A More Realistic Target Portfolio

A couple of changes to the target portfolio. There are really two target portfolios. One is our desired asset allocation and the other is the benchmark portfolio I compare performance to each month and year. 

The first change applies to the benchmark portfolio. Up till now, I have used the FTSE DSC venture and buyout indices as the proxy for venture capital and buyout PE. But these indices track gross performance before investment fees. Investment fees are very high for these asset classes and it is unrealistic to assume I could match the gross performance. By contrast, the HFRI index I use for hedge funds is net performance after fees. So, I am going to apply the standard 2 and 20 investment fee structure to the returns of these indices. 2 refers to the 2% annual management fee and 20 refers to the carried interest or performance fee - 20% of the profits. 

There is actually a big difference between hedge funds and private equity in how these fees are applied. Hedge funds charge 2% of NAV each year and 20% of the profit above a hurdle rate of return. Usually, if gross profits are in a drawdown - below the previous "high water mark" - no performance fee would be charged. Private equity charges 2% of the original investment and only charges carried interest when an investment is realised - but usually there is no hurdle rate. I will deduct 2%/12 of NAV each month and 20% of profits when gross profits are above the high water mark. I implement this by computing the gross index and then a high water mark index - the maximum of the gross index in all previous months. If the gross index at the end of the month is above the the high water mark, 20% of the percentage increase relative to the high water mark is deducted from returns.* This exaggerates likely fees. On the other hand, I don't take into account the dilution that often happens to early stage venture investors. 

Venture returns are reduced from 1.67% per month gross since January 2008 to 1.22% net and buyout returns fall from 1.29% to 0.93%. These returns are still better than any other asset class.

I have also tweaked the allocations to give 20% to each of long public equity, hedge funds, and private equity. I have also increased the credit allocation to 10%. So, the benchmark portfolio consists of:

MSCI All Country World Index Gross in AUD 9%  

ASX 200 Total Return Index 11%

HFRI Fund Weighted Hedge Fund Index 20%

Net FTSE Venture Index 10% 

Net FTSE Buyout Index 10%

Gold Spot Price in AUD 10% 

TIAA Real Estate Fund 12%

CREF Bond Fund 10%

Winton Global Alpha Fund 5%

Australian Dollar Cash 3%

Short Australian Dollar Futures 31% 

The index is effectively rebalanced monthly.

The 31% short Australian Dollar position is half the total position in hedge funds, private equity, real estate, and bonds. The indices or funds for each of these is in US Dollars. This hedge implies that half of the allocation to these assets is in Australian Dollar denominated funds and half in US Dollar denominated funds.

Our target allocation for investment is close to this. We split the Australian stock allocation into 7% large cap and 4% small cap. Real assets, credit, and futures categories are also broader than the specific funds listed here.

I won't bother deducting fees from the long stocks allocation as you could use ETFs with very low fees to track these indices. 

Here is a graph of the simulated performance of the benchmark since September 1996:

The benchmark has about matched the returns of the MSCI index and gold with a lot less volatility. My own performance was terrible up to 2012 and has tracked the benchmark pretty well since then (it's a log chart). Here is a comparison of the benchmark, myself, and the Vanguard 60/40 benchmark since the latter funds inception:

 

* A simpler approach is just to multiply the gross return by 0.8 and deduct 2%/12 each month. The result of this approach is highly correlated with the high water mark approach. The high water mark approach is more realistic though. Let's say you invested $1000 and gross performance was 100%. Your account now has $1800 and the manager has $200. Now the gross price falls by 10%. Both your share and the manager's share fall by 10%. It would be incorrect to say that your $1800 fell by only 8%.

Effects of Inflation Versus Growth on Stock Returns

 

From this video. Growth is relatively low currently. This explains why the Fed is cutting rates. The most bullish region for stocks is low inflation and moderate growth. Will the fund cut too much and reignite inflation more? Hard to be that bearish here.

November 2025 Report

In November, the Australian Dollar rose very slightly from USD 0.6542 to USD 0.6550 meaning that USD investment returns are slightly better than AUD investment returns. Stock markets were flat or fell with a lot of intramonth volatility (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 0.02%

S&P 500: 0.25%

HFRI Hedge Fund Index: 0.01% (forecast)

Australian Dollar Benchmarks

ASX 200: -2.51%

Target Portfolio: -0.34% (forecast - depends on HFRI result)

Australian 60/40 benchmark: -0.42%

We lost 1.93% in Australian Dollar terms or 1.88% in US Dollar terms. So the only benchmark we beat was the ASX 200. Our performance was hit by the crash in the price of 3i (see below). After underperforming last month, the SMSF returned 0.16% beating Unisuper (-1.06%) and PSS(AP) (-0.61%).

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

The asset class returns are in currency neutral terms as the rate of return on gross assets and do not include investment expenses such as margin interest, and so the total differs from the Australian Dollar returns on net assets mentioned above. Returns were very mixed. Gold had the largest gain, while rest of the world stocks had the lowest. Gold made the greatest positive contribution and private equity the most negative contribution.

Things that worked well this month:

• Two investments gained more than AUD 10k: Gold (AUD 38k), Berkshire Hathaway (11k).

What really didn't work:

• Four investments lost more than AUD 10k: 3i (-), bitcoin (-28k), Defi Technologies (-20k), and Dash/IPS (-17k). 3i crashed after saying sales growth recently was soft in Action's French market. A more than 25% fall in the share price seems to be an irrational response. The actual earnings report was great. I bought more, but as usual was too early. I got out of all crypto investments (see below). IPS didn't do as well as hoped and so the "earn out" component of the takeover was less than expected.

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 the same statistics for four benchmarks. The middle block gives our performance relative to the indices. 

Our alpha relative to the ASX200 is 2.9% with a beta of only 0.51. We have much lower volatility, resulting in a information ratio of 1.30 vs. 0.99. We capture much less of the downside moves than the upside moves in the market. We also have very good performance relative to the Vanguard 60/40 portfolio with similar volatility but 3.5% p.a. more return. We captured 104% of the upside of this portfolio but only 69% of the downside. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of far higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is almost five percentage points lower!

We moved a bit away our target allocation due to investments and investment performance. Our actual allocation currently looks like this:

About 65% 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 liquidity, so our portfolio is not as illiquid as you might think.

We receive employer superannuation contributions every two weeks. We make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. There is one remaining USD 10k contribution to make to the Unpopular Ventures Rolling Fund and there will be capital calls from Aura Venture Fund II and III. I am now receiving TTR (soon to be retirement) pension payments from both Unisuper and our SMSF and contributing more than the total of these back to my superannuation accounts for the remainder of this financial year. 

I was quite busy making the following additional moves this month:

• I bought 700 shares of 3i (III.L) after the price crashed. I still believe in the company.
• I sold our entire bitcoin position across three accounts. This was just over one bitcoin's worth.
• I also sold our ether position. 
• I sold our Defi Technologies (DEFT) position (15k shares).
• I bought 36k WAM Capital (WAM.AX) shares.
• I bought 5k Regal Partners (RPL.AX) shares.
• I sold 1k WCM Global Quality (WCMQ.AX) shares.
• I sold 500 Pershing Square Holdings (PSH.L) shares.
• I bought 30k Cadence Opportunities (CDO.AX) shares.
• I bought 1k Putnam BDC (PBDC) shares.
• I sold 750 PMGOLD.AX gold ETF shares.
• I made a non-concessional contribution of AUD 40k to Unisuper.
• I bought 2k Hearts and Minds (HM1.AX) shares. 

On the whole it is a shift from speculative investments to income investments, though the extra 3i shares are speculative. The last day of the month was my retirement date. This month's net worth (not including our house) together with the redundancy payment I should get this week constitutes our "retirement number". It should be approximately AUD 6.8 million. Using the 4% rule means we could spend AUD 272k per annum. Our spending is a lot below that. Total net worth at the end of November is at AUD 7.78 million.

Update to the Target Portfolio

Time to tweak the target portfolio we use for benchmarking and asset class allocation. I am lowering the allocation to futures from 7.5% to 5% and increasing the allocation to hedge funds from 15% to 17.5%. This better reflects current reality.

Private vs. Public School

Moominmama is a Chinese Mum who stereotypically thinks you should sacrifice anything for your children's education. Her friend from uni days also lives in our city and sends her children to the most expensive private school. So, we have been sending both children to a private school that is in walking distance of our home. I think that public schools are fine, at least where we live. Fees at the private school have increased by 8% in each of the last two years. Then a couple of weeks ago they announced 2026 fees. They are up for the school years relevant to us by almost 23%. The school is suggesting that fees will increase by 9-12% for 2027 and after that by smaller numbers, but it would likely be 7% per year I think. The school community is shocked and outraged by this. The school has taken some financial missteps, but we can't see how more than say 10% is justified. We have gotten a lot of education on school finances in the last fortnight, both on a huge parent WhatsApp group and from the school's own presentation in reaction to the outrage. On Monday there will be a live parent-organized town hall. 

So, I have modelled the effect of these on our finances and in theory we could cope with it, though by Little My's final year the school would be as expensive in real terms as some of the more expensive schools in Melbourne and Sydney now. Trinity Grammar at AUD 44k matches what this school would cost in his final year. Our school has 2,200 students. It grew so big by offering a private education at a reasonable price. Lots of parents are talking about leaving. If students numbers fell but costs remain high they could go into a death spiral, in my opinion, where they have to raise fees more and choke off more and more demand. 

So, we are starting to think about public schools seriously again. Moomintroll will be in Year 5 next year. High School starts in Year 7 here. We are locked into next year pretty much, and it doesn't make sense, I think, to move him to a public primary school for just one year. So, maybe he would move to our local public high school in Year 7.  That school has reasonable NAPLAN test scores. 47% of students are from the top socio-economic quartile compared to 80% at the current school. This will depend on what we think the future trajectory of school fees will be how are finances are holding up.*

In another negative shock, Moominmama's employer announced another restructuring. They will make 5% of research staff redundant and maybe a much higher share of her division. So far, she has managed to survive all the previous restructurings, but maybe her luck will finally run out. Again, we could handle this, but all of this is adding stress. 

* The public high school is a bit awkward to get to. You need to change buses in our local "town centre". I don't think Moominmama should have to drive him there and back every day. After the first year, I think it would be reasonable for him to cycle there and back if the weather is OK. It is actually only 2.5km away. There are bike paths, but also big highways to cross, though there are traffic lights on the crossings. But I did a thought experiment where he took Uber back and forth every day. That would cost about AUD 5k per year, which is a sixth maybe of the private school fees! 

Hockney Sold

Masterworks sold the Hockney painting I invested in. Profit after fees is 23% and the IRR was 6%. They are giving the option to reinvest in another paper or receive the cash. Overall, my Masterworks investments only have a 2% IRR. 

Art has been in a slump while stockmarkets have rallied in the last 3 years. Who knows if it is going to recover now? I'm not inclined to tie up the money again for an unknown period. This is especially given that I am retiring now. So, for now, I am going to withdraw any money I can from this portfolio. I have investments in nine paintings remaining.