Two New Investments

 I invested in another painting at Masterworks, No Hopeless by Yoshitomo Nara:

This takes my investment back up to 12 paintings again, given that Doppelbild by Albert Oehlen was sold and should pay out soon. I was a bit nervous this was overvalued but after a bit of research took the plunge anyway and invested USD 10k.

I also started buying units in a property on Domacom: 60 Devonshire Road, Rossmore, which is a market garden near the planned Badgery's Creek Airport. After the initial investors paid up big fees for the establishment of the investment, it trades below par but at the last valuation saw an uptick in value. I am thinking now it makes more sense to buy in the secondary market on Domacom instead of joining "campaigns" that seem to go nowhere. 

So far, I only invested AUD 920, but have a bid open waiting for sellers.

Unpopular Ventures

We have invested in a rolling fund – Unpopular Ventures – on the AngelList platform. We invested in Moominmama's name (because she is in a lower tax bracket) following a failed attempt to invest through our SMSF. We will invest USD 10k each quarter for eight quarters, which is the minimum investment. The fund will invest in new startups each quarter. In effect, you invest in eight different subfunds. I learnt about Unpopular Ventures from an episode of Meb Faber's podcast, which featured an interview with Peter Livingston, one of the general partners. The attraction of this fund are: 

• It has good historic returns.
• Meb is an investor, which I see as a good sign.
• It not only invests in the US but also in other countries, and in particular, developing countries and regions like India and Latin America. These regions are not as competitive for venture capital as the US market and so it should be able to get into investments at better valuations in theory. I guess exits might not be as highly valued either... but diversification is good.

Until now, we only had venture capital investments in Australia through Aura Ventures funds and the listed Wilson Asset Management Alternative Assets Fund (WMA.AX).

New Trade: Pendal

I bought a position in Pendal (PDL.AX). Yesterday, they announced that they got a takeover offer from Perpetual (PPT.AX) for the equivalent of AUD 6.23 per share. The price isn't a constant as it is about 2/3 in terms of Perpetual shares. The stock was trading around AUD 5.25 after being higher yesterday, but PPT was trading up on yesterday. Analysts say the stock is undervalued and a strong buy after falling a lot in the last year, prior to the bid. So, I didn't see  lot of downside in this. 

In other news, URF.AX is now up to AUD 0.24, 10% above the AUD 0.22 that investors are supposed to eventually receive. I can't sell as my shares are in transit from Interactive Brokers to Commonwealth Securities. They have now left Interactive Brokers, but haven't shown up yet at CommSec...

Domacom Appoints New Chairman and CEO

Good news at Domacom (DCL.AX). They announced today that they have appointed John Hewson as chairman and John Elkovich as the new CEO. Hewson is chairman of Crescent Finance who are collaborating with Domacom on Islamic mortgages. Domacom has interesting products but has struggled to get enough funds under management to breakeven. They need 5-10 times as much FUM to become profitable. So, though they have seen nice growth in FUM recently, 40% p.a. growth just doesn't move the needle that quickly. My hope has been that the company would be acquired. It's good to see that some other experienced people believe in the product.

I can see scope for improving the fractional investing product. I find the financial information provided on existing investments to be unclear and non-transparent. The level of explanation really needs to be stepped up to make secondary investors willing to participate and increase market liquidity in my opinion. I have only invested in one secondary investment, which is now exiting. I signed up to several "campaigns" but there is glacial progress on raising funds for them. I just discovered that two of them seem to have given up and released the pledged cash back to investors.

Hopefully, these things will improve going forward. Maybe I should send the new chairman (who is my honorary colleague) a letter with my thoughts :)

March 2022

World markets rebounded with the MSCI World Index (USD gross) rising by 2.22%, the S&P 500 by 3.71%, and the ASX 200 rising by 7.10%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7248 to USD 0.7494 reducing Australian Dollar returns and increasing USD returns. We gained 1.89% in Australian Dollar terms or 5.35% in US Dollar terms. The target portfolio rose by 0.75% in Australian Dollar terms and the HFRI hedge fund index is expected to rise 1.11% in US Dollar terms. So, we under-performed the ASX200, but outperformed all the other benchmarks. 

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

Real assets, gold, and rest of the world stocks lost money, while other asset classes gained. Real assets were negatively affected by the URF debacle. Rest of the world stocks were negatively affected by the China Fund. Gold fell in Australian Dollar terms, though the USD price rose. Futures performed best, and hedge funds contributed most to performance.

Things that worked well this month:

• The three top performers were all hedge funds: Tribeca Global Resources (TGF.AX) gained AUD 35k, Regal Funds (RF1.AX) AUD 30k, and Pershing Squre Holdings (PSH.L) AUD 27k. These were followed by the Winton Global Alpha Fund with an AUD 14k gain.
  

What really didn't work:

• URF.AX lost AUD 22k when the fund announced they were selling their portfolio at a discount. Gold was second worst with an AUD 19k loss.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 and the MSCI but not against the hedge fund index. We are basically performing like the average hedge fund levered 1.64 times.

I adjusted the leverage on the URF.AX investment down to 1:1 in our gross asset allocation as it is supposedly no longer exposed to movement of the actual real estate portfolio. On the other hand, since the end of the month, the share price has bounced back above the 22 cents which shareholders are supposed to receive as a distribution later this year while the convertible bonds are trading at an 18% discount to face value. This suggests that the market doesn't think that the stated deal is final. After all, URF shareholders need to vote on it.

This changed our asset allocation a lot. Real assets are now the most underweight asset class and hedge funds the most overweight. We moved nearer to the target allocation. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• I sold AUD 125k in exchange for US dollars.
• I sold 2,000 shares of PMGOLD.AX equivalent to 20 ounces of gold.
  
• I sold 1,000 shares of Fortescue Metals (FMG.AX). 
• I sold 10,000 shares of URF.AX. Only 5% of our position. 
• I sold 7,039 shares of RF1.AX.
  
• We are exercising the rights distributed by Pengana Private Equity (PE1.AX).
• I am preparing to invest in a venture capital fund on the AngelList platform. I was trying to invest through our SMSF but that ran into problems...
  

Related-Party Asset

I have been trying to invest in a fund on the AngelList venture capital platform. But my SMSF administrator flagged that there might be issues because the fund is organized as a limited partnership. The auditor has now provided the following information:

"A partnership can elect to be taxed as a Limited Liability Company (LLC) in USA or a partnership under the tax law due to the elections that the LLCs make with the US Internal Revenue Office. It is common for such partnerships (US) to be taxed as a company.

To support compliance with SISA/SISR for investments in Limited partnerships we note the following potential scenarios and information for audit purposes:

1. Where the entity is taxed as an LLC, this supports that the LP should be treated as a company where the members of the Fund are not members of the LP and the investment therefore is considered as an investment in an unrelated entity. This is usually able to be ascertained from the financial report of the LP. 
2. Where the entity is taxed as an LP, and the members of the fund are not members of the LP, and the investment is in within a limited capital account arrangement. This is usually able to be ascertained from the financial report and the application agreements. 
3. Where the entity is taxed as an LP, and the members of the fund are members of the LP.

If the investment falls into scenario 2 and 3 then the investment would classified as an in-house asset which would mean it needs to be below 5% of the SMSF’s total assets."

It seems that this falls under scenario 3. I just sent AngelList an email to check. The problem is that the minimum investment required, let alone subsequent hoped for appreciation, would take us over the 5% limit. So, it seems it is not really true that you can invest in anything you like through an SMSF. It seems silly to me to treat a fund where I am only investing through the SMSF along with 1500 other investors as a "related-party asset". Probably, I will need to invest in this fund using my own name and pay higher tax than I would through the SMSF.

Still Trying to Transfer Shares

So, I have been trying to transfer our holdings of listed investment trusts from our SMSF's Interactive Brokers account to a new account I set up with Commonwealth Securities. I first sent the required form to Commonwealth Securities 6 weeks ago. After nothing happened for three weeks I emailed them again. They then sent me the next day a text message telling me to phone. They told me that I needed to change some details on the form. I sent a new form in. Again nothing. Yesterday, I again emailed them. Today, they again texted me and I phoned them. They said that Interactive Brokers were not accepting the transfer and I should initiate it at that broker instead. I have just done that. All online of course, no paper forms required. Let's see if it works. I don't want to have to sell and rebuy the shares again as there is a AUD 34k capital gain plus two sets of commissions and slippage. 

But this service from CommSec where they just forget about the request for 3 weeks until they are reminded again is really not good!

P.S. 6Apr22

Success! The shares have arrived at CommSec.

Another Sale and a Failed Auction

Following the recent record gain on a townhouse, a freestanding house sold in our development last Thursday but the price hasn't been disclosed yet. On Saturday, there was an auction of another townhouse. I went to the auction and there were no bidders. The condition of the property wasn't that great. 

P.S. 29 March

The townhouse has been listed at "offers above $829k".

URF Selling Property Portfolio

The U.S. Masters Residential Property Fund (URF.AX) announced they are selling their property portfolio at a discount. As a result, they will pay out URFPA holders at the AUD 100 face value of the units, but ordinary equity owners of URF.AX will only get 22 cents per unit.

I didn't manage to get out in the initial auction and the price is now at 20 cents. I am down AUD 25k for this month and a AUD 15k loss overall at this point. This is my 5th worst trade or investment ever at this point.

However, this is a 10% return from here and so I guess I will hold for the moment. That will turn it into the 10th or 11th worst investment.

This was always a speculative investment and so I didn't invest too much in it. It represented 1.36% of net worth not including our house prior to this announcement. However, there are still some lessons to be learned:

1. When they recently said that they were likely going to sell the portfolio at a discount I should have sold then.

2. I should have invested in the URFPA units all along. I was put off investing in them because of their complicated structure/conditions. But they were safer than URF.AX and had a lot of potential upside.

3. There's often a good reason why the market seems to undervalue an investment. Turns out it didn't undervalue it enough, though!

4. Still, the 5th and 10th best investments have made roughly 10 times what this has lost at the moment.

In other bad news, Domacom settled the dispute for only AUD 2.5 million. That will only last them 6 months...

New Record Gain for our Development

 This townhouse sold for AUD 835k:

That is a 101% gain on its original 2008 sale price, the largest gain to date in our development. This is also more than the AUD 740k we paid for our house. I added all the townhouse sales to my valuation model and it comes up with a value of AUD 1.307 million for our house for 2022. Of course, this is based just on this single sale for 2022. But there is another auction coming up later this month, which will provide another datapoint. I use a single value for our house for a year at a time. This new value also pushes us over another big round number networth wise, which I once thought we wouldn't reach till the end of 2024.

February 2022 Report

World markets fell but the Australian market rose with the MSCI World Index (USD gross) falling by 2.55%, the S&P 500 by 2.99%, and the ASX 200 rising by 1.66%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7063 to USD 0.7248 reducing Australian Dollar returns and increasing USD returns. We lost 1.10% in Australian Dollar terms but gained 1.49% in US Dollar terms. The target portfolio fell 2.38% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 1.09% in US Dollar terms. So, we under-performed the ASX200, outperformed the other benchmarks.

It was a bit calmer month despite war breaking out in Ukraine at the end of the month. We continued to work on setting up a second brokerage account for the SMSF and transferring our holdings of listed investment trusts into it.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

All the equity categories lost money, while all the others gained. Gold both performed best and added the most to returns. US stocks was the worst performer while hedge funds detracted most from performance.

Things that worked well this month:

• Gold gained AUD 26k. WAM Alternatives (WMA.AX) and URF.AX were the next two best performers, gaining AUD 10k and AUD 6k, respectively.
  

What really didn't work:

• Hearts and Minds (HM1.AX)  and Cadence Opportunities (CDO.AX) were the two worst performers, losing AUD 13k and AUD 11k, respectively.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 but not so much against the other two benchmarks, which are measured in USD terms.

Our asset allocation did not change much. Private equity is still the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• As the gold price rose, the share of gold in gross assets went over 10% and following policy I sold 500 shares of PMGOLD.AX to bring it back to 10%. 
• I sold 1,000 shares of Fortescue Metals (FMG,AX). Should have sold more...
• I opened a new position in WAM Leaders (WLE.AX), buying 20,000 shares so far.
• I bought 6k shares in Pengana Private Equity (PE1.AX) when the price was low.
• I sold 3k shares of Regal Funds (RF1.AX) to fund this.
  
• I heard that our investment in Doyle's farm through Domacom will be wound up and sold. The majority of holders voted to do this. This is my only active investment through Domacom, so a bit disappointing. Hopefully, we won't lose too much considering selling costs and that we have had very little upside so far in this investment. The management company, Domacom (DCL.AX), also doesn't look like relisting on the ASX any time soon.
• On the other hand, Masterworks sold their second painting, which turns out to be one I hold.
  

Good and Bad News: Masterworks Sells Doppelbild by Oehlen and Domacom Goes to Court with AustAgri

 

It's one of the paintings I invested in. The price uplift is 43%. They are claiming a 33% IRR after fees. My original investment was in early January 2021. US investors will receive payment in their "Masterworks Wallet". Don't know how foreign investors will be paid yet. I still have shares in 11 paintings I have invested in.

To counter this good news, Domacom (DCL.AX) announced today that AustAgri haven't onboarded Cedar Meats to the Domacom platform. Domacom is, therefore, demanding the AUD 8.5 million break fee, but AustAgri is disputing that they owe anything and it is going to court. This deal always sounded strange. If they have the funding to acquire Cedar Meats from other sources why would they need to pay fees to Domacom? I expect that Domacom will remain suspended from the ASX. I am pretty sceptical of recovering any of this investment at this point.

Annual Report 2021: Contributions of Individual Investments

I think all investment valuations for 2021 are now in. So, as I promised here is the profit or loss on each individual investment. We didn't hold all of these at the same time. Currently we have about 37 investments.* This doesn't account for investment costs, the most important of which is interest, or other investment returns like interest on bank accounts, of which there is very little.

Of course, this doesn't control for the size of each investment. Generally, the losing investments were smaller, with the exception of Hearts and Minds. Still even that investment was not as bug as the two top investments in terms of performances or the really large investments in the two superannuation funds. This means our capital allocation made sense and helped generate strong returns this year.

* Counting all 12 paintings at Masterworks as a single investment, for example.

New Investment: WAM Leaders

I bought some shares of WAM Leaders (WLE.AX) in our SMSF. The position is only 0.16% of the total portfolio so far but I will likely add to it. This is because the allocation model says that we need more Australian large cap shares. Previously, I held Argo (ARG.AX) but that is trading at more of a premium and seems that this performs better. Here is a comparison of WAM Leaders with an ASX200 ETF (A200.AX):

On top of this, WLE has a higher dividend yield...

January 2022 Report

Stock markets fell, with the MSCI World Index (USD gross) falling by 4.89%, the S&P 500 by 5.17%, and the ASX 200 by 5.80%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7266 to USD 0.7063 reducing Australian Dollar losses and increasing USD losses. We lost 2.28% in Australian Dollar terms or 4.94% in US Dollar terms. The target portfolio is expected to lose 2.53% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 2.16% in US Dollar terms. So, we out-performed the ASX200, the S&P 500, and the target portfolio, and underperformed the other two benchmarks. Of course, we are trying to optimize AUD returns. This means USD returns will be a lot more volatile. The currency neutral return for the month – where we just look at the gains on each investment in its own currency and ignore appreciation or depreciation of assets due to exchange rate changes was 2.82%. This tends to be close to the Australian Dollar return because we hold a lot of foreign investments in Australian Dollar denominated funds.

It was a busy month with a lot of trading. Quite a bit of this was for tax loss harvesting, selling in one of our names and buying in the other.

The record-breaking run of winning months in Australian Dollar (and currency neutral) terms finally ended. We hadn't had a losing month since March 2020. This was a 21 months run. We had several monthly US Dollar losses in that time.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

Futures performed best. Gold made the largest contribution, but that was only because we hold it in an Australian ETF (PMGOLD.AX). The price of gold in Australian Dollars was boosted by the fall in the exchange rate. Aus small cap and US stocks were the worst performers while hedge funds detracted most from performance.

Things that worked well this month:

• Gold gained AUD 11k. Other gainers included Winton Global Alpha (AUD 7k), Aspect Futures (AUD 5k), Cadence Capital (CDM.AX), Fortescue Metals (FMG.AX), Pengana Private Equity (PE1.AX)...
  

What really didn't work:

• Hearts and Minds (HM1.AX) lost AUD 37k, while Pershing Square Holdings (PSH.L), Regal Funds (RF1.AX), and Unisuper each lost AUD 24-25k constituting the majority of our total loss. This is the downside to benefiting from the upside in the latter two. I'm beginning to question whether HM1 is a good investment and am thinking of reducing our position. In theory, it is attractive to invest in fund managers "best ideas", but when those are all overvalued growth stocks, there is a problem.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We  show the desired asymmetric capture and positive alpha against the ASX200 but not against the other two benchmarks, which are measured in USD terms.

Our asset allocation got a little closer to our long-run asset allocation. Private equity is the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• I sold and bought  Pengana Private Equity (PE1.AX) shares, which were trading a lot above NAV and then near NAV. I ended up increasing the position by around 6k shares.
  
• I bought 3k Hearts and Minds (HM1.AX) shares, which was a mistake so far.
• I sold 1,000 Fortescue Metals (FMG.AX) shares, to trim my position a bit. Then I bought back at a lower price.
  
• I bought a net 11k Regal Funds (RF1.AX) shares.
• I sold 2k Ruffer shares (RICA.L) to get liquidity.
• I net added around 1k of Cadence Opportunities (CDO.AX).
• I net added about 0.5k (WAM Strategic Value) WAR.AX shares.
• I closed our position in MCP Income Opportunities (MOT.AX).
• I did a couple of small futures trades.
  
• I started opening a second brokerage account for the SMSF with CommSec. The idea is to hold our listed trusts (RF1.AX, PE1.AX, URF.AX) in this account in order to get proper tax statements from the share registries. The tax data that Interactive Brokers provides for these is incorrect but I discovered that they are now sharing it with the ATO who challenged Moominmama's tax return from a couple of years back... So ATO believes the incorrect data...
  

Update on TIAA Real Estate Fund

Back in May, I predicted that the TIAA Real Estate Fund would perform well and shifted almost all my US retirement account into it. Well, it has done exactly that:

Since May it has gained 14.4%, while the Social Choice fund gained only 1.3%! I wish all my predictions were this good and I hadn't left anything in the Social Choice fund. The question now is when to start switching back again.

How Has Our SMSF Done So Far?

 

We have been fully invested in the SMSF for 9 months now. It's more volatile than PSSAP – Moominmama's employer super fund and about as volatile as Unisuper – my employer super fund. It has higher mean returns than both of them so far: 1.32% per month vs. 0.30% for Unisuper and 0.81% for PSSAP. Unisuper's return has really been brought down by a more than 5% loss in January. By contrast, the SMSF lost 1.18% (preliminary) and PSSAP 1.52%. If I regress the SMSF returns on the Unisuper returns I get a beta of 0.34 and alpha of 16% p.a. Of course, these are really early days and I don't expect that to hold up. I will want to see a longer track record before considering rolling over any of our employer superannuation into the SMSF.

How is Our Portfolio Holding Up in the Downturn?

Looks like this will be our first down month since March 2020. At this point, we are roughly down 1.75% in AUD terms and 2.95% in USD terms for the month. By comparison, the ASX 200 is down 3.62%, the MSCI down 5.52% and the S&P 500 down 7.2%. So, we are capturing about half the downside, which is roughly what I expect. We're only 1.5% below the ASX200 total returns over the last 10 years here (207.5% vs. 209%) and beat it at all horizons through five years...

Gold is the strongest performer in dollar terms so far this month. Regal Funds and Hearts and Minds are neck and neck for worst performer in dollar terms. US stocks are the
worst asset class (-7.22%) and futures the best (2.68%).

Australian Unity Merger Terminated

Australian Unity Office Fund (AOF.AX) announced that the merger with the Australian Unity Diversified Fund has been cancelled. It's odd that it is large shareholders of the listed fund who scuppered the deal when I thought the merger was disadvantageous to the unlisted fund members.

Annual Report 2021

Overview 
The biggest development this year at Moomin Valley is that we set up the SMSF. We also finished investing the money we inherited in late 2018. I also reviewed all our existing investments to decide which to drop. Investment returns were again very strong. We exceeded the net worth projection in last year's report, which at the time I thought was crazy. In my academic career, I didn't feel very productive. Mainly I worked on completing research projects started in previous years, though there was one project that started right at the end of last year that we have already submitted for publication. I was frustrated with online teaching in the first half of the year and then with the second lockdown in Canberra in the second half of the year. Luckily, we could send our younger child to daycare throughout the lockdown this time. The estimated value of our house rose sharply in line with market trends and we closed some of the lag to the general housing market that we have experienced since buying here. At the end of the year, we went for our first trip outside our local region since the pandemic started, to South Durras, NSW:

 

All $ signs in this report indicate Australian Dollars. I'll do a separate report on individual investments. I do a report breaking down of spending after the end of the financial year.

 

Investment Returns 
In Australian Dollar terms we gained 18.8% for the year and in USD terms we gained 11.7% because of the decline in the Australian Dollar over the year. The MSCI gained 19.0%  in USD terms and the ASX 200 only 19.5% in AUD terms. The HFRI hedge fund index gained 12.4% in USD terms. Our target portfolio  gained 17.4% in AUD terms. So, we only beat the target portfolio benchmark this year. This is expected in a strong bull market.

 

This chart compares our portfolio to the benchmarks in Australian Dollar terms over the year:

We tracked the target portfolio quite closely and ended the year with a similar return to the ASX 200 but less volatility. This is the goal of our investment strategy. We had no down months. The ASX tracked the MSCI till the middle of the year and then lagged. The S&P 500 was strong throughout. Here are the same indices in US Dollar terms with the target portfolio replaced by the HFRI hedge fund index:

The ASX 200, HFRI and to some degree MSCI, all stagnated in the second half of the year. I ended up with a similar performance as the median hedge fund, but with more volatility because of the translation into US Dollars. If we targeted low volatility of US Dollar returns we would need to short non-US Dollar currency, whereas going long foreign currency achieves low volatility for Australian Dollar investors. US based investors are, therefore, more likely to hedge out foreign currency exposure, while we seek it.

 

Here are annualized returns over various standard periods:

Both our returns and the benchmark returns have increased over time. We have a better performance than the ASX 200 over the last two years and similar over 5-10 years. We beat the HFRI over all the longer time horizons. We had a similar performance to the MSCI over the last two years, but much worse over longer horizons. Whether you think our performance is good or bad depends on what you think the default alternative investment is. If it is an ASX 200 index fund, then we are doing OK. If it is a global stock index fund then not so good. If you think it is our target portfolio (not in the table) then we are doing a bit better than that over 10 years and about the same over shorter horizons.

Here are the investment returns and contributions of each asset class in 2021:

 

The contributions to return sum to the total portfolio return in gross asset terms. These returns are currency neutral and because of leverage are lower than the returns reported above for net assets. The portfolio shares are at the beginning of the year. Hedge funds and private equity again had the highest returns. Hedge funds had by far the largest contribution to total return. Gold was the weakest performer. The rate of return on bonds was surprisingly good. Returns to long-only stocks were surprisingly poor compared to market indices.

Investment Allocation
The main changes in allocation over the year were that we continued to reduce our bonds allocation while increasing real assets and private equity mostly:

 

The blip in the early part of the year is when we transferred funds from Colonial First State to the SMSF. The CFS funds were all converted to cash.

Accounts
Here are our annual accounts in Australian Dollars:

Percentage changes are for the total numbers. 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 $166k after tax in salary, business related refunds, medical payment refunds, tax refunds etc. This was up 17% on 2020 because Moominmama went back to work. We earned (pre-tax including unrealized capital gains) $485k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We gained $278k on retirement accounts with $37k in employer retirement contributions (more details below). The big difference to last year, is that instead of the value of our house falling, I estimate it rose by $246k. As a result, investment income totalled $1.008 million and total income $1.211 million.

 

Total spending (doesn't include mortgage payments) was up 12% on 2020, which saw a fall in spending. Combining the two years, spending is rising at 3% per year.

$19k 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 $374k into retirement accounts (ultimately the SMSF) from existing savings.

 
The change in current net worth, was therefore $1234k. Looking at just saving from non-investment income, we dissaved $344k. So, before the transfer to retirement accounts we saved about $31k (19%) from salaries etc.

We made $37k in pre-tax contributions to retirement accounts (after the 15% contribution tax) and made an estimated $278k in pre-tax returns. $20k 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 apart from the SMSF 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 $668k.

 

Total net worth increased by $1.038 million,  which was up 218% on last year. $67k of this was from saving from non-investment sources, up 95% on last year. Thanks to employer superannuation contributions this was 33% of our total after tax non-investment income.

How Does This Compare to My Projection for This Year?
Last year my baseline projection for 2021 was for a very high 19% rate of return, a 6% increase in spending, and flat other income, leading to an $800k increase in net worth to around $5.7 million. This just seemed like too much to me so I also made a "more sensible projection" of an increase of $400k to around $5.3 million. Investment returns matched the baseline projections very closely. The additional gain in net worth is mainly due to the estimated increase in the value of our house. Using the same methodology, the baseline projection for 2022 is for a 16% rate of return, no increase in the value of our home, flat other income, and 6% growth in spending. This results in net worth increasing by $800k to around $6.7 million. Again, anything could happen.

 
Notes to the Accounts
Current account includes everything that is not related to retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. However, property taxes etc. are included in the current account. Since we notionally converted the mortgage to an investment loan, mortgage interest is counted in current investment costs. So, the only item in the housing account now is increases or decreases in the value of our house. This simplified the accounts a lot but I still keep a lot of cells in the spreadsheet that might again be used in the future.

 

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.... 

 

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.

December 2021 Report

 

Stock markets performed very strongly, with the MSCI World Index rising by 4.03%, the S&P 500 by 4.48%, and the ASX 200 by 3.15%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7122 to USD 0.7261 reducing Australian Dollar returns and increasing USD returns. We gained 2.14% in Australian Dollar terms or 4.14% in US Dollar terms. The target portfolio is expected to gain 1.13% in Australian Dollar terms and the HFRI hedge fund index is expected to rise 1.90% in US Dollar terms. So, we out-performed three of the benchmarks but underperformed the S&P 500 and the ASX 200. Though I track performance against the S&P 500, it isn't really a benchmark, as I can't imagine investing all my assets in it. This month's numbers are very preliminary though. The returns for two of the top performing investments are just estimates based on historical internal rates of return. These venture capital funds only update valuations every six months and report the results more than a month after the quarter end.

The record-breaking run of winning months in Australian Dollar (and currency neutral) terms continued. We haven't had a losing month since March 2020. This is a 21 months run so far. We have had several monthly US Dollar losses in that time.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

Private equity had the best performance and contributed the most to the account. This includes estimated returns of venture capital funds that won't report the year end value till some time in February and so is very preliminary. US and rest of the world stocks had negative returns. This was because of the negative performance of the Hearts and Minds Fund (HM1.AX), which lost 7% for the month and had a 3.7% portfolio weight.

Things that worked well this month:

• Venture capital funds Aura VF1 and VF2 are predicted to perform well. In reality VF2 might not be upvalued at all and VF1 revalued by more than predicted because of a strong funding round for Shippit, which is the largest holding in the fund. Pengana Private Equity (PE1.AX) gained AUD 15k, Tribeca Global Resources (TGF.AX) AUD 12k, Cadence Opportunities (CDO.AX) 10k, Fortescue (FMG.AX) 9k, and Pershing Square Holdings (PSH.L), 9k also.
  

What really didn't work:

• As mentioned above, Hearts and Minds was by far the worst performer, losing AUD 14k.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are a little bit better than the median hedge fund levered 1.6 times. 

We moved a little bit towards our desired long-run asset allocation. We reduced the shares of futures and hedge funds in the portfolio and increased the shares of everything else. Private equity is the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• I bought a second Australian Dollar futures contract to hedge our foreign currency exposed positions.
• I reduced our leverage quite a lot from 23% of gross assets (not counting our house) to 18%. This includes the mortgage on our house. The main reason was to reduce our most expensive debt – a margin loan from Commonwealth Securities. I also replaced a pile of AUD cash with the second futures contract and reduced our US Dollar margin loan from Interactive Brokers by selling AUD 66k. I sold the remaining 200 shares of the Ready Capital baby bond (RCB) to complete this delevering.
  
• I invested in my twelfth painting at Masterworks. A David Hockney painting shown above. I just liked it. As usual, I invested USD 10k.
• I sold 25k shares of Pengana Private Equity (PE1.AX) as the share price rose above NAV.
  
• I sold 38k of Regal Funds (RF1.AX) shares I recently bought when the NAV hit AUD 4.02. NAV is now AUD 3.83. Still we made a profit of about AUD 3k on this trade.
• I bought 1,000 shares of the China Fund (CHN) after they paid out a dividend that reduced the dollar value of my holding by almost as much.
  

Australian Unity Merger Deferred

 

Australian Office Fund (AOF.AX) announces that the merger meeting is delayed till at least February because some large shareholders gave negative feedback on the proposal. That's strange because I thought the merger unfairly benefited AOF shareholders! Anyway, we will have to wait and see what changes are made or if the whole thing is cancelled in the end.

November 2021 Report

The MSCI World Index fell by 2.38%, the S&P 500 by 0.69%, and the ASX 200 by 0.37%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7518 to USD 0.7122 boosting Australian Dollar returns and making USD returns very negative. We gained 1.52% in Australian Dollar terms or lost 3.83% in US Dollar terms. The target portfolio gained 2.15% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 0.99% in US Dollar terms. So, we under-performed the target portfolio benchmark, the two international indices, and the HFRI but outperformed the Australian index.

The record-breaking run of winning months in Australian Dollar (and currency neutral) terms continued. We haven't had a losing month since March 2020. This is a 20 months run so far. We have had several US Dollar losses in that time. This month was the 6th and worst decline. This graph shows returns since 2018 in Australian Dollar terms:

As designed we are getting less volatility on average than the MSCI index in Australian Dollar terms. This month it was up though the index was down in US Dollar terms. If you are wondering why the scale is so wide on this graph, this is the reason:

US Dollar returns are much more volatile. For Australians, holding foreign assets reduces volatility in Australian Dollar terms as the Australian Dollar tends to move with stock prices, raising the Australian Dollar value of foreign assets when stock markets decline. For Americans, holding foreign assets increases volatility... You really would need to short the US Dollar to get similar results in US Dollar terms.

Here is a report on the performance of investments by asset class (currency neutral returns):

Gold had the best performance and contributed the most to the account followed by large cap Australian stocks.

Things that worked well this month:

• Gold was the star performer. Gold started the month very strongly but then collapsed after Jay Powell was appointed for another term as Federal Reserve chair. But it then ended the month a lot ahead. We gained AUD 31k. In fact the US Dollar price of gold fell slightly but the fall in the Australian Dollar provided all the gains as we hold our gold as PMGOLD.AX. Runners up were Fortescue (FMG.AX) at AUD 12k and Regal Funds (RF1.AX) AUD 10k. The Fortescue position is relatively small. It gained 15%.
  

What really didn't work:

• Cadence Capital (CDM.AX) lost AUD 10k and Cadence Opportunities (CDO.AX) lost AUD 5k after opening above the IPO price. Despite CDO's great historic performance, the firm raised much less money than they hoped at the IPO.

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are a little bit worse than the median hedge fund levered 1.6 times. 

We moved a little bit away from our desired long-run asset allocation. Private equity is the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

Roughly two thirds of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• I closed the small positions we had in Pengana Capital (PCG.AX) following the distribution in specie from PE1.AX and sold 10k shares of PE1 I recently bought when the stock price was below NAV.
• I bought back 4k shares of RICA.L that I sold to participate in the RF1.AX rights issue.
• I bought 36k Regal Funds (RF1.AX) shares when they announced a jump in NAV to the share price on the hope of the premium to NAV coming back. I don't plan to hold this for the long term. I've already sold 17k of them.
  
• Cadence Opportunities IPO-ed (CDO.AX). I moved the shares into Moominmama's Interactive Brokers account and planned to sell stuff there to pay down some of my CommSec margin loan. I try to keep a balance of contributions in her IB account to match money we deposited there from the mortgage redraw.
• Planning for that move, I sold 12k MOT.AX shares, an Australian private credit fund.
• But then WCM Global Long-Short (WLS.AX) announced that they have redone their accounts and now the post-tax NAV is the same as the pre-tax NAV, which is also higher. I thought it was a good opportunity to increase our holding in that fund to around a 2% position and bought 44k shares, which used up the cash in the account...
• But I did sell all our holdings of Scorpio Tankers (SBBA) and most of our Ready Capital (RCB) baby bonds in her account and bought AUD 65k helping increase our holdings of Australian Dollars and reducing US Dollars.
• I also sold our position (4k shares) in Argo Investments (ARG.AX), which was suggested by the investment review.
  
• In order to hedge some remaining foreign currency exposure and get back closer to a 50/50 Australian Dollar/Foreign Currency exposure balance, I bought one Australian Dollar futures contract.
  

Defined Benefit vs. Defined Contribution Update

Each time I was given the choice to be in a defined benefit scheme or a defined contribution superannuation scheme, I chose defined contribution. So, now and then I like to check whether I made the right decision. I worked from 1996 to 2001 in the Australian Higher Education sector. In fact, at the same employer I now work for. Originally, defined benefit was the only option. But then they gave us the choice to switch. In 2001, I rolled over my account to Colonial First State and then this year to our SMSF. I have now worked out how much that money is now worth. I estimate that it is AUD 410k. In 2009 I started working at the same employer again and opened a new Unisuper defined contribution account. It now has AUD 477k in it. So, in total I have AUD 888k. Including the 5 years that I worked from 1996 to 2001 my defined benefit lump sum would now be AUD 473k. We are going to need to have a big crash to make those numbers equal...

Save, Inherit, and Invest

I love reading the Millionaire Interviews at the Earn, Save, and Invest Blog. One of the questions they get asked is "What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?" Compared to many of his interviewees, our earning has not been that strong. Despite my salary putting me in the top 5% of Australian earners, it's only nominally about USD 125k per year. On the other hand, our household income including superannuation contributions and net investment income is nearer USD 250k per year. Historically, I would have said that our strength was in saving. Before we bought the house and had children, we had a very high saving rate. But, in the last few years, our investment profits have really taken off. Now the sources of our net worth are roughly 25% saving, 30% inheritance, and 45% investment returns.

I've posted earlier versions of this crazy chart before:

It separates net worth into saving and investment returns in superannuation and non-superannuation accounts, inheritance, and housing equity. Part of housing equity is saving and part gains. Maybe, in the future I will split that up in the graph. Only recently is that difference becoming significant.

Up till the end of 2014, we saved a lot apart from the meltdown following the dot.com crash. Since then we moved savings into housing equity and superannuation, resulting in negative current savings. More interesting is that after the first transfer to housing equity the growth rate of savings (i.e. the slope in the segments without a transfer) is much lower than before 2015. On the other hand, retirement contributions remain strong.

P.S. 25 November

So, I made a chart showing just total savings, inherited money, and investment returns:

Investment returns are the gap between net worth and the other two categories. As investment returns went negative a few times, plotting them in the same way as the other two sources would be confusing. This graph shows that savings continue to increase but at a slower pace than they did in the first part of the previous decade.

Cadence Opportunities Starts Trading

I had decided not to buy more shares in the Cadence Opportunities (CDO.AX) IPO. But the stock closed at AUD 3.00 on the first day, up from the IPO price of 2.77, so perhaps I should have. Still haven't got our holding statement yet and it's not on Boardroom's website so it will be a while till we could actually trade it. They tried to raise AUD 52 million and only raised 15 million. So, it's surprising that it is trading above the IPO price, really.

Ruffer Investment Company Rights Issue

Ruffer Investment Company (RICA.L) launches a 1 for 4 rights issue at NAV. The stock has been trading for a small premium. This isn't very exciting and is a bit annoying as I just bought 4,000 shares for £3.05 a share. I had sold those shares for less than that to buy into the Regal Funds (RF1.AX) rights issue. I sold some Pengana Private Equity (PE1.AX) shares and used part of Moominmama's concessional contribution for the year to buy the shares. We have a total of 8,000 shares in the SMSF.

I don't think I'll be taking up the rights in the SMSF as I'd have to sell something else or make another retirement contribution. Maybe in Moominmama's account where we have another 8,000 shares.

Update on Australian Office Fund / Australian Unity Diversified Property Fund Merger

I have been planning to vote no on this merger for a number of reasons. The explanatory booklet for the merger has been released to the ASX. This provides details on the options to exist the fund. Though the unitholder meeting will be on 10 December, we have to decide by 8 December whether we want to exit the fund. However, we can choose to withdraw only if the merger goes ahead, so that is OK.

They are also offering to redeem a minimum of AUD 24.8 million of units if people want to redeem that much and maybe more than that if the merger is approved. If the merger isn't approved the cap will be at AUD 8.6 million. So, I plan to submit a withdrawal notice now and vote no. My guess is that only part of our investment will be redeemed if the merger doesn't go through. Anyway, we could always apply for more units again if we really wanted to in that case.

After reading all these details I am happier than I was about the proposal, but really would have preferred if they raised more capital instead. I would have been happy to invest in more units.

Auction in Our Development

 

After a few recent sales in the neighboring development, finally two houses were listed in ours. One was auctioned on Saturday. I went to the auction. The price was AUD 971k, which was a 66% increase on the original 2008 price. It is a record for our development both in dollar and percentage terms. The previous highest price was 850k back in 2015. This confirms that the recent sales in the neighboring development weren't flukes. There is another, smaller house for sale. It's one of those "by negotiation" ones. Neither an auction nor a listed price.

Changing Target Asset Allocation Again

 I still think it is useful to have one...

Reducing the bond allocation and moving it to the equity allocation including hedge funds.

Headhunter

I was contacted by a head hunter today for a senior government position on the borderlines of research and policy. Normally headhunters approach me about academic positions, so this was a bit different. I wouldn't have to move for the job and I could plausibly apply for it. It would pay about double what I get now. I had a look at the "selection criteria", the current holders of the same level positions, and some reports they put out. I was already thinking that I would have a lot less freedom in such a position. The upside is I am a bit bored again with my career and it would be a new challenge. I felt positive when I saw the backgrounds of some of the people in those positions. But when I looked at the reports I felt mind-numbingly bored. Typical government reports with heaps of recommendations. I just don't think I could do it. So, I told the headhunter no, but recommended someone else.