July 2007 Report

This is my net worth and investment performance report for July. All figures are in US Dollars unless otherwise stated. This month saw the first negative investment performance in 10 months (in USD terms), bad trading results, and a small decline in net worth.

Income and Expenditure



Expenditure was $2,113 - this month there were no moving expenses. Current non-investment income mainly consisted of a refund from the IRS. I'm no longer receiving a salary or making retirement contributions. Non-retirement accounts lost $1797 but would have lost $3923 if it were not for the continued lift from the Australian Dollar. Retirement accounts gained $288. I've introduced a new entry this month: "retirement tax credits". As I've explained, I measure all investment performance on a pre-tax basis including my Australian supperannuation account. Unlike US retirement accounts the returns on Australian retirement accounts are taxed at source but at a concessional rate. In order to compute the actual gain in my superannuation account after tax to get the change in net worth I need to take out the tax paid. This month the account lost in Australian Dollar terms so the tax adjustment is negative.

Net Worth Performance
Net worth fell by $US356 to $US444,932 and in Australian Dollars lost $A6615 to $A517,784. Non-retirement accounts were at $US244k. Retirement accounts were close to $US201k.

Investment Performance
Investment return in US Dollars was -0.34% vs. a 1.50% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.17% loss in the S&P 500 index. Non-retirement accounts lost 0.73%. Returns in Australian Dollars terms were -1.48% and -1.91% respectively.



The S&P 500 is barely beating a savings account so far this year.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. I can't see any patterns at all in these results - the best gains and worst losses both came from futures trading.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.59. Allocation was 34% in "passive alpha", 64% in "beta", 6% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 16%. My Australian Dollar exposure was steady at 62% from 69.5% in January.

IPO

I have an opportunity to participate in an IPO, in this case the IPO of Interactive Brokers - one of my US stockbrokers. When I lived in Australia I participated in several IPOs some of which were very profitable and some of which were disastrous. I've learnt how to tell them apart upfront. My guess on this one, even before reading the prospectus is that it would be intermediate between the two extremes. Only 5% of the company is being IPOed. Owners don't do that if they expect the value to fall. They will sell the whole company then (see HIH). On the other hand they are going to use a Dutch auction to set the price and they are opening it to all the account-holders of the company. This encourages a full valuation of the company as it is an efficient auction mechanism. The indicative pricing ($23-27) gives a P/E of around 20. I haven't participated in a US IPO before. Maybe I'll do it just for fun. I'm thinking of bidding for 100 @ $27 and 100 @ $36. If the issue prices from $27-36 I'd end up with 100 shares and below $27 200 shares. What do you think?

P.S. 9:54PM

Another IPO - Platinum Asset Management - these guys are the manager of Platinum Capital (PMC.AX) , which is one of my passive alpha investments. They are selling 20% of the company valuing it at $A2.8 billion. They have $A22 billion under management. I can't participate in the IPO as I'm not resident in Australia. But this one is going onto my watchlist.

April 2007 Report

All figures are in US Dollars unless otherwise stated. This month saw very strong performance, which has been the case for the last several months.

Income and Expenditure



Expenditure was $3525 - more than take home pay ($3,299) due to spending on my brother's upcoming visit to the US. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were again very strong this month ($10,363). Retirement investment returns were also nicely positive ($5,615). The rise in the Australian Dollar again contributed significantly to returns.

Net Worth Performance
Net worth rose by $US17544 to $US423,791 and in Australian Dollars gained $A7451 to $A509,058. The Australian Dollar again rose this month resulting in a relatively large gap between performance in the two currencies. Non-retirement accounts reached $US232,779. Retirement accounts also saw nice gains to $US191,012.

Investment Performance
Investment return in US Dollars was 3.93% vs. a 4.48% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.33% gain in the S&P 500 index. Non-retirement accounts gained 4.65%. Returns in Australian Dollars terms were 1.11% and 1.87%. The markets were extremely strong this month. My U.S. Dollar returns beat the indices year-to-date and over the last 12 months:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Trades around the Google and Apple earnings reports made good contributions. I again had a positive result for QQQQ/NQ trading ($527). The biggest gain was from a balanced mutual fund - the CFS Conservative Fund. Symbion began to run up in anticipation of the May 1st merger bid. Everest Brown and Babcock suffered a loss this month as the fund of funds sold off in response to the rights issue.

Progress on Trading Goal
Trading in my US accounts netted $3,248 a 10.8% return on trading capital. The model gained 6.4% while the NDX rose 5.4%. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts in total gained a net $3,249 and I have now achieved $12,297 of the annual goal of about $19,000. Since the beginning of the year the trading capital gained 56.1%, the NDX has gained 6.3% and the theoretical model gained 36.5%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.04. 41% of the portfolio was in stocks, 42% in bonds, 13% in cash, and loans totalled -9%. The remainder was in hedge fund type and real estate investments, futures value etc. Looking at asset allocation the way I prefer, 25% was in "passive alpha", 66% in "beta", 8% allocated to trading, 7% to industrial stocks, 3% to liquidity, and I was borrowing 9%.

Madame X: International Stock Funds

On to Madame X's international stock funds and a hopefully interesting lesson in passive vs. active management:



(something seems to be seriously wrong with Yahoo's index return figures for the last few years).

ETINX and FSIIX are both international (developed countries) index funds and as you can see almost exactly replicate each other. Madame X has both of these because they are in different accounts. The Fidelity one is just slightly better than the E-Trade version until this last year when it has slightly underperformed. On the other hand FDIVX, an actively managed fund has positive alpha (market-risk adjusted return) and better performance than either of the index funds despite its much higher expense ratio and much larger size. Low expense ratios are not the be all and end all of fund selection. This fund was in the upper quartile of its category in the last 5 years but has drifted downward in performance in the last few years. I wouldn't sell it, but it wouldn't be on my buy list either.

VEIEX is an emerging markets index fund. Its alpha and beta are measured relative to the developed country international index - its performance relative to emerging market funds is not as fantastic, but still respectable - in the last year it was in the top 20%. It's probably not a bad fund for exposure to emerging markets.

None of these international funds could be responsible for the possibly negative performance of Madame X's portfolio.

A 60/40 Australia-Oriented Passive Benchmark

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.

Designing a Portfolio for Baby Moomin

I decided that the best provider of investment bonds is Generation Life. This is mainly because they seem to be scandal free, not about to be sold off to an overseas manager, and have lower fees than other providers. Next I needed to pick an investment portfolio from their investment options. I decided on the following rules and criteria:

1. 50/50 equities/fixed income and alternatives
2. 50/50 passive and active management
3. 50/50 Australian and international assets
4. Pick the best fund from alternatives in each of these niches - focusing on long-term "alpha" and in particular their performance during the Global Financial Crisis and the recent December 2018 mini-crash.

This is the resulting portfolio:

50% Dimensional World Allocation 50/50 Trust. Here I compared a Vanguard balanced fund with this fund. In the long run, DFA have done much better than Vanguard:

Here, Portfolio 1 is a DFA stock fund and Portfolio 3 the Vanguard equivalent. The equity curves are for someone withdrawing 5% per year in retirement. Portfolio 2 is a DFA 60/40 stock/bond portfolio. The difference is stunning. Recently, DFA hasn't done as well as value stocks are out of favor. I am betting on them coming back. If there is a major market correction we might shift this core holding to a more aggressively equity focused fund.

10% Ellerston Australian Market Neutral Fund. Ellerston has done horribly in the past year, but prior to that it did very well for a market neutral fund. It now seems to be rebounding. This fund manager originally managed James Packer's money and then branched out.

10% Magellan Global Fund. This has been one of the best Australia based international equity funds. It did particularly well during the GFC.

10% Magellan Infrastructure Fund. This fund seems better than the other real estate options. It didn't do very well during the GFC, but all the others were worse.

10% Generation Life Tax Effective Australian Share Fund. This fund is managed by Redpoint Investments. The idea is to tilt a bit towards tax effective Australian shares given the high taxes on this investment bond overall. The manager is pretty much an index hugger, but the other options for actively managed Australian shares seem worse.

5% PIMCO Global Bond Fund. PIMCO is the gold standard for actively managed bonds. I decided to split my allocation to PIMCO between international bonds and

5% PIMCO Australian Bond Fund, as Australian bonds have actually done very well recently.