How I Made AUD 2,900 Instantly

A couple of days ago, I went on the Domacom platform just to see if anything was new. I found an offer to sell about 10,000 units in a semi-rural property near Sydney for AUD 1.0156 placed on 30th May. But the property was revalued on 18th July by around 30%!. Almost instantly I bought the units. One downside is that I already own about AUD 10k of units in the neighboring property. Of course, I can't realize this profit, so it is just on paper. The market is very illiquid, which is why I managed to get this bargain in the first place. Both properties have a vote next March on whether to sell the properties and wind up the funds or whether to continue to hold. Recently, my first investment at Domacom held a vote and sold for a big profit.

 

To get the funds, I had to cancel my pledge to a campaign to buy rural property. My money has been tied up in the campaign for a year while they have made almost no progress on raising money. I think that in future I won't make pledges to campaigns and only engage in the secondary market. The additional advantage of that is that I avoid paying big fees for the purchase of the property and the often huge upfront cut (c. 10%) taken by the promoters of the campaign. It would be much better if they were paid by performance fees instead...

Career Update

A year on, the career plan needs updating. I agreed with the School Director to take long service leave in 2022 and delay my leadership position to 2023-24. Instead, another person would take that leadership role for one year. Two months into the year, the director became a head of school at another university. The person temporarily filling the leadership position took over as interim director and a third person filled the leadership role. When I raised the issue recently, the person in the leadership role said they knew nothing of the plan to put me into the position in 2023-24 and it would depend on the new permanent school director who will be starting in January 2023. I don't think that the new director would be enthusiastic about me in that role.

Yesterday, I met with my immediate Department Head. He said that he thinks the leadership position is now off the table and doesn't think there will be pressure for me to take that kind of role now... He also wants me to again teach one of the courses I dropped.* The advantage, of course, is that teaching this course won't require any preparation. This new course has taken more preparation that anything I've taught before, I think. I am still working on that as the course began this week, but the end of prep is near... I'm not happy about teaching more again... Anyway, I told him that I would want to teach both courses in the same semester rather than spreading them out over the year. I find switching between teaching and research to be hard and end up wasting a lot of time doing that.

I also told him that I had thought about going to part-time status instead. Yesterday, I sent an email to HR asking about that. But I think that depending partly on investment income is a bit scary given the current economic and market uncertainty. On the other hand, the question is whether I will ever feel like I have enough money to retire....

I'll probably end up teaching the old course again together with the new one this time next year.

* He is teaching it this year (he also taught it before). Next year, he wants to revive another course that we have both taught before....

Sam Dogen Interview

Sam Dogen of Financial Samurai has first video interview. Finally, you can get to see him, even if you still don't know his real name 😀

A Tale of Two Bloggers

Enough Wealth has a new post comparing our two NetWorthShare net worth curves titled a Tale of Two Bloggers. He took out the step changes due to inheritance in both our histories. But the two curves are in different currencies - mine in USD and his in AUD despite us both living in Australia. I wanted my track record to be comparable to the majority of other members who are US based. The volatility of my net worth is much lower in AUD than in USD. This is by design. The Australian Dollar tends to fall during "risk-off" periods reducing losses in AUD terms and increasing them in USD terms.

So, I thought I'd post a comparison of my net worth curve in both AUD and USD terms:

These go back way before the record on NetWorthShare. Back to September 1990, the month I started my PhD in the US... In addition to bigger moves during bear markets, the US series has a number of flat periods compared to the AUD series - around 2015, 2018-19 and in 2021. Overall, the AUD curve ascends more smoothly. We can also reminisce about that time after the GFC when the Australian Dollar was worth more than the US Dollar!

Division 293 Humblebrag

It looks like I will have to pay Division 293 superannuation contributions tax for the first time. This is an extra 15% tax on superannuation contributions that you have to pay if your income including concessional super contributions is above AUD 250k. My preliminary estimate of my taxable income is already above AUD 250k. So, for sure the total including around 30k of super contributions will be even if the final income number is a little lower. This is probably going to mean an extra AUD 4,500 of tax. 

I'm also currently estimating I'll owe more than AUD 13k in extra tax after paying AUD 6k in tax installments. Last year I got a tax refund because of the Virgin Australia debacle. Bond losses can be deducted immediately from your income unlike losses on shares. The tax installments were because the previous year's tax return...

I'm reluctant to stuff more money into super as non-concessional contributions to reduce tax in case we'll need it. For example, to buy a bigger or better located house. If I continue to work, we can't withdraw the money from my account till I'm 65 in 8 years time. And much longer in Moominmama's case. That liquidity costs in taxes. 

In the last couple of years we made large non-concessional contributions. I also have illiquid investments in venture capital and art. Our liquid investments are 46% of gross assets not including our house. I doubt I can get a bigger mortgage given my age and Moominmama's low wage income.

Some Good Financial News

  

Masterworks sold Lured by Cecily Brown for USD 1 million. The initial offer price was USD 605k. We are supposed to get the money within a month. I think this is the third painting they have sold, two of which were ones I invested in. 

Domacom reported to the ASX that their private placement was over-subscribed! They hope to be reintstated in the ASX soon.

Portfolio Planning

I won't post June accounts for quite a while. There doesn't seem much point until we have all valuations for private assets for the end of the financial year and that won't happen till some time in August probably.

I did a bit of a portfolio planning exercise again with some moves planned. I tweaked the portfolio allocation a little as a result to meet the various constraints. Target allocation to Australian large cap is down from 8% to 7%, hedge fund allocation down from 25% to 24% and bonds and futures both up from 5% to 6%. Other allocations remain unchanged (real assets 15%, private equity 15%, international shares 11%, gold 10%, and cash 1%). Back in 2017, our Australian large cap allocation was 35-36%!

In theory, the new allocation does increase the historical portfolio Sharpe ratio. 

So here is the current allocation where I break down by asset class and type of holding:

You are going to need to click on this to see any detail. The names at the bottom are most of the relevant investments in that category. Employer super includes my US retirement account as well. I originally developed this spreadsheet when we were planning the SMSF. Then the future allocation tries to move more towards the long run allocation while taking into account the amount of money in each pot and what the employer super is invested in etc.

It also reflects that we are probably going to get the cash back from our investment in PSTH, which is then reinvested in the SMSF. I want to move my holding of Aspect Diversified Futures into the SMSF  I will sell and buy again rather than actually move it as I plan to buy a class with lower fees. With the proceeds from selling Aspect we invest in Australian small cap and international shares. We then use the proceeds from PSTH to buy Aspect in the super fund. Plus a $20k concessional contribution for Moominmama I just made. Otherwise, the allocation says we need to increase holdings of real assets outside of super a lot. I don't know what those investments would be...

Spending 2021-22

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

The gross income for this year (bottom line) is just an estimate. It looks like falling quite significantly. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending, while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Current saving is then what is left over. This is much bigger than saving out of salaries because gross income includes investment returns reported in our tax returns. The latter number depends on capital gains reported for tax purposes, so is fairly arbitrary. Spending also recommenced its increase this year. Graphically, it looks like this:

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

Our biggest spending category, if we don't count tax, is now childcare and education, which has again risen steeply. As mentioned above, the income and tax numbers are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions and salary sacrificed contributions but not concessional contributions we paid to the SMSF this year.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This year it includes tax on our concessional contributions to the SMSF.

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

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

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

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). We haven't spent much on maintenance this year, so spending is down.

Transport: About 2/3 is spending on our car and 1/3 my spending on Uber, e-scooters, buses etc.

Utilities: This includes spending on online subscriptions etc as well as more conventional utilities. I need to cut back on spending on video games as this category continued to climb strongly.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets. Seems crazy that it has almost doubled in five years and become our second biggest spending category.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low last year because of the pandemic and this year because of a seeming permanent behavior change.

Cash spending: This has collapsed to zero. I mainly use cash to pay Moomin pocket money and he pays me back if we buy stuff online for him. That's how it ended up negative for the year. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. No real trend here.

Mail order: This seems to have leveled out in the last three years/

Childcare and education: We are paying for private school for one child, full time daycare for the other, plus music classes, swimming classes...

Travel: This includes flights, hotels etc. It was very high in 2017-18 when we went to Europe and Japan. Last year it was down to zero due to the pandemic and having a small child. This year we went to the nearby coast for a week and this is mostly how much the accommodation, booked at the last minute, cost.

Charity: Not sure why it's down this year.

Other: This is mostly other services. It includes everything from haircuts to professional photography.

This year's increased spending was mainly driven by increased childcare and education costs. I expect these to be about the same next year and then fall for a while in subsequent years - private primary school is cheaper than daycare with the low level of subsidy we get - before beginning to rise again.

New Investment: Regal Partners

Regal Partners just merged with VGI to create a new larger alternative fund manager that will be known by the former name. The company still trades under the VGI.AX ticker but is expected to switch to RPL.AX. It seems undervalued to me at a PE of 6 and so I bought some shares. Especially, as that is based on VGI's inferior track record to date.

May 2022 Report

World markets stabilized with the MSCI World Index (USD gross) rising by 0.19% and the S&P 500 by 0.18%. On the other hand, the ASX 200 fell 2.43%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7114 to USD 0.7177 increasing Australian Dollar returns and reducing USD returns. Our luck ended this month, and we lost 3.10% in Australian Dollar terms or 2.24% in US Dollar terms. The target portfolio lost 1.05% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 0.21% in US Dollar terms. So, we under-performed all benchmarks.

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

Hedge funds were the worst drag on performance followed by gold. Only futures and real assets had positive returns.

Things that worked well this month:

• TIAA Real Estate (AUD 4k), Australian Dollar Futures (4k), and URF  (also 4k) were the best performers.
  

What really didn't work:

• Tribeca Global Resources (- AUD 25k), gold (-19k), and Pershing Square Holdings (-18k) were the three worst performers...
  

 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 performing 1% per annum worse than the average hedge fund levered 1.67 times.

We moved a little bit nearer to our 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. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think. On the other hand, around 47% of net worth (not including our house) are now in retirement accounts. Liquid investments are 57% of net worth and illiquid non-retirement investments are 13% of net worth. Because of leverage, the total is 117%. 

We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month. It was a busy month.

• I bought 1,000 shares of 3i (III.L) after its share price fell in sympathy with US retailers like Target and Costco. I figured that the problems those faced probably weren't that similar to those faced by Action – 3i's European discount retailer. 3i also posted very good results recently.
• I sold all our shares in URF at 27 cents a share.
• I made additional investments in APSEC and the Australian Unity Diversified Property Fund.
• We made a small investment in a start-up via Unpopular Ventures syndicate.
• There were a lot of small trades involved with forex, tax loss harvesting, moving positions between accounts etc...

Invested in Another Startup

Unpopular Ventures offered a syndicated investment in the seed round of a start-up based in Europe. I can't give any details of the investment. Based on their projections, which I think look pretty unrealistic, it would be a fantastic investment but they have been growing very rapidly so far, have a lot of experience, and the valuation doesn't seem too crazy.

The investment is basically in a separate fund, where the general partners get 20% carry. They suggested investing USD 2,500 (minimum was USD 1,000) and I did that, following Meb's advice to invest a little in lots of different start-ups. I'm used to investing 1-2% or as little as 1/4% of the portfolio in an investment and this is more like 1/16%. On the one hand, I don't want to make too many different investments because of information overload. On the other hand, I can't do anything about this investment unless there is an exit or opportunity to invest more, so I don't really need to pay much attention to its performance.

Got Out of URF

After reading the most recent quarterly report I decided to get out of URF. I'm not optimistic that even if the shareholders vote against the sale deal we will eventually realize more for the investment and there is a big risk it is approved and we get less than the current market price. I exited yesterday and today at 27 cents per share for a net loss on the investment of AUD 2,300, which isn't too bad, I guess. Obivously, there are a lot of people thinking differently to me who want to buy in.

So Far So Good

The graph tracks the performance of our portfolio (Moom, orange) since the March 2020 low versus various benchmarks. All of these are in Australian Dollar terms. So, for example, we multiply the S&P 500 index by the Australian Dollar - USD exchange rate and track that.

 

 

Our portfolio is now a little ahead of the S&P 500 and quite a bit ahead of the MSCI but has had a smoother ride than both. The ASX 200 is ahead of us, but has also been more volatile.The target portfolio (Portfolio, black) also has lower volatility but we have beaten it by fund selection and trading.

No guarantee that this performance continues, but our goal is to achieve market like returns with lower volatility. Also, it isn't as pretty in US Dollar terms. Our strategy is designed to give low volatility in Australian Dollar terms.

April 2022 Report

World markets fell sharply with the MSCI World Index (USD gross) falling by 7.97%, the S&P 500 falling 8.72%, and the ASX 200 falling 0.85%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7494 to USD 0.7114 increasing Australian Dollar returns and reducing USD returns. We lost only 0.16% in Australian Dollar terms but lost 5.23% in US Dollar terms. The target portfolio lost by 2.34% in Australian Dollar terms and the HFRI hedge fund index is lost 0.93% in US Dollar terms. So, we out-performed all benchmarks apart from the HFRI index. I felt like I was losing a lot of money, but in Australian Dollar terms it wasn't that bad.

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

In a reversal of last month real assets, gold, and futures gained money, while other asset classes lost. Real assets were negatively affected by the URF debacle. Rest of the world stocks were negatively affected by the China Fund. Gold rose in Australian Dollar terms, though the USD price fell. US stocks performed worst and detracted from performance most, while gold performed best and contributed most to performance.

Things that worked well this month:

• Gold gained AUD 21k, Winton Global Alpha 10k, Tribeca Global Resources (TGF.AX) 11k, and Aspect Diversified Futures 8k.
  

What really didn't work:

• Pershing Square Holdings (-22k), Australian Dollar Futures (-17k), and Hearts and Minds (HM1.AX, -11k) all lost more than AUD 10k.

Our SMSF continues to perform quite well compared to our employer superannuation funds:

They're all indexed to 1000 in April 2021.

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 a bit worse than the average hedge fund levered 1.67 times. Hedge funds have been doing well recently.

I adjusted the leverage on the URF.AX investment  to roughly 3:1 in our gross asset allocation as there still seems some possibility that the wind-up deal will be voted down by the shareholders.

We moved a little bit nearer to our 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. It was a busy month.

• I invested in the Unpopular Ventures rolling fund on the AngelList platform. The initial investment is USD 10k and then the same amount each quarter for eight quarters.
• Our listed investments trusts are now all in a CommSec account within the SMSF, which means I get accurate tax reporting and can subscribe to dividend reinvestment, which I did.
  
• I sold 10k shares in Pengana Private Equity (PE1.AX). These were shares in my name that I held to get accurate tax reporting, which I don't need any more. I sold at AUD 1.69 and the price is now AUD 1.49. So, that was a good move.
• I sold AUD 30k for USD and bought one more AUD futures contract, increasing AUD exposure by about 100k, which was a mistake.
  
• I withdrew AUD 25k from Domacom Investments after two crowdfunding campaigns just vaporized. 
• But I started accumulating units in another property at Domacom. It is a market garden property near the planned Badgery's Creek Airport. 60 Devonshire Road, Rossmore.
  
• I bought 12.5k WAM Leaders shares (WLE.AX).
• I invested AUD 10k in the Winton Global Alpha Fund, which has been doing well recently, for a change as I predicted. Seems futures work well in inflationary environments but not in low inflation environments. I based this opinion on this research.
• I invested AUD 10k in the Australian Unity Diversified Property Fund.
  
• I bought AUD 7k shares in Pendal as a merger arbitrage play.
• I invested in a new painting at Masterworks: "No Hopeless". I felt this might be over-valued but took the plunge anyway.
  

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.