Today I received three cheques in the mail from the Reserve Bank. Here is one:
They are my payout from the collapse of HIH back in 2001. It's about a third of the value of the shares I had bought. I computed the internal rate of return on this investment: -9.44%.
After a couple of failed attempts at merging the Diversified Property Fund with other funds, Australian Unity has decided to rid itself of managing the fund by selling the management rights to ASA Real Estate Partners. I don't have any objections to this. The previous mergers would have reduced the diversification of the fund and also financially disadvantageous to existing unit holders. This sounds like an experienced team.
So, as soon as I had increased the cash buffer in our offset account, I got AUD 40k of capital calls, so back to square one again. The capital call from Unpopular Ventures was expected. We have completed our first 2 year subscription period and are renewing for another two years. We need to make quarterly contributions of USD 10k. This is an act of faith that our investments will eventually be as good as their earlier investments. Ten years of fees come out of the investments up front, so we are underwater on our investment so far.
The other call is from Aura Venture Fund II for AUD 25k. These don't come on any schedule. When they need more money they make a call with about two weeks of notice. We have now contributed 55% of the total capital we pledged. There is no choice about this one. It's also losing at the moment.
I am expecting my rate of return over the last 20 years to look bad this year because 2004 was such a good year. In 2004 I gained 42.4% compared to a 13.7% gain for the MSCI World Index (in AUD terms). It was my best year ever in terms of investment performance. The ASX 200 gained 30.3%. You can already see this in this chart:
In 2023 my performance over the last 20 years almost matched the MSCI World Index's performance over the previous 20 years. But this year I am lagging a lot. Why did I do so well in 2004? It was mainly due to leveraging Australian shares. This table shows the AUD gains in 2004 for each investment:
The CFS Geared Share Fund is a levered Australian share fund. It provided the majority of gains. Nowadays I feel that I can't handle that much volatility. The fund is still available. Of these investments I am currently, 20 years later, invested in CFS Developing Companies, Platinum Capital, CREF Social Choice, and TIAA Real Estate.
I started 2004 with a net worth of AUD 170k and ended with AUD 298k.
In February, the Australian Dollar fell from USD 0.6595 to USD 0.6504. Stock indices and benchmarks performed as follows (total returns including dividends):
US Dollar Indices
MSCI World Index (gross): 4.33%
S&P 500: 5.34%
HFRI hedge fund index: 1.92% (forecast)
Australian Dollar Indices
ASX 200: 1.03%
Target Portfolio: 3.08% (forecast)
Australian 60/40 benchmark: 1.65%.
We gained 1.78% in Australian Dollar terms or 0.37% in US Dollar terms. So, we beat the ASX200 and the 60/40 benchmark but underperformed the other four. The main reason we underperformed the target portfolio is because it gained 1.15% from venture capital and buyout whereas we had a negative return from private equity.
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 and so are lower than the Australian Dollar returns on net assets mentioned above. Futures experienced the highest rate of return and made the largest contribution to returns followed by US stocks and ROW stocks. On the other hand, private equity and real assets had negative returns in February.
Things that worked well this month:
What really didn't work:
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 lines give results for three indices. Compared to the ASX200 we have a lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.90 vs. 0.69. But as we optimise 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.
The SMSF outperformed both its benchmark funds after underperforming for a few months:
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. In contrast to January, it was a busy month:
This post follows up on EnoughWealth's comments on my previous post on Ramit's Conscious Spending Plan. In that post, I commented that I should have more cash in our offset account, in case I die or something, as otherwise bills might start to bounce (like the bill for tuition for the term for two children... or an AUD 25k capital call from Aura), especially once my salary was stopped. Even though I now have my salary coming into our offset account I am finding I have to shuffle money around quite frequently to able to pay the bills. This is because investments like in Unpopular Ventures are also coming out of this account. We are earning the mortgage rate implicitly on money in the offset account. But as that is less than our top margin rate that we are paying I have been reluctant to just put a lump of tens of thousands in the offset account.
EnoughWealth said that that is the purpose of life insurance. Yes, we both have life insurance attached to our employer superannuation. But getting life insurance paid out could take weeks. Only in 50% of cases is it within 2 weeks. My death cover is AUD 168k. This number seems to be falling as I get older.
So, probably I should hold more cash in our offset account despite the interest cost. I also need to write an "operating manual" and get Moominmama who has no interest in finances to read it...
I recently learned that I have an above average probability of getting a heart attack for my age (59). I am taking statins now to try to reduce that rate, but who knows how effective that will be.
I like to watch Ramit Sethi's podcasts where he has an in depth discussion with a couple about their finances. These sessions usually involve the "Conscious Spending Plan", which is basically a type of budget. You can get a copy of the spreadsheet here. I was curious how our numbers compared to the guests on the show and so filled in the template myself.
My main issue was deciding what income number to use. At first, I tried using our income as reported in our tax returns plus employer superannuation contributions. That includes net investment income outside of superannuation. But then it was pretty tricky working out what amounts to put in for investment flows. I switched to using just our salaries plus employer superannuation contributions and it all made much more sense. I added a childcare and education category as that is our largest expense. For the "clothes" category I used our spending on mail order and groceries is what we spend in the supermarkets category. Transportation includes all our transportation spending including petrol, car repair, buses, taxis, e-scooters etc. Saving is our employer superannuation contribution plus the concessional contributions we make for Moominmama to our SMSF. All the numbers in the following are in Australian Dollars:
What do I notice in the results? One is that we don't really do "savings" both in terms of saving towards goals and having savings. Our savings are basically money in "checking" accounts. If we need more money we take it out of an investment account or borrow money. I am thinking I probably should get the savings buffer up more in case something happens to me. Otherwise, the family will quickly have payments bouncing without someone to make sure there is always enough money to cover bills. We used to keep about 1% of net worth in our offset account.
Our total "fixed costs" are at 76%, which Ramit considers too high. On the other hand, our investment contributions are at double the recommended level and I think they are now very low.
The amount left over in the "guilt-free spending" category is only 4%, which Ramit considers to be very low. There is a lot of flexibility here in what should fall into the fixed cost and this category. Is subscribing to e-scooters, which saves me a lot of time and is fun, something I should consider a fixed cost or "guilt-free spending"? Should private school and music lessons be considered a "fixed cost"? I have included some hobby-related subscriptions in the subscription fixed cost... But moving those would only change things by $100 a month at most.
What is in the guilt-free spending is in practice spending on eating out (mostly lunch these days) and travel - mostly the money we spent on renting a house for our vacation. The recommended 20-35% of spending is really a lot!
Expected that some or even many companies will go bust in this space. This is the first individual venture investment of ours that went bust. Luckily I only invested USD 2,500 so it is about a 0.1% loss to our portfolio. One of my main criteria for making an individual investment rather than through a fund is that there is a clear pathway to profitability or breakeven laid out. So, surprising this went under relatively quickly. I was going to mention the company involved but see that the email is marked confidential so can't give you more details. I think it should be OK to mention the company when they are no longer going to be in business but I'm paranoid about getting removed from AngelList so won't do so...
We have now been running an SMSF for almost three years. How is it doing?
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.
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 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.
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.
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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...
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.
First, here is how $1000 would have evolved if invested either with me or in VDGR since the end of November 2017:
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.
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:
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.
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:
Things that worked well this month:
What really didn't work:
Here are the investment performance statistics for the last five years:
We are quite close to our target allocation. We are underweight private equity and overweight real assets. Our actual allocation currently looks like this:
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:
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.
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.
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.
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.
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.
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.
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.
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.
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!
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.
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.
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.
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!
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.
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.
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:
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.
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.
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.
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...
