real estate, private equity, hedge funds, and shares. Again, there has been some change in the mix of those "risk assets". Some of my bonds have also turned out to be quite risky...

Now it is looking more and more likely that there will be a recession and opportunities to buy risk assets cheaper. Though, if I really knew that I would have sold a lot of risk assets or shorted the market. So, I don't really know. Mainly I'll be watching the yield curve. The long-run target allocation to all these risk assets is around 70% and 30% in gold, bonds, and futures.

I am planning to increase purchases of Australian Dollars from AUD 10k per week to maybe AUD 15k per week in the short term.

January 2020 Report

A relatively uneventful month. Even though I went into the branch, I still have no news from HSBC on refinancing our mortgage...

The Australian stock market rose sharply in January as the Australian Dollar fell, but overseas markets fell. The Australian Dollar fell from USD 0.7023 to USD 0.6695. The MSCI World Index fell 1.08% and the S&P 500 0.04%. On the other hand, the ASX 200 gained 4.98%. All these are total returns including dividends. We gained 3.46% in Australian Dollar terms and lost 1.38% in US Dollar terms. This was the biggest monthly investment return ever in terms of absolute Australian Dollars gained (AUD 124k). The target portfolio is expected to have gained 4.00% in Australian Dollar terms and the HFRI hedge fund index lost 0.19% in US Dollar terms. So, we under-performed all our benchmarks. Updating the monthly AUD returns chart:

MSCI is positive here in January because of the fall in the Australian Dollar.

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

Gold and Australian stocks did well. The returns reported here are in currency neutral terms. Our gains in gold in Australian Dollar terms were near 10% (AUD 27k increase in value).

Things that worked well this month:

• Gold did very well.
• Diversified portfolios at Unisuper, PSSAP, and CFS Diversified Fund all performed well.
• Hedge fund Regal Funds (RF1.AX).

What really didn't work:

• Hedge funds Platinum International and Tribeca Global Resources did poorly
• Our futures position betting on a steepening of the yield curve lost heavily as the curve moved back towards inversion.

We moved a little bit further towards our new long-run asset allocation:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• USD10k of Genworth and USD 16k of Dell bonds were called, USD 50k of Tomari bonds matured, and bought USD 25k of Ready Capital baby bonds (RCP). So, our corporate bond holdings fell by USD 51k.
• We bought AUD 40k by selling US Dollars.
• We sold out of our position in URF.AX (10k shares) when they announced a write-down of their US real estate portfolio. We made a small loss, but since then the stock has fallen a lot more.
• We sold 25k of Pengana Private Equity (PE1.AX) shares after they hit AUD 1.70 (NAV of 1.33) and announced a 2 for 1 rights issue at NAV. We still hold 25k shares and plan to buy our full allocation of shares in the placement, ending up with a 50% bigger position than we started with. We need to increase our allocation to private equity to reach our target allocation.
• I bought 500 CHN shares in the wake of the coronavirus scare. This looks like being premature. We do need to allocate more to non-US stocks.

How Well is Baby Moomin's Portfolio Doing?

Back in August last year I designed a portfolio and invested for Baby Moomin with Generation Life. How well have his investments done? I have just downloaded price data from their website and computed this graph:

I adjusted the actual portfolio returns for tax paid to get the pre-tax rate of return. This just about has matched the target portfolio to date and outperformed the ASX 200 a little. It has underperformed the MSCI in AUD terms so far. So far, there hasn't been a negative month. The best performing fund so far is the Ellerston Market Neutral Fund, which has made 8.93% post tax since August.

Why Not Just Invest in Stock Index Funds?

Financial Independence recently asked in the comments why I don't just invest in a portfolio of stock index funds. I answered that I am more interested in protecting against the downside now than getting richer. But basically I think you can do better than that. This is the simulated performance of our target portfolio against the MSCI All Country World Index and ASX200 in Australian Dollar terms:

Notice what happened during the 2000-2002 Tech Wreck and 2007-2009 Global Financial Crisis? The target portfolio more or less flatlined, while Australian shares dropped 40% in 2007-9 and the MSCI fell around 20% in AUD terms. Over this whole period the portfolio also outperformed the MSCI index, though not in recent years.

Contributions of Individual Investments 2019

Here are the contributions of each of 86 individual investments or trading vehicles in the 2019 calendar year (Australian Dollars):

Of course, these deoend on how much we have invested in each one and the superannuation funds that head the list are our biggest investments.

Annual Report 2019

Investment Returns

In Australian Dollar terms we gained 12.61% for the year and in USD terms we gained 12.16%. This is a lot less than stock markets gained, but I now prefer to compare our performance to the average hedge fund, which gained 10.35% in USD terms. The MSCI gained 27.3%  in USD terms and the ASX 200, 25.6% in AUD terms. These are the US Dollar returns month by month compared to the MSCI and HFRI indices:

We followed HFRI very tightly until September, when, apparently because of an increase in the volatility of the Australian Dollar, our performance became more volatile than the hedge fund index.
I posted equivalent Australian Dollar returns in the December monthly report. The next chart shows long term returns in Australian Dollar terms compared to the MSCI, ASX200, and the target portfolio:

In recent years, we've followed the target portfolio quite closely. Here are annualized returns over various standard periods:

US Dollar returns are not very good over longer periods, but they still beat the HFRI, especially over the 3-5 year horizon.

Investment Allocation
The main change in allocation over the year was that we converted cash into bonds and gold and then began to run down the bond allocation mostly in favor of hedge funds:

Also, at the beginning of the year, I was still a part owner of my mother's apartment, which was then sold.

Accounts
Here are our annual accounts in Australian Dollars:

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

We earned $152k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. We earned (pre-tax including unrealized capital gains) $251k on non-retirement account investments. The latter number was up strongly from last year. The former number continued its decline. The investment numbers benefited from the fall in the Australian Dollar ($40k in "forex" gain). Total current income was $403k. Not including mortgage interest we spent $133k. Total actual spending including mortgage interest was $147k, which was up 12.3% on last year.

$9k of the current pre-tax investment income was tax credits – we don't actually get that money so we need to deduct it to get to the change in net worth. We transferred $135k into retirement accounts from existing savings in "non-concessional (after tax) contributions. Near the end of the year we paid off the mortgage. Including mortgage payments during the year, that meant a total $520k transferred to our housing account.


The change in current net worth, was therefore -$394k. Looking at just saving from non-investment income, we dissaved $636k. Both these are crazy numbers...

The retirement account is a bit simpler. We made $46k in pre-tax contributions (after the 15% contribution tax) and made an estimated $204k in pre-tax returns. $23k in "tax credits" is an adjustment needed to get from the number I calculate as a pre-tax return to the after tax number. Taxes on returns are just estimated because all we get to see are the after tax returns. I do this exercise to make retirement and non-retirement returns comparable. Net worth of retirement accounts increased by $362k.

Finally, the housing account. I estimate that our house gained $24k in value. We spent $15k on mortgage interest. We would have paid $17k in mortgage interest if we didn't have an offset account. After counting the transfer of $520k into the housing account housing equity increased $527k of which $504k was due to paying off principal on our mortgage.

Total net worth increased by $495k, $48k of which was saving from non-investment sources. These numbers are steeply down from last year. The net worth increase last year mostly came from the inheritance.

Though our saving is down sharply on last year, we still saved in total 24% of our after tax non-investment income. Of course, this is less than last year's 33% and 2017's 54%! Including investment income our savings rate was 77%. This is based on our income calculated here at a ridiculously high $643k.

How Does This Compare to My Projection for This Year?
At the beginning of the year, I projected a gain in net worth of only $60k based on an 0% return on investments and a 6% increase in spending. As you can see, spending rose 12% and return on investments was also about 12%. As a result net worth increased by $495k. So, this was a big forecasting fail, as was last year's projection.

So, it's probably a mistake to try to make a projection for 2020 :) The baseline projection in my spreadsheet is for a 12% rate of return, a 6% increase in spending, and flat other income, leading to a $425k increase in net worth. I expect that forecast will fail big time again.

Notes to the Accounts

Current account is all non-retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. But housing spending only includes mortgage interest. Property taxes etc. are included in the current account. There is not a lot of logic to this except the "transfer to housing" is measured using the transfer from our checking account to our mortgage account. Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... Finally, "core expenditure" for housing is the actual mortgage interest we paid. "Expenditure" adds back how much interest we saved by keeping money in our offset account. We include that saved interest in the current account as the earnings of that pile of cash. That virtual earning needs to be spent somewhere to balance the accounts... It is also included in the "transfer to housing". Our actual mortgage payments were less than the number reported by the $2k in saved interest. For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, there are none of those one-off expenditures. "Saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.