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.

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.

July 2019 Report

July was another positive month for long term investments, but we lost money trading. In July the Australian Dollar fell from USD 0.7012 to USD 0.6879. The MSCI World Index rose 0.33% and the S&P 500 1.44%. The ASX 200 rose 2.94%. All these are total returns including dividends. We gained 2.25% in Australian Dollar terms and 0.31% in US Dollar terms. The target portfolio is expected to have gained 2.38% in Australian Dollar terms and the HFRI hedge fund index is expected to have gained only 0.10% in US Dollar terms. So, we had a relatively strongly performing month, almost a bit below the ASX200 and more or less matching our target portfolio and the MSCI and beating HFRI. Updating the monthly returns chart I posted last month :


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

Australian Small Cap Stocks was the best performing asset class and Futures Trading the worst, losing 3.34%. The largest contributions to the rate of return came from hedge funds followed by private equity. The Australian Dollar return is higher than the 1.48% reported here because of foreign currency gains due to the fall in the Australian Dollar over the month.

Things that worked very well this month:

• Hedge funds, private equity, and Australian small cap all did well. I think this could be because many of these investments were not doing well and were probably sold to crystallize tax losses last month before the end of the Australian financial year and then rebought this month. The CFS Developing Companies Fund gained 5.86%. 
• I marked Oceania Capital to $2.30 at the end of the month, which was the record date for the buyback associated with the delisting that was approved at the extra-ordinary meeting.  The buyback price is $2.30 a share. This translated to a 7% gain for the month.
• The Winton Global Alpha Fund also did well gaining 2.46%. A big contrast to my own trading...

What really didn't work:

• We had major losses trading Bitcoin, though, so far, it is just a "correction". I closed short positions early which would have been winners. The Bitcoin "model" also suffered its worst percentage loss to date on a long trade. As I have been trading double the size long as short this just compounded the loss. Going forward I will only take long Bitcoin trades for the moment.

Including long-term trading in gold trading we lost AUD $17.2k for the month in trading. I prefer this measure now as it covers all the ways we are trading and is compatible with the long-term trading returns chart I recently posted. The rate of return on capital allocated to trading was -4.18%.

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:

• We tendered USD 40k of Avon Products bonds into an early redemption and sold USD 21k of Deutsche Bank bonds. Also, USD 50k of Citibank bonds matured. I bought USD 10k of Lexmark bonds, USD 25k of Kraft-Heinz bonds, and USD 25k of Dish bonds. So, our direct bond allocation fell by USD 51k.
• We traded unsuccessfully, as discussed above.
• I bought 1,000 more shares of the IAU gold ETF. 
• I bought another 450 shares of Oceania Capital.

* 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.

November 2019 Report

A less frenetic month financially but somehow I didn't get to make any blogposts since October's monthly report. We started on refinancing our mortgage at a lower interest rate, but the transaction is not yet complete.
 
The Australian Dollar fell from USD 0.6894 to USD 0.6764. The MSCI World Index rose 2.48% and the S&P 500 3.63%. The ASX 200 gained 3.51%. All these are total returns including dividends. We gained 2.17% in Australian Dollar terms but only 0.25% in US Dollar terms. The target portfolio is expected to have gained 1.53% in Australian Dollar terms and the HFRI hedge fund index is expected to have gained 0.75% in US Dollar terms. So, we out-performed our target portfolio but lagged other benchmarks. Updating the monthly AUD returns chart:

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

Stocks and real estate did well while hedge funds, private equity, and gold did poorly. The largest positive contribution to the rate of return came from large cap Australian stocks and the greatest detractor was gold. The returns reported here are in currency neutral terms.

Things that worked well this month:

• The Unisuper superannuation fund gained more than any other investment in dollar terms.
• Soybeans and Bitcoin were the next best  performers.

What really didn't work:

• Crude oil and gold lost heavily.
• Regal Funds (RF1.AX) fell sharply after it was reported that the firm was under investigation by the regulator, ASIC.

Trading:  The month started with two losing Bitcoin trades but then a big winning trade and we ended the month positive in Bitcoin with a USD 6.1k gain. We also did well in soybeans, shorting four contracts (more than 500 tonnes of soybeans...). The trade is still open and up USD 6.5k. On the other hand, we lost a lot in crude oil, which had six losing trades in a row and more than cancelled out the gains in soybeans.

Using a narrower definition including only futures and CFDs we made 3.55% on capital used in trading or USD 6.5k. Including ETFs we lost just 0.01% or AUD 46. Using the narrow definition, we are catching up to last year's returns. This graph shows cumulative trading gains using the narrower definition year to date:

I think I should increase the risk allocations to soybeans and palladium to USD 5,000 each from USD 2,500 and AUD 1,250 currently. These would be roughly the allocations suggested by the portfolio optimization given current allocations to Bitcoin and oil (USD 3,670 and 2,500). Risk allocation is the maximum potential loss on a single trade.

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

Futures, bonds, and gold 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:

• I rebought 100,000 shares of Domacom (DCL.AX).
• I bought 10,000 shares of Regal Funds (RF1.AX) after the price fell sharply following an ASIC investigation of the firm.
• USD 100k of bonds (Virgin Australia & Viacom) matured. I bought USD 25k of Dell,  16k of Nustar, and 25k of Tupperware bonds. So our direct exposure to corporate bonds fell by USD 34k.
• I transferred AUD 45k to my Colonial First State superannuation account, investing in the Conservative Fund.
• I bought around AUD 43k and GBP 7k, selling US dollars.
• I bought 750 shares of 3i.

June 2019 Report

Because the financial year has just ended in Australia, this report has more estimated figures than normal. June was another positive month with big wins in Bitcoin and gold. In June the Australian Dollar rose from USD 0.6930 to USD 0.7012. The MSCI World Index rose 6.59% and the S&P 500 7.05%. The ASX 200 rose 3.80%. All these are total returns including dividends. We gained 1.39% in Australian Dollar terms and 2.59% in US Dollar terms. The target portfolio gained 2.36% in Australian Dollar terms and the HFRI hedge fund index gained 2.60% in US Dollar terms. So, we under-performed all benchmarks apart from HFRI. On the other hand, all months since the end of November have had positive returns in Australian Dollar terms:


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

Gold was the best performing asset class gaining 12%. The worst asset class was Australian small cap, losing 4%. The largest contributions to the rate of return came from futures followed by bonds. The Australian Dollar return is lower than the 2.02% reported here because of foreign currency losses due to the rise in the Australian Dollar over the month.

Things that worked very well this month:

• Trading Bitcoin. Trading profits for this month were greater than for all of 2018. 
• Gold.

What really didn't work:

• Tribeca Global Resources and Cadence Capital. These are now two of my three worst investments in dollar terms. Both of these are trading a lot below NAV. Tribeca is actually doing fine but investors have sold it perhaps because of a misleading report from Morningstar.

Trading income was USD 21,451 for the month, which is three times larger than any previous monthly total. The rate of return on cash in trading accounts was 13.88%.

We moved towards our new long-run asset allocation * as we began to shift out of bonds and moved the first money that orginally came from Chocolateland into our Australian bank account. Gold futures, and cash all increased. As predicted, last month was "peak bonds".

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:

• USD 130k of corporate bonds matured (Cigna) or we sold them after early redemptions were announced (CNO, HCA) and we bought USD 103k of USD bonds (Genworth, Goodyear, Xerox, and Avon Products). We also sold 2,000 CBAPH Commonwealth Bank hybrid securities.
• We traded successfully, as discussed above.
• I bought 5,000 shares of the IAU gold ETF. 
• We bought 66,126 shares in Domacom (DCL.AX), a startup company that is enabling fractional ownership of residential property.
• I bought another 4,734 shares in Oceania Capital.

* 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.

Types of Trading

There are lots of types of trading. Some of the important strategies are the following:

1. Market-making: A market maker profits from the bid-ask spread in the market, selling at the ask and buying at the bid. This is very apparent in options markets where there is usually a big bid-ask spread. They can hedge their "delta" risk by buying or shorting the underlying security - for example for futures options they can buy and sell futures contracts. For individual stocks - if they are trading a diversified basket they can again hedge using futures contracts (or ETFs). It is possible for individual investors to make markets in small and illiquid stocks - ie. selling at the ask and buying at the bid, but it is a very slow process waiting for people to trade with you.

2. Arbitrage: This exploits pricing anomalies, for example between futures contracts and ETFs for the same underlying index. Short one and buy the other. Occasionally, there are big arbitrage opportunities such as the famous Palm case.

3. Mean reversion: These are generalizations of arbitrage. For example, buying closed end funds (listed investment company in Australian) when they are selling below net asset value and shorting them when they are above. I've done this quite a lot with Platinum Capital (PMC.AX - just selling when above NAV - but actually there is a CFD you could use to short the stock). This is arbitrage between the value of the portfolio and the price of the fund. Statistical arbitrage is a market-neutral mean reversion trade where stocks that have risen in value are shorted and those that have fallen are bought. It was pioneered by Ed Thorp.

4. Selling option premium: This relies on the time decay of options. Most options expire worthless and risk aversion means that buyers should pay in net to reduce their risk. So option sellers should on average win. Again, delta risk could be hedged away in theory. The simplest case is covered calls where the trader buys a stock and sell a call - though actual delta hedging is a lot more complex than that.

5. Information trading: Here the trader knows information that they think will move the security. For example, recently I bought shares in IPE because Mercantile did. I assumed correctly that their analysis must have shown that the underlying portfolio was worth more than the stock price. This is a kind of mean reversion/arbitrage of course and is could also be seen as investing. Even after the company released news of the sale of Threatmetrix to Elsevier, the price didn't immediately move to the new higher NAV.

6. News trading: Here the information is not yet known but a trade is placed to take advantage of it. For example, if I know that Apple Computer will release their earnings but I don't have a hypothesis of which way it will move the stock, I could buy both calls and put options in the hope that a big move will make one increase by more than the other decreases. This seems pretty close to gambling - option prices should take into account the size of likely moves, so you are gambling that the move will be bigger than the market thinks.

7. Trend following/momentum trading: This is what most people think of as trading. The trader tries to take advantage of market momentum. This is the approach taken by many managed futures funds. Much online trading advice is based on this.

8. Hedging: These traders trade to hedge their investment or business positions. For example, an airline buying oil futures contracts to guarantee their future price of oil or an option buyer hedging an investment portfolio. The latter might also sell options to fund the hedging puts.

What have I missed? This paper has an interesting discussion of types of traders.

Investments Review: Part 8, Managed Futures

Managed futures have not performed well in recent years, but I am betting that they will make a bit of a comeback.

Macquarie Winton Global Alpha Fund. Share of net worth: 3.53%. IRR: -0.3%. This is a Macquarie Bank fund that provides access to the Winton fund management firm. Winton, Aspect, and Man AHL are all offshoots of the same original Adam, Harding, and Lueck team. Our profits in this fund peaked in August 2019 at AUD 29k and then fell to a minimum of AUD -19k in November 2020. Since then they have recovered to near break even.

Aspect Diversified Futures. Share of net worth: 2.04%. IRR: n.a. We hold this recent investment via the Colonial First State platform. It has performed better than Winton recently:

Long Futures Collar Trade

I put on my first collared futures trade. The idea was to sell a call 5 points above my long futures entry point and buy a put 5 points below. But my futures entry was at 2676.25 instead of 2675 and and the call was 1.5 points less than the put. So my potential upside is only $112.50 not counting fees and my potential downside is $387.50. As the model has a 71% win rate, the expected value is -$32.50 :( It's probably worse than that because the futures gapped up over the weekend reducing the potential upside. Oh well, the expected "tuition fee" is not so big. The screenshot shows the current state of play. Down.

P.S. 17 April
I "managed" the trade a bit and the futures were just below 2680 when the options expired. So I had a naked futures position, which I then sold at 2680.25. Overall, I made about USD 200 on the trade. I have now put another trade on. Long futures at 2681.5, sold a 2690 call for 7.25 and bought a 2675 put for 9.25. Maximum upside is USD 325 and maximum downside is USD 425 not counting commissions, which are small. Expected value is about USD 100. The spread between the two options today is 15 points, up from 10 points yesterday. The idea is to gradually widen the points spread as I am comfortable with it, eventually buying the put 25 points below the futures entry price, which is equivalent to a 1% stop. Yeah, the model is still long, the market is "overbought" and trending up according to the model.

Self Managed Superannuation

I am exploring setting up a self managed superannuation fund (SMSF). I want to do this so that I can implement our target portfolio investment strategy and so I can put higher tax investments into the lower tax superannuation environment. Managed futures are a tax ineffective investment outside super when your marginal tax rate is 47%. Inside superannuation they will be taxed at 15%.

Setting up an SMSF is very complicated in Australia compared to the US where you can just open an IRA account with a broker like any other brokerage account and the only issue is limits on contributions and later on minimum withdrawals. For standard IRAs you pay tax on withdrawals only, on your regular tax return. The main reason Australian SMSFs are complex is taxation but some of the bureaucracy just seems to be for the sake of it... In Australia, pretax or concessional contributions are taxed at 15% (or 30% for high income levels) going in, and you can also make after tax contributions. Its necessary to keep track of which were taxed how. Then earnings are taxed at 15% (10% for capital gains) and can be offset by franking credits and foreign tax paid. When you finally withdraw your money, no tax is due and earnings of the account are untaxed if you set up a pension, though now there is a cap of $1.6 million on the amount of assets whose earnings are untaxed. So funds need to submit tax returns separate from their members. And they need to be audited annually and there are lots of ways they could become non-compliant with the rules. And an SMSF is a trust which is set up as a separate legal entity. You might also want to set up a company to act as trustee!

You could go to a lawyer to set up the trust and to a local accountant to help audit the fund and do everything else yourself. But there are many providers who streamline the set up and administration of SMSFs. You can get "year-end" administration which just helps get everything in order for the tax return and audit, or you can get a full daily service. Though I do our own tax returns, I have decided to go for the full daily service as I want to outsource this as much as possible (looks like I am going to have to do tax returns for my son too and am also looking at setting up a company...) and want to be confident that I am compliant with the rules, because the penalties for non-compliance are very severe.

This is a great site with information about different providers of services for self-managed superannuation funds. I visited the websites of all the providers that offer a daily service. Some sites have a lot information and some have next to none. The latter want you to phone them to give you the details. I have a strong preference for financial services that are as transparent as possible. I also investigated Commonwealth Securities and Dixon Advisory, which are not on this list.

Dixon are based in Canberra and I often go past their offices on Northbourne Avenue. Years ago, I used to read Daryl Dixon's column in the Canberra Times. Their service combines admin and investment advice and costs from $3,000 for a $333k account to a maximum of $6,000 for accounts above $666k. To make investments, you have to call their broker and the commissions for shares are 1.1%, which is capped at $400 for Australian shares and uncapped for foreign shares. I don't need investment advice and trading is way too expensive.

Commonwealth Securities is a more realistic option. Including audit fees, they charge a flat $3,000 a year. On a $900k account that is 1/3%, which is reasonable. Trading fees are 0.12% for Australian stocks, which is good though not the lowest, and 0.31% for US stocks and 0.41% for shares in the UK and many other countries, which is expensive but not as outrageous as Dixon. You can't trade CfDs (which are offered by CommSec for other accounts) or futures (which aren't offered by CommSec).

You can set up a trading account for an SMSF with Interactive Brokers, which can trade anything you like for low fees, and then find an administration provider who is prepared to work with them. Determining who can work with IB is what I need to do next. You can trade futures in an SMSF as long as it fits within the written investment strategy (yes, you are required to write one) and other risk related rules.

Two providers on my list, who have won awards and who I am going to investigate next, are Heffron and Super Guardian. I am impressed with the transparent information on Super Guardian's site. They also have an endorsement from Chris Cuffe. Super Guardian charge more the more investments you have. If we have up to 20 investments then they are a similar price to CommSec. Heffron charge a flat fee of $3,300 for their top level service.

March 2023 Report

In March, stock markets rebounded. The MSCI World Index (USD gross) rose 3.15% and the S&P 500 3.67% in USD terms, while the ASX 200 only gained 0.25% in AUD terms. All these are total returns including dividends. The Australian Dollar fell from USD 0.6740 to USD 0.6695. We gained 0.55% in Australian Dollar terms but lost 0.15% in US Dollar terms. The target portfolio gained 1.84% in Australian Dollar terms and the HFRI hedge fund index is expected to gain 1.47% in US Dollar terms. So, we only out-performed the ASX200.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I then add in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return. We underperformed the target portfolio benchmark because of negative returns on international stocks and hedge funds as well as negative returns on Australian small caps. We lost on US stocks because of a very negative return from Hearts and Minds (HM1.AX) offsetting positive returns on other US holdings.

Gold was the main positive contributor to returns and the highest returning asset class while futures were the largest detractor and worst performing asset class. The trend-following managed futures funds got caught in the sudden movement in US bonds during the month associated with the banking crisis.

Things that worked well this month:

• Gold gained AUD 54k - the biggest monthly gain in a single investment since I started investing.

What really didn't work: 

• Tribeca Global Resources (TGF.AX) lost AUD 11k. Followers up were: Pershing Square Holdings (PSH.L, -10k), Aspect Diversified Futures (-9k), Hearts and Minds (HM1.AX, -9k), and Winton Global Alpha (-8k).
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The MSCI is reported in USD terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture, positive alpha, and higher Sharpe Ratio against the ASX200 but not the USD benchmarks. We are performing about 3.6% per annum worse than the average hedge fund levered 1.76 times. Hedge funds have been doing well in recently.

We are now very close to our target allocation but we mived away from it quite sharply during the month. In particular, real assets increased as we added to URF.AX and it rose, while private equity fell as we took profits in PE1.AX. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• I sold 100 China Fund (CHN) shares.
• I sold 3,500 WAM Leaders (WLE.AX) shares.
• I sold 10k MCP Income Opportunities (MOT.AX) when the price spiked back up to AUD 2.10.
• I bought 12k shares net of Cordish-Dixon Private Equity Fund 3 (CD3.AX).
• I did a losing trade in bond futures.

Target Portfolio

Following up on my previous post where I tested the performance of an idealized portfolio, here are some more ideas about an actual implementation. In total, 50% would be allocated to stocks, half of that Australian and half of that international. A fifth (maybe more) of the Australian category would be allocated to small cap stocks. Of the remaining 20% portfolio allocation half would go into unhedged funds/stocks and 10% into hedge fund type funds, probably mostly listed hedge funds, such as Cadence Capital (CDM.AX). Of the 25% in international stocks, half would go into hedge funds, primarily Platinum Capital (PMC.AX), which pays franked dividends. Then 25% is allocated to managed futures, probably mostly Winton Global Alpha Fund. This should mostly be held in a superannuation account for tax reasons – pay 15% tax on distributions instead of 47%. That means I am going to need a self-managed superannuation fund.

5% is allocated to gold. This would be held in a taxable account as it doesn't pay dividends. On the other hand, the long-term capital gains rate in superannuation accounts is 10% (and zero after going into pension mode) and my current long-term capital gains rate is 23.5%. If Labor get into power, which is likely, and implement their program, which is less likely, that will rise, though in retirement I expect my marginal tax rate will fall back into the 32.5% bracket but with Medicare tax and Labor's proposal, I would still be paying more than 25% for long-term capital gains. So it makes sense to get more money into superannuation, which is zero taxed in pension mode for the first $1.6 million for each partner. I plan to initially invest about $900k in the SMSF. This will come from rolling over my superannuation fund now at Colonial First State and adding $300k - you can invest 3 years of contributions at once - for each of Moominmama and myself.

The remaining 20% is allocated roughly equally to (mostly direct - i.e. not listed) real estate, bonds, private equity, and cash. Then the whole thing is levered up a bit, with the overall exposure adjusted for market conditions. I expect that debt will be roughly equal to the value of our house ($840k).

To summarize, this is the asset allocation (not including our house):

We are quite a long way from that - in particular very overweight long Australian shares and underweight hedge funds, managed futures, and gold.

Adjusting the Target Portfolio

Given the continued underperformance of managed futures, I think I am going to again lower my allocation to this asset class to 5% from 10%. I've never gotten above 5% in managed futures funds anyway. In place of this, I could raise the allocation to real estate to 15% or raise both real estate and gold to 12.5%. Or is there something else I should allocate capital to?

Updating Target Asset Allocation

 

Not sure when I last posted about our target asset allocation, as I have tweaked it since this 2021 post. I am tweaking it again to reflect continuing new allocations to private equity (venture capital, buyout funds, and SPACs).

Overall we still have a 60% equity allocation. Now 20% of that will be the target for private equity, 20% hedge funds, and 20% long equity. Among the latter, 11% allocated to Australia and 9% to foreign shares. Within Australia, 6% is allocated to large cap and 5% to small cap. Within foreign equity, 5% to the US and 4% to the rest of the world. 

Among the 40% allocated to other assets, 15% is allocated to real assets including real estate, art, water rights etc., 5% to bonds (including private credit), 10% to managed futures, 10% to gold.

The benchmark target portfolio splits the private equity component 50/50 between venture capital and buyout. It also allocates all the Australian exposure to the ASX200 and all the real asset allocation to a specific (mainly US) real estate fund. All the managed futures is allocated to Winton in the benchmark. Maybe I should try harder on this benchmark, but this seems good enough for my purposes.

February 2022 Report

In February, stock markets fell again. The MSCI World Index (USD gross) fell 2.83% and the S&P 500 2.44% in USD terms, while the ASX 200 lost 2.25% in AUD terms. All these are total returns including dividends. The Australian Dollar fell from USD 0.7113 to USD 0.6740. We also lost money: 0.47% in Australian Dollar terms or 5.69% in US Dollar terms. The target portfolio gained 0.72% in Australian Dollar terms and the HFRI hedge fund index is expected to lose about 0.83% in US Dollar terms. So, we out-performed the ASX200 but under-performed all the other benchmarks.

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

The asset class returns are in currency neutral returns as the rate of return on gross assets. I then add in the contributions of leverage and other costs and the Australian Dollar to the AUD net worth return. One reason that we underperformed the target portfolio benchmark is the very negative returns we got for rest of world stocks and to a lesser degree hedge funds. The Australian Dollar cash price of gold was breakeven for the month, so I also don't understand why PMGOLD.AX lost value, especially as I bought some extra shares during the month at a price that was lower than the end of month price...

Real assets were the main positive contributor to returns and the highest returning asset class while hedge funds were the largest detractor.

Things that worked well this month:

• URF.AX (US residential real estate) was the biggest gainer adding AUD 11k, followed by two managed futures funds: Winton Global Alpha (9k) and Aspect Diversified Futures (6k).
  

What really didn't work: 

• Tribeca Global Resources (TGF.AX) lost AUD 30k. The next worse were the China Fund (CHN, -19k) and Australian Dollar Futures (-15k).
  

The investment performance statistics for the last five years are: 

The first three rows are our unadjusted performance numbers in US and Australian dollar terms. The MSCI is reported in USD terms. The following four lines compare performance against each of the three indices over the last 60 months. The final three rows report the performance of the three indices themselves. We show the desired asymmetric capture, positive alpha, and higher Sharpe Ratio against the ASX200 but not the USD benchmarks. We are performing about 3.3% per annum worse than the average hedge fund levered 1.77 times. Hedge funds have been doing well in recently.

We are now very close to our target allocation but we mived away from it quite sharply during the month. In particular, real assets increased as we added to URF.AX and it rose, while private equity fell as we took profits in PE1.AX. Our actual allocation currently looks like this:

 

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In addition, we made the following investment moves this month:

• I bought 1,000 shares of the gold ETF, PMGOLD.AX.
• I sold 4,000 shares of WAM Leaders (WLE.AX).
• I sold 59,976 shares of Pengana Private Equity (PE1.AX).
• I bought 29,638 shares of the Cordish-Dixon private equity fund CD3.AX.
• I bought 25,000 shares of MCP Income Opportunities private credit fund (MOT.AX).
• I bought 65,000 shares of URF.AX (US residential real estate).
  

December 2019 Report

This month I decided to stop short-term trading again. I think you can make money doing what I was doing, but trading at a size that makes a real difference generates too much anxiety for me. I didn't hear from HSBC on refinancing our mortgage. I sent them one email. Will need to chase them more in January.

The Australian stockmarket fell a bit in December and the Australian Dollar rose, but overseas markets rose. The Australian Dollar rose from USD 0.6764. to USD 0.7023. The MSCI World Index rose 3.56% and the S&P 500 3.02%. On the other hand, the ASX 200 lost 2.08%. All these are total returns including dividends. We gained 0.28% in Australian Dollar terms and 4.11% in US Dollar terms due to the rise in the Australian Dollar. The target portfolio is expected to have lost 0.82% in Australian Dollar terms and the HFRI hedge fund index is expected to have gained 1.07% in US Dollar terms. So, we out-performed all our benchmarks, which is rather unusual. Updating the monthly AUD returns chart:

MSCI is negative here in December because of the rise in the Australian Dollar. We haven't lost money on a monthly basis in Australian Dollar terms since November 2018...

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

Hedge funds and gold did very well, which is the opposite of last month. Trading detracted most from returns. The largest positive contribution to the rate of return came from hedge funds. The returns reported here are in currency neutral terms.

Things that worked well this month:

• Hedge funds Platinum Capital/International Fund and Tribeca did very well. Tribeca (TGF.AX) is no longer our worst ever investment in dollar terms, though it is still hugely drawn down.
• Gold did well, almost reaching this year's highs again.

What really didn't work:

• Bitcoin lost heavily and we stopped trading it.

We moved a little bit further towards our new long-run asset allocation:

This is what the target portfolio would look like:

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:

• USD15k of Ford bonds were called and we didn't buy any new bonds.
• We bought AUD 40k by selling US Dollars.
• We traded very badly...
• We bought 500 shares of a Commonwealth Bank hybrid (CBAPI).

Performance of Commodity Trading Advisors

An interesting paper on managed futures funds, otherwise known as "Commodity Trading Advisors":

"Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors"

They argue that the after-fees performance of the average fund is hardly higher than U.S. government bond returns and that no skill is shown on average by CTAs. The latter isn't a surprising result, the former may be a bit surprising. But maybe not when you find that annual fees averaged 4 1/2 percent!

On the other hand some managed futures funds have very good track records and can provide diversification benefits. The question is will their outperformance persist? If it does then it will have been worthwhile to research the better funds to invest in.

May 2018 Report

Another very active month financially. The Australian stock market rebounded quite strongly but then turned over as other markets did. This month was the second month of the futures trading experiment. The first month was the model development phase, while this month was about ironing out the glitches and training myself to trade the model properly (and not give in to gut instinct etc).

The Australian Dollar rose from USD 0.7540 to USD 0.7571. The MSCI World Index rose 0.21%, and the S&P 500 2.41%. The ASX 200 rose 1.09%. All these are total returns including dividends. We gained 1.84% in Australian Dollar terms and 2.26% in US Dollar terms. So, we outperformed both the Australian market and the international markets and slightly underperformed the US market.

The best performing investment in dollar terms was NASDAQ futures gaining AUD 9.5k (this is going to be a theme :)). The second best was CFS Geared Share Fund gaining AUD 8.9k. The worst performer in dollar terms was IPE, losing AUD 1.5k. The best performing asset class was "commodities", which includes futures trading, gaining 6.24%. Hopefully, this will become a near permanent feature. The second best performer was Australian small cap stocks, gaining 2.92%. The worst performing asset class was private equity, losing 0.78%, the only asset class that lost money.

A new feature starting this month is the following table of investment performance statistics. The statistics are computed with the last 36 months of data:

The first row gives the Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Beta expresses the change in investment returns for a 1% change in the market. Compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. Alpha shows the risk adjusted excess annual return. This is how much we are beating the market (or not) adjusted for risk expressed as beta. We have a slightly positive alpha compared to the Australian market and a close to zero alpha compared to the world market. Finally, up capture and down capture breaks beta into the response to positive and negative months in the stockmarket. A greater up capture than down capture ratio is desirable. We do capture more of the up movements in the Australian market and suffer less of the down movements. A hedge fund like return would show this positive skew and a positive alpha. Compared to the Australian market we show some hedge fund like properties.

This month I made money trading futures: USD 7.2k. The table compares my performance to the markets and the models:

I also bought and sold investments in this account and added AUD 25k in cash towards the end of May, so don't expect the starting cash to change with just income earned. My rate of return in May far exceeds the models or markets because of leverage. I mostly traded one contract at a time and so was using a bit over 3 times leverage. I could also select the market where I thought the model signal was most reliable. In the early part of the month I mostly traded NQ (NASDAQ) and in the later part of the month ES (S&P 500). I also traded CL (oil). Most of the gains were made early in the month when the market rose. After that the market mostly went sideways.

I more or less successfully followed the plan for the month, which was to consistently trade one futures contract according to the trades that the model provides, while learning about entering trades more optimally and setting stops. There were some hiccups, particularly on 14 May when I lost much more than the model due to bad trading. I can say that the second of my goals in the experiment - to consistently trade the model - was a qualified success. I was much more disciplined than when I previously traded futures, but still not disciplined enough. The third goal - to earn as much as my salary from trading fell short though I was in the ballpark. I would need to make USD 12.5k to reach the goal. For the next month I plan to work on the same goals and maybe increase the position size when I am particularly certain about the market direction. This is why I added more cash to the account. After adding the money and doing some bad daytrading, which I shouldn't be doing, I had second thoughts about taking a larger position. But I maybe should be trading both stocks and oil simultaneously. Horizontal rather than vertical expansion.

We made more progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged mutual funds.

The improvement in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• Traded futures successfully, increasing the allocation to "commodities" as a result. As mentioned above, I also added cash to the trading account. Just over 4% of net worth is now allocated to trading.
• Added another AUD 10k to the Winton Global Alpha fund, also increasing the allocation to commodities.
• Closed my investment in GMOM, due to poor performance over many years.
• Increased investments in the China Fund (CHN), Boulder Income Fund (BIF), and 3i (III.L).
• Sold my trade in Woolworths (WOW.AX) and made a quick trade in Platinum Capital (PMC.AX).
• Switched from Colonial First State Geared Share Fund to CFS Conservative Fund in a small account I have, which I am planning to close soon (after the end of June distribution). Then I switched back again. Originally, I had this account as a trading account!

Will Listed Investment Companies Restructure if Labor Eliminates Refundability of Franking Credits?

As you probably know if you live in Australia, Labor plans to abolish the refundability of franking credits - the tax credits attached to dividends for company tax already paid. This will affect taxpayers with low marginal tax rates including self managed superfunds that are paying out a pension, which is tax free if they have less than AUD 1.6 million in assets for that member. This could significantly cut the retirement income of self-funded retirees who have a lot of Australian shares. OTOH, this was the policy prior to 2000 and most other offsets, like foreign tax credits, aren't refundable either.

I already plan to have relatively small amounts of Australian shares when I start an SMSF - this makes sense as I have lots of investments outside super and so it makes sense to put the least tax efficient investments like managed futures into super.

Listed investment companies (LICs) are closed-end funds that pay tax on their earnings and then distribute franked dividends to shareholders. I own shares in several of these like Platinum Capital, Cadence Capital, Hearts and Minds, and Tribeca Global Resources. Both Geoff Wilson and Cadence Capital's Karl Siegling have suggested that they will reorganize their funds if this happens. There are a couple of ways this could happen. One I had thought about, is to delist and turn the fund into a unlisted managed fund (mutual fund). For funds that trade at a premium to NAV, like several of Wilson's funds, this would cause investors to lose a lot of money as now their holdings would only be worth the NAV. For funds trading at a discount to NAV it could be attractive, as shareholders would gain wealth (but see below). To the extent that the funds receive franked dividends from companies, they would still have to distribute franking credits, but capital gains would no longer create franking credits.

Another option I didn't know about, is that they could instead convert to a listed investment trust like an ETF that doesn't pay taxes. This solves the problem of wealth destruction for funds trading at a premium to NAV.

But the article I linked says that this would result in realization of the portfolio for tax purposes. This could be a huge tax bill for companies like Argo that do little trading. The funds will need to pay out a massive special dividend to distribute the associated franking credit. According to Argo's website they will need to pay 72 cents in tax for liquidating the portfolio. That means they would have to pay a $1.68 cash dividend and so actually sell 23% of the portfolio to pay the dividend out. Some other funds have undistributed franking credits and so would also need to sell shares to generate the cash for such a dividend. They will need to do this soon, as there will probably be an election next May. So, I am a bit skeptical that many will.

March 2018 Report

The first of the new style reports. A second losing month, but thanks to (listed) private equity investments, we beat the ASX200 index.

The Australian Dollar fell from USD 0.7794 to USD 0.7680. The MSCI World Index fell 2.15%, and the S&P 500 2.54%. The ASX 200 lost 3.77%. All these are total returns including dividends. We lost 1.20% in Australian Dollar terms and 2.64% in US Dollar terms. So, we outperformed the Australian market and underperformed international markets.

The best performing investment in dollar terms was IPE.AX, a listed private equity fund, which gained AUD 9.8k in the continuing rise after the acquisition of Threatmetrix by Elsevier. I sold my holding in IPE prior to the stock going ex dividend, as I didn't want an AUD 11k income tax bill. I then bought back even more shares than before as MVT.AX were recently still acquiring shares.

The worst performer in dollar terms was not surprisingly CFS Geared Share Fund, down $18.6k. The best performing asset class was private equity, which gained 7.12%. The only other asset class with gains was hedge funds, up 0.57%. The worst performing asset class was large cap Australian stocks down 3.01%.

We made a little progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged mutual funds. The "improvement" in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2000 monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• Sold out of Clime Capital (CAM.AX)
• Bought a small amount of Oceania Capital Partners (OCP.AX, listed private equity)
• Did the trading in IPE.AX
• Bought more units in the Winton Global Alpha fund (managed futures - in the commodities category)

Over time we've been reducing our exposure to large cap Australian stocks since the post financial crisis high: