Risk Reduction

I switched $A13,750 from our holdings of Colonial First State Geared Share Fund to the CFS Conservative Fund in my CFS Superannuation account. This effectively sells the units I purchased in July and September 2008 for a small profit. Even so, the value of our holdings in this fund in this account has still gone up this month at this point. Our allocation to large cap Australian stocks will be about constant this month and still well overweight and leverage will be down by just over a percentage point. Still this is a small step towards risk reduction without going overboard in any way :)

P.S.
I'm actually going to let the risk allocation in Snork Maiden's accounts drift up going forward. I increased the allocation of future investments in superannuation account in the "sustainable" (=Australian shares) allocation to 20% from 10%. The actual current allocation is 11%. I'm also going to tweak the allocations in her non-superannuation Colonial First State account. But I'll blog about that more when I actually make a move there. My accounts have gotten overinvested in risk and hers under, so we'll move them towards each other.

Income Replacement Rates of Mandatory Retirement Schemes

The table is from a paper by Richard Disney presented at a conference on taxation held as part of the Australian tax policy inquiry. It shows the percentage of income replaced by mandatory retirement programs at different levels of average earnings. The Australian data includes both the means tested age pension and the 9% superannuation guarantee! The two together are estimated to replace only 52% of average earnings. Australia's outcomes are very similar to those of the US which only has one mandatory program: social security. With Australia's government worrying about the tax benefits provided to superannuation and raising the age of eligibility of the age pension to 67, you can see just how unsustainable the US program must be. I won't even talk about some of the European schemes :)

Bottom line: You probably need to save more than the 9% superannuation guarantee.

April 2020 Report

This month saw a rebound in the stockmarket and in Australia the rate of new COVID-19 infections and deaths fell to near zero (and zero in our city) after peaking in March. The local state government had said that schools will remain closed for all of the next term, which ends in early July. But yesterday, their resistance to re-opening weakened. I am working for home and our university campus also will be mostly closed over this period. So, it is hard keeping up with everything - full time job, co-parenting two small children, and keeping on top of our finances. At least I am already set up to work from home comfortably and have converted part of the office I share with Moominmama into a mini-classroom complete with whiteboard I brought home from my campus office...

My main scenario is still that the stock market lows will be at least be retested. Only in 1987 really was there such a steep fall in the market that did develop into a longer bear market. And even then there was more bouncing along the bottom than there has been so far. This is probably like the March-May 2008 rally. The bullish case is that government's and central banks are pouring so much money into the financial markets and broader economy that this time it will be different. On the other hand, though people are comparing this period to the Great Depression, I think there is no chance that stock prices will fall as much as they did then because of all the government action.

I don't usually talk about monthly spending, but this month we only spent AUD 4,300. This doesn't include mortgage interest, which is now treated as an investment expense. Still, it is the lowest monthly spend in a long time. Including mortgage interest it would be AUD 5,800, which is the lowest since July 2017.

The Australian Dollar rose from USD 0.6115 to USD 0.6524. The MSCI World Index rose 10.76%, the S&P 500 12.82%, and the ASX 200 8.78%. All these are total returns including dividends. We gained 4.02% in Australian Dollar terms and 10.98% in US Dollar terms. The target portfolio is expected to have gained 2.93% in Australian Dollar terms and the HFRI hedge fund index gained  4.79% in US Dollar terms. So, we strongly out-performed these latter two benchmarks and beat the MSCI by a little. Updating the monthly AUD returns chart:

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 performed best after terrible performance in March. Hedge funds and bonds contributed most to the total return.

Things that worked well this month:

• Gold
• Hedge funds rebounded. In particular, Regal Funds and Tribeca Global Resources.

What really didn't work:

• Virgin Australia. The company went into voluntary administration and unfortunately I'm still holding USD 25k in face value of their bonds. 
• Though it only lost AUD 142, I was surprised by the poor performance of the PSS(AP) superannuation fund (balanced option). This is the main public service superannuation fund for workers who joined the service in recent years. With stock markets and corporate bonds rebounding strongly and a roughly even balance between Australian and foreign assets it must have lost big in real estate or hedge funds to post this result. Unisuper (the universities superannuation fund) gained almost 7%.

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:

• General Motors and Anglogold bonds matured, releasing USD 72k plus interest. I bought USD 15k of Woolworths (Australia) bonds, reducing net exposure by USD 57k.
• I shifted USD 16k from the TIAA Real Estate Fund to the TIAA Money Market Fund. I am concerned that the direct real estate investments the fund holds will be written down soon.
• I bought 4 September out of the money put options on the S&P 500 E-Mini futures as downside insurance in case the market lows are retested or worse.
• I bought AUD 25k by selling US Dollars.

Government Response to Henry Review

The government will do three main things - raise the compulsory employer superannuation contributions to 12% from 9% of salary over time, reduce the corporation tax from 30% to 28% over time, and introduce a 40% mining rent tax. For the latter state royalties already paid can be credited against the tax. The first of these moves was actually ruled out by the Henry Review. The second is more timid than the Henry Review (they proposed 25%) and the latter probably more aggressive. No bold tax reform is planned.

The first move will have no effect on Snork Maiden or me as our employers already contribute more than 12%. The second is rather marginal. The latter move could have negative effects on stock prices to the degree that a lower rate of resource tax was expected.

There are quite a few other provisions but I see them as being more minor. Superannuation taxes are unchanged as is the $A25k p.a. cap on concessional contributions for under 50s. Over 50s will be able to contribute up to $A50k p.a. if they have less than $A500k in super.

P.S.

"The Henry review recommended abolishing the tax on super contributions and halving the rate of tax on fund earnings to 7.5 per cent, neither of which was adopted by the government."

P.P.S.

It seems that they meant to abolish the super contributions tax and instead tax super contributions at normal rates. So yes that would be a move towards the Roth IRA model. The government just ignored this of course (like 136 other recommendations).

P.P.P.S.

The Review actually proposed a 20% "offset". This means that people on the 15% bracket would pay -5% on super contributions and people on 45% would pay 25% on super contributions. But, the full contribution would actually go into the fund. So this would have effectively increased the superannuation guarantee to 10.575% from 9%.

Outrageous Superannuation Grab!

I just read about this in the Australian Financial Review today. The government plans to grab the superannuation contributions of temporary residents and only let them have it back if they become permanent residents or leave the country. In the meantime the contributions will earn no interest! At least they could pay interest! The superannuation industry is saying that it might be unconstitutional. It hasn't been implemented yet, but Nick Sherry, the minister responsible, says they are going to go ahead with it. Snork Maiden will likely be a temporary resident for another two years at least before she gets permanent residence. This would be extremely annoying. Hopefully, Snork Maiden's employer will not notice this... or the super industry and universities will sue the government.

P.S.

I sent an e-mail to my member of parliament (a Labor member) about this issue.

April 2025 Report

April was our third down month in a row, though the loss was less than in the previous two months. I also went through something of a mental health crisis involving insomnia. I am already beginning to feel better. As a result of the crisis I closed all our investments listed on North American markets. I also decided to continue in my job on a full-time basis for now rather than quit or go part time. Also, because the information ratio of our SMSF is now lower than both Unisuper and PSS(AP), I am redirecting our non-concessional contributions to the latter funds instead of to the SMSF. On the other hand, the SMSF's rate of return since inception still beats the professionally managed funds (8.4% p.a. vs. 5.7% and 6.6%). But I got that extra return by taking on more risk. I now think that was too much risk for my health.

 

The Australian Dollar rose from USD 0.6240 to USD 0.6392 meaning that USD investment returns are better than AUD investment returns. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 0.98%

S&P 500: -0.68%

HFRI Hedge Fund Index: 0.18% (forecast)

Australian Dollar Benchmarks

ASX 200: 3.63%

Target Portfolio: 0.58% (forecast - depends on HFRI result)

Australian 60/40 benchmark: 0.48%

We lost 0.93% in Australian Dollar terms or gained 1.49% in US Dollar terms. So we outperformed the US Dollar indices and underperformed the Australian Dollar benchmarks.

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

The asset class returns are in currency neutral terms as the rate of return on gross assets and do not include investment expenses such as margin interest, and so the total differs from the Australian Dollar returns on net assets mentioned above. Performance was mixed, with rest of the world stocks having the worst rate of return and the most negative contribution to overall return followed by Australian small cap in terms of rate of return. Gold performed best, but private equity made the most positive contribution to total return (with gold in second place).

Things that worked well this month:

• 3i (III.L) was the star performer, gaining AUD 45k. Gold gained AUD 32k and Australian Dollar Futures 10k.

What really didn't work:

• Defi Technologies (DEFI.NE) was the biggest loser at AUD 52k. Bitcoin lost 33k, Pershing Square Holdings (PSH.L) 18k, Aspect Diversified Futures 11k, Regal Partners (RPL.AX) 12k, and Winton Global Alpha 10k.

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give the same statistics for three indices. The middle block gives our performance relative to the indices. 

These are now measured from the end of April 2020 and so are quite different to last month's data as they include one month of the post-pandemic rebound in the baseline value. Our alpha relative to the ASX200 fell to 3.15% with a beta of only 0.49. We still have much lower volatility, resulting in a Sharpe ratio of 1.12 vs. 0.93. We capture much less of the downside moves than the upside moves in the market. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of much higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is almost three percentage points lower.

We moved away from our target allocation partly because we changed the allocation and partly because of our trades. 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 superannuation contributions every two weeks. We make an annual concessional contribution to Moominmama's superannuation to reach the annual cap on contributions. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. I am now receiving TTR pension payments from both Unisuper and our SMSF and contributing more than the total of these back to our superannuation accounts. (around AUD 4k net contribution per month). I made the following additional moves this month:

• I sold all our position in Defi Technologies (DEFI.NE and DEFTF). We made a 90%+ IRR on the investment, which is some consolation, despite giving up the potential for more profit.
• We sold all our position in the Fidelity Bitcoin ETF (FBTC) (for a 17% IRR) and opened a much smaller position in Australia in the Monochrome Bitcoin ETF (IBTC.AX). Our allocation is now just 1.7% of net worth, which removed my anxiety entirely. My mistake was buying too much bitcoin at relatively high prices after first entering the investment at a reasonable price. This made me anxious about losing money and I sold out near a local low. Maybe we will do better next cycle. As a result of these two moves, we now have a huge pile of cash to re-invest - near AUD 700k.
• I bought 500 shares of IOZ.AX, an ASX200 ETF. This is to begin to match the new target allocation that has a larger allocation to long-only shares. 
• I bought 40,000 shares of WAM Capital (WAM.AX), which is a small cap Australian stock fund managed by Wilson Asset Management. It has a very good track record. Another move to match the new target. We will gradually buy into these positions, which are both still very small.
• I did a quick trade of 5,000 RF1.AX shares (bought these by mistake in the wrong account!). I bought 15,000 RF1.AX shares in the SMSF.
  

July 2024 Report

This was a better month, ending with us outperforming all benchmarks apart from the ASX200 and MSCI. Spending hit almost AUD 25k this month, the highest since the month we bought our house in January 2015. We paid quarterly school fees, half the cost of a new air conditioning system and went on holiday in Queensland. A lot of the Queensland trip was already paid for before July but probably a couple of thousand in expenses wasn't.

In July, the Australian Dollar fell from USD 0.6671 to USD 0.6531 so US Dollar returns are lower than Australian Dollar returns this month. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 1.64%

S&P 500: 1.22%

HFRI Hedge Fund Index: 1.27%

Australian Dollar Indices

ASX 200: 4.20%

Target Portfolio: 1.79%.

Australian 60/40 benchmark: 3.06%.

We gained 3.55% in Australian Dollar terms or 1.37% in US Dollar terms

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

The asset class returns are in currency neutral terms as the rate of return on gross assets and so the total differs from the Australian Dollar returns on net assets mentioned above. Returns varied radically across asset classes. RoW stocks (mostly Defi Technologies) gained more than 20% and contributed the most to the overall return. Gold had the second highest return and contribution. Only hedge funds lost money due to the fall in Pershing Square Holdings.

Things that worked well this month:

• Defi Technologies (DEFI.NE) was the top performer, gaining AUD 61k. This is a new record for the most any one investment has gained in a month. Also gaining AUD 10k or more were: Gold, 38k, Bitcoin, 30k, 3i (III.L), 10k, and Regal Partners (RPL.AX), 10k.
  

What really didn't work:

• Pershing Square Holdings (PSH.L) lost AUD 32k. It fell steeply after Universal Music Group – one of its main holdings – fell sharply following its earnings report. Nothing else lost AUD 10k or more.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give results for three indices. Compared to the ASX200 we have a slightly lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.89 vs. 0.53. But as we optimize for Australian Dollar performance, our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. We do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 of 3.59% with a beta of only 0.45.

We moved towards our target allocation. I raised the desired level of cash and reduced all the other asset classes accordingly. We are most underweight cash and overweight rest of the world stocks. 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.

It's time for a check-in with the SMSF. This was a good month with a return of 6.15% after a few months of underperformance:

Performance since inception has been 9.8% per year compared to 6.7% and 7.2% for the Unisuper and PSS(AP) benchmarks. Volatility has been greater than either of these, but that includes volatility to the upside. Compared to Unisuper, we have captured 81% of its upside but only 29% of its downside. Put another way we have a beta of 0.43 to Unisuper but 6.8% of alpha annually.

We receive employer superannuation contributions every two weeks. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. We made the following additional moves this month:

• We made our annual concessional superannuation contribution to the SMSF for Moominmama. AUD 22.5k this time.
  
• I sold all our 96k shares of Platinum Capital (PMC.AX) following the announcement of their restructuring plan. I bought 17.5k shares of Pengana Private Equity (PE1.AX) and 6k of Regal Funds (RF1.AX) in place of our SMSF holding. I am transferring most of the proceeds of the sale in my own brokerage account to our offset account.
  
• I bought another 250 shares of the Fidelity bitcoin ETF (FBTC) in the SMSF.
  
• I bought 400 shares of the Putnam BDC ETF in the SMSF.
  
• I redeemed all units of the Longwave Australian Small Companies Fund in my name – 118k units worth about the same number of dollars. I reinvested half in the First Sentier Imputation Fund and sent the rest to our offset account. I also redeemed AUD 25k of Moominmama's holding. This funded her superannuation contribution above.
  
• By the end of the month we had around AUD 125k in our offset account, which is a big change.
  

Annual Report 2024

We are still waiting for the Aura venture funds to report, but I am guessing their values will be unchanged. So, now we can compute reasonably accurate annual accounts. All $ signs in this report indicate Australian Dollars. I'll do a separate report on individual investments. I do a report breaking down spending after the end of the financial year. I'll probably do another report on our SMSF performance then.

Overview 

Investment returns were positive and net worth again increased. We did a lot better than in 2023. This was a direct result of my dis-satisfaction with the 2023 result and my determination to do better. We came in way ahead of the best case net worth projection I made in the 2023 report of $6.7 million with an end of year total of $7.4 million. We took a vacation in Maroochydore, Queensland in July and in December we travelled overseas for the first time since before the pandemic to China and Thailand. I did some short business trips to Sydney during the year as well. My 60th birthday was in December and I started a transition to retirement pension in that month.

Investment Return

In Australian Dollar terms we gained 23.1% for the year while in USD terms we gained 12.1%. The big gap is because the Australian Dollar fell. The MSCI gained 18.0% and the S&P 500 25.0% in USD terms while the ASX 200 gained 13.2% in AUD terms. The HFRI hedge fund index gained 9.6% in USD terms. Our target portfolio gained 19.2% in AUD terms. The new Vanguard 60/40 AUD benchmark only returned 12.4%. So, we under-performed the US Dollar stock indices but outperformed the other benchmarks. 

This chart compares our portfolio to the benchmarks in Australian Dollar terms over the year:

 

I can be happy with this. Beating US tech stocks is hard! The following chart shows monthly returns in Australian Dollar terms:

 

This shows that our out-performance mainly came towards the end of the year. We beat the target portfolio in seven of the twelve months and the 60/40 portfolio in eight of the months.

 

Here are our annualized returns over various standard periods:

 

There is a big improvement over last year. We beat the ASX 200, HFRI, the target portfolio, and the 60/40 portfolio over the last 5 years. We also beat HFRI over the longer time horizons and are close to the target return over 10 years. But we performed much worse than the US stock indices over all time horizons and the ASX 200 and the target portfolio over the 20 year time horizon. The positive news is that our performance is better in the last 10 years than in the previous 10 years. Though not shown here, we also match the target performance over the last 15 years since the GFC. As a result, I have begun to use the returns of the target portfolio over 20 years to project our future returns. I lost big in the GFC due to using too much leverage. I now use only 10-15% leverage and much of that is our mortgage.

Here are the investment returns and contributions of each asset class in 2024 in currency neutral and unlevered terms:

 

The contributions to return from each asset class sum to the total portfolio return. The portfolio shares are at the beginning of the year. Rest of the world stocks did best, because of the performance of Defi Technologies, followed by futures, which includes bitcoin, and gold. These three also made the largest contributions to the total return. All asset classes had positive returns but real assets, private equity, and hedge funds did not perform that well despite some strong individual performers in those asset classes.

Investment Allocation

There were significant changes in asset allocation over the year:

 

Cash, futures, and rest of the world stocks increased their shares, while hedge funds, Australian small cap, US stocks, and bonds reduced their shares by quite a lot. Other asset classes changed their shares by 1% or less.

Accounts

Here are our annual accounts in Australian Dollars: 

Percentage changes are for the total numbers. There are lots of quirks in the way I compute the accounts, which have gradually evolved over time. There is an explanation at the end of this post. 

We earned $208k after tax in salary etc. Total non-investment earnings including retirement contributions were $240k, up 14% on 2022. I'm quite surprised by that increase! Part of it seems to be from timing of payments as well as larger tax refunds.

 

We gained (pre-tax including unrealized capital gains) $577k on non-retirement account investments. A chunk of the gains were due to the fall in the Australian Dollar (forex). We gained $562k on retirement accounts with $32k in employer retirement contributions. The value of our house is estimated to have risen by $51k. As a result, investment gains totaled $1.194M and total income $1.435M.

 

Total spending (doesn't include mortgage payments, life insurance, margin interest etc.) of $169k is up 13% on last year. Again, I am surprised by the size of the increase. Our spending including mortgage interest (but not principal repayments) seems to be up by only 5%. We did reduce our mortgage interest a lot by increasing the cash in our offset account.

 

$20k of the current pre-tax investment income was tax credits – we don't actually get that money so we need to deduct it to get to the change in net worth. We saved $38k from salaries etc. before making contributions of $26k to the SMSF. I also record an $8k "inheritance", which are gifts we received, mostly on our trip to China. Current net worth increased by $577k.

Taxes on superannuation returns are just estimated because, though we know the tax paid by the SMSF, our employer superannuation funds only report after tax returns. I estimate this tax to make retirement and non-retirement investment returns comparable. The total estimated tax on superannuation was $20k. Net worth of retirement accounts increased by $600k after the transfer from current savings. With the gain in the value of our house, total net worth increased by $1.228M.

Projections

Last year my best case scenario for 2024 was for an increase in net worth of $500k to $6.7 million. We actually reached $7.4 million. For this year, my base case scenario is simply a 10% increase in net worth to $8.2 million. The bear case is for a 10% decline to $6.7 million. In 2022, our net worth only fell by 0.7%, so this is very bearish. What about the best case scenario? This is going to seem crazy but I project double the percentage increase of 2024 for a net worth of $10 million. Told you it was crazy.

Notes to the Accounts

Current account includes everything that is not related to retirement accounts and housing account income and spending. Then the other two are fairly self-explanatory. However, property taxes etc. are included in the current account. Since we notionally converted the mortgage to an investment loan, mortgage interest is counted in current investment costs. So, the only item in the housing account now is increases or decreases in the value of our house. This simplified the accounts a lot but I still keep a lot of cells in the spreadsheet that might again be used in the future.

 

Current other income is reported after tax, while investment income is reported pre-tax. Net tax on investment income then gets subtracted from current income as our annual tax refund or extra payment gets included there. Retirement investment income gets reported pre-tax too while retirement contributions are after tax. For retirement accounts, "tax credits" is the imputed tax on investment earnings which is used to compute pre-tax earnings from the actual received amounts. For non-retirement accounts, "tax credits" are actual franking credits received on Australian dividends and the tax withheld on foreign investment income. Both of these are included in the pre-tax earning but are not actually received month to month as cash.... 

 

For current accounts "core expenditure" takes out business expenses that will be refunded by our employers and some one-off expenditures. This year, I didn't bother to note these, which amounted to about $1,000. "Saving" is the difference between "other income" net of transfers to other columns and spending in that column, while "change in net worth" also includes the investment income.

June 2017 Report

This month we spent a lot of money. We went on vacation to Singapore - our first trip overseas with little Moomin. Since last year there are now direct flights between our city and there - one of two international destinations now available on direct flights. I think next time we will go to the other country where the weather is much more to my liking, at least in the summer. The trip ended up costing a lot more than expected...

This month's accounts are very preliminary as they include estimates of franking (tax) credits on managed funds ($3.9k) that we won't actually know till the end of July. Here are our monthly accounts (in AUD):

"Current other income", which is mainly salaries, was a bit higher than usual at $14.8k. Spending (not counting mortgage) was very high at $10.9k. After deducting the mortgage payment of $5.5k (which includes implicit interest saving due to our offset account - the actual mortgage payment was about $698 less than this) - there were three mortgage payments this month rather than the usual two - we dissaved $1.5k on the current account and added $3.5k in added housing equity. Retirement contributions were quite high at $5.1k as I got three retirement contributions this month. Net saving was, therefore, $7.1k across the board.

From next month I will stop my voluntary retirement contributions of $100 a week due to the reduction in the concessional contribution cap from $35k a year to $25k a year. My employer contributions will actually exceed the cap. As is usual in the public sector they are much higher than the 9.5% compulsory contributions. The excess will just be taxed at my marginal rate like a non-concessional contribution. I might still add some non-concessional contributions to superannuation in a few years time but don't feel like locking up more money than necessary when there is no immediate tax advantage and the rules on taxation in the retirement phase, could change at any time...

The Australian Dollar rose from USD 0.7437 to USD 0.7681. The ASX 200 rose by 0.17%, the MSCI World Index gained 0.50%, and the S&P 500 0.62%. We gained 0.38% in Australian Dollar terms and 3.68% in US Dollar terms. So, unusually we outperformed both the Australian and  international markets. The best performer in dollar terms was CFS Geared Share Fund up $5.6k. Next best was Platinum Capital, gaining $3.0k across our various different holdings. The worst performer was PSSAP superannuation fund, losing $0.8k. Small cap Australian stocks was the best performing asset class in percentage terms, followed by hedge funds. All other asset classes gained apart from commodities and real estate.

As a result of all this, net worth rose AUD 9k to $1.839 million (new high) or rose USD 51k to USD 1.413 million (also a new high).

30th June is the end of the Australian financial year. Over the last 12 months we had a rate of return of 13.7% in AUD terms (17.5% in USD terms). The ASX200 gained 14.1%, while the MSCI gained 19.4% in USD terms. Net worth increased AUD 262k and we are still on track to get close to the optimistic projection for 2017. Of course, anything could happen in the next 6 months!

I Got Paid!

Finally. It's two months worth of pay. I paid off the credit card bill which was around $A3,800. Now we have $A6,000 worth of borrowing capacity there. $A5,000 available on the Australian margin loan, and about $A4,000 in our Australian bank accounts. Of course there is more cash and borrowing capacity in our US accounts. We don't have an emergency fund as such. The goal now will be to build more borrowing capacity again. The money that is in the bank accounts that isn't spent in the next month will be allocated to investment and reducing the margin debt.

One of the things I want to do is take advantage of the Superannuation Co-contribution Scheme. Low income individuals (who get more than 10% of their income from employment or business) are eligible for a government contribution of up to $A1.50 per $A1 contributed from after-tax income to a superannuation (retirement) fund up to a limit of a $A1,500 government contribution. I should qualify for the full co-contribution I think as I'll only be employed for 4 months this tax year (which ends on 30th June).

More Unisuper Glitches

I was actually sent a statement by Unisuper yesterday, but the glitches continue. I noticed that my account was about one month behind where it should be given the contributions that have gone in. In July, I just assumed they were behind a bit in crediting things. In preparing this month's accounts I noticed the same thing and went in to examine the transactions in detail. I found negative transactions exactly cancelling all my June contributions! They told me that they will investigate this. The average person who ignores their superannuation statement (as people have told me) would never catch this kind of thing. We can't assume that this will be automatically corrected at some stage. That this whole company seems so "buggy" I think is a sign of lack of competition. They have a monopoly over providing superannuation services in the university sector.

Superannuation Reform Again?

Changes to superannuation are a perennial topic. If the government does this - lower the threshold for the 30% super contributions tax to $180k income per year and cut the concessional cap to $20k p.a. - I figure I will have to pay almost $7,000 a year more in tax. My taxable income this year looks like being just below $180k but the threshold for the super surcharge adds things like employer super contributions and investment losses to the taxable income amount. It would make most sense to cut the non-concessional cap, which is currently $180k per year, dramatically, as that is the way that wealthy people can get really large amounts of money into the super system, which will be taxed at a zero rate once they retire. But, of course, there is no immediate revenue to be gained by cutting the non-concessional cap. To simplify the system the government could just get rid of the concessional/non-concessional distinction, stop taxing earnings and then have a simple US Roth style system. Much too logical, of course. Actually, the optimal solution, assuming that super will be taxed in some way is to go for the US 401(k)/403(b) approach where there is no tax on contributions or earnings and regular tax on payouts. This gives the the money the best opportunity to increase in value... well under some economic assumptions anyway.

How Come Australia Has Less Government Spending than the US and Has Free Healthcare for All?

Following up from my comments on this post of Madame X, I thought I'd have another go at comparing Australian and US government spending:



As you can see from the chart, Australia spends less as a share of GDP than the US does. Only Korea and Switzerland spend less than Australia among the OECD countries for which there is data. Australian government revenue is slightly higher as a share of GDP than the US, because we have a budget surplus whereas the US has a large deficit. But we have more or less free healthcare for all, while the US does not. Australia encourages people to get private health insurance through tax incentives, and around 35% of people do have private healthcare. This makes free healthcare easier to provide than in other OECD countries where there is less private insurance. So how does Australia achieve universal healthcare when the US does not? Here are some suggestions:

1. Our defence budget is smaller. Also we have far fewer people in prison. The US has 4.5 times as many prisoners per capita as Australia.

2. Because we run surpluses our government has net assets rather than net debt. So we don't have to pay any net interest on the non-existent national debt. There are government bonds outstanding just to keep the market open.

3. Retirement benefits are means tested and less generous than average US social security benefits. Whereas the US gives more retirement and unemployment benefits to people with previously higher incomes, Australia does the opposite. Over time retirees will be more and more self-funded due to compulsory superannuation saving in Australia. Since 1992, employers have been required to put at least 9% of salary into a superannuation fund - the equivalent of a 401k. It's much harder to get the money out before retirement too.

4. Our medical care is much cheaper than the US. Reasons include the high level of litgation and consequent insurance and overtreatment in the US and price discrimination by drug companies due to the fragmented nature of demand for drugs in the US. Doctors earn less in Australia.

So, in order to get "socialised medicine" you don't need "socialist" levels of government spending ;)

Government Wimps Out and Makes Super More Complicated

So the government will increase the superannuation contributions tax to 30% but only for people who earn more than $300k per year. This is said to reduce the budget deficit by $1 billion. But if there are only 128,000 people earning more than $300k per year the total is:

128,000*$25,000*.15 = $480 million

To get to $1 billion you either have to assume that they are all over 50 with less than $500k in super in their accounts, or use 30% by mistake in the calculation. So everyone from $180k to $300k per year in income will get a 30% concession and those of us earning between $80k and $180k will get a 23% concession. But those earning more than $300k only a 15% concession. Of course, this doesn't make a lot of sense and makes super more complex. It would make much more sense to abolish the concessional tax on contributions and if that is too severe an increase in tax also cut the rate on superannuation earnings a little. This would make the system much simpler by getting rid of the distinction between concessional and non-concessional contributions, salary sacrificing etc. Of course, Labor is still hoping that public servants and maybe some others earning between $80k and $300k a year will still vote for them. So they haven't raised their tax.

January 2019 Report

In January stock markets rebounded but because the Australian Dollar rose, we didn't gain a lot in Australian Dollar terms. The Australian Dollar rose from USD 0.7049 to USD 0.7274 The MSCI World Index rose 7.93% and the S&P 500 8.01%. The ASX 200 rose 3.87%. All these are total returns including dividends. We gained 0.49% in Australian Dollar terms and 3.79% in US Dollar terms. So, we underperformed the markets. This is not surprising given the weight of cash and bonds in our portfolio. Our currency neutral rate of return was 1.89%. I estimate that the target portfolio gained 1.57% in Australian Dollar terms.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also included the Australian Dollars return from foreign currency movements and other net investment gains and losses - net interest and fees. The loss on the apartment is the estimated sale costs.

Things that worked very well this month:

• The China Fund - the fund has announced a tender for 30% of outstanding shares at 99% of NAV. The share price is rising towards NAV as a result. I tendered my shares into the buyback. At least it will probably realise a small capital loss.
• Pershing Square Holdings. This bounced back nicely from December losses and we are now up in this investment.  
• Unisuper. This is after a steep fall in previous months. I continue to be surprised how much higher the beta of Unisuper is compared to PSS(AP). Both are public sector superannuation funds and we supposedly have a similarly aggressive stance in each.

What really didn't work:

• US Dollars - The Australian Dollar rose, especially after the statement from Jerome Powell.
• Cadence Capital - It continues to lose money and is now our third worst investment ever in terms of dollars lost. The fund manager explained that they focus heavily on value stocks and those got trashed.
• Yellowbrickroad...

We moved towards the new long-run asset allocation:*

The main driver is continued movement of cash from my US bank account to Interactive Brokers where I am buying bonds before eventually transferring some of the money to our Australian bank accounts when the broker allows. Also, we sold the apartment we inherited.

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:

• I moved AUD 30k from the CFS Geared Share Fund back to the CFS Conservative Fund in my CFS superannuation account. I originally moved this money in October to CFS Geared Share Fund. I made a small profit on the roundtrip trade, but the main motivation for closing the trade was to reduce risk.
• I bought 1558 shares in OCP.AX at AUD 2.07 a share just because they were being offered so low.
• I sold 15,000 shares in PMC.AX and bought 5000 shares in PIXX.AX as the PMC premium to NAV was still high.
• I bought AUD 24k during the "flash crash" and sold them after the Australian Dollar recovered a few cents.
• I bought 1000 shares of PERLS XI as I can't move the Australian Dollars I bought in December to our Australian bank account yet.
• I bought USD 100k of treasury bills maturing in February.
• I bought USD 100k of Santander UK bonds maturing in March. 
• I bought 1000 shares of the gold ETF, IAU.

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

Financial Planning

Life is very busy recently and so I don't have much time to blog. I haven't even posted much on my professional blog. There hasn't been much new on the financial front to write about. Anyway, today I had an appointment with a financial planner at Commonwealth Bank. It was a bit strange as a financial planning session. She didn't really seriously try to get a picture of mine and Snork Maiden's finances. She was just interested in selling me on a couple of products. One was insurance and the other superannuation. She tried to interest me in "trauma insurance" and "income protection". I'm generally a big skeptic of insurance. I promised to look into whether I already had income protection from my superannuation provider and to think about whether I need it. But I think not. On super, she could put me into a wholesale fund that has lower management fees in exchange for a $1500 up front financial advice fee. It probably will pay off. I'll look into it in more detail and report here.

Division 293 Humblebrag

It looks like I will have to pay Division 293 superannuation contributions tax for the first time. This is an extra 15% tax on superannuation contributions that you have to pay if your income including concessional super contributions is above AUD 250k. My preliminary estimate of my taxable income is already above AUD 250k. So, for sure the total including around 30k of super contributions will be even if the final income number is a little lower. This is probably going to mean an extra AUD 4,500 of tax. 

I'm also currently estimating I'll owe more than AUD 13k in extra tax after paying AUD 6k in tax installments. Last year I got a tax refund because of the Virgin Australia debacle. Bond losses can be deducted immediately from your income unlike losses on shares. The tax installments were because the previous year's tax return...

I'm reluctant to stuff more money into super as non-concessional contributions to reduce tax in case we'll need it. For example, to buy a bigger or better located house. If I continue to work, we can't withdraw the money from my account till I'm 65 in 8 years time. And much longer in Moominmama's case. That liquidity costs in taxes. 

In the last couple of years we made large non-concessional contributions. I also have illiquid investments in venture capital and art. Our liquid investments are 46% of gross assets not including our house. I doubt I can get a bigger mortgage given my age and Moominmama's low wage income.

Endowment Asset Allocations II

Following up on my recent post about endowment asset allocations I've updated Moom's and Moominmama's numbers for November and also added the allocation of the Public Sector Superannuation Scheme (Accumulation Plan) which is Snork Maiden's retirement account:



The PSS(AP) allocation is the "trustee choice" or default option. We are investing 90% in this and 10% in the "Sustainable Option" which is Australian shares with a green bias. That increases the equity percentage of her portfolio and brings it closer to our developing target allocation.*

The top panel in the table is the allocation of each of the portfolios to the different asset classes while the bottom panel is the Euclidean distance between the portfolios on the left and the those listed on the top line. Moom is closest to the PSS(AP) portfolio, which is not so surprising as they are both Australian based allocations. Moom is also nearer the average US endowment than to Moominmama. This diversification is probably a good thing. While Moominmama is nearest to the average US endowment she is also quite close to the PSS(AP) portfolio.

Moom's allocation moved further from the US endowments and from Moominmama's portfolio this month, mainly due to selling US equities.

* Snork Maiden's retirement portfolio is 17% from our target portfolio and 23% from our current overall portfolio.

P.S.

The New York Times reports on the losses of the Harvard endowment. Their losses in July-October pretty much match the S&P 500's losses (23%) but are better than the MSCI World Index (33% loss). And they are far far better than Moom's performance (47% loss in USD terms).


P.P.S. 8th December

I just found more accurate information on the PSS(AP) superannuation fund's current allocation (rather than the targets in the prospectus):

Hedge funds 15%, Domestic Equity (US) 9%, Fixed Income 10%, Foreign Equity 33%, Private Equity 7%, Real Assets 15%, and Cash 11%.

Given this Moom's distance from this portfolio is 26% and Moominmama's 28%. So we are both closer to this portfolio than to any of the US endowments.

P.P.P.S. 10th December

Harvard's actual allocation to foreign equity is 22% not 2%!

Concessional Contribution Cap and Unisuper

Unisuper say they are concerned that the Australian government will not index the concessional superannuation limit this year. The issue is that employers in the university sector are contributing 17% of employees stated salaries to the Unisuper superannuation fund. In other words, for someone earning $A100k per year they contribute $A17k to this retirement fund in addition to the salary they pay. Somewhat similar to the "matching contribution" idea in the US, though no match is required from the employee. This is greatly in excess of the 9% which the government mandates employers to pay.

The problem for high earning employees is that the limit on pre-tax (or concessional or salary sacrifice) contributions is $A25k a year. I'm just below this threshold at the moment. Probably, when our salaries go up in July I'll be over it. Concessional super contributions are taxed at 15% rather than your usual marginal tax rate (mine is 37% + medicare). If you try to contribute too much the fund will accept the money but the government taxes it at the top tax rate - 46.5% (including medicare). So a little bit of my salary will get taxed at the top rate and then stuffed in an account I can't access for at least another 13 years...

The logical thing would be to reduce the contribution from 17% for high earners and pay that out to employees as extra salary. But that seems to be too simple for the convoluted Australian super system. Instead, Unisuper just lobbies the government to raise the cap. I guess it's not in their interest to reduce contributions and the unions who negotiated this deal (which I don't belong to) don't care that some full professors have to pay some extra tax.

It won't amount to much money for me, but it just seems silly. For those earning more than $A180k a year, the rate is no higher than their usual marginal tax rate.

Average Australian Households

Thanks to high house prices and compulsory superannuation the average Australian household is much wealthier than the average American household.

We are below average with a net worth of about $A510k vs. $A720k for the average household. The average house was worth $A541k for those who owned their home outright and $A521k for those with mortgages. The average superannuation (retirement) balance was $A154k. Here we are above average at $A261k. That includes a couple of US retirement accounts though.

Our income (not discussed in this article) puts us in the top 10% or so probably of households and in the long-run I expect we will end up wealthwise in the top 20% of households who average $A2.2 million.