December 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the continuing decline in global stock markets this month. Both these trends were milder than last month. Net worth also decreased in Australian Dollars terms. Trading results were bad and I stopped active trading to focus on improving my trading performance using simulated trading.

Income and Expenditure



Expenditure was $3,547 - there were no exceptional expenses. There were $315 of implicit car expenses - depreciation and interest - so actual cash expenditure was $3,212.

Non-investment earnings ($5,924) included another refund of work-related expenses from Snork Maiden's employer. She also again got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions from her employer were $559.

Non-retirement accounts lost $6,052 with $1,414 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $1,731 but would have lost only $405 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed around half the loss in the non-retirement accounts, but actually came out slightly positive in my Roth IRA.

Net Worth Performance
Net worth fell by $US4,759 to $US448,556 and in Australian Dollars fell $A1,161 to $A511,233. Non-retirement accounts were at $US237k. Retirement accounts were at $US211k.

Investment Performance



Investment return in US Dollars was -1.72% vs. a 1.08% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 0.69% loss in the S&P 500 total return index. Non-retirement accounts lost 2.51%. Returns in Australian Dollars terms were -0.88% and -1.70% respectively. In currency neutral terms the portfolio lost 1.11%,. Summing up the year, we gained 18.35% (USD) vs the MSCI with 12.18% and the SPX with 5.5%. Our non-retirement accounts are up 21.68%. Australian Dollar returns were competitive with the SPX. In currency neutral terms we gain 9.8% for the 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. Trading resulted in some of the biggest losses - QQQQ/NQ and ES. Otherwise, no clear story emerges this month except that EBB.AX and EBI.AX continue to perform poorly.

Progress on Trading Goal

I lost $2,003 in trading . The loss is 6.92% of trading capital. The NDX was down 0.2% for the month. For the year, trading generated $9,749 or a gain of 35% vs. an NDX gain of 18.4%. So in the end I beat the market, but with a lot more risk and volatility.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.47. Using a regression on the last 36 months of returns gives a beta of 0.81 to the MSCI or 0.60 to the SPX. Alphas are 0.55% and 6.44% respectively. A more sophisticated time series method yields a beta of 0.97 and alpha of 7.6% for the MSCI index. The extra beta generated by these methods is due to the correlation between equity returns and the Australian Dollar in recent times as a result of the "carry trade".

Allocation was 29% in "passive alpha", 66% in "beta", 6% allocated to trading, 3% to industrial stocks, 7% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 14%. Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

Australian Fund Updates

Allco Equity Partners (AEP.AX): The Liberman family got a margin call and now ANZ owns the 25% of the company that they used to own and which had hoped they could sell to the now bankrupt Allco Finance Group for net asset value (about three times the current share price). Steve Eckowitz at EBB also got a margin call a while back. These wealthy families don't seem to be any smarter than me :) In the meantime, the company was trying to terminate its management agreement with Allco and rebrand. The courts just ruled against it. They're looking to appeal of course. They have also hired UBS to look at ways of reducing the discount in the share price.

Platinum Capital (PMC.AX): The very bold attempt to raise more capital with a 1:1 rights issue only raised a small fraction of the planned amount. Only 13,436,583 of the possible 127,163,967 shares were taken up but some shareholders asked for additional allotments of 2,878,901 shares. So they raised 12% of what they hoped for. They also raised a bit more with dividend reinvestment and a "share purchase plan".

Everest Brown and Babcock Alternative Investment Trust (EBI.AX): The fund is embroiled in legal proceedings over the planned delisting and the postponed shareholder meeting. I'm still hoping to get my redemption money on 19th December (the period was extended from 12th December). The stock is trading at about 1/3 of NAV. The AFR reported that there are rumors that the fund that is bringing proceedings (Laxey Partners) is being forced to sell units in the market due to margin calls.

Everest Brown and Babcock (EBB.AX): Not a fund, but a fund manager. Babcock and Brown (BNB.AX, which is close to bankruptcy) sold a 20% holding in EBB.AX to the Wingate Group which apparently is backed by the Smorgon family of Melbourne. One wealthy investor who didn't get a margin call or go bankrupt apparently :) This is good news I think because the company's share price of 4-5 cents (Smorgon bought at 4 cents and have already made 25% on their investment notionally!) looked like the market thought they were heading for bankruptcy too. Given the apparent smarts of this investor that would appear to not be the case. But $A2 million is peanuts for them so who knows.

Frustrating Month

But at least it was better than last month. On the other hand I'm going to record "trading" losses for the first time in six months. I didn't really do any active trading apart from dealing with an expiring short options position but I mark to market my still open CFD position (SPI (ASX 200 Futures)). The Australian Dollar fell, reinforcing below market returns in US Dollar terms. Full details coming soon. The chart above though could be construed as an inverted head and shoulders formation and weekly charts definitely look like a near term bottom is in place.

I started working on our Australian tax returns. Putting together the spreadsheet for calculating Snork Maiden's tax return. It's the easier of the two but still plenty to learn about. For example, she's not a temporary resident for tax purposes because she is married to an Australian citizen. This means that interest received on her HSBC savings account must be included. However, foreign interest doesn't enter the "interest" box on the tax return but is included in "foreign source income". I vaguely remember that sort of thing from the last time I did an Australian tax return in 2002 (I previously lived in Australia from 1996 to 2002). However, I won't be able to submit Snork Maiden's return until I've completed mine. If my net income comes in sufficiently low we might be able to claim the spouse offset (offset = tax credit in US jargon). I won't be able to complete my tax return till I get full details of distributions from EBI and CIF in late August. But if my income is already over the limit before including those distributions we'll be able to submit Snork Maiden's return fairly soon. She should get a refund as she only worked for 9 months of the year, but has had tax withheld at the rate that would apply if she worked the full year. Unlike the US you don't actually compute on your tax return how much money you either owe the government or they owe you. But the tools are provided to allow you to estimate it.

I stopped by the ATO "shopfront" this morning and picked up a bunch of extra forms and information booklets. I still prefer to have a hard copy rather than a pdf. Also we have to submit our returns on the paper forms as electronic filing is only available if you have previously submitted a return and also the software doesn't work on Apple computers...

December 2008 Report

Finally an up month, and a market beating one at that, in US Dollar terms at least. However, due to the rise in the Australian Dollar this month we lost in AUD terms and AUD net worth also declined.

Income and Expenditure



Expenditure was $5,181 ($A7,420). We bought a TV (Samsung 32", Full HD (1080), LCD, about $A,1400), some furniture (about $A400), a bike for Snork Maiden ($A750), and health insurance for her stepfather who will be visiting Australia (about $A350). Non-investment income of $6,465 due to the refund of Snork Maiden's China trip costs. Retirement contributions were $684. Before taking into account foreign exchange movements non-retirement accounts gained and retirement accounts lost money. They both gained in USD terms after taking into account the change in exchange rates.

Net Worth

Net worth rose by $10,158 to $205,660 or in Australian Dollar terms fell by $A4,202 to $294,558.

Investment Performance

USD returns were 4.12% vs. 3.67% or 1.06% for the MSCI and SPX respectively. In AUD terms we returned -2.41%.Using my preferred time series method, portfolio beta to the MSCI index was 1.36 with an annual alpha of 1.4%. Other methods now give a negative alpha. Individual investments made the following contributions to the result:



International and small cap Australian stocks made positive contributions. The top performer was the Challenger Infrastructure Fund which made an asset sale at carrying value during the month boosting confidence in its valuations. The fund is still trading at a massive discount to NAV. A similar positive valuation effect was seen for NDS following the European Union approving the buyout by News Corp and Permira. However, private equity funds MVC, 3i, and IPE all fell as did the TIAA Real Estate Fund and Everest Brown and Babcock despite the seeming resolution of the negative issues surrounding the fund.

Asset Allocation

At the end of October the allocation was 46% in "passive alpha", 60% in "beta", 1% was allocated to trading, 3% to industrial stocks, 5% to liquidity, 5% to other assets, and we were borrowing 20%. Due to the use of leveraged funds, our actual exposure to stocks was 104% of net worth. We regeared slightly. In November we were borrowing 17 cents for each dollar in equity; we are now borrowing 20 cents. When we take into borrowing by the leveraged funds we are invested in, borrowing per dollar of equity rose from 63 cents to 65 cents. Looking at asset classes:



Exposure to non-US foreign stocks rose due to market gains and purchases and exposure to hedge funds fell mainly due to the poor performance of EBI. We moved slightly towards our long-term asset allocation. The story of total assets (includes assets owned by leveraged funds) over the last few months is shown in this chart:



Our ownership of US stocks was particularly badly hit (13% of gross assets in August 4% now) due to market declines and subsequent margin calls.

Annual Report: Investments and Trades

I've already reported on annual investment and trading cash flows and rates of return. Today, I break things down into how much was made or lost on each security, fund, future etc. I invested in or traded. It's all in this table, which is an annual version of the ones in my monthly reports.



Last year's results for comparison. Again, there are more investments towards the top of the table and trades towards the bottom of the table. As last year the largest amount of money was earned by the Colonial First State Conservative Fund and Option (option is the retirement version of the fund). But the second best investment last year - EBB and EBI - is the worst this year. Platinum Capital was also a good performer last year and a poor one this year. I made decent money trading US stock indices but lost on the Australian index. I made a really dumb trade in Salesforce.com. Last year, Newscorp and Hansen featured as dumb trades. Trades in Apple contributed nicely in both years (but I should have invested in Apple instead!). There are contributions from trades exploiting the housing-credit disaster - IYR, Toll Brothers. Lehman, and Beazer - all winners. My investment in HCBK and the TIAA Real Estate Fund worked out as plays on the best in real estate, while Newcastle Investments, decidedly did not work out.

Well all the rest is there for you to see in the table.

Commonwealth Securities Service Deteriorating

After ranting yesterday about Ford, today it's Commonwealth Securities turn. I don't like putting down companies but I feel that criticizing companies on blogs is one way consumers can pressure them to perform better. CommSec's service has shown a very sudden deterioration since the beginning of this calendar year. It's almost as bad as Citibank now:

1. I sent in a request to buy units in a Colonial First State fund (another subsidiary of the Commonwealth Bank) through CommSec. Nothing happened. I contacted CommSec and was told to contact CFS. I contacted CFS and was told to contact CommSec. They told me they had no record of my application and instructed me to send in a new application. Which I did. Two weeks later, I get a call from CommSec: "Mr Moom - the form you sent in to buy CFS funds had a different account number than that of the funds which are on your margin loan". "Um, yes, that was on purpose, I sent the application to you to avoid the 4% load I'd have to pay if I sent the form direct to CFS. But as I've already sent in another application please just cancel this one...".

2. Still nothing has happened with my second application I sent in around 2 weeks ago...

3. I requested to withdraw x thousand units of my total shareholding of y thousand EBI.AX to the new unlisted EAIT. I see online that all y thousand of my units have disappeared from my CommSec account. I phone them up and am reassured that that is just a formality and the y-x thousand units will appear back in my account after the deal closes. I just opened the letter from Everest Financial welcoming me as a new unitholder of y thousand shares in EAIT... I guess not such a big deal, except all that money is now locked up for one year...

Update

We've bounced another $4k off the low point and are now only down $16k for the month. I've now made a profit of about $US750 in trading this month, which I hope I can hold onto. No trades for today but I've put a bunch of lowball bids in on Australian closed end funds to see if they get hit. Babcock and Brown (BNB.AX) bought a bunch of EBI.AX and EBB.AX which is a nice vote of confidence after the battering those two stocks have received. Interactive Brokers (IBKR) announced nice results but the stock sold off after hours. I didn't sell (maybe I'll regret this). Microsoft announced very nice numbers and soared AH and currently the NQ futures are up about 15 points. This also lifted AAPL a little AH. So the rally seems intact and my plan is still to hold till Tuesday's close and model depending sell a bunch of stuff and hedge then before the FOMC meeting.

The Day After

At this point it looks like the market is shaping up for a sideways day after the rebound in Shanghai overnight and smaller losses in European trading than Wall Street experienced yesterday. I put on a hedge trade - long 2 ES and short 2 NQ which is biased to the long side, but exited it at a loss as I had a meeting at 9:30 and it didn't seem to be doing well. It would have been in the money by now. So I guess I am just jittery after yesterday though I made plenty of money in the US market, but got slammed of course in Australia. I don't know the full extent of damage there as mutual fund prices are reported with a delay. Worst are probably the losses in resource stocks affecting my CFS Global Resources Fund which has about 10% in each of RIO, BHP, and RTP (those are the US tickers). The more hedge fund like instruments mostly responded better, though EBI.AX fell 5% and hedge fund manager EBB.AX fell 8%. I reckon I was probably slightly up yesterday overall, though I don't know how the short-term Australian Bonds in the CFS Conservative Fund (my biggest holding) responded. The Aussie Dollar fell and US bonds rose.

But I'm not worried that I don't have a trade on. I don't have to have a trading position at all times. I used to think of my short-trades as hedging my long positions and felt nervous if I didn't have a short when I thought the stock market might fall. But now I think in a much more "alpha-centric" way. Alpha are returns that are not correlated with stock market returns while beta reflects returns that are correlated with the market. I divide my portfolio into three sections:

1. Hedge fund type instruments that hopefully generate alpha. Sometimes some of these seem to have a bit more beta than I was reckoning on.

2. Beta - mainly long-only mutual funds whose return is mostly correlated with market returns and may have a positive alpha. It's no big deal if their alpha is negative to a small degree (one reason I am not worried about expense ratios which tend to reduce alpha) because I can generate alpha elsewhere in my portfolio. I change my exposure to these funds over the 4 year stock cycle. At the beginning of the cycle my exposure to stocks would be much bigger. I don't have to get my market timing perfectly right. At the moment I am 50-50 in bonds and stocks reflecting the late stage of the cycle which maybe now is heading towards the bottom - assuming that we need to see a 20% correction before the cycle is over. At the beginning of the cycle I will use leveraged stock funds and margin.

3. Short-term trading - I regard this now also as a generator of alpha. The trades are in ETFs or futures and so have a +1 or -1 correlation to the market while the trades are on. But the stochastic model has a zero beta coefficient to the NASDAQ 100 index. So in the long-run the returns are all pure alpha.

And of course I am also diversifed across US and Australian Dollars.

I've arrived at this strategy after a lot of experience and seeing what works and what does not and what I can tolerate emotionally. It's much more sophisticated than the standard "buy and hold" long-only models. I know I can't tolerate the fluctuations that that leads to. It was interesting seeing the responses of some newbie investors yesterday to the drop in the markets - which in the Dow was significant for a one day drop but was really not that much of a decline off the highs yet. I wonder how many will throw the towel in when we are down 20%? I started investing and trading in 1997 and have been through the high volatility of the 1998-2002 period. I also remember very well the crash in 1987 though I wasn't invested (I did buy a little in some Israeli mutual funds before then and was an undergrad economics and geography student) and even dim memories of the 1970s. Even then I was interested in investing and would discuss things occasionally with my father who was a long-time stock and mutual fund investor though he certainly wasn't wealthy then (we were definitely lower middle class in Britain) and read the financial news.

Anyway, here is what happened in one account, my account with Interactive Brokers:



You can see the big dip a couple of weeks back and then yesterday's recovery, followed by more erratic trading. My Ameritrade account would have a similar pattern. My z-score in NQ trading (total of 209 contracts traded) is now 2.03, which means that the probability that my performance is random or actually negative is something around 2%. The Kelly ratios though for both this and my weekly results in my IB account say that I should be taking on huge amounts of leverage. The Sharpe ratio for the weekly returns on my IB account is 1.68, which is a respectable number for a hedge fund.

January 2009 Report

In USD terms we pretty much matched the MSCI index this month. Of course, this was its worst January ever. In Australian Dollar terms performance was flat and net worth increased slightly.

Income and Expenditure



Expenditure was $3,036 ($A5,015). Car repairs cost $A550. We bought a barbeque ($A365) and there were about $A260 of medical expenses which were partly refunded by Medicare in February. And the car depreciated another $A500. Before taking into account foreign exchange movements non-retirement accounts gained and retirement accounts lost money. They both lost in USD terms after taking into account the change in exchange rates.

Net Worth

Net worth fell by $17,337 to $188,160 or in Australian Dollar terms rose by $A735 to $295,060.

Investment Performance

USD returns were -8.92% vs. -8.51% or -8.43% for the MSCI and SPX respectively. In AUD terms we returned -0.19%.



All asset classes lost apart from hedge funds, which gained massively mainly due to the delisting of EBI as EAIT. Returns for both EAIT and the Man managed futures fund are now going to be estimated at the time of writing these accounts reports and adjusted later in the month (mid-month and month's end respectively) after the actual returns are available.

Using my preferred time series method, portfolio beta to the MSCI index was 1.31 with an annual alpha of 1.9%. Other methods now give a negative alpha.

Asset Allocation

At the end of October the allocation was 51% in "passive alpha", 57% in "beta", 0% was allocated to trading, 4% to industrial stocks, 5% to liquidity, 4% to other assets, and we were borrowing 21%. Due to the use of leveraged funds, our actual exposure to stocks was 98% of net worth. When we take into account borrowing by the leveraged funds we are invested in, borrowing per dollar of equity was 60 cents. Looking at asset classes:



Shifts in the allocation are mainly due to relative performance this month. We moved further towards our long-term asset allocation, though not for a good reason, but mainly because Australian stocks underperformed and we are overweight in them.

Carry Trade Unwinding

The "carry trade" is where investors borrow in low interest currencies and invest in currencies with high interest rates, pocketing the spread. The main low interest rate currency has been the Japanese Yen and one of the main high interest currencies the Australian Dollar (AUD). In recent months the Australian Dollar soared higher and higher and the Yen mostly lower. In the current financial crisis the process is reversing and the Aussie has fallen around 10 US cents from its peak. It's down 3.5 US cents overnight, which is a massive move in a currency:



This is having a massive impact on my net worth measured in US Dollars as around 2/3 of my net assets are in AUD related investments. At this point in the month my rate of return on investment is -9.7% and net worth has fallen $US 47,000 from last month. In AUD terms, though, the return is -1.6% and net worth is off only $A 12,000. In USD terms this is the worst drawdown since the big bear market in the early part of this decade. But in Australian Dollar terms it is nothing remarkable. I lost more in June 2006 for example: -3.3%.

I am sufferring some big losses on investments, however, especially in the Everest Brown and Babcock Hedge Fund of Funds (EBI.AX) and the management company (EBB.AX). The latter has halved from its peak. I really should have sold some when it was so overvalued. I guess irrational exuberance and a dislike of paying taxes overtook me.



As for the fund of funds itself - it trades as a closed end fund on the Australian Stock Exchange and so the stock price can trade at a discount to NAV which is only announced monthly. Undoubtedly some of the hedge funds in the portfolio have suffered losses in the current market conditions. But I doubt this justifies the steep fall in price relative to the end of July net asset value. NAV was $A4.06 on July 31st. Yesterday, the fund traded as low as $A2.48 before ending up.

Many people claim they wish to emulate Warren Buffett and buy like crazy when prices are below intrinsic values. I have been doing some of that in recent weeks but have been wary that prices could fall lower. So I haven't been "buying like crazy". It's hard in practice to actually put such a plan into action when the time comes.

Savings Policy

From now on we'll split all savings 50:50 between paying off debt (margin loans and credit card) and making new investments (in Snork Maiden's and my own Colonial First State accounts). Just another form of diversification. We are due to receive a refund of a large part of the costs of the China trip and hopefully get the moneys from redeeming EBI.AX units. In total that is $A12,000 to be reinvested. All this is on top of our regular $A400 monthly contributions to Snork Maiden's account.

Buying at a 28% Discount to NAV

Just bought another 2000 units of EBI - the listed Australian fund of hedge funds - at $A2.92. Today the manager announced that NAV for the end of July was $A4.06 per unit and the fund lost 0.25% in July. They also emphasized that they don't have any investments in mortgage funds. I guess investors might be concerned that the fund is structured using a total return swap. But otherwise this 28% discount to NAV seems a bit overdone.