Masterworks Sells First Painting, Investors Make 32% in One Year

Masterworks sold a Banksy Mona Lisa for $1.5 million after holding it for one year. Investors gain 32% after all fees and costs. I don't think this would be typical but nice to see that this first deal worked out.

I've now invested in four paintings through Masterworks.

Adjusting Home Price Down

 

In the last couple of years I have used the Corelogic house price indices to update the value of our house. But this price has gotten more and more out of touch with sales prices in our development. Well, there was only one this year and it was a lot lot lower. So, I have now redone a regression analysis of all the comparable sales since we bought here. The dependent variable is the percent premium over the original sale price when the development was new and the explanatory variables are dummy variables for each year (0,1 variables that take the value one in the relevant year). This re-values our house at AUD 810k down from 852k last year. We paid 740k at the beginning of 2015 and so this hasn't been great investment-wise as it has appreciated a lot less than the average home in this city supposedly has.

This graph shows how the premium over the original price has changed over time:

In the last year prices have fallen quite a bit. I am not sure why there has been this trend, which is out of step with the rest of the city. One possibility is that the ongoing construction of a new large denser neighboring housing development in place of low rise offices has reduced the value of our development.

September 2020 Report

Stock markets fell and the US Dollar rose this month. The Australian Dollar fell from USD 0.7380 to 0.7156. The MSCI World Index fell 3.19%, the S&P 500 3.80%, and the ASX 200 3.51%. All these are total returns including dividends. We gained 1.09% in Australian Dollar terms and lost 2.07% in US Dollar terms. The target portfolio is expected to lose 0.70% in Australian Dollar terms and the HFRI hedge fund index 0.17% in US Dollar terms. So, we outperformed the stock market indices and the target portfolio but not the hedge fund index. Here is a report on the performance of investments by asset class (currency neutral terms):

 

Hedge funds added the most to performance and gold detracted the most.

 

Things that worked well this month:

• Bluesky Alternatives (soon to be Wilson Alternative Assets) gained AUD 13.5k followed by Regal Funds (AUD 10.4k) and Cadence Capital (AUD 7.4k).
  

What really didn't work:

• Gold fell the most (- AUD 16.6k).

The investment performance statistics for the last five years are:

 

The first two rows are unadjusted numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We have the desired asymmetric capture for all three indices now and positive alpha compared to two of them.

 

We moved further towards our long-run asset allocation. Bonds are still the asset class that is furthest from their target allocation:

 

 

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• I bought 100k of Australian Dollars by selling US Dollars.
• Woolworths (USD 25k) and Nustar (16k) bonds matured.
• I invested USD 10k in a painting at Masterworks.
  
• I bought 22,136 Domacom shares (DCL.AX) at 6.6 cents each. The company announced a deal that might get them about halfway from here to profitability.
  
• I bought 25,000 Bluesky Alternatives shares (BAF.AX). 
• I bought another 1,000 shares of the IAU gold ETF.
  
• I was stopped out of the short 10 year treasuries futures position.
• We reduced our Commonwealth Securities margin loan by another AUD 90k to AUD 92k. Ultimately, I plan to borrow mainly from Interactive Brokers who have a much lower interest rate and only use the Commsec margin loan or our home mortgage facility when there are particularly good opportunities.
  

Income and Tax History

Reading one of ESI Money's millionaire interviews I was inspired to track our income from previous tax returns (all on this blog). While I was at it, I added the tax as well:

Moominmama's income has actually been more consistent. From 2015-16 there was a fall due to taking maternity leaves and a spike last year due to trading income in her account. My income was low at first after we moved to Australia as I didn't have a job and was trying to trade. My tax was actually negative in those years due to franking credit refunds. My income rose to the $50k zone when I got a part-time academic research job and then very steeply when I became a professor. Since then it has drifted slowly upwards.

2019-20 Taxes

I just completed our tax returns for this year. As usual they only took a few hours as I am very well-prepared with spreadsheets updated throughout the year. Preparing taxes is mainly a case of checking that all the spreadsheet links and calculations are correct and refreshing my memory about some of the details of what goes where on the tax form. Last year's taxes are here.

Here is a summary of my taxes (To make things clearer, I reclassify a few items compared to the actual tax form):

On the income side, Australian dividends, capital gains, and foreign source income are all up strongly. My salary still dominates my income sources but is not really growing and we have a pay freeze for next year.

Interest is Australian interest only and is up strongly due to interest on Macquarie, Woolworths, and Virgin Australia bonds.

Unfranked distributions from trusts is up strongly due to the huge distribution from the APSEC fund I invested in just before the end of the tax year. That was a bad move. Foreign source income is mostly dominated by foreign bond interest and losses on futures trading. Other income is gains on selling bonds. These aren't counted as capital gains.

After recording a net capital gain for the first time in a decade last year, I again have zero capital gains and I am carrying forward around $150k in losses to next year. Foreign source income is mostly from futures trading and bond interest. 

In total, gross income rose 6%.

Increased deductions are mostly due to losses on selling bonds. Interest rates are historically low and most bonds that you will be able to buy have higher nominal interest rates. As a result, these bonds are priced above par. If you hold them to maturity you have a loss that is more than offset by the interest received.

Dividend, foreign source income, and trust deductions are all mostly interest on loans.

Total deductions rose strongly, and as a result, net income fell 2%.

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. I again expect to pay extra tax.

I paid 30% of net income in tax. Tax was withheld on my salary at an average rate of 32%.

Moominmama's (formerly Snork Maiden) taxes follow:

Her salary was down a lot because of maternity leave. Dividends and capital gains were up strongly due to investment in various listed investment companies and Commonwealth Bank hybrid securities. Foreign source income was down strongly due to losing on trading this year rather than gaining last tax year. As a result, total income fell by 23%.

Deductions rose dramatically, because of recording trading losses as deductions and starting to deduct interest against dividends. As a result, net income fell 42%. Tax was 15% of net income. Tax withheld on her salary was really high for this income level.

Because income was very high last year, Moominmama had to pay tax installments every three months over the last year. As a result, her expected tax refund is almost as large as my expected tax payment. On net, we need to pay about $500 in extra tax.

Completed Internal Rates of Return

I posted recently the internal rates of return for 66 of my investments. I've now completed the calculations for all 94 investments that were held for more than one year:

Shaded returns are investments that I currently hold. The median rate of return is 5.1%. Most of the larger investments are above the median as are the majority of current investments. The median return of current investments is 9.1%.

Powertel and Looksmart were some dotcom era investments that worked out. DeepSkyWeb one that didn't. I can't even remember what FTS was. I held it in 2007-8. Newcastle was a mortgage fund that blew up in the GFC. Legend was a Joe Gutnick mining company that went to zero and HIH an insurance company that was the worst bankruptcy in Australia's history.