Checking in on the SMSF

 We have now been running an SMSF for almost three years. How is it doing?

The obvious benchmarks are our employer superannuation funds - Unisuper and PSS(AP). All these numbers are pre-tax. I probably over-estimate the tax paid by the funds, while I know the exact amount of tax paid by the SMSF. So the funds have a bit of an advantage here. 

The SMSF got a good start after which it gradually trudged higher. The two industry funds both declined substantially in 2022 and then recovered. PSS(AP) is almost catching up with the SMSF now.

The SMSF has had lower volatility than the two industry funds, though, at 1.85% per month, its standard deviation is only marginally lower than PSS(AP) at 1.87%. Up and down moves are both penalized using this metric. Unisuper's standard deviation is 2.23%.

Using Unisuper as the benchmark, the SMSF has a beta of 0.42 and an annualized alpha of 4.75%.* Another way of expressing this is that the SMSF captures 64% of the Unisuper's upside but only 24% of its downside. Reducing downside risk is one of our main goals.

* This is treating the risk free rate as zero. The official CAPM alpha using the RBA cash rate will be a bit lower.

Closed Two Investments

I sold our holding in WAM Leaders (WLE.AX). It was down to only 0.1% of the portfolio. Once we held a lot more but gradually sold it off over time to fund other things. I think it is a good investment and maybe we will come back to it in the future. We got a 7.8% internal rate of return on this investment.

The other was Ruffer Investment Company (RICA.L) a diversified listed investment company on the London Stock Exchange. This has not been doing well in the last couple of years and I am tired of losing money. I think the managers got too clever for their own good in being bearish. We got a -3.9% internal rate of return on this investment.

I also sold the holding of Hearts and Minds (HM1.AX) in the SMSF to tidy things up. We still hold more than 40,000 shares of that. Hearts and Minds is currently at an IRR of 3.7%. Our median investment is at 8.5% (PSSAP).

I started a new investment/trade with some of the proceeds, which I'll talk about in due course.

My Aunt's Legacy

My aunt died in 2020. She was single all her life. My father and her did not get on well. They fought each other in court over their mother's will. We wondered who she left her money to. Turns out she set up a foundation with about £5 million in assets. Most of the value came from her house and a company that seems to rent properties. The charities commission in the UK is already investigating the foundation for donating money to things that she didn't specify and maybe benefiting the trustees.... I wonder what happened to the art she inherited that they fought over? Either she had already sold it or she must have given it to someone else. 

One of my cousin's children found out about this charity when they were looking for grants for education, which did fall within one of the approved purposes of the foundation.

When Does Our Investment Strategy Add Value?

EnoughWealth wonders if our investment strategy only adds value under certain market conditions. As a first step let's look at when the out-performance relative to the 60/40 portfolio happened:

The graph simply takes away the monthly return on the Vanguard 60/40 portfolio from Moom's actual results. We see there are periods of out- and under-performance throughout the period. Not surprisingly, it was weaker in 2023 in particular. I didn't do well in implementing the target portfolio strategy last year. Here is a graph comparing the performance of this theoretical portfolio and the Vanguard portfolio:

This looks more consistent. This portfolio is theoretical because it consists of a mix of actual investible funds and non-investible indices.

Bottom line, is I think it is a good idea to add things like managed futures, gold, real estate etc to your portfolio. It makes a real difference.

Lost Money Found

Got an email from Commonwealth Bank that mentions their "Benefits Finder" button in the CommBank App. This can help you find missing money. Turns out I have about $650 with ASIC in liquidator dividends from the collapse of HIH Insurance. I owned 7,500 shares when it collapsed. Need to have a document with my name and address on at that time. I even have the ASX holding statement for my shares! Get a certified copy, a certified copy of my passport, and a statutory declaration and send it all to ASIC.... Will be paying a visit to the Post Office tomorrow to do all this...

A 60/40 Australia-Oriented Passive Benchmark

If we create a portfolio invested 50% in VDBA and 50% in VDGR we can simulate a 60/40 passive benchmark:

This requires monthly rebalancing of the portfolio. We ignore the costs of this rebalancing. Over this period, the benchmark portfolio had a compound annual return of 5.60% with a monthly standard deviation of 2.55% compared to Moom's compound return of 7.77% with a monthly standard deviation of 2.32%. Moom's beta to this portfolio was 0.8 with an annual alpha of 2.9%.

Note that our portfolio goes through three different "regimes" during this period. Up to October 2018 we had a portfolio that was about 60% long public equity. Then we received a large amount of cash, which we converted to bonds and then gradually invested in other assets. This phase lasted up to the end of 2020. Since then we have been close to the target portfolio.

VDGR

Following up on my comparison of our portfolio to VDBA, here is a comparison to VDGR. VDGR is a 70/30 mix, while VDBA is 50/50 and our portfolio is 60/40.

First, here is how $1000 would have evolved if invested either with me or in VDGR since the end of November 2017:

Put another way, the average annual return over this period was 6.97% for VDGR and 8.65% for Moom. 

VDGR is less conservative, but still underperformed. The monthly standard deviation of returns for VDGR is 2.84%, while it is 2.28% for Moom. So, we had higher returns with lower risk.

I again did a CAPM style analysis using the RBA cash rate as the risk free rate and treating VDGR as the index. Moom has a 0.72 beta to VDGR and an annual alpha of 2.58%.

Again, I conclude that the additional diversification in our portfolio really does add value.
 

Does My Investment Strategy Add Value?

EnoughWealth commented on my recent post on our target allocation:

"Have you tried benchmarking your actual and target asset allocation performance against something a lot simpler - like a basic Bond:Shares allocation with similar risk level, with appropriate split of AU vs Global within each and a basic index fund proxy for each? I just suspect you may not be adding a lot of performance by the degree of complexity and number of individual holdings. I did a quick comparison of your NW monthly figures to mine (after converting my figures using the relevant monthly avg AUD:USD exchange rate), and aside from the jump in my nW in Feb '23 when I updated my estimated valuations for non-home real estate values, the monthly and three year trend is visually almost identical -- if anything yours seem to have more volatility than mine. Since most of the individual investments in your portfolio have internal diversification, I'm not sure your role as an active fund manager of your own investment portfolio is actually adding much 'alpha' ;) Then again, your spare time is 'free' so at least you aren't charging yourself a fee as fund manager (on top of whatever fees are embedded in some of those funds you've chosen)."

My response was that I had a beta of less than one to the ASX 200 and had positive alpha... But I have now done an analysis that I think is close to what EnoughWealth is suggesting here. I picked the Vanguard managed ETF VDBA.AX, which is diversified across Australian and global stocks and bonds. So, this is a potential alternative to our current investments. It is 50/50 stocks and bonds, whereas I am targeting 60% equities. But we could lever it up a little bit if we wanted.

Vanguard nicely provide all the data needed. Most of the work is in calculating dividend reinvestment. I assumed dividends were reinvested on the ex-date increasing the number of shares. Then I multiplied the daily price by number of shares to get the total value. I carried out my analysis using month end values since inception of VDBA.

The results might surprise Bogleheads :)

First, here is how $1000 would have evolved if invested either with me or in VDBA since the end of November 2017:

Put another way, the average annual return over this period was 5.06% for VDBA and 8.65% for Moom. 

Is this because VDBA is a bit more conservative? As you can see from the graph, volatility is about the same for the two investments. Formally, the monthly standard deviation of returns for VDBA is 2.32%, while it is 2.28% for Moom. So, it's not because of that.

So, I also did a CAPM style analysis using the RBA cash rate as the risk free rate and treating VDBA as the index. Moom has a 0.88 beta to VDBA and an annual alpha of 3.33%. 1% of extra return on a $5 million portfolio is $50,000...

In conclusion, the additional diversification in our portfolio really does add value.
 

January 2024 Report

Monthly reports are back! In January, The MSCI World Index (USD gross) rose 0.61% while the S&P 500 rose 1.68%, and the HFRI hedge fund index gained 0.44% in USD terms. The ASX 200 rose 1.19% and the target portfolio 2.87% in AUD terms. All these are total returns including dividends. The Australian Dollar fell from USD 0.6806 to USD 0.6595. We gained 1.92% in Australian Dollar terms or lost 1.24% in US Dollar terms. So, we under-performed all benchmarks apart from the ASX200.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. US Stocks experienced the highest rate of return, while hedge funds made the largest contribution to returns. On the other hand, Australian small cap and rest of world stocks had negative returns in January.

Things that worked well this month:

• Pershing Square Holdings (PSH.L, AUD 19k), gold (AUD 13k), and Hearts and Minds (HM1.AX, AUD 11k) all had more than AUD 10k gains.
  

What really didn't work: 

• Tribeca Global Resources (TGF.AX) lost AUD 23k and Australian Dollar Futures lost AUD 10k.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three line give results for the indices. Compared to the ASX200 we have a lower average return but also much lower volatility, resulting in a higher Sharpe ratio of 0.93 vs. 0.76. But as we optimize for Australian Dollar performance our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. Well, we do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 with a beta of only 0.45.

We are quite close to our target allocation. We are underweight private equity and overweight real assets. Our actual allocation currently looks like this:

About 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.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. It was a very quiet month. I made one change to our investments:

• I sold around USD 35k of the CREF Social Choice Fund and bought the same amount of the TIAA Real Estate Fund in my US 403b retirement account.
   

Updating Target Asset Allocation

 

Not sure when I last posted about our target asset allocation, as I have tweaked it since this 2021 post. I am tweaking it again to reflect continuing new allocations to private equity (venture capital, buyout funds, and SPACs).

Overall we still have a 60% equity allocation. Now 20% of that will be the target for private equity, 20% hedge funds, and 20% long equity. Among the latter, 11% allocated to Australia and 9% to foreign shares. Within Australia, 6% is allocated to large cap and 5% to small cap. Within foreign equity, 5% to the US and 4% to the rest of the world. 

Among the 40% allocated to other assets, 15% is allocated to real assets including real estate, art, water rights etc., 5% to bonds (including private credit), 10% to managed futures, 10% to gold.

The benchmark target portfolio splits the private equity component 50/50 between venture capital and buyout. It also allocates all the Australian exposure to the ASX200 and all the real asset allocation to a specific (mainly US) real estate fund. All the managed futures is allocated to Winton in the benchmark. Maybe I should try harder on this benchmark, but this seems good enough for my purposes.

Insurance Inflation

 

This year's home contents insurance bill is 70% higher than last year's! How does that make sense? The number I am comparing to is one that the company provides that they say is adjusted for any change in policy. This seems particularly egregious but part of a general trend of rising insurance costs.

Big Moomin vs. Little Moomin

We have now re-invested Big Moomin's portfolio in the two suggested managed funds. At this point, Little Moomin has just over 8% more money than Big Moomin, despite starting investing later and paying 30% tax on gains in his investment bond account.

Individual Investment Performance 2023

 

To better understand our investment underperformance in 2023 let's dive into the returns on each individual investment. If we'd managed to avoid all the losing investments in the table we would have roughly matched the return on the target portfolio. So, as usual it is the losers which hurt. In particular, the Cadence, Cadence Opportunities, and Tribeca listed hedge funds all did poorly. The worst of all though was the Aura VF2 venture capital fund. One of their companies - Lygon - went bankrupt and was then restructured. Once you are in a venture fund you can't really get out and I invested in this fund because VF1 has done well over time.

When I reviewed the hedge fund investments two years ago, these funds were all doing well. I did mention that I wanted to reduce exposure to Cadence Capital, which I failed to do. Tribeca has turned out to be a very volatile investment. Sometimes they have big wins and some times big losses. I failed to get out when it traded above NAV at about the time of the review. I thought then they had reformed, but apparently not. 

The other two main losers are Domacom and the China Fund. I really should have gotten out of Domacom when it relisted on the ASX. Now it does look like they will turn things around, but dilution from new investors means we might never make any money. There's no real excuse for remaining in the  China Fund, as I have been bearish on the long-term prospects of China under Xi Jinping. It is hard to explain.

On the other hand, I lost on the TIAA Real Estate Fund, but correctly reduced my exposure. Not by enough. My gains in the CREF Social Choice Fund just balanced my losses in the Real Estate Fund in 2023.

I have much less to say about the winners. 3i and Pershing Square Holdings have turned into big winners. I could have done even better on 3i if I had not sold 20% of the position. Half of the fund is in one company - Action - which made me a bit nervous. Gold did well and the other two big winners are our employer superannuation funds. With gold, these are our three biggest investments. Pershing Square is now our fourth biggest investment.

Annual Report 2023

In the second half of 2023 I stopped writing monthly reports on this blog because each month's accounts had large errors.* But now I have got the errors down to not more than $500 in any one month and 0.01% of the portfolio for the year as a whole. Our private investments have all also reported their results for the year. So, now we can compute reasonably accurate annual and monthly accounts for the year.

Overview 
Investment returns were positive and net worth again increased. But I was disappointed that we underperformed the target portfolio and were far behind the gains in stock indices. So, we also fell short of the net worth projection I made in the 2022 report. In the first half of the year, I spent quite a lot of time on my new hobby of researching my family tree. In the second half of the year I was working hard on teaching. I do all my teaching in the second semester now. In the second half of the year I also took on a new editorial role that will keep me busy over the next three years. We took a vacation at Coogee Beach in Sydney in January and I made a couple of short business trips to Melbourne in March and the end of November. Maybe in 2024 we will finally travel overseas again...

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

Investment Return
In Australian Dollar terms we gained 5.6% for the year while in USD terms we gained 5.9%. The Australian Dollar didn't move much over the year. The MSCI gained 22.8% and the S&P 500 26.3% in USD terms while the ASX 200 gained 14.4% in AUD terms. The HFRI hedge fund index gained 7.3% in USD terms. Our target portfolio gained 10.8% in AUD terms. So, we under-performed all benchmarks. 

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

 

This is really not good. The following chart shows monthly returns in Australian Dollar terms:

 

We beat the target portfolio in four of the twelve months, but the eight months where we under-performed dragged down returns for the year.

 

Here are annualized returns over various standard periods:

We beat the HFRI over 5 to 20 year horizons but otherwise we under-perform, though we are quite close to the target portfolio over 3 and 5 year horizons.

Here are the investment returns and contributions of each asset class in 2023 in currency neutral and unlevered terms:

 

The contributions to return from each asset class sum to the total portfolio return. The portfolio shares are at the beginning of the year. Not surprisingly, US stocks did best followed by gold, Australian large cap, and private equity. The latter contributed the most to total return mainly due to the stellar performance of 3i (77.8% for the year). Australian small cap and rest of the world stocks had negative returns. Thankfully, they take up small shares of the portfolio. Returns from hedge funds were particularly disappointing despite a strong performance by Pershing Square Holdings (24.4% for the year), which is our largest hedge fund allocation.

Investment Allocation 

There were no large changes in asset allocation over the year:

 

Mainly, relative exposure to hedge funds fell, as exposure to private equity and real assets rose.

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 $178k after tax in salary etc. Total non-investment earnings including retirement contributions were $210k, up 14% on 2022. The result is likely driven by lower net tax. We gained (pre-tax including unrealized capital gains) $154k on non-retirement account investments. A small amount of the gains were due to the fall in the Australian Dollar (forex). We gained $130k on retirement accounts with $31k in employer retirement contributions. The value of our house is estimated to have risen by $33k. As a result, the investment gains totaled $317k and total income $527k.

 

Total spending (doesn't include mortgage payments) of $151k down 1.3% on last year. It looks like my efforts to cut spending are working. We saved $28k from salaries etc. before making a concessional contribution of $20k to the SMSF. So, current net worth increased by $132k.

$31k 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. Taxes on superannuation returns are just estimated because, apart from tax paid by the SMSF, all we get to see are the after tax returns. I estimate this tax to make retirement and non-retirement returns comparable. The total estimated tax on superannuation was $40k. Net worth of retirement accounts increased by $141k after the transfer from current savings. With the gain in the value of our house, total net worth increased by $306k.

Projections
Last year my baseline projection for 2023 (best case scenario) was for an 11.2% investment rate of return in AUD terms, an 11% nominal increase in spending, and about a 3% increase in other income, leading to an $550k increase in net worth to around $6.5 million or a 9% increase. Net worth only increased by just over half of this due to much lower than predicted investment returns. On the other hand, spending actually fell despite high inflation and non-investment income rose.

 

The best case scenario for 2024 is flat spending at $151k, an investment return of 10%, and probably a 3% increase in non-investment income, resulting in a 8% increase in net worth of $500k to $6.7 million.

 
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, I didn't bother to note these, which amounted to about $1,000. "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.

 

* The error is the difference between two different ways of computing the profit or loss from changes in exchange rates for the month. The two methods should give the same result, but they don't when there are errors in the accounts.

Projected Retirement Income

If we retired today, how much would our retirement income be? To answer the question, I updated an analysis I did a few years ago and came up with this graph:

Passive income is what our combined tax returns would be in each year if we had not received a salary nor made any work related deductions. I also added back charitable deductions and personal concessional superannuation contributions to our SMSF as these aren't costs in the same way that margin interest is, for example. So, it is not 100% passive as it includes realised capital gains and losses. I also plot how much a 4% withdrawal from our superannuation accounts and US retirement fund would amount to under the assumption that we apply the 4% rule to these accounts. My thinking is that unrealised gains on the non-retirement funds would be sufficient to maintain purchasing power. Taxes are likely to be very low, so I just ignore them.

Last tax year our income would have been AUD 154k. Our spending not including mortgage interest and life insurance was AUD 152k. So, this is one reason why I don't feel comfortable retiring as we are spending very close to our sustainable income and spending is likely to continue to rise. On the other hand, if we apply the 4% rule to our entire portfolio at 30 June 2022, it would yield AUD 175k. But maybe the 4% rule is not conservative enough. My recent analysis of how much of our returns is needed to compensate for inflation, was much more pessimistic than this.

If we were forced to stop working we could easily slash spending by taking the children out of private school, which accounts for an expected 30% of our budget.

How Much Investment Income Do We Need to Compensate for Inflation?

 

This chart compares the fitted investment income curve from my previous post about the "boiling point" with the monthly loss of value of our portfolio (including our house) due to inflation. I just took the monthly percentage change in Australia's consumer price index and multiplied by the value of our portfolio that month. The gap between the blue and orange curves is a naive estimate of how much can be spent each month in retirement mode.

Currently, projected investment income is only just enough to cover the loss from inflation. Smoothing inflation over twelve months tells a similar story:

Here I divide the CPI by its value twelve months earlier, take the twelfth root and subtract one before multiplying by the value of the portfolio. This shows that inflation is coming down a little but is still high. We really need to boost our rate of return relative to inflation in order to retire and maintain the real value of the portfolio. It is hard to think about retiring until in inflation is more under control.

Investment income accounts for superannuation taxes, but assumes that the only tax on investments outside superannuation is exactly equal to the franking credits paid.* In retirement, the superannuation tax would go away, but there would be capital gains and other taxes on investments outside superannuation. So, probably it is in the ballpark.

* This is because the series is computed as the change in net worth minus saving and inheritances. Saving is computed after tax including superannuation contribution taxes and income tax.

Further Update on Big Moomin's Account

I recently posted about the returns on the children's portfolios. It looks like it would be complicated to transfer Big Moomin's portfolio to me here in Australia. My brother has taken up my idea of just picking a couple of diversified funds and sticking with them and sent me details of two. These are growth oriented funds that invest in shares in his country and internationally as well as some bonds. The managers have mandates to do whatever they want. There isn't really a stated strategy. These are called "flexible" funds there. One is a few years old and has done well and isn't too correlated with any particular stock index. The other is only just over a year old and also did well in 2023. So, I said, sure, invest in those two funds and see how it goes after a year.

When Was the Boiling Point?

Interesting post from Enough Wealth on the "boiling point" when more of your gain in net worth comes from investment returns rather than saving. Rather than just look at the change in net worth, I created the following graph of monthly total saving from non-investment income:

This includes superannuation contributions and mortgage principal payments but not inheritances. I fitted a linear trend to this. Then I created a graph of investment income (including superannuation returns and changes in the value of our house):

 

I fitted a quadratic trend to this data. When the two curves cross we are at the boiling point. Because of the volatility of investment income it's a bit hard to see where that is. So, I also did this close up:

 

The boiling point was in January 2012 according to this analysis. Currently the trend is at about $35k per month, which is about four to five times the savings trend. That doesn't really say anything about the ability to retire. Some of the investment return is needed to maintain the real after inflation value of the portfolio and it needs to be compared to spending not saving!

Bottom in Real Estate?

Fundrise have come out and said that they think the bottom is in in the commercial real estate market. Coincides with my assessment that maybe the bottom is close for a diversified portfolio. This graph shows monthly percentage returns of the TIAA Real Estate Fund and a twelve-month moving average:

So, I am switching some of my US 403b account back to the TIAA Real Estate Fund. My mistake in the last couple of years was not switching enough out of this fund to CREF Social Choice, though I did switch a lot. I was at 43% Real Estate, 57% Social Choice last month and now am at 70% Real Estate, 30% Social Choice. As a result of the switches I managed to roughly maintain the balance of the account in the last couple of years:

I was actively saving in this account up to June 2007, after which the trend is solely due to investment returns.

Contributions to Annual Return

I haven't formally finalized the accounts for 2023 yet. I will need to wait to get investment returns on illiquid investments that report with a long time lag. But I do have a preliminary estimate of 6.38% in AUD terms (6.64% in USD terms). This is rather disappointing as the MSCI returned 22.81%, the S&P 500 26.27%, and the ASX 200 14.45%. Our target portfolio returned 10.84%. So, why did we underperform the target by so much? The following tables analyze the returns of each portfolio:

RoR is the rate of return of the asset class and contribution is the rate of return multiplied by the share of the portfolio. The sum of contributions gives the portfolio return. The returns for the Moom portfolio are in currency neutral and unlevered terms and, so, differ slightly from the Australian Dollar return for the portfolio. The asset classes don't quite match, but it's close enough. 

The target portfolio got 2.48% returns from international stocks. The return I got from US stocks at 15.8% was less than the MSCI index at 22.5% but more importantly, my allocation to other countries resulted in a negative return and so the total contribution from international stocks was only 0.89%. 

The target portfolio got 1.73% returns from Australian stocks. Again, my return from Australian large caps was a bit lower than that of the ASX 200 but my allocation to small cap stocks had a negative return and so the overall contribution was only 0.49%.

The target portfolio represents managed futures using the Winton Global Alpha Fund. This gave a contribution of 0.59%. I also allocated to the Aspect Diversified Futures Fund and Australian Dollar futures. These dragged down returns resulting in a contribution of only 0.18%.

The target portfolio obtained a 1.61% contribution from hedge funds (based on the HFRI index), while I only got 0.25%. Though some funds like Pershing Square did very well, other Australian hedge funds under-performed.

Real Assets is the area where I outperformed. I represent this in the target portfolio using the TIAA Real Estate Fund. My allocations to other real assets resulted here in a small gain rather than a large loss.

Bonds and gold made a similar contribution to each portfolio. Finally, venture capital made an outsized contribution to the target portfolio of 4.38%. My venture capital investments lost money overall in 2023. I did much better than the target portfolio in buyout investments like 3i. But this wasn't sufficient to match the target portfolio's overall private equity contribution.

I think there is some luck here. In a different year, non-US stocks or Australian small caps might perform well. On the other hand, I also need to eventually reduce some of my allocations to Australian hedge funds that have under-delivered.

Update on the Children's Portfolios

I was calling our children Moomin and Baby Moomin on this blog. But the latter is no longer a baby, so let's call them Big and Little Moomin :) My brother reported to me that Big Moomin's portfolio only returned 4% in USD terms in 2023. He put that down to not trading enough because the bank has made it harder to trade on this trust account...  Obviously it's down to being in the wrong things. I have tried to get him to stick with a diversified portfolio. He manages this one and the accounts for two of his children who all inherited money from our mother. The will stated that they couldn't access the money till they were 23 years old. I manage Little Moomin's portfolio, because he was born after my mother died and so wasn't included in the will. My brother and I each contributed from our inheritances to his account. I invested his money in an investment bond with Generation Life. His account returned an estimated pre-tax 14% in AUD terms in 2023.* The target portfolio benchmark made about 10.8% for the year. So, finally, this portfolio outperformed the benchmark after under-performing so far:

The graph also shows how the target portfolio has matched the ASX 200 while experiencing lower volatility over this period.

Anyway, my brother says that he is going to try to transfer the money to me. Initially, he was advised that the money had to stay in his country, where my mother lived, but now apparently he has reason to think otherwise.

* It is estimated, as 30% tax is deducted inside the investment bond. You can reduce this tax eventually if the child "breaks the bond" by adding an additional investment and they are in a lower tax bracket when withdrawing the money.

Scammed

I just got scammed for AUD 2,300. I got an email from my webhosting company saying that my card had expired and I needed to renew. Except it wasn't actually from them. Instead of an AUD 100 or so fee, somebody called HalalBooking London charged me AUD 2,381. Now looking at the original email, I see it came from info@thelabhaus.com rather than Crazy Domains. I contacted Commonwealth Bank and they will try to recover the money and I cancelled my debit card. The email looked perfect apart from the email address. I had thought that if a payment was still pending they could always cancel it. Apparently not true. Instead, the bank won't do anything until the payment is no longer pending and only then will they try to reverse it!

Based on this, it seems that there is very little protection against getting scammed here in Australia compared to in the US.

HalalBooking London actually is a website where supposedly you can book Muslim friendly hotels in London. I am guessing it is actually someone else using that name for added confusion value. I contacted the website and asked them to reverse the charge if it is them or be aware that scammers are using their name. I also informed Crazy Domains about the scam.

In other news, Moominmama's friend who bought a knockdown and rebuild property in one of the most expensive suburbs of our city is now asking whether we have a spare AUD 170k we can lend them. Because of the increase in interest rates their bank has reduced the amount they are willing to lend against their existing house. I can't give specific advice without a lot more detail, but seems to me that they are likely going to have to sell their existing house ASAP if they don't want to end up reselling the property they bought. My guess is that the RBA is still going to raise rates more at this point.

P.S.

According to ChatGPT, if I cancelled my debit card while the transaction was still pending the scammer won't be able to complete processing the transaction. This makes sense, but I am a bit dubious as Commonwealth Bank asked me if I wanted to cancel the card to prevent them getting more money rather than to stop them getting this amount. CrazyDomains said I should report it to the police. I already have reported it to ACCC.

P.P.S. 15 November

I got a response from HalalBooking. They said that someone did make a booking via their site for this amount and they detected it as a fraud and refunded it. They said that there is a security vulnerability in the bank's software that was exploited. So, this is looking like there will be a positive outcome.

P.P.P.S. 17 November

Good news - the money has been refunded to our account. I don't know whether this would have happened anyway or it is because I cancelled my card quickly or because I contacted HalalBooking.

P.P.P.P.S 4 December

I found, when compiling the monthly accounts for November, that did have to pay an AUD 70 fee for the international transaction!

Reducing Gas and Electricity Bills

Today I received new format gas and electricity bills from ACTEWAGL which include a notice on the front page that we can reduce our bills by a total of AUD 558 per year by switching to the Direct Saver Plan. I am now doing that. This seems to just be straight up price discrimination, like the higher mortgage rates I used to pay.

Second Australian Unity Merger Plan Scuttled

Australian Unity and Cromwell announce that their fund merger plan is cancelled. I wasn't very enthusiastic about the merger and so am happy it has been called off. Cromwell's fund only included offices, so while the deal was diversifying for Cromwell unitholders it was not so for Australian Unity unitholders. I invested in the fund to get diversified property exposure, not just offices.

Moominmama's Taxes 2022-23

I also did Moominmama's taxes for this financial year. The post about last year's taxes is here. Here is a summary of her tax return for this year:

Her salary was up only 3% this year. Gross income was down 2%, though there were some big fluctuations across categories. Australian dividends rose quite strongly, which is something of a trend...

Total deductions rose by 46%, mainly because of increased interest costs. As a result, net income fell 27%. 

Gross tax applies the tax bracket rates to taxable income. This was more than offset by franking credits. So, she gets the franking credits refunded as cash and has a negative tax rate. As a result, she should get a large refund.

Moominpapa's 2022-23 Taxes

This year, I've prepared our tax returns just before the deadline. Here is a summary of my taxes. Last year's taxes are here. To make things clearer, I reclassify a few items compared to the actual tax form. Of course, everything is in Australian Dollars. 

Overall, gross income and deductions barely changed from last year, falling by 1% each.

On the income side, Australian dividends and franked distributions from managed funds are again up strongly. My salary still dominates my income sources but again only increased by 3%. 

Other income sources are down strongly, partly because I shifted the assets, which produced these returns into the SMSF. Net capital gain is zero due mainly to some strategic sales to generate losses. I am carrying forward $93k in capital losses.

Deductions fell 47% because last year they included the loss on Virgin Australia bonds. I redistributed deductions a bit to match the size of different holdings. This resulted in some big changes in the individual categories. Didn't plan on charity falling that much...

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

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

Estimated assessed tax fell because of the larger offsets this year.

I estimate that I will pay 25% of net income in tax. Tax was withheld on my salary at an average rate of 32%. I already paid $7,782 in tax installments and so estimate that I should get a refund of $8,701.

Good News from Pershing Square

The SEC finally approved the registration of Pershing Square SPARC Holdings. I bought Pershing Square Tontine Holdings (PSTH) around $23. We got $20 back when the SPAC was wound up. It's great to see that it will now be resurrected. Hopefully some good deal will come out of this. I wasn't that inspired by the Universal Music deal, which fell through, anyway. We ended up being invested in that all the same through PSH.L.

Why I Haven't Posted a Monthly Report Recently

I haven't posted monthly reports for July or August. The reason is that the July accounts have an error of more than AUD 12k and I don't have the time or inclination to try to reconcile them at the moment. Probably this will have to wait till later in the year when my teaching is over. I focus all my teaching in the second semester so I am really busy. And I am also working on my new hobby of genealogy research, since December last year. Probably I will eventually make a post for the second half of the year as a whole with monthly investment performance figures. There is also an error of more than AUD 8k that cropped up now in the December 2022 accounts, which wasn't there before. Possibly they are related...

Anyway,  in AUD terms July is currently at 2.18% (compared to our target portfolio of 1.77%. ASX200 = 2.89%) or 3.18% in USD terms (HFRI = 1.75%, MSCI = 3.45%). So not bad.

August is at 0.05% (ASX = -0.44%, target = 0.90%). In USD terms though it was a fall of 3.62%. Stock markets were down but not that bad...

P.S.

After writing this post I realised what might be wrong with December 2022 and fixed that and June 2023. But July 2023 still has a 12,000 dollar error...

Nischa: Great Personal Finance Videos

I just found these great personal finance videos. I know most of this stuff, but lots (most?) of people could learn a lot from this!

Paypal

Closed my Paypal account. Only time it ever comes up is when someone is trying to scam me. Just had someone try to charge USD 599 to me.

Lifetime Health Cover Loading

In Australia, if you don't get private health care when you are younger, if you finally do get it you have to pay an extra "loading". I had to pay 36% more and Moominmama 14%. But apparently that is only for ten years. The ten years is up and our premium has been reduced!

June 2023 Report

We finally have all the investment statements and reports for the 2022-23 financial year, which means I can put together a report on our investment performance in June. In June, The MSCI World Index (USD gross) rose 5.85%, the S&P 500 rose 6.61%, and the HFRI hedge fund index gained 2.20% in USD terms. The ASX 200 rose 1.74% and the target portfolio 1.09% in AUD terms. All these are total returns including dividends. The Australian Dollar rose from USD 0.6479 to USD 0.6657. We lost 0.27% in Australian Dollar terms or gained 2.40% in US Dollar terms. So, we under-performed all benchmarks apart from the HFRI. Our hedge fund and private equity investments underperformed their benchmarks, dragging down performance relative to the target benchmark, which has a 38% weighting on these two asset classes.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I then add in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return. Gold was the biggest detractor, while futures contributed the most.

Things that worked well this month:

• Pershing Square Holdings and Australian Dollar Futures did well.
  

What really didn't work: 

• Gold and Tribeca Global Resources did badly.
  

The investment performance statistics for the last five years are not looking good and I don't feel like reporting them. 😕

We are now very close to our target allocation. Our actual allocation currently looks like this:

About 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.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. It was another quiet month. The only additional investment moves I made were:

• I bought 500 PMGOLD.AX and 1778 CDO.AX (Cadence Opportunities Fund) shares.
  

Superannuation Returns in the Long-Run

Following up from my post on how our SMSF is performing compared to our managed superannuation funds, here is how our superannuation in general has done over time:

Note that the y-axis is a log scale! Our superannuation has outperformed the MSCI index in AUD terms in the long-run. The big win was in the couple of years after 2002 when I rolled over my Unisuper fund to Colonial First State and invested in geared funds. Then I got too conservative leading up to the GFC - the flat top you can see on the red line. Superannuation returns crashed in the GFC because I got aggressive again too early. After that, we have followed the market more closely until after 2018 when we have gone into a bit more of a capital preservation mode again. This reduced the volatility in 2022 but returns in 2023 are a bit disappointing so far.

On the other hand, our non-superannuation assets had catastrophic performance up to 2009. After that, I got my act together, which eventually gave me the confidence to set up an SMSF. But you can see the value of handing control to an external manager early on.

Superannuation returns are pre-tax but after fees. My method of imputing tax paid for public superannuation funds probably exaggerates their performance a bit. These time based returns are quite different from dollar based returns. All the early volatility wasn't that important because total assets were small. Performing well now is much more important.

Enough Wealth followed up on my original post by comparing his SMSF over a longer period to a basket of industry funds.

Superannuation Performance Update July 2023

Inspired by this article in the AFR, here is an update on how well our SMSF is doing compared to Unisuper and PSS(AP). after underperforming for a few months, it outperformed in June and July:

Looking at the longer term, it is still ahead of the two super funds:

It rode out the 2022 downturn with less "volatility". PSS(AP) actually has a slightly lower standard deviation of monthly returns but also a lower mean. As a result, the SMSF has an information ratio (Sharpe ratio with a zero return hurdle) of 1.1, while Unisuper is at 0.61 and PSS(AP) at 0.73. Relative to Unisuper, the SMSF has an annual alpha of 5.36% and a beta of 0.44 (Relative to PSS(AP): 4.61% and 0.61).

I compute all these returns pre-tax. This probably overestimates the taxes paid by Unisuper and PSS(AP), giving them a bit of an advantage. OTOH, I don't charge for my time in managing the investments.

Got a Call from Australian Unity

I blogged recently about the proposed merger between the Australian Unity Diversified Property Fund and a Cromwell office fund. Today, I was called by a representative who told me about the plan and timeline and asked if I had questions and whether I would support the proposal So, I told him that I understood the reasons for seeking a merger and that I thought this merger was better than previous proposal but also that I invested in the fund to get exposure to a diversified portfolio and now it was going to be a office dominated fund, a sector that's not doing too well. So, I wasn't really sure which way to vote. He sounded disappointed and said he understood my thinking...

New Australian Unity Merger Proposal

Australian Unity Diversified Property Fun has a new merger proposal on the table following the failed merger in 2021-22. This is a merger with the unlisted Cromwell Direct Property Fund. This seems like a fair deal unlike the previous one. It has various advantages. The only downside is that the merged fund will have 70% of its assets in offices. The attraction of AUDPF was that it was truly diversified and not dominated by offices. 

I expect I will stay in the fund (there is only a limited near term opportunity to withdraw) and think about withdrawing in 2025 when a full liquidity event is promised. The main risk is that office properties are downvalued in 2024 and 2025 after the merger happens. I am seeing a decline in value in the TIAA Real Estate Fund even though only a quarter of their assets are in offices. I reduced my holdings near peak value, should have reduced them more. So, maybe I should try to withdraw some of our investment when allowed later this year...

Spending 2022-23

For the last six 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) into the following categories of spending:

The gross income for this year (bottom line) is just an estimate. It is based on the gross income we expect to report in our tax returns (before investment expenses etc) plus employer superannuation contributions. 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 increased substantially, though we also expect income to hit a high though it's been fairly constant over the last five years. 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 continues to trend upwards. As mentioned above, the income and tax numbers are all estimates. Commentary on each category follows:

Employer superannuation contributions: These include employer contributions (we don't do any salary sacrifice contributions) but not concessional contributions we paid to the SMSF this year.

Superannuation contributions tax: The 15% tax on concessional superannuation contributions. This 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.

Income tax is one category that has fallen since 2017-18!

Life and disability insurance: I have been trying to bring this under control and the amount paid has also fallen since 2017-18 a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child. It is up this year because I had an operation early this calendar year.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association). Rising interest rates have pushed up spending this year.

Transport: About half is spending on our car and half is my spending on Uber, e-scooters, buses etc.

Utilities: This includes water, gas, electricity, telephone, internet, and online storage etc.

Subscriptions: This is a new category this year, split out from utilities. It's been trending up strongly.

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

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It was low in the last two years because of the pandemic but doubled this year as life got more back to normal and prices are climbing I feel particularly in this area.

Cash spending: This has collapsed to almost zero. I try not to use cash so that I can track spending. 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 and actually came down this year,

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. In 2020-21 it was down to zero due to the pandemic and having a small child. This year we went to Sydney for a week and this is mostly how much the accommodation cost.

Charity: Not sure why this is trending down.

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 and higher mortgage interest. I expect education to fall a little next year as private primary school is cheaper than daycare.

What I Get Out of Tracking Spending Categories

Ramit Sethi advocates only tracking about four categories of spending and is critical of couples who do more fine-grained tracking. For the last few years I have been tracking 15 top level spending categories and 27 more detailed spending categories. So, what do I get out of this. I think the following:

• I can track which items have grown fast and maybe we should cut back on. This has resulted in saving money on car insurance, health insurance, and mortgage interest.
• Some things that I think we are spending a lot on, and should cut back on are actually not that big. For example, our current spending on restaurants is AUD 3k per year or 1.7%. My spending on bus, Uber, taxis etc. is AUD 4.5k per year or 2.5%, which is less than half our spending on transport. These are two of my three areas of "luxury" or personal spending. The other is spending money on subscriptions online etc So, being able to see these numbers makes me feel more comfortable about my spending in these areas.
• Perhaps some things seem small and we can consider raising them, like our spending on charity at only 0.4%.
  
• Well, yes it's neat to see what we are spending money on and comparing to other people :)