Good and Bad News: Masterworks Sells Doppelbild by Oehlen and Domacom Goes to Court with AustAgri

 

It's one of the paintings I invested in. The price uplift is 43%. They are claiming a 33% IRR after fees. My original investment was in early January 2021. US investors will receive payment in their "Masterworks Wallet". Don't know how foreign investors will be paid yet. I still have shares in 11 paintings I have invested in.

To counter this good news, Domacom (DCL.AX) announced today that AustAgri haven't onboarded Cedar Meats to the Domacom platform. Domacom is, therefore, demanding the AUD 8.5 million break fee, but AustAgri is disputing that they owe anything and it is going to court. This deal always sounded strange. If they have the funding to acquire Cedar Meats from other sources why would they need to pay fees to Domacom? I expect that Domacom will remain suspended from the ASX. I am pretty sceptical of recovering any of this investment at this point.

Investments Review: Part 3, Small Cap Australian Equities

CFS Developing Companies. Share of net worth: 2.14%. IRR: 12.86%. This is one of my oldest investments. I originally invested in May 1997. However, I sold out again in 1998 and bought back in in 2001. Until recently, when I closed my CFS superannuation account, we had a larger position. It's performance relative to CFS's "custom benchmark" has been erratic. It has strongly outperformed over 10 years but underperformed over horizons up to 5 years. Still it gained 80% in the year up to March 2021 but that was less than the benchmark's 104% gain. However, I don't see any reason to change this investment, unless someone knows a better small cap Australian fund. Wilson Microcap (WMI.AX) is such a fund but trading at a big premium to NAV.

WAM Strategic Value. Share of net worth: 2.04%. IRR: Too new. We have applied for shares in this listed investment company that is in the process of IPO-ing and is managed by Wilson Asset Management. The fund's goal is mostly to invest in undervalued closed-end funds in Australia with the aim to closing the gap. It doesn't qualify as a hedge fund as far as I am concerned because it won't go short or use puts etc. As most of these funds are small caps, I'm categorizing it as a small cap investment.

CFS Future Leaders. Share of net worth: 1.00%. IRR: 10.37%. This is the oldest investment I still have. I originally invested in December 1996. This fund invests in somewhat larger companies than Developing Companies does. It has not performed as strongly in the long run. Like Developing Companies, it outperformed its benchmark over 10 years, though not as strongly, and has underperformed in recent years. I'm inclined to roll this into Developing Companies, despite nostalgia.

Domacom (DCL.AX). Share of net worth: 0.73%. IRR: -3.04%. This is a company rather than a fund and its business is fractional property investment. The company has developed a series of innovative products but has struggled to increase funds under management and so continues to make large losses. My thesis for investing was that they would likely get acquired by a larger financial player who could put a lot more funds into their products. Really it is surprising that this is a listed company rather than a venture capital sponsored investment. Now the company has "voluntarily suspended" its shares because ASIC is investigating its merger/takeover of a company called AustAgri that has made all kinds of wild claims the most solid of which was it was buying Cedar Meats in Melbourne. Why they would want to become a Domacom managed fund, paying management fees to Domacom was not clear. In return they were supposed to receive Domacom shares. Whatever the outcome of this is I don't think this will be a complete loss, because again I think they could sell the platform. I don't have any choice but to hold at the moment.

Domacom Appoints New Chairman and CEO

Good news at Domacom (DCL.AX). They announced today that they have appointed John Hewson as chairman and John Elkovich as the new CEO. Hewson is chairman of Crescent Finance who are collaborating with Domacom on Islamic mortgages. Domacom has interesting products but has struggled to get enough funds under management to breakeven. They need 5-10 times as much FUM to become profitable. So, though they have seen nice growth in FUM recently, 40% p.a. growth just doesn't move the needle that quickly. My hope has been that the company would be acquired. It's good to see that some other experienced people believe in the product.

I can see scope for improving the fractional investing product. I find the financial information provided on existing investments to be unclear and non-transparent. The level of explanation really needs to be stepped up to make secondary investors willing to participate and increase market liquidity in my opinion. I have only invested in one secondary investment, which is now exiting. I signed up to several "campaigns" but there is glacial progress on raising funds for them. I just discovered that two of them seem to have given up and released the pledged cash back to investors.

Hopefully, these things will improve going forward. Maybe I should send the new chairman (who is my honorary colleague) a letter with my thoughts :)

February 2022 Report

World markets fell but the Australian market rose with the MSCI World Index (USD gross) falling by 2.55%, the S&P 500 by 2.99%, and the ASX 200 rising by 1.66%. All these are total returns including dividends. The Australian Dollar rose from USD 0.7063 to USD 0.7248 reducing Australian Dollar returns and increasing USD returns. We lost 1.10% in Australian Dollar terms but gained 1.49% in US Dollar terms. The target portfolio fell 2.38% in Australian Dollar terms and the HFRI hedge fund index is expected to fall 1.09% in US Dollar terms. So, we under-performed the ASX200, outperformed the other benchmarks.

It was a bit calmer month despite war breaking out in Ukraine at the end of the month. We continued to work on setting up a second brokerage account for the SMSF and transferring our holdings of listed investment trusts into it.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

All the equity categories lost money, while all the others gained. Gold both performed best and added the most to returns. US stocks was the worst performer while hedge funds detracted most from performance.

Things that worked well this month:

• Gold gained AUD 26k. WAM Alternatives (WMA.AX) and URF.AX were the next two best performers, gaining AUD 10k and AUD 6k, respectively.
  

What really didn't work:

• Hearts and Minds (HM1.AX)  and Cadence Opportunities (CDO.AX) were the two worst performers, losing AUD 13k and AUD 11k, respectively.
  

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 over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 but not so much against the other two benchmarks, which are measured in USD terms.

Our asset allocation did not change much. Private equity is still the most underweight asset class and real assets the most overweight. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered 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:

• As the gold price rose, the share of gold in gross assets went over 10% and following policy I sold 500 shares of PMGOLD.AX to bring it back to 10%. 
• I sold 1,000 shares of Fortescue Metals (FMG,AX). Should have sold more...
• I opened a new position in WAM Leaders (WLE.AX), buying 20,000 shares so far.
• I bought 6k shares in Pengana Private Equity (PE1.AX) when the price was low.
• I sold 3k shares of Regal Funds (RF1.AX) to fund this.
  
• I heard that our investment in Doyle's farm through Domacom will be wound up and sold. The majority of holders voted to do this. This is my only active investment through Domacom, so a bit disappointing. Hopefully, we won't lose too much considering selling costs and that we have had very little upside so far in this investment. The management company, Domacom (DCL.AX), also doesn't look like relisting on the ASX any time soon.
• On the other hand, Masterworks sold their second painting, which turns out to be one I hold.
  

Domacom Reinstated to ASX Quotation

On the last trading day before Christmas, Domacom has been reinstated to quotation. I wonder where the price will end up?

7:27pm

It went up! Closing at 7 cents a share. It was last quoted at 6.5 cents before being suspended. There were more shares on the buy side than the sell side most of the day.

Two New Investments

 I invested in another painting at Masterworks, No Hopeless by Yoshitomo Nara:

This takes my investment back up to 12 paintings again, given that Doppelbild by Albert Oehlen was sold and should pay out soon. I was a bit nervous this was overvalued but after a bit of research took the plunge anyway and invested USD 10k.

I also started buying units in a property on Domacom: 60 Devonshire Road, Rossmore, which is a market garden near the planned Badgery's Creek Airport. After the initial investors paid up big fees for the establishment of the investment, it trades below par but at the last valuation saw an uptick in value. I am thinking now it makes more sense to buy in the secondary market on Domacom instead of joining "campaigns" that seem to go nowhere. 

So far, I only invested AUD 920, but have a bid open waiting for sellers.

April 2021 Report

This month we completed the initial investments in our self-managed superannuation fund (SMSF). I stopped systematic trading for the moment. We also reached a big round net worth number in  Australian Dollar terms. But once I raised the value of our house to reflect a recent sale in our neighborhood, I realised we would have actually reached that number in February.

The Australian Dollar rose from USD 0.7612 to USD 0.7725. It was another month of increases in world stock markets. The MSCI World Index rose 4.41%, the S&P 500 by 5.34%, and the ASX 200 rose 3.48%. All these are total returns including dividends. We gained 2.54% in Australian Dollar terms or 4.06% in US Dollar terms. The target portfolio is expected to have gained 1.76% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 2.07% in US Dollar terms. So, we outperformed these benchmarks and did OK vs. the MSCI. Here is a report on the performance of investments by asset class (currency neutral terms):

Hedge funds added the most to performance and only Australian small cap had a negative return. Things that worked well this month:

• Tribeca Global Resources was the largest contributor in dollar terms contributing AUD 21k. Gold bounced back, contributing AUD 15k. Unisuper, Cadence Capital, and Pershing Square Holdings all also contributed more than AUD 10k. Other notable strong performers were URF.AX (NY/NJ residential real estate), 3i (UK private equity), and soybeans.
  

What really didn't work:

• The worst performers were Hearts and Minds (HM1.AX) and Domacom (DCL.AX).
  

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. Against the MSCI World Index we could be doing better and we are doing a little worse than the median hedge fund levered 1.6 times.

We moved decisively towards our desired long-run asset allocation again as I implemented our SMSF investments. In October 2018, when we received the inheritance we were 48 percentage points away from our target allocation at the time. Now we are less than 6 percentage points away. We compute this by calculating the Euclidean distance between the target and actual allocation vectors. This is the square root of the sum of squared differences between the actual and target allocations for each asset.  Real assets is the asset class that is now furthest from its target allocation (4.6% of total assets too little):

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. This was a very busy month. I'm only recording net changes here:

• Australian large cap: I invested in Argo Investments again.
  
• Hearts and Minds (HM1.AX): I bought back 20k shares I had sold a while ago at higher prices. This is a long only global equities fund.
  
• Hedge funds: I increased our holding of Regal Funds (RF1.AX). This wasn't intentional, but I didn't get the price I wanted in exiting part of our holding in a regular brokerage account while also establishing a position in the SMSF.
  
• Private equity: I increased our holding of the Pengana private equity fund (PE1.AX).
  
• Bonds: Our Medallion Financial baby bond matured and we bought shares in Scorpio Tankers,  Star Bulk Carriers, and Ready Capital baby bonds, increasing our net holdings of US corporate bonds by USD 50k. We also bought shares in the Australian MCP Income Opportunities Trust (MOT.AX).
  
• Art: I invested in another painting at Masterworks.
  
• Real estate: I invested in the Domacom and Australian Unity Diversified Funds. I also doubled our holding of URF.AX (NY/NJ residential property).
  
• Futures: I successfully closed a calendar spread trade in soybeans and stopped systematic trading of ASX futures.
  

April 2022 Report

World markets fell sharply with the MSCI World Index (USD gross) falling by 7.97%, the S&P 500 falling 8.72%, and the ASX 200 falling 0.85%. All these are total returns including dividends. The Australian Dollar fell from USD 0.7494 to USD 0.7114 increasing Australian Dollar returns and reducing USD returns. We lost only 0.16% in Australian Dollar terms but lost 5.23% in US Dollar terms. The target portfolio lost by 2.34% in Australian Dollar terms and the HFRI hedge fund index is lost 0.93% in US Dollar terms. So, we out-performed all benchmarks apart from the HFRI index. I felt like I was losing a lot of money, but in Australian Dollar terms it wasn't that bad.

Here is a report on the performance of investments by asset class (currency neutral returns in terms of gross assets): 

In a reversal of last month real assets, gold, and futures gained money, while other asset classes lost. Real assets were negatively affected by the URF debacle. Rest of the world stocks were negatively affected by the China Fund. Gold rose in Australian Dollar terms, though the USD price fell. US stocks performed worst and detracted from performance most, while gold performed best and contributed most to performance.

Things that worked well this month:

• Gold gained AUD 21k, Winton Global Alpha 10k, Tribeca Global Resources (TGF.AX) 11k, and Aspect Diversified Futures 8k.
  

What really didn't work:

• Pershing Square Holdings (-22k), Australian Dollar Futures (-17k), and Hearts and Minds (HM1.AX, -11k) all lost more than AUD 10k.

Our SMSF continues to perform quite well compared to our employer superannuation funds:

They're all indexed to 1000 in April 2021.

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 over the last 60 months. We show the desired asymmetric capture and positive alpha against the ASX200 and the MSCI but not against the hedge fund index. We are basically performing a bit worse than the average hedge fund levered 1.67 times. Hedge funds have been doing well recently.

I adjusted the leverage on the URF.AX investment  to roughly 3:1 in our gross asset allocation as there still seems some possibility that the wind-up deal will be voted down by the shareholders.

We moved a little bit nearer to our target allocation. Our actual allocation currently looks like this:

70% of our portfolio is in what are often considered 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. It was a busy month.

• I invested in the Unpopular Ventures rolling fund on the AngelList platform. The initial investment is USD 10k and then the same amount each quarter for eight quarters.
• Our listed investments trusts are now all in a CommSec account within the SMSF, which means I get accurate tax reporting and can subscribe to dividend reinvestment, which I did.
  
• I sold 10k shares in Pengana Private Equity (PE1.AX). These were shares in my name that I held to get accurate tax reporting, which I don't need any more. I sold at AUD 1.69 and the price is now AUD 1.49. So, that was a good move.
• I sold AUD 30k for USD and bought one more AUD futures contract, increasing AUD exposure by about 100k, which was a mistake.
  
• I withdrew AUD 25k from Domacom Investments after two crowdfunding campaigns just vaporized. 
• But I started accumulating units in another property at Domacom. It is a market garden property near the planned Badgery's Creek Airport. 60 Devonshire Road, Rossmore.
  
• I bought 12.5k WAM Leaders shares (WLE.AX).
• I invested AUD 10k in the Winton Global Alpha Fund, which has been doing well recently, for a change as I predicted. Seems futures work well in inflationary environments but not in low inflation environments. I based this opinion on this research.
• I invested AUD 10k in the Australian Unity Diversified Property Fund.
  
• I bought AUD 7k shares in Pendal as a merger arbitrage play.
• I invested in a new painting at Masterworks: "No Hopeless". I felt this might be over-valued but took the plunge anyway.
  

First Investment through Domacom

 

 

I made my first investment using the Domacom platform. I bought some shares in a cattle grazing property in Victoria. Mostly, I just want to see how the platform works, so this is a very small investment. I also have made "pledges" for three "campaigns". Activity seems low on the platform in terms of either trading or crowdfunding campaigns. It's not surprising that the company seems to be focusing on other ways to generate funds under management. The platform provides quite a bit of information but I think deals mostly are a bit too nebulous to commit a lot of money to any one. For example, these are the financials for another farm property in Victoria:

What exactly are the outgoings? If there are finance costs, then how big is the mortgage on this property? The "position" has no loan listed. Was the loan paid off? But last year there were no finance costs. It's hard to understand the financials of most properties I looked at.

What farming activity is generating the rent? The pds says: "It is intended that this property will be used to derive income from mixed agriculture use including the farming of sheep and the growing of trees producing nuts." I'm doubtful about the latter. Is it happening? 

Most residential property listed on the site has fallen in value since the initial investment was made. Are initial valuations over-valuing the properties?

I think if this platform is going to be successful it needs to have much more transparent information.

Individual Investment Performance 2023

 

To better understand our investment underperformance in 2023 let's dive into the returns on each individual investment. If we'd managed to avoid all the losing investments in the table we would have roughly matched the return on the target portfolio. So, as usual it is the losers which hurt. In particular, the Cadence, Cadence Opportunities, and Tribeca listed hedge funds all did poorly. The worst of all though was the Aura VF2 venture capital fund. One of their companies - Lygon - went bankrupt and was then restructured. Once you are in a venture fund you can't really get out and I invested in this fund because VF1 has done well over time.

When I reviewed the hedge fund investments two years ago, these funds were all doing well. I did mention that I wanted to reduce exposure to Cadence Capital, which I failed to do. Tribeca has turned out to be a very volatile investment. Sometimes they have big wins and some times big losses. I failed to get out when it traded above NAV at about the time of the review. I thought then they had reformed, but apparently not. 

The other two main losers are Domacom and the China Fund. I really should have gotten out of Domacom when it relisted on the ASX. Now it does look like they will turn things around, but dilution from new investors means we might never make any money. There's no real excuse for remaining in the  China Fund, as I have been bearish on the long-term prospects of China under Xi Jinping. It is hard to explain.

On the other hand, I lost on the TIAA Real Estate Fund, but correctly reduced my exposure. Not by enough. My gains in the CREF Social Choice Fund just balanced my losses in the Real Estate Fund in 2023.

I have much less to say about the winners. 3i and Pershing Square Holdings have turned into big winners. I could have done even better on 3i if I had not sold 20% of the position. Half of the fund is in one company - Action - which made me a bit nervous. Gold did well and the other two big winners are our employer superannuation funds. With gold, these are our three biggest investments. Pershing Square is now our fourth biggest investment.

How I Made AUD 2,900 Instantly

A couple of days ago, I went on the Domacom platform just to see if anything was new. I found an offer to sell about 10,000 units in a semi-rural property near Sydney for AUD 1.0156 placed on 30th May. But the property was revalued on 18th July by around 30%!. Almost instantly I bought the units. One downside is that I already own about AUD 10k of units in the neighboring property. Of course, I can't realize this profit, so it is just on paper. The market is very illiquid, which is why I managed to get this bargain in the first place. Both properties have a vote next March on whether to sell the properties and wind up the funds or whether to continue to hold. Recently, my first investment at Domacom held a vote and sold for a big profit.

 

To get the funds, I had to cancel my pledge to a campaign to buy rural property. My money has been tied up in the campaign for a year while they have made almost no progress on raising money. I think that in future I won't make pledges to campaigns and only engage in the secondary market. The additional advantage of that is that I avoid paying big fees for the purchase of the property and the often huge upfront cut (c. 10%) taken by the promoters of the campaign. It would be much better if they were paid by performance fees instead...

Second New Property Investment: Domacom

I made a second property investment application today. This one is to Domacom which is a fractional property investment or crowdfunding platform. I have been an investor in the company itself for a while.  It is now looking quite a bit more stable than it did when I wrote about it before. It's still one of my most speculative investments. The way it works is that you put cash into an interest paying account and then bid on various crowd-funded projects. You can also get a syndicate together to invest in a property using their platform. They have a variety of other products like housing equity release for seniors – selling part of your house, rather than doing a reverse mortgage – Islamic financing for buying houses etc. Their model is supposed to allow SMSFs to invest with leverage because you buy units in a fund rather than buying a property directly. 

The focus is on residential property, but there are also more unusual opportunities like solar power and rural farmland.

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.
  

August 2019 Report

Stock markets fell in August but we did OK in Australian Dollar terms and not so bad in US Dollar terms. The Australian Dollar fell from USD 0.6879 to USD 0.6729. The MSCI World Index fell 2.33% and the S&P 500 1.58%. The ASX 200 fell 2.05%. All these are total returns including dividends. We gained 0.93% in Australian Dollar terms and lost 1.27% in US Dollar terms. The target portfolio is expected to have gained 1.82% in Australian Dollar terms and the HFRI hedge fund index is expected to have lost  0.70% in US Dollar terms. So, we had a relatively strongly performing month, beating all three stock indices but under-performing our target portfolio and the HFRI. Updating the monthly returns chart:

Here is a report on the performance of investments by asset class (futures includes managed futures and futures trading):

Gold, futures, bonds, and Australian small cap had positive returns while other asset classes lost money. The largest positive contribution to the rate of return came from gold and the greatest detractor was hedge funds. The returns reported here are in currency neutral terms.

Things that worked well this month:

• Gold gained 7.8%.
• The Winton Global Alpha Fund also did very well gaining 5.6%...
• I was impressed by the PSS(AP) balanced fund, which actually gained this month. But generally, diversified investments did well as bond performance outweighed the fall in stocks.

What really didn't work:

• Trading. Not including gold we lost 2.48%. Including gold it was a 2.18% gain for the month. Near the beginning of the month we had a big winning trade in Bitcoin, gaining USD 16k. We then gave it back in losing trades as the cryptocurrency chopped around. I have now reduced my position size in case this chop continues. The treasuries steepening trade also lost as the yield curve inverted more.
•  Tribeca Global Resources Fund (TGF.AX) did horribly in terms of its share price. It's trading at quite a large discount. Cadence Capital (CDM.AX) returned to its position of being my worst investment ever in dollar terms, down AUD 20.6k cumulatively (AUD 3.2k this month).

We moved a little more towards our new long-run asset allocation.* Gold and cash increased most and bonds decreased most:

On a regular basis, 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:

• $25k of Scorpio Bulkers baby bonds matured slightly early, $25k of Hertz bonds were called, and $50k of Macquarie Bank bonds matured. I bought $50k of Energy Transfer bonds and $15k of Ford bonds. So, our direct bond holdings declined by $35k.
• We traded unsuccessfully, as discussed above.
• I opened a small position (10,000 shares) in URF, an Australian based REIT investing in US residential property, that was trading at a large discount to net asset value. 
• I increased our holding of Domacom (DCL.AX) shares to 100k. It's still a very small position – 0.2% of net worth.
• I bought 1,000 more shares of the IAU gold ETF. 
• I invested the inheritance of baby moomin. This reduced our cash and debt by the same amount as I was holding cash for this purpose but recording a loan from him in our accounts. Reported net worth does not include the net worth of our children, just my wife and I.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.

August 2020 Report

The US stock market continued to rise as the US dollar fell. The Australian Dollar rose from USD 0.7159 to 0.7380. The MSCI World Index rose 6.16%, the S&P 500 7.19%, and the ASX 200 3.09%. All these are total returns including dividends. We gained 3.03% in Australian Dollar terms and 6.03% in US Dollar terms. The target portfolio is expected to gain 1.89% in Australian Dollar terms and the HFRI hedge fund index 2.46% in US Dollar terms. So, we outperformed the latter two benchmarks and almost matched the stock market indices. Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. Small cap Australian stocks performed best and hedge funds contributed the most to overall return.

 
Things that worked well this month:

• Regal Funds (RF1.AX) was the top performer, up AUD30k, closely followed by Bluesky Alternatives (BAF.AX, 22k), and Hearts and Minds (HM1.AX, 19k).
  
• Domacom (DCL.AX) doubled in price from 4 to 8 cents. Half my position was bought at 2 cents a share. But then the company voluntarily suspended its quotation pending an announcement about a major transaction. The trading halt started on 19 August and there is still no news, though the company did release its annual report.
  
• The Aura Venture Fund reported that it performed very well in the June quarter. In retrospect, it was easily the best performing investment that month.
  

What really didn't work:

• Winton Global Alpha Fund continued to lose money. The fund announced that a special meeting of unitholders will consider broadening the strategy and lowering the fees.
  

We moved further towards our long-run asset allocation. The share of hedge funds rose most while the shares of bonds fell the most:

 

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 small positions in URF.AX, CDM.AX, RF1.AX, TGF, AX, and PE1.AX in my Commsec account (for a total of 1% of net worth roughly) with the aim of getting better tax information on distributions than provided by Interactive Brokers.
• I bought 13,719 shares of Platinum Capital.
• I bought 25,000 shares of Bluesky Alternatives and 1000 shares of 3i to increase our private equity position a little.
• I opened an account with Masterworks and bought 500 shares in my first painting for USD 10k.
• USD25k of Goodyear bonds, USD25k of Safeway bonds, and USD28k of Xerox bonds matured.
• I bought net AUD 60k and GBP 14k and sold net USD 61k.
• I closed the 2 year-10 year US treasuries September futures spread and shorted 1 contract of December 10 year bonds  futures.
  

May 2020 Report

This month the stockmarket rose at a slower pace.

This month, our spending was again low relative to pre-COVID-19. We spent AUD 5.3k which is up on April's AUD 4.6k.

The Australian Dollar rose from USD 0.6524 to 0.6647. The MSCI World Index rose 4.41%, the S&P 500 4.76%, and the ASX 200 4.42%. All these are total returns including dividends. We gained 2.49% in Australian Dollar terms and 4.40% in US Dollar terms. The target portfolio is expected to have gained 1.53% in Australian Dollar terms and the HFRI hedge fund index 1.69% in US Dollar terms. So, we strongly out-performed these latter two benchmarks and matched the MSCI return.

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

The returns reported here are in currency neutral terms. Small cap Australian stocks and hedge funds again performed best after a terrible performance in March and a strong performance in April. Hedge funds and bonds contributed most to the total return.

Things that worked well this month:

• Regal Funds and Pershing Square Holdings were the top performing assets in dollar terms. Some other listed hedge funds (Cadence, Tribeca) also did well.
• Gold.
• CFS Developing Companies Fund.
• Pengana Private Equity.
• Domacom continued to rebound from the lows of March.

What really didn't work:

• Winton Global Alpha managed futures fund lost 4.6%. I now have lost money overall from investing in this. Is trend-following really dead?

We moved further towards our new long-run asset allocation. The share of hedge funds rose most while the share of bonds fell most:

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:

• Dish and Scorpio Tankers bonds matured, releasing USD 50k plus interest.
• I invested AUD 100k in the APSEC hedge fund.
• I bought 20,000 more shares of the Tribeca Global Resources Fund (TGF.AX). 
• I sold 20,000 shares of Pengana Private Equity (PE1.AX) when the price rose a lot above net asset value.

Coinvestment, Revised Target Allocation, and Rights Issue

I'm making an investment in a pre-IPO company alongside a venture capital fund and other investors. I valued the company based on their forward projections for EBITDA and the multiples similar companies listed on the stock exchange have. Of course, the company could fail and so it is sensible to take a middle valuation between the extremes of zero value and the value if the company succeeds as planned. This still gave a good gain on the current valuation. In reality, total loss is unlikely as the company is already approaching profitability. The funding is for expansion. The worst outcome is more likely a sale for the current valuation or something less to a competitor. I am planning to invest about 2% of our portfolio in this company.

This means I will have to raise my target allocation to private equity and reduce my allocations to hedge funds and long-only equities. To also take into account my future commitment to a venture capital fund I am increasing the private equity allocation of gross assets from 10% to 15%. I am reducing the hedge fund allocation from 24% to 22%, Australian large cap from 9% to 8%, US stocks from 6% to 5%, and rest of the world stocks also from 6% to 5%. I would be happy to have an even higher allocation to private equity if I had access to enough diverse good quality opportunities. So, changing the target allocation isn't just like the US government raising its debt ceiling every time they hit it :)

By contrast, I am an investor in listed company Domacom (DCL.AX), which has been suspended from the ASX for a while, pending completion of a deal to effectively acquire a company called AustAgri. The ASX instructed them to raise more capital before relisting. I don't intend to participate in the rights issue, especially as the issue price is slightly above the last traded price of the shares on the ASX. Success of the company in the short-run really depends on this AustAgri transaction and it is still hard to be certain why it is so delayed and what will happen. Even after that transaction, the company will not be in anywhere near as good a position as this pre-IPO company.

November 2020 Report

Stock markets rose strongly and the US Dollar fell this month. The Australian Dollar rose from USD 0.7036 to USD 0.7361. The MSCI World Index rose 12.36%, the S&P 500 by 10.95%, and the ASX 200 rose 10.32%. All these are total returns including dividends. We gained 3.83% in Australian Dollar terms or 8.63% in US Dollar terms. The target portfolio is expected to have gained 2.70% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 2.82% in US Dollar terms. So, we outperformed the latter two benchmarks. 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:

• The following funds all gained more than AUD 20k: Tribeca Global Resources (TGF.AX), Hearts and Minds (HM1.AX), Platinum (PMC.AX), Pershing Square Holdings (PSH.L). Pershing and Tribeca both gained more than 18%. URF.AX (US residential real estate) gained 34%.
  

What really didn't work:

• Gold fell 5.9% or AUD 23k. Domacom (DCL.AX) drifted down, losing AUD 5.5k.
  

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 have the desired asymmetric capture for all three indices now and positive alpha compared to all three of them. 

 

The next graph shows monthly performance relative to the MSCI and HFRI indices in US Dollar terms. Before COVID-19 we seemed to track the hedge fund index closely. Post-COVID-19 we are tracking the MSCI closely. We did take on more risk but it wasn't that big a change I thought. So, our investments must also be behaving differently.

 

We moved further towards our long-run asset allocation. Bonds are still the asset class that is furthest from their target allocation (8.4% of total assets too much) followed by real assets (real estate and art) (8.0% too little):

 

 

We are now over-allocated to hedge funds, so will look to trim some positions over time. 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 applied for AUD 100k of shares in the Cadence Opportunities Fund.
• The first capital call for the Aura VFII fund was made for AUD 62.5k.
  
• General Financial called 760 of our GNFSL baby bonds. We still have 240.
• I made a trade in E-Mini S&P call options around the US election. Got out for a small profit, but should have held much longer.
• I bought another 1,000 IAU gold ETF shares. Still not at 10% of gross assets in gold!
• I sold 5,000 Hearts and Minds (HM1.AX) shares, taking our position down to 40,000. This was because the stock was trading at a large premium to NTA.
  
• I bought AUD 25k by selling US Dollars. We are now at roughly 50/50 in terms of Australian Dollar linked and foreign currency linked investments and so will probably not buy more Australian Dollars for a while.
• I borrowed AUD 100k from Interactive Brokers and AUD 30k from CommSec to fund the new investments.
  

Investments Review: Part 6, Real Assets

In my usual reporting, gold is a separate category from real assets. I plan to put 10% of gross assets into gold and 15% into real assets. 10% would be in real estate and 5% in other assets, such as art.

Gold (PMGOLD.AX). Share of net worth: 12.10%. IRR: 15.2%. This is one of the more cost and tax effective ways to hold gold. The fund reflects rights to gold held by the Perth Mint. This is much more tax effective than using futures and less hassle than owning real gold, though Perth Mint provide some fairly easy options there. The IRR reflects our total gains on gold ETFs. The management fee is taken by the manager cancelling some shares each year. That means the price exactly tracks the Australian Dollar price of 1/100 of an ounce of gold.

WAM Alternatives (WMA.AX). Share of net worth: 4.32%. IRR: 16.9%. About 10% of this fund is in real estate and half in real assets, mainly water rights. The rest is in venture capital and cash. This fund was started by the failed Bluesky group and has now been taken over by Wilson Asset Management. The fund has traded deep below NAV. It has closed some of the gap but is still below NAV. I'm holding the fund mainly in the hope that eventually it trades at a premium to NAV. The underlying performance is not that good. In 2020 it lost 3 cents per share in NAV to $1.08 per share while paying out 4 cents in dividends. This year, so far it's gained 6 cents per share, which I guess is OK.

TIAA Real Estate. Share of net worth: 2.78%. IRR: 4.8%. This fund invests in US real estate - offices, retail, apartments, and industrial. It is in my US retirement account (403b). The IRR for this fund is low, but its returns are very smoothed and so it has a nominally high Sharpe ratio and a low correlation to my other assets. Based on my analysis, I'm hoping that the coming period is one of higher returns than average for this fund. It is easy to market time this fund due to the lag in revaluations.

Masterworks. Share of net worth: 2.63%. IRR: -0.28%. This fund provides fractional access to paintings, mostly works from the last few decades. I have now invested in nine paintings through the platform, investing USD 10k in each. Not much to report so far regarding performance. The downside of the platform I think, is that it isn't worthwhile for the manager to buy a painting for $100k or even $1 million. Buying a $10 million painting has a huge economy of scale for them. They are incentivised to make profits, but they could make it either by getting a lot of appreciation or less appreciation but more assets under management faster. Less expensive paintings that have a larger potential for gain cost them too much to offer.

US Masters Residential Property Fund (URF.AX). Share of net worth: 1.25%. IRR: -1.85%.This is an Australian fund that invests in residential real estate in metropolitan New York. The fund has had a quite disastrous history and now trades at less than 50% of NAV. The fund's underlying exposure to real estate is much larger than the value of the shares on the ASX. The fund has stabilized after refinancing its debt. Previously, it had assets in US Dollars and a lot of debt in Australian Dollars. My bet is that house prices rise in the New York area, that fund costs are now lower after the restructuring, and that the fund eventually trades nearer NAV.

Australian Unity Diversified Fund. Share of net worth: 1.17%. IRR: 28.2%. A recent investment in our SMSF. Invests in Australian office, retail, and healthcare real estate. This is unlisted property and so the price reflects the actual net asset value. Listed real estate provides much less diversification from stock market risk.

Domacom Investments. Share of net worth: 1.12%. IRR: 0.16%. Another recent investment in our SMSF. Fractional investing in Australian real estate. So far, I bought a small share in a farm, but the platform is very slow moving regarding new investments and most existing investments that are trading don't look like good bets.

October 2019 Report

This month we "inverted" our mortgage, paying off the mortgage and then redrawing it for investment purposes. As a result the mortgage interest should now be tax deductible. I carried out quite a lot of trades and money shuffling to carry this out.

The Australian stockmarket fell a bit in October and the Australian Dollar rose, but overseas markets rose. The Australian Dollar rose from USD 0.6752 to USD 0.6894. The MSCI World Index rose 2.76% and the S&P 500 2.17%. The ASX 200 fell 0.35%. All these are total returns including dividends. We lost 0.20% in Australian Dollar terms but gained 1.90% in US Dollar terms. The target portfolio lost 1.03% in Australian Dollar terms and the HFRI hedge fund index is expected to have gained 0.83% in US Dollar terms. So, we out-performed our target portfolio, the HFRI, and the ASX, while underperforming compared to the MSCI World Index and the S&P 500 (a bit). Updating the monthly AUD returns chart:

Hmmm... It is looking like my performance is an average of the MSCI and the target portfolio in recent months.

Here is a report on the performance of investments by asset class (futures includes managed futures and futures trading):

Private equity, real estate, and gold did well while hedge funds and futures did poorly. The largest positive contribution to the rate of return came from private equity and greatest detractors were futures and hedge funds. The returns reported here are in currency neutral terms.

Things that worked well this month:

• Pengana Private Equity and Bluesky Alternatives did very well, gaining AUD 8.7k and AUD 10k, respectively. Hearts and Minds gained AUD 5.3k.
• Gold gained (AUD 7.3k).

What really didn't work:

• Winton Global Alpha lost significantly, reversing recent gains.
• Pershing Square, Cadence Capital, and Tribeca Natural Resources all lost money.

Trading: We started the month closing a winning trade in Bitcoin, but then there were six losing trades in a row before a winner. We also lost money trading palladium. Using a narrower definition including only futures and CFDs we lost 0.96% on capital used in trading. Including ETFs we gained 0.89%. Using the narrow definition, we are now behind where we were at this point last year. This graph shows cumulative trading gains using the broader definition year to date:

Using this definition we are still ahead of where we were at this time last year.

We moved further towards our new long-run asset allocation.

The table shows how leverage increased this month as we moved the mortgage into the investment portfolio. Cash and bonds fell and all other asset classes increased their shares.

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:

• USD 21K of Kraft-Heinz bonds were called early and we didn't buy any new bonds So, our direct bond holdings declined by USD 21k.
• We traded at a small loss, as discussed above.
• I sold 100k of Domacom (DCL.AX), 40k of Tribeca Global Natural Resources (TGF.AX), and 79k of Cadence Capital (CDM.AX) shares to harvest tax losses and obtain cash for the mortgage inversion. I subsequently bought back 40k of Tribeca and 80k of Cadence. I now have the funds which are marginable and/or are likely to pay large franking credits in my account and the non-marginable funds, which mostly also are likely to pay out fewer franking credits in Snork Maiden's account. As franking credits are applied to the tax bill it doesn't actually matter which account they are in, but I like to see my larger tax bill cut more :) I have a margin account with Commonwealth Securities, while Interactive Brokers don't offer margin loans to Australian customers.
• I bought 20k shares of Hearts and Minds (HM1.AX) before the upcoming annual Sohn Conference. The fund is currently winding down the investments in the stocks recommended at the last conference and will invest in new recommendations following this year's conference. The share price is very close to NAV and I think following the conference there could be a boost in price. The fund has done very well since inception.
• I went to Regal Fund's presentation here and was impressed and bought 20k more shares of RF1.AX.
• I sold 50k of Pengana Private Equity (PE1.AX) shares because the price seemed unsustainably high but then bought back 50k at lower prices. This is not looking like a good move given the tax implications
• We bought AUD 40k of Australian Dollars.
• We moved around AUD 1/4 million to our offset account and paid off the mortgage. We then redrew AUD 1/2 million and sent it to my CommSec account and Moominmama's Interactive Brokers account. This reduced my margin loan a lot and increased the cash in her account a lot. The latter is deemed to be "futures" in the pie chart above. Cash in our offset account fell to AUD 40k.