Asset Allocation

Nice. I was also looking at Stake, but they don't yet have AVUV/AVDV listed.

What are Interactive Brokers brokerage and FX costs like? If I already have USD in TransferWise, do you know can I fund Interactive Brokers directly without incurring FX?

 

Ok, coming back to fixed interest. There are a few things here. I see the portfolio from a holistic, top down perspective. Looking at it from a bottom up - individual asset based viewpoint, it is hard to make any case for bonds. Some points on my situation and how I view things.

I carry significant risk via a single asset PE exposure with a fairly high degree internal leverage, at todays valuation somewhere around 20% of net wealth. There is always a chance of that going zero, though unlikely....currently. This figures into my overall risk appetite and SANF.

I am not in accumulation phase. I'm working 3 days a week now by choice and will likely cease all work by mid-late 40s. We are past "enough" so the quality of the ride matters now. Yes, some volatility smoothing but also SANF around knowing we still have x in largely AAA/AA and can deploy this into risk assets during market sell off. We didn't need to do this in 2020 as we were still DCA into risk positions, but will do so in future. To be able to buy when others are tapped out by being fully invested I see as a psychological boon.

Lastly, fixed interest provides optionality around other unlisted investments that I expect to be involved with from time to time. (i.e. small-micro PE and private debt, direct investment in SME). Depending on portfolio tax position fixed interest can allow you to make opportunistic investments when your risk assets are beaten down - the worst time to sell. Overall, when I include SMSF and unlisted assets, Cash and Fixed interest represents just on 15% of our total investment assets, we are also debt free and I am comfortable with that.

 

So is fixed Interest a static allocation for volatility dampening (seems sensible given other outsized risks and position of enough)

Or is it a dynamic allocation to take advantage of opportunities? (seems sensible if your skills and enthusiasm for risk justify costs of the optionality)

To me each justification seems defensible in isolation but jointly contradictory.


Devils advocate! No offence intended.

 

My understanding of their fees is as follows: (their fees aren't super straightforward and my account hasn't been set up yet, so this might not be 100% accurate. I think I will have it figured out when I do my first purchase...)

For buying US shares, it's US$0.005 per share (min US$1.00, max 1% of trade value).

There's a minimum US$10.00 monthly fee. If your monthly trading commission paid (above) is less than $10, then they will charge you a difference.

I can fund my account with AUD, and IB will take care of the currency conversion when I exercise a trade to buy US shares. Their rates are supposedly very competitive and they charge a 0.002% fee... laughably low... but there's a US$2.00 minimum per order.

As for using TransferWise - this should be possible, but worth reaching out to IB for more info.

SUMMARY:
Brokerage: US$0.005 per share
Monthly fee: $US10.00
FX fee: US$2.00

 

Right, you’ve picked up a dichotomy there.

Until large PE asset is realised its (A). After that it’s (B) in a minor way having unwound the huge concentration risk....there is assumed to be a little more risk appetite giving strong consideration to overall risk and diversification. These type of investments have a fixed realisation date and I’d expect to remain a small component of total portfolio....over time I’ll get tired of that and return to (A) in the long run. Not sure If that makes sense to anybody else but does me.

 

Seem you are dealing with a run-off (tapering) of risk situation/appetite. That makes sense why you would be flexing the cash allocation. Much less contradictory than straight static unless you perceive an active opportunity.

ps
I'm having lots of contradictions in my thinking at the moment and some of them are not justifiable.

 

The current posture seems “right” for now based on exposures and opportunity....this will likely change a little over time.

Don’t beat yourself up over the contradictions...as long as you are largely headed in the right direction that’s all you can expect. Perfection is unattainable.

 

Really helpful discussion and viewpoint which has prompted me to take a fresh look at our own portfolio of Cash vs Equities minus the noise of Property, Private Equity, Debt etc. to see what rebalancing potential we have in a downturn.

Currently 9% Cash, 20% Equities outside super, 71% Equities inside super. Surprisingly close to VDHG

Considering gliding up the Cash / Fixed Interest component as we approach retirement in ~5 years time, although given the Private Equity will convert to cash for redeployment at this point (or earlier) and we can DCA income in the meantime, it is probably ok as is.

 

Below chart is from MSCI and is a breakdown of revenue as relates to its ACWI index.
(Large & Mid Caps across 23 developed and 27 emerging markets)


First column is Market cap per region domicile.
Second column is reported revenue per region
Third column is the source of the revenues.

You can deduce the following from the information provided.


Are North american companies really able to extract that much more profit to justify the price to sales ratio they are trading at relative to the other regions?

Are they being correctly priced by a rational market or is there elements of late stage momentum fracturing pricing considerations from cash flow? Plenty of observational examples of animal spirits chasing momentum and winning at the moment.

Market seems to be divided. Anything that has broken the shackles of pricing justified by cashflow is free to fly and it's flying. Anything shackled to earnings is in the doldrums. That's how I remember late 1999 to be.

A passive global asset allocation to capitalization index's requires me to not ask question. I'm not very good at not asking questions, it seems. Can't help but tilt away from certain things at certain times even though I know such actions will be detrimental unless I'm above average in my guesses. In making those guesses I'm showing as much hubris as those that are unsettling me with their enthusiasm for momentum.

 

Are you not listening? Tesla will be the only company remaining in 5-10 years. Innovation. All those 3rd world companies will cease to exist.

 

Tesla is not allowed to fail.
Maybe the tracking and remote control in it's vehicles have something to do with it.

 

I can fee a passive value tilt coming on.

 

Already in place.

Just trying to justify the unjustifiable now.

 

Sorry, I didnt address this as wasn't entirely clear. The fixed interest for buying beaten up risk assets bit refers to rebalancing within bands only - not "oh here's a buying opportunity lets go all in, 100% equities". The optionality bit refers to unlisted stuff that might come about - or might not...which could be funded ex fixed interest or equities depending on portfolio position..the idea isn't to use the fixed interest for market timing. Hope that makes sense.

 

Some might find this interesting. Family office asset allocation, commentary etc

https://www.ubs.com/global/en/wealt...-report/global-family-office-report-2020.html

 

Some more insights into spread of global companies by Aswath Damodaran.

As of 1/1/21, 46,579 publicly traded companies listed across 136 Countries.

Broken into regions it looks like this.



Broken into market capitalisation it looks like this:


This doesn't match the index providers Market cap weightings because they have lots of rules about what's in and what's out. Where as the only criteria for this breakdown is that its a publicly listed company.


This is the breakdown for the 46,579 companies according to industry.

 

Sorry some more questions. This time on your interest arb thinking.

Is the borrowing going to be secured against the unlisted units on a non-recourse basis? What's the borrowing cost for such an arrangement? Still better than the yield?

If the borrowing is secured some other way, is the linkage between unlisted property and your borrowing rate really only a mental linkage?

From an overall portfolio perspective, why do you want to be long currency via bonds and simultaneously short via a mortgage? I take it the mortgage would be A$ whilst the bonds are diversified globally - Do you have a particularly negative view on A$.

Is the cost of your A$ borrowing (short) cheaper than your return on your Global Bond long? That after considering risk spread and duration should be the arb consideration from a portfolio perspective shouldn't it.

Do you have reason to believe the risk premium is mispriced on the unlisted asset you are considering? If it's not mispriced risk that you can see whilst others can't why unlisted over listed?

If the opportunity is mis-priced in unlisted property why not just decrease bonds and increase unlisted property in the static asset allocation. That would give you the same increased risk profile without the expenses and complexity of being long and short basically the same asset class.

Maybe hands off holistic portfolio management could trump mental constructs to segregate and leverage one part of the picture. But maybe that wouldn't satisfy driving forces to "do something" with these rates.

Maybe my own bias stops me seeing the sense in leveraging a portfolio that has a bond allocation, so am missing the obvious in your plan.

Interested in your thoughts.

 

Very good questions and I have thought the same things. Arb is indeed the wrong way to think about it. Mortgage backed debt at 2.7% 5 year fixed vs. 5.8-6.0% distribution @50% tax deferred + inflation linked CG. You are correct, it is mental accounting and it doesn't matter where that leverage is applied to the portfolio. I understand the seeming dichotomy of bonds + debt and in isolation it makes sense to deploy fixed interest in advance of debt. Re the unlisted prop ; It's really an illiquidity premium that I can accept, not mispricing.

Consideration ; Cheap, mortgage backed debt is available now. When I would want to deploy debt in the future - who knows? Often credit dries up when opportunity abounds. I'll have bonds (+ equities) to cover if required and have bonds (+ equities) should I wish to invest in an unlisted business in any market conditions in the future. I expect a fair chance of this in coming years, in the industry I've spent my career in...short notice equity investment on favourable terms.

Total Portfolio leverage will be just on 10% if I go down this path. I've recently been looking at family office use of leverage and it seems that most hold what many would consider high amounts of cash / fixed interest and at the same time apply 10-20% leverage across portfolio. This is I suspect because most are involved in direct unlisted investments. Debt is available cheap in "good" times, but often not available when you need it most. I suppose my approach really doesnt fit a fixed SAA approach, but SAA core and TAA satellite with consideration for opportunities beyond the listed portfolio.

Looking across all portfolios (trust, company, SMSF, listed and unlisted assets), current position is roughly this if adding the AU unlisted piece now with debt. LVR across total portfolios would be just on 10%.

28% World Cap weight, World Small/Value tilt, World Large Cap Value, EM Cap weight, Global Property.
24% Australia Cap weight, Australia Small and Microcap active management.
21% Private Equity
17% International Bond Index (Hedged), AUD Cash
10% AU Unlisted Property

 

Thanks for expanding.

Core, Satellite, another mental construct?

Debt availability and cost in good times vs bad I get but cost benefit of the dry powder - I have reservations. I'm sure the majority that advise/work for family offices don't share my reservation.

Only dry powder I hold is offsets. Basically zero cost. But then again I don't rate "my" dry powder option value very highly so couldn't justify anything above zero cost dry powder.

Its all very interesting how we each construct our investing frameworks. I have my mental constructs under fire at the moment. Cognitive dissonance I think is asking me to choose what I believe and apply it to the whole. The foundations of my segregation are not strong enough to manage opposing mindsets.

Sorry the questions I ask of you are really directed at myself, but I appreciate the discussion.

Cheers

 

They are hard questions to answer but useful. I think mental segregations are fine if they help one to plod a reasonable course....note ; reasonable, not optimal mathematically, but reasonable as each of us comes from a different place with regards to money and investing, has different experiences, different opportunities and weigh risk / reward differently. For some, having some kind of a mentally segregated "back stop" will enable higher SANF and arguably risk appetite elsewhere, in direct investment for example...this is probably where I sit. I think as long as your rationale makes sense to you, is not glaringly damaging, and you are comfortable and mentally invested in it then its probably not too far from optimal which is only clear in hindsight.