Monday, 26 May 2008

An attempt at benchmarking my portfolio performance

My investment portfolio is a bit like an old attic full of family "treasures" that have been accumulated over the years. And it often seems like I've managed to accumulate some wealth in spite of, rather than because of, my investment choices. Many of the investments purchased seemed like a good idea at the time, but don't form a sensible part of any overall asset allocation strategy. And, just as I always seem to pick the slowest queue in the supermarket*, I seem to have a knack for going ahead with some poor investments while deciding against the ones that eventually became "10-baggers".

So it would be nice be able to compare my actual investment performance with what I "should" have achieved, given my chosen asset allocation and level of gearing. Benchmarking my portfolio isn't a simple matter as my asset allocation is slowly changing over time (by buying an investment property and then our own home, I've started out with a lot more real estate in my investment portfolio than I'd really like. Over time this should slowly drop from 50%+, towards my target allocation of around 25%). It's also complicated by variations in the level of gearing that I have - the property mortgages are slowly declining, while the stock portfolio gearing tends to fluctuate around my desired gearing level (60% LVR) as I buy and sell particular investments:


A final complication is the irregular addition of savings to my investment portfolio. I aim to add around $30K pa in 'savings', but this comes from a variable mix of superannuation contributions, mortgage principal repayments, funding the negative cashflow of my leveraged stock portfolio, and some ad hoc new investments (such as paying for the T3 share installments).

To simplify things I assumed a constant $30K addition to my investments at the end of each year, and a constant overall gearing level of 100% (50% LVR). I've also assumed that the average cost of my investments loans is around 2% above the cash rate. A recent investment report from Count Financial Planning provides the required data for a rough benchmarking of my portfolio over the past 1-, 3- and 5-years:

Simplified^ Benchmark:
50% - Property (Australian House Prices, Sydney median annual values from REIA)
50% - All Ordinaries Accumulation Index.

Data (Quarterly figures up to 31 Apr 08):


1-year 3-year 5-year
% pa % pa % pa
--------- ---------- ----------
50% Property - Syd 2.70% -0.99% 3.21%
50% All Ords Accum. -4.56% 17.39% 18.40%

Overall, ungeared -0.93% 8.20% 10.81%

CPI 4.24% 3.22% 2.80%

Cash rate 7.10% 6.39% 5.99%

Approx Loan int rate 9.10% 8.39% 7.99%

Benchmark" -10.96% 8.01% 13.63%

My Portfolio -5.26% 8.06% 11.46%


" = ungeared rate + (ungeared rate - int cost of gearing).

The figures show that:
: gearing improved returns over 5 years, but has the reduced 3 year average return (due to the negative investment returns of the past 12-months).
: My portfolio did better than this rough benchmark over the past year, but didn't perform as well as I'd expect over 5 years. Probably because I had some international stock exposure in my retirement account which isn't reflected in this rough benchmark.
: Sydney real estate was not the best place to be invested over the past 5 years!

Since I'm not a fund manager, benchmarking my portfolio is really just for idle curiosity. If I ever get all my investment information up to date in Quicken I may have a go at doing this more accurately.


* There's actually a valid reason why you always seem to pick the wrong queue. If there are ten queues, you only have a 10% chance of picking the fastest line. So, 90% of the time you'll end up sitting in a 'slow' queue watching one of the others queues proceed much faster. It's just human nature to pay attention to queue(s) that are faster than yours, while ignoring all the other queues that are even slower than the one you're in! ;)

^ My current allocation includes a mix of Australian and International stocks, so the benchmark should probably be:
50% Sydney Residential Property
25% Australian All Ords Accumulation Index
25% MSCI world (ex-Australia) Accumulation Index.

My Target Allocation is something like:
10% - Cash/Bonds/Alternative (Hedge/Agri/Art/Gold etc).
25% - Property (Mix of direct investments and Listed Property Index)
35% - Aust Shares (Index)
30% - International Shares (Index)
but I don't expect to get to this mix for another decade or so, buy making additional investments only in those asset classes which are currently underweight.

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1 comment:

MoneyEnergy said...

Just found your blog. Nice to see an Aussie in the PF universe. I'm definitely interested in learning more about investing down under - both domestically and for foreigners.

What do you say your top 10 companies are? (I know one of them....)

Canadian Clare