SMSF Returns

[craft]

This is my portfolio return since inception about 2 year ago. Red line is the XJOAI index. The return charted includes dividend and franking credits, but excludes interest and tax... so it's EBIT.

View attachment 66641

The portfolio currently has ~24 positions... 15 are "core" holdings while remaining ones are speculative. I try to keep transactions low, but I had a change of strategy about 12 months ago which resulted in a bit of turnover. I initially allocated ~40% of the funds to buy income stocks (REITs, utilities, infrastructure etc) whose dividends will more than cover the funds interest costs... but I had a change of heart when I thought the US rates cycle would turn up and affect this strategy negatively (I was wrong!).

The portfolio is housed under a discretionary family trust structure which improves the tax effectiveness somewhat. I don't actually have a SMSF as yet - my super balance is not large and it's simply sitting there in some sort of standard balanced fund. It is something for down the track (although the new budget changes may render it less attractive)... but I am just a bit too busy to want to do that right now.

Overall this is my first real attempt at being a long term investor... so whilst performance is good over the first 2 years, it really hasn't even brush on the potential of long term compounding yet.

Awesome Job SKC.

The change of strategy 12 Months ago looks promising on the equity curve.

It’s nice to see a trader building another string to their bow. The compounding may seem slow at the start but it keeps plodding even while you living your life and doing your day job – chuck a few free bucks at it when you can and maybe snag a winner or two in your travels and you never know what may happen. You are certainly off to a promising start.

Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.

Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible. 10-20 years of ticking away more efficiently than maybe it is now will make a difference.

Cheers

 

[Huskar]

Awesome Job SKC.

The change of strategy 12 Months ago looks promising on the equity curve.

It’s nice to see a trader building another string to their bow. The compounding may seem slow at the start but it keeps plodding even while you living your life and doing your day job – chuck a few free bucks at it when you can and maybe snag a winner or two in your travels and you never know what may happen. You are certainly off to a promising start.

Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.

Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible. 10-20 years of ticking away more efficiently than maybe it is now will make a difference.

Cheers

Always love following you SKC - for your disciplined focus on performance measurement as much as your market insights. But I recall you doing some relative value investing a few years ago which could probably fall into the longer term / value investing bucket?

One thought on super holdings: I don't have enough for SMSF either but hold in what is effectively a semi-SMSF without the hassle with ING Super. I can invest in ASX300 stocks (although max 20% of portfolio in any stock and max of 80% of portfolio in equities). Brokerage more expensive (~$25 per trade) so doesn't suit a trader but I just hold ETFs and Bob's your uncle. Costs are comparable or lower than even industry super funds (all other things equal). Each basis points of fees you can claw back are an edge.

 

[skc]

Awesome Job SKC.
The change of strategy 12 Months ago looks promising on the equity curve.

Thanks. It's not an equity curve, but a unit price chart. Total $$ profits would have been higher if I stayed with the income strategy, although the percentage return would be lower. Since selling those income stocks I have yet to re-deploy all the freed-up capital.

Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.

There are pros and cons of monitoring along side the benchmark. If you continuously underperform then at some stage it would be irrational not to just buy the index. At the same time, you don't want to jump at shadows either.

Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible. 10-20 years of ticking away more efficiently than maybe it is now will make a difference.

I am still waiting for a crash to do the switch

Always love following you SKC - for your disciplined focus on performance measurement as much as your market insights. But I recall you doing some relative value investing a few years ago which could probably fall into the longer term / value investing bucket?

Thanks. That was almost 7 years ago believe it or not. That effort was neither long term or true value investing... it was short term market opportunity capturing using fundamentals. To illustrate I think I bought the AZJ IPO and sold in the first day or 2.

One thought on super holdings: I don't have enough for SMSF either but hold in what is effectively a semi-SMSF without the hassle with ING Super. I can invest in ASX300 stocks (although max 20% of portfolio in any stock and max of 80% of portfolio in equities). Brokerage more expensive (~$25 per trade) so doesn't suit a trader but I just hold ETFs and Bob's your uncle. Costs are comparable or lower than even industry super funds (all other things equal). Each basis points of fees you can claw back are an edge.

Yes my superfund has similar options... but I am usually too busy during market hours that anything requiring more than 2 seconds for order entry is just too long. I still can't shake the trader mindset where every tick counts. So when it comes to investing I actually struggles with my order entry. I can't get over missing a trading opportunity that could make me 10x in the next 5 minutes because I have to enter an order to make 1x in my Superfund in the 6 months.

 

[DeepState]

SKC, well done. Naturally, I have to pepper you with a questionnaire because whatever you are thinking is required reading:

1. Are you now long-only? Done with pairs etc...

2. What leverage are you using?

3. Do you have any stats on portfolio characteristics?
- eg. Capitalisation bands, value metrics, GICS weights vs benchmark etc

4. Do you invest with a view to the benchmark at all or it is just something whose total return you look at as well from time to time just for interest?

5. You caught a major updraft upon change of strategy. How to do attribute that outcome? ie. Great individual stock picks, sector rotation outcome etc. In your judgment, skill/luck/style/specific.. You've always been a very objective person so I am curious as to how you thought about that period.

6. When you say that you try to control turnover...what turnover are you now thinking of and where did it come from?

7. What has prompted the change in strategy in the last 12 months? Why did you decide to give a long term value approach a guernsey?

8. The concept of Value is an interesting one, subject to definition by the user. You indicated that you tilted (heavily?) into REITs and Utils for running yield. However running yield and "value" can be two different things. For example, Dimensional Fund Advisors and RealIndex are regarded as quant value style investors. Both are materially underweight REITs and Utilities, deeming them not 'value' sectors at this time. These have been amongst the strongest performers, sector-wise. in the last 12 months [along with Healthcare and Industrials]. At a guess, the market started to reward earnings stability and increased international competitiveness. Awesome for you! What is your definition of a 'value' situation?

 

[skc]

SKC, well done. Naturally, I have to pepper you with a questionnaire because whatever you are thinking is required reading:

Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.

For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.

Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.

So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc).

Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method so if I made any gross error then please kindly point it out.

Other response in blue below.

1. Are you now long-only? Done with pairs etc...
This portfolio is long only. This is not my trading portfolio. Trading is my day job. This is sort of like the investment everyone else do aside from their day job.

2. What leverage are you using?
There is no leverage in the portfolio. It is debt funded but the return calculations did not include any leverage.

3. Do you have any stats on portfolio characteristics?
- eg. Capitalisation bands, value metrics, GICS weights vs benchmark etc
I don't keep track of these. I can certainly find the answer but I am not sure there'd be much meaning. Holdings are however mostly smaller companies outside ASX200.

4. Do you invest with a view to the benchmark at all or it is just something whose total return you look at as well from time to time just for interest?

No I don't really set out to beat the benchmark. I wanted this to be a growing portfolio and a constant exposure to companies that I thought should grow their businesses and go up in price (as opposed to micro trading them to pinch a few % here and there). I would probably reassess if I underperform the index over say 3-4 years... but frankly I didn't really have a firm plan there.

5. You caught a major updraft upon change of strategy. How to do attribute that outcome? ie. Great individual stock picks, sector rotation outcome etc. In your judgment, skill/luck/style/specific.. You've always been a very objective person so I am curious as to how you thought about that period.

Some part of that was mathematical (I think). Initially I allocated some 40% to the income strategy. I bought stocks yielding 7-8% while expecting minimal capital growth. As I exited these income stocks.. some of which I would have collected the 7% yield while selling at breakeven after holding for 8-9 months, boosted the percentage return while permanently added to the unit price. I am guessing the unit price method works better with smoother changes in number of units.... but a more abrupt change could throw out slightly funny numbers.

Another part was due to some good luck with a few capital raising on some of the winners. The market liked the raising, I oversubscribed for more shares and held onto these oversized winners. The portfolio performance would have been worse if I didn't add to these winners (or if I sold them for a quick profit).

6. When you say that you try to control turnover...what turnover are you now thinking of and where did it come from?

By turnover I meant I don't want to do too much buying or selling. In the past I often adjust my market exposure during downturns... I tried to avoid that in this portfolio. Craft has a mantra of "buy right - hold tight" - I want to at least practice the "hold tight" part even if I am still refining the "buy right".

7. What has prompted the change in strategy in the last 12 months? Why did you decide to give a long term value approach a guernsey?

As I said, I ditched the income strategy because I didn't think the reward justified the risk, in a rising rates environment. I was always going to end the yield-interest arbitrage game when I start feeling uncomfortable doing so. I reasoned that I could handle missing out on 3-4% return, but I can't accept -20% capital loss chasing those 3-4% return.

I don't know what you meant by guernsey

8. The concept of Value is an interesting one, subject to definition by the user. You indicated that you tilted (heavily?) into REITs and Utils for running yield. However running yield and "value" can be two different things. For example, Dimensional Fund Advisors and RealIndex are regarded as quant value style investors. Both are materially underweight REITs and Utilities, deeming them not 'value' sectors at this time. These have been amongst the strongest performers, sector-wise. in the last 12 months [along with Healthcare and Industrials]. At a guess, the market started to reward earnings stability and increased international competitiveness. Awesome for you! What is your definition of a 'value' situation?

I don't have a firm definition. In my half page "strategy" I simply said "Companies with strong growth potential irrespective of market direction. Should mostly be profitable and attractively priced.". There was no more than that.

Yes the market is handsomely rewarding these seemingly stable sectors at the moment. AFR just had an article about exactly what you described. But I am comfortable to not be involved (in this portfolio) for the reason I outline in 7 above. To buy these with a view to trade them as long as the trend holds is fine... but I find that to be in conflict with the rest of the portfolio's "buy right - hold tight" approach. To achieve "hold tight" one must ignore certain market noises and short term feedback... but I am worried that if I get too good at "holding tight" with the income stocks I will simply hold them till it's too late if and when the music stops.

If I was to re-participate in this yield chase I will do so with a different setup...

Thanks for the questions. You made me think hard about what I am actually doing.

 

[galumay]

... but it's actually the first time I use this unit price performance method so if I made any gross error then please kindly point it out.

I don't see any particular errors with your use of this method. I track my SMSF with a TWIRR method (time weighted, internal rate of return.) that I built a spreadsheet for. It works in a similar manner by ending up with a unit price. I believe this is basically the methodology that managed funds use.

I do use a benchmark for comparison, the SPAX2F0 which is the ASX 200 FRANKING CREDIT ADJUSTED ANNUAL TOTAL RETURN INDEX (TAX-EXEMPT) - but like you I don't get too fixated on it because my SMSF is a long term strategy and I am also a bit wary of the weighting with an ASX 200 index.

 

[craft]

I do use a benchmark for comparison, the SPAX2F0 which is the ASX 200 FRANKING CREDIT ADJUSTED ANNUAL TOTAL RETURN INDEX (TAX-EXEMPT) - but like you I don't get too fixated on it because my SMSF is a long term strategy and I am also a bit wary of the weighting with an ASX 200 index.

My data supplier doesn't provide data for SPAX2F0 - wasn't even aware it existed until your post. Do you have a source for the data? Thanks

On benchmarking, I think it is critical. If you can't beat the low input indexing option then get the hell out of active management and get on with something else - your are not only wasting your time but also your money.

The big difficulty when comparing to the benchmark is in distinguishing between a normal period of underperformance for your approach and permanent poor performance that the approach is not going to come back from. People/approaches that are probably most at risk are those that have had ability(luck) but subsequently lost it - Its the recipe for digging a really big hole before the penny drops that something has permanently changed.

 

[craft]

Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.

For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.

Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.

So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc).

Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method so if I made any gross error then please kindly point it out.

Ah, Intricacies of determining the return.

On one hand you may judge yourself by return on funds deployed. In the case you describe of borrowing money it probably makes most sense to use Time Weighted Return. In which case you are determining the return for the period and amount of money you have drawn.

But you could also take the view you have 200K credit limit available and judge yourself on an IRR basis with 200K starting capital – this makes you responsible for not only the money deployed but responsibility for the funds underutilised. This more aligns with how you would probably see your return if you had 200K equity and held yourself accountable not only for the return on investments made but in getting the money invested. Having only 10K invested out of a 200K pot even if that 10K makes 300% is not a great total return on 200K if the other 190K is sitting in an at call bank account gathering rust. (or in the case of debt making 50% on a 10K loan might not be as good as making 10% on a 200k loan)

For an SMSF I feel I'm responsible for the return on total equity available so the return measure should be return on time weighted equity (XIRR)

 

[skc]

For an SMSF I feel I'm responsible for the return on total equity available so the return measure should be return on time weighted equity (XIRR)

Yes and I do keep track of that as well... and return / funds available is a smaller number for obvious reason. But the difference is less pronounced if you compare NPAT as opposed to EBIT...

My funds deployed was up to 85% of funds available. The sale of income stocks reduced that number a lot and it is now around 65%. The aim is to build it back to 85%+ when the time is right.

If I am comparing to the benchmark then it makes sense to use "funds deployed" as the denominator... as you are measuring how well your own decisions perform against the alternative of an index fund.

 

[craft]

If I am comparing to the benchmark then it makes sense to use "funds deployed" as the denominator... as you are measuring how well your own decisions perform against the alternative of an index fund.

To me it makes sense to compare return on total equity available against the benchmark, That's the encapsulation of everything I take responsibility for as an active manager as opposed to the passive alternative.


But I can see a big difference in my thinking when looking at equity perspective as opposed to a borrowing perspective (which agrees with your above statement). Maybe that's a contradiction in my own mind? Maybe its because there is no obvious detriment from borrowings not made whereas there is from equity not efficiently employed? If I held myself accountable for borrowing capacity not utilised maybe I would give borrowing a bit more thought???????????

Sorry probably running off on a tangent here - you just got me thinking.

 

[skc]

To me it makes sense to compare return on total equity available against the benchmark, That's the encapsulation of everything I take responsibility for as an active manager as opposed to the passive alternative.

But I can see a big difference in my thinking when looking at equity perspective as opposed to a borrowing perspective (which agrees with your above statement). Maybe that's a contradiction in my own mind? Maybe its because there is no obvious detriment from borrowings not made whereas there is from equity not efficiently employed? If I held myself accountable for borrowing capacity not utilised maybe I would give borrowing a bit more thought???????????

Sorry probably running off on a tangent here - you just got me thinking.

I think calculating performance against funds that has been designated to be deployed (the entire facility in my case) is a fair enough metric.

Calculating performance against all potential / possible funds deploy-able, however, is probably a bit too much. How far do you go? May be you could have applied for another facility (I know I still have plenty of untapped equity in properties), or buy a less expensive PPOR, or take an unsecured loan from your friend, or sell your old furniture etc etc. It is only limited by your imagination.

The amount allocated to the market should be a separate consideration under one's overarching wealth strategy... but has nothing to do with investment performance. And it comes down to different life circumstances and ambitions as much as anything else. Some want a nice beach holiday, some want a new house, some want inter-generational wealth. There's no right answer there...

 

[galumay]

My data supplier doesn't provide data for SPAX2F0 - wasn't even aware it existed until your post. Do you have a source for the data? Thanks

On benchmarking, I think it is critical. If you can't beat the low input indexing option then get the hell out of active management and get on with something else - your are not only wasting your time but also your money.

The big difficulty when comparing to the benchmark is in distinguishing between a normal period of underperformance for your approach and permanent poor performance that the approach is not going to come back from. People/approaches that are probably most at risk are those that have had ability(luck) but subsequently lost it - Its the recipe for digging a really big hole before the penny drops that something has permanently changed.

Hi craft, thanks for sharing your thoughts. Its always a pleasure (and informative) to read your thoughts. SPAX2FO is a bit of a hidden one! Spindices is where I sourced it - but had to also get it pointed out to me! http://eu.spindices.com/indices/equ...adjusted-annual-total-return-index-tax-exempt

My caution with benchmarking as a long term value investor is that the first few years of running such a portfolio it can be very dangerous to pay to much attention to relative performance - just as it would be very dangerous to totally ignore it! For me, in the early years of a portfolio its important to self reflect on reasons for divergence from the benchmark - in either direction, was it good luck? or good management? and vice versa. In very general terms I am comfortable in the short term if my overall performance is at least related to the index i am benchmarking.

What i mean by this is that in my fairly small number of companies owned, one company that runs up in price very quickly and strongly, can have sufficient impact to move my performance to the +ve side of the benchmark, (and vice versa obviously) - what I watch is that my relative performance continues, so if the market drops my scale of outperfomance or if it rises my outperformance floats up with the rising tide!

Anyway what I am saying in all that waffling is that I agree with your comments about benchmarking!

 

[craft]

I think calculating performance against funds that has been designated to be deployed (the entire facility in my case) is a fair enough metric.

Calculating performance against all potential / possible funds deploy-able, however, is probably a bit too much. How far do you go? May be you could have applied for another facility (I know I still have plenty of untapped equity in properties), or buy a less expensive PPOR, or take an unsecured loan from your friend, or sell your old furniture etc etc. It is only limited by your imagination.

The amount allocated to the market should be a separate consideration under one's overarching wealth strategy... but has nothing to do with investment performance. And it comes down to different life circumstances and ambitions as much as anything else. Some want a nice beach holiday, some want a new house, some want inter-generational wealth. There's no right answer there...

Don’t mind my ramblings skc.

Until this discussion, Return on total equity allocated to investment was a very black and white metric for me, but I caught a glimpse of a little grey and perused it as a thought, maybe return on only invested funds or return on equity + safe debt capacity has merit. How far do you go indeed? Don’t know but it’s not as black and white as I had previously seen it.

My portfolio manager actually has two return calculations (presented right next to each other) Return on total portfolio (includes cash balance) which I would have observed daily for years and return on securities (ignores cash balance and calculate only on funds invested in securities) which I barely even registered that it existed. Talk about biases blocking things out.

 

[craft]

Anyway what I am saying in all that waffling is that I agree with your comments about benchmarking!

And I with yours.

Thanks for the index info.

 

[skc]

Don’t mind my ramblings skc

Thanks for the exchange. Many will pay to hear more of your ramblings.

 

[VSntchr]

still hopeful that some more people will chime in with their picture one day.

Okay, so here is my contribution to the thread.
After all the talk about how everyone is measuring their returns I feel a little embarrassed to provide my method.

I am simply calculating end of current month value divided by end of last month value to get a % return for the month. The end of month figure is normalised by subtracting deposits and adding back withdrawals. Return is being measured on total securities value + cash balance. I tend to run a portfolio that is 80%+ invested at all times, so the cash drag is never too large. The monthly % return is then applied to an indexed line (I chose $100k) and compared against XJOAI and XSOAI. There is error using this method, as the method above shows a FY16 YTD return of 38.002%, while taking the current value divided by the beginning value (normalised for dep/withdraw) gives a return of 38.98%.
The performance must also be taken into context that the deposits to the fund have been ~50% of the starting value, primarily due to adding in a new member - so position sizing has had to evolve as the fund has grown. The SMSF was actually established a bit earlier than FY15, but due to some data issues I just started it from start FY15.

One note: I have found tremendous value since being in charge of multiple portfolios. I have used the SMSF as a way to express a slightly different view than the way I have been managing my retail portfolio. The result is that the SMSF has vastly outperformed my own portfolio

Enough chat, heres the chart:

 

[craft]

Okay, so here is my contribution to the thread.
After all the talk about how everyone is measuring their returns I feel a little embarrassed to provide my method.

I am simply calculating end of current month value divided by end of last month value to get a % return for the month. The end of month figure is normalised by subtracting deposits and adding back withdrawals. Return is being measured on total securities value + cash balance. I tend to run a portfolio that is 80%+ invested at all times, so the cash drag is never too large. The monthly % return is then applied to an indexed line (I chose $100k) and compared against XJOAI and XSOAI. There is error using this method, as the method above shows a FY16 YTD return of 38.002%, while taking the current value divided by the beginning value (normalised for dep/withdraw) gives a return of 38.98%.
The performance must also be taken into context that the deposits to the fund have been ~50% of the starting value, primarily due to adding in a new member - so position sizing has had to evolve as the fund has grown. The SMSF was actually established a bit earlier than FY15, but due to some data issues I just started it from start FY15.

One note: I have found tremendous value since being in charge of multiple portfolios. I have used the SMSF as a way to express a slightly different view than the way I have been managing my retail portfolio. The result is that the SMSF has vastly outperformed my own portfolio

Enough chat, heres the chart:
View attachment 66710

Another awesome result - thanks for sharing.

Any interest in expanding on the bolded bit?

 

[VSntchr]

Any interest in expanding on the bolded bit?

I still consider myself a rank amateur when it comes to investing and business analysis. I have definitely improved since beginning around 10 years ago at a tender age of 16 where I had NFI at all, although I still seem to learn very simple lessons quite often .
My retail portfolio therefore, has had to endure very poor management from the early stages with a slow improvement in investment selection and position management etc. I think that a poor ability to cull investments which don't deserve a place in my portfolio has held the retail portfolio back. Being able to start a fresh with the SMSF gave me a chance to focus clearly on portfolio construction without any bias towards what I already hold.

As for the style - the retail portfolio has been managed with a focus on small-mid caps. Essentially the goal was to find good businesses with a strong growth runway that I could ride for a number of years. Only one or two 'home-runs' was needed every couple of years to really set the returns on fire...and these have been achieved with random consistency and a few big chunks of luck. As the years have gone on, I have realised that this style doesn't fit perfectly with me. I think that alot of the early wins in the portfolio were due to blind luck, and while that gave me a good springboard - it wasn't sustainable. I began to transition the portfolio towards higher quality companies, although some of the laggards remained for far too long in the portfolio.

When starting the SMSF portfolio I found myself reading some stuff, namely threads like this one and the PVFCF thread, which accelerated my path of trying to create a portfolio that I could be really confident in holding. A portfolio that is more than just a list of potential lottery tickets and momentum plays. Something that comprises a list of businesses that I am happy to be a part owner of, that will hopefully provide a continually increasing stream of cash flows over the years. Hence, the focused has shifted from trying to find '10-baggers' to trying to find 'dividend baggers'.

The 'shifting view' has really been that the SMSF is used for longer term wealth generation, a getting rich slow type thing.

 

[Huskar]

Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.

For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.

Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.

So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc).

Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method so if I made any gross error then please kindly point it out.

Other response in blue below.



Thanks for the questions. You made me think hard about what I am actually doing.

My on calculating return because I have been studying recently and I have it to hand (the below is paraphrasing of the CFA Institute text): a unit price calculation should give you a total rate of return (which is really what you are left with at the end of the day - ie increase in wealth due to investment income and capital gains). But then do you calculate the investment-related growth rate in the account's value by focusing on a single unit of money invested in the account or by focusing on an average amount of dollars invested? Because calculating the return on the average amount of money in the account is sensitive to the size and timing of cash flows into/out of the account, it seems sensible to focus on the single unit of money measure which reflects how you would have fared over the period if you had placed funds in the account at the beginning of the period. This is the time-weighted rate of return approach (TWR).

The approaches will produces similar results under normal conditions but differences can be significant where external cash flows occur that are large relative to the account's value and the account has significant volatility during the period.

The downside is that TWR requires account valuations on every date that your external cash flow takes place and then the returns need to be linked (to account for compounding), while MWR can just be calculated at the end of the period.

To show how the differences work: if your account is worth $100k at the start of the month, on day 10 it is valued at $220k after receiving a $120k contribution and at the end of the month the account is worth $300k:

For MWR, solve for R:
$300k = $100k(1+R)^30 + $120k(1+R)^30-10
By trial and error, R = ~0.01265. That is a monthly return of (1+0.01265)^30 - 1 = 46%

For TWR:
subperiod 1: [($220k-$120k) - $100k]/$100k = 0%
subperiod 2: ($300k-$220k)/$220k = 36.4%
Then return for total period = (1+0)x(1+0.364) - 1 = 0.364 or 36.4%

Apologies for the rant!

 

[skc]

When starting the SMSF portfolio I found myself reading some stuff, namely threads like this one and the PVFCF thread, which accelerated my path of trying to create a portfolio that I could be really confident in holding. A portfolio that is more than just a list of potential lottery tickets and momentum plays. Something that comprises a list of businesses that I am happy to be a part owner of, that will hopefully provide a continually increasing stream of cash flows over the years. Hence, the focused has shifted from trying to find '10-baggers' to trying to find 'dividend baggers'.

The 'shifting view' has really been that the SMSF is used for longer term wealth generation, a getting rich slow type thing.

Nice results. Great stuff.

Questions if I may...
1. You are also a trader. Any thoughts to share on how you handle the much slower feedback cycle involved with SMSF investing?

2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).