December 2018 Report

You'll probably have heard that this was the worst December for US stocks since 1931. December is seasonally a positive month for stocks. Things weren't quite that bad in Australia and because the Australian Dollar fell, our returns for the month in AUD terms ended up being positive.

The Australian Dollar fell from USD 0.7302 to AUD 0.7049 The MSCI World Index fell 7.00% and the S&P 500 9.03%. The ASX 200 fell only 0.01%. All these are total returns including dividends. We gained 0.24% in Australian Dollar terms and lost 3.24% in US Dollar terms. So, we outperformed the Australian and international markets. This is not surprising given the weight of US Dollar cash in our portfolio. Our currency neutral rate of return was -1.74%.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also included the Australian Dollars return from foreign currency movements and other net investment gains and losses - net interest and fees.

Things that worked quite well this month:

• US Dollars cash 
• Gold
• Property, including:
• My jointly owned apartment with my brother. We got an offer for the apartment near the end of the month and I raised the carrying value in line with that.
• TIAA (direct US investments) and Pendal (REITS) real estate funds.
• On the other hand BlueSky lost a lot...
• Our direct share holdings in Medibank and Yellowbrickroad.
• Again, the PSS(AP) superannuation fund did relatively well (though losing) compared to Unisuper. But on the way up it gained just as much as Unisuper. It has both lower beta and higher alpha... At least based on the investment choices I have made within the fund.

These all show the value of diversification pretty nicely.

What really didn't work:

• Cadence Capital, again fell sharply. It's performance in the last three months has been very bad. It's not surprising that they have cancelled their IPO of the Cadence Opportunities Fund. They received only AUD 8 million of subscriptions. It will still go ahead as an unlisted public company, whatever that is. Overall, we have lost money investing in Cadence.
• BlueSky fell back too.  We still have made some money on this investment.
• 3i, China Fund, Pershing Square, and CFS Geared Global Shares all fell in line with global stock markets. The latter would have benefited from the fall in the Australian Dollar, which for an investment denominated in Australian Dollars is included in the return on that investment, but is separated out for the investments denominated in foreign currency...

We moved towards the new long-run asset allocation:*

This is partly because I am classifying cash in trading accounts as "commodities". I started moving cash from my US bank account to Interactive Brokers. Another large part of the change was due to the fall in the Australian Dollar raising the value of our USD cash in AUD terms. From next month we should see a big increase in allocation to bonds instead.

We also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• I bought 400 shares of the China Fund (CHN) early in the month. Not a good idea.
• I bought 25,000 shares of Bluesky Alternatives in the middle of the month (BAF.AX). Another bad idea.
• I bought 500 shares of Pershing Square Holdings (PSH.L) at the end of the month. So far, not a bad idea.
• I received cash from UBS in my US bank account and started moving it to Interactive Brokers and from there to our Australian bank account. After this first transfer, most of this money will go into buying a US Treasury Bills ladder in the short run. Today, I discovered that I have to keep the cash at IB for 2 months before I can move it to another bank account. So I am looking to buy some Australian bonds (probably bank hybrid securities) in the interim.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.

What's Your Forecast for the Stock Market?

My brother asked me what my forecast for the stock market was. Here is what I wrote to him:

"Well, I’ve been surprised how weak it has been recently, particularly in December, which you may have heard is so far the worst December in US stock markets since 1931. December is a seasonally strong month as is January. The US economy has been strong though house prices have been falling in many places, presumably due to the Fed raising interest rates and this seems to have been the main reason why the market is down. House prices have been falling in Sydney and Melbourne without any increase in interest rates here. Some indicators though show that the global economy could already be in recession, but I don’t know how reliable that is. The reason I was a bit surprised was it has been very predictable that before recessions the yield curve would invert (short term interest rates higher than long term). This hasn’t happened yet in the US. However, the Fed is signalling that they are going to raise interest rates by another 0.5% in 2019 which would reach an inversion probably. Stock markets tend to be leading indicators and so looks like this time it is more leading than usual. The US economic expansion is the 2nd longest in history and so presumably would come to an end some time soon (Australia hasn’t had a recession since the early 90s though…). Now we can say that the bull market ended as stocks have fallen 20%. If we look at the last two recessions and stock market crashes in the US, the stock market bottomed near the end or after the actual recession – in March 2003 and 2009. At that point the Fed will have slashed interest rates dramatically and unemployment will be high. OTOH in the 1990s the US market bottomed in October 1990, which was when the recession was only just getting underway. The Gulf War turned that around.

I did reduce my exposure to the stock market in early October, but not by enough. So, I’d probably use rallies in the market to reduce exposure more at this point. I was planning to use trading as a hedge, but I stopped trading soon after that as backtests weren’t good and I got ill and didn’t have time to work on it.

Of course, I could be completely wrong about all of this. In the last cycle I got out too early and got back in too early. Probably this time I’ll be late :)

I’m not planning on buying Australian Dollars in a hurry either, even though the current price is quite good. I’ll buy them gradually."

No Interest on More Than $2 Million Deposit?

My brother and I have between us more than USD 2 million in cash in an account at UBS – most of the money we inherited – that we have been jumping through hoops to get out of there. In the meantime the bank seems to be paying no interest on the money and in the last two weeks it actually the account went down by USD 800 for no clear reason – online I can't find any info on fees the bank has charged. How is that possible?

Looks like we have everything in place now to close the account but have been told it'll take about 2 weeks still given the coming holidays etc. However, the client manager told my brother that she could transfer the majority of the money to us right away, while keeping some for unspecified fees and sending us the remainder not spent on fees later. My brother told her that he was happy to wait to get the money in one lump when they close the account. I was shocked and told him to accept her offer. It's hard for me to imagine that the extra fees for a second transfer could be more than the interest we could potentially earn on the money in two weeks (c. USD 2,000 if investing in US Treasury bills).

Update: We missed the client manager leaving for the Christmas break, so likely won't be till mid-January that we'll get the money out...
Another update: Actually, we now got about 90% of the money transferred to us. Why they need to hang on to a 1/4 million dollars, I don't know...