October 2021 Report

The run of winning months in Australian Dollar terms continued. We haven't had a losing month since March 2020. This is a 19 months run so far. As this was only a slightly positive return, it could become negative when all the unlisted investments report.

The MSCI World Index rose 5.36%, the S&P 500 by 7.01%, and the ASX 200 fell by 0.09%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7227 to USD 0.7518. We gained 0.07% in Australian Dollar terms or 4.10% in US Dollar terms. The target portfolio is gained 0.68% in Australian Dollar terms and the HFRI hedge fund index is expected to rise 2.54% in US Dollar terms. So, we underperformed the target portfolio benchmark and the two international indices but beat the HFRI and Australian indices. Here is a report on the performance of investments by asset class (currency neutral returns):

Private equity had the best performance but hedge funds contributed the most to performance followed by private equity. Several asset classes lost money. Gold performed worst.

Things that worked well this month:

• Pershing Square (PSH.L) gained AUD 26k and Tribeca Global Resources (TGF.AX) gained AUD 25k. Both, and especially PSH, are still well below their net asset values.
  

What really didn't work:

• Regal Funds (RF1.AX) lost AUD 27k following the rights issue and placement. Issuing more shares at NAV is sure to depress the stock price. Cadence Capital (CDM.AX) lost AUD 11k. The fall in the price of The Metals Company post-IPO is probably weighing down the share price.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are doing a bit worse than the median hedge fund levered 1.6 times. 

We increased our distance from our desired long-run asset allocation a little mostly due to the RF1 placement increasing our allocation to hedge funds. Private equity and bonds are both underweight and hedge funds and real assets overweight. I think having an allocation does make me think harder about overweighting in a particular direction but right now I am thinking of changing the allocation again by reducing the bond allocation to 5% from 10%. Our actual allocation currently looks like this:

Roughly two thirds of our portfolio is in what some consider to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• We participated in the Regal Funds (RF1.AX) rights issue and placement, buying 17k shares.
• To help fund this, I sold 4k shares of Ruffer Investment Company (RICA.L). This was a bad move, as it immediately finally started increasing. 
• I sold 25k MOT.AX shares (Australian corporate debt fund). The idea was to fund buying shares in the Cadence Opportunities IPO. But then I changed my mind about that.
• I made a concessional contribution to the SMSF of AUD 20k for Moominmama for this tax year. This replaces her previous salary sacrifice contributions to PSS(AP).
  

Moominpapa's 2020-21 Taxes

I am finally able to submit my taxes for this year. 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. Of course, everything is in Australian Dollars.

On the income side, Australian dividends and franked distributions from managed funds are  up strongly. My salary still dominates my income sources but is not growing. Interest is Australian interest only and is zero due to no longer holding Australian bonds.

Unfranked distributions from trusts is down strongly because the distribution from APSEC was exceptionally large last year. I have now moved the APSEC fund to our SMSF. Foreign source income is from foreign bond interest and distributions and dividends both from directly held foreign investments and from Australian managed funds. Other income is gains on selling bonds. These aren't counted as capital gains. As we have few bonds any more the amount is small. I used most of my carry forward capital losses this year reducing the net capital gain to zero. I am still carrying forward $28k to next year.

In total, gross income fell 2%.

Increased deductions are mostly due to writing down the loss on my Virgin Australia bonds. This isn't counted as a capital loss and can be deducted immediately. Dividend, foreign source income, and trust deductions are all mostly interest on loans.

Total deductions rose strongly, and as a result, net income fell 9%.

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. This time because of the Virgin Australia loss and the ESVCLP offset I should get a large refund.

I estimate that I will pay 24% of net income in tax. Tax was withheld on my salary at an average rate of 31%.

Cadence Opportunities IPO

Another "corporate action" to consider. Cadence Opportunities Fund attempted an IPO about three years ago, which failed. I invested in the fund at a second fund-raising. Now it is again attempting an IPO and attempting to triple funds under management in the process. I was thinking to buy more shares in the IPO and even moved money from one account to another to do so, but then had second thoughts. Don't get me wrong, this is so far a great investment. I have a 50% internal rate of return on my investment. But after reading the independent report I became concerned that the price might trade below the IPO price and so it would be better to wait to buy shares on market. On the other hand, if the fund keeps performing so strongly, the increase in the NAV might outweigh an illiquidity discount... But given we have 3% or so of net worth in the fund already, I think I will give it a pass.

Corporate Actions

Two current "corporate actions". Regal Funds (RF1.AX) announced a 1 for 3 rights issue at the net asset value of AUD 3.79 per share. Price prior to the announcement was AUD 4.47 per share. I plan to fully take up the entitlement. The question is what do I sell in our SMSF to take up the offer as I only have AUD 27k in cash and will also need to pay taxes etc some time... The rights issue will cost AUD 55k.

Australian Unity Diversified Property Fund announced that they plan to merge with the ASX listed Australian Unity Office Fund (AOF.AX). The joint fund will continue to be listed on the ASX. There are four reasons I will vote against this merger:

1. The reason I invested in an unlisted property fund is to not be exposed to stock market fluctuations in the value of the fund.

2. We will receive shares in AOF according to the current NAV of that fund. Its price on the ASX is much below that. That means that the market value of our shares will instantly fall.

3. I invested in a diversified fund because I didn't want to just be exposed to office property. The new fund will be dominated by offices.

4. The reason for the merger is supposedly to allow easier capital raising for the development pipeline while not increasing the gearing of the fund. The gearing will actually fall. I wanted to be in a geared fund.

P.S. 28Oct21

I just read the AOF annual report. It is much less profitable than Australian Unity Diversified Property Fund despite not charging performance fees. Or maybe because of that? It's surprising that they are looking to give up those fees! That is a fifth reason to vote no. I will withdraw our investment prior to listing if the merger is approved. According to the fund we get six days to withdraw after the meeting. Two of them are a weekend. But usually they only allow a maximum of 2.5% of the fund to be withdrawn per quarter. So, now I am seeking clarification on that. The merger document is a bit vague on how much withdrawals will be allowed.

September 2021 Report

This month world stock markets finally declined. But we gained a little in AUD terms,* showing the value of our alternative assets strategy. In Australian Dollar terms we haven't had a losing month since March 2020. This is an 18 months run so far. The previous longest runs were the 10 months ending in September 2019 and the 10 months ending in April 2013. It could be that one of my late reporting investments comes out negative enough to overturn the positive result, but I'm not expecting that.

The MSCI World Index fell 4.09%, the S&P 500 by 4.65%, and the ASX 200 by 1.49%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7314 to USD 0.7227. We gained 0.11% in Australian Dollar terms or lost 1.08% in US Dollar terms. The target portfolio is expected to have lost 1.27% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 1.86% in US Dollar terms. So, we outperformed all benchmarks, which is exactly opposite to what happened last month (again). The most important reasons for outperformance were the gains in hedge funds. Here is a report on the performance of investments by asset class (currency neutral returns):

Futures had the best performance but hedge funds contributed the most to performance followed by private equity. Australian large cap had the worst performance and detracted by an equal amount to gold.

Things that worked well this month:

• Regal Funds (RF1.AX) gained AUD 30k, Pengana Private Equity (PE1.AX and the spin-off of PCG.AX shares) gained AUD 17k, and Tribeca Global Resources (TGF.AX) gained AUD 15k.
  

What really didn't work:

• Gold lost AUD 18k, Cadence Capital (CDM.AX) AUD 18k, and Fortescue Metals (FMG.AX) AUD 12k.
  

The investment performance statistics for the last five years are: 

The first two rows are our unadjusted performance numbers in US and Australian Dollar terms. The following four lines compare performance against each of the three indices. We show the desired asymmetric capture and positive alpha against the ASX200 index. We are doing a bit worse than the median hedge fund levered 1.6 times. 

We maintained about the same distance from our desired long-run asset allocation while the allocation to hedge funds rose. Real assets equity is the asset class that is now furthest from its target allocation (3.6% of total assets too much). Our actual allocation currently looks like this:

Roughly two thirds of our portfolio is in what some consider to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. We receive employer contributions to superannuation every two weeks. In addition we made the following investment moves this month:

• USD 35k of Ford bonds matured.
• I sold 5k RF1 shares as their price spiked.
• I bought 20k TGF.AX shares based on insider buying and thinking that the price was about to break out above the IPO price. It didn't yet.
• I bought 31k CDM.AX shares following the IPO of TMC. TMC promptly tanked. So neither of these hedge fund purchases was a good idea so far.
  

* The first version I posted of this month's accounts showed a small loss because I accidentally included an AUD 14k margin loan in our Australian Dollar cash, making it smaller than it should have been. I knew there was a mistake somewhere because the implied change in the value of the portfolio due to exchange rate movements was much too big.

Moominmama's 2020-21 Taxes

I finished Moominmama's taxes for this financial year. I still need the details of my venture capital investment tax offset to complete mine. The post about last year's taxes is here. Here is a summary of Moominmama's tax return:

Her salary was down steeply as she went back to work part time after being on maternity leave at full time, though the full time pay was only paid for part of the year she took off. Dividends managed fund distributions, and foreign source income were all up steeply. A quirk of the system is that foreign gains are treated as income and losses on trading foreign instruments are recorded as deductions. Capital gains were up 148% and dominated her income. This was largely due to recording capital gains on investments that we transferred into our SMSF. On the deductions side, other deductions includes interest for foreign source income and trading losses.

Net income increased 55% and tax 110%. The latter is my estimate of the tax she owes. You don't need to calculate this number on an Australian tax return. Her average tax rate was 20%. Remember, that there are no state income taxes in Australia. Only AUD 2,808 was withheld from her salary. We paid AUD 3.886 in quarterly installments. I calculate that we still owe AUD 11,203.

FI or FIRE?

 

I wrote about FIRE (Financial Independence Retire Early) at least once before. The Retire Early bit is the problematic bit. It makes much more sense for people to use financial independence to do what they want to do rather than just stop working.

A while back I heard that Mr Money Mustache got divorced. Seems his wife wanted to spend more money given their high income. But that wouldn't fit with his frugality message. Now here is a FIRE blogger who retired with a small nest-egg - so-called "lean FIRE". His wife got tired of not spending much either and of having too much leisure time and not making "progress" in life. And here is another blogger who is tired of not having enough money. Many FIRE bloggers who supposedly retired actually work on their blogging business. They stopped being an employee and became self-employed. This is great.

With a net worth of approaching AUD 6 million we are financially independent by any reasonable definition. But I'm not planning on retiring. As I mentioned before, I like my job, at least the research part. I am hoping to not ever teach more than one course a year again. I am sacrificing more than AUD 40k to take long-service leave next year to reduce my teaching load. After that I am planning to take on a "leadership role" for a while and once I turn 60 I hope to go part-time. Also, I don't want to sacrifice the "prestige" and become a nobody. Unless we plan on moving somewhere else, it seems to make sense to do my very flexible job.

And actually I am thinking that our money isn't enough. Our older child is going to private school and the younger one probably will too. The alternative is to move to a top public school catchment area. My wife isn't happy with the public schools here, though I think they are fine. With the way the property market is going that means an AUD 2 million + house price. Or maybe move to Sydney because the best public schools in Sydney are better than the private schools here. My wife puts a big weight on education. I thought Jewish parents like my parents and me were into education. Chinese parents are at another level.

And, actually, I did the retire early bit already. I just wasn't financially independent.