Monday, July 02, 2018

Mid-year review

One the last few months an escalation of the "trade war" between the US and its trading partners has pushed equity prices down, rising interest rates have cut the value of bonds and the rising USD has knocked the HKD value of non-USD/HKD investments. YTD we are down 1.08% on our mark to market investments and would be ahead if the current values of our investment properties were taken into account.

Like most investors, I find it painful to watch the value of my investments decline and have to remind myself that it is the income stream from my investments that matters – not the day to day fluctuations in value and, as long as I am accumulating assets, lower prices are actually good for me.

Although it is not entirely an apples-to-apples comparison because (i) I have reformatted the way I calculate my gross and net income streams and (ii) some dividends which were paid in July 2017 have been paid in June this year, my net income from investments is considerably higher than for the same six month YTD period last year. After adjusting for the timing differences and for loss of income from some shares which were sold, I expect my total net income for 2018 to be at least 5% higher than last year. If I back out the small amount on consulting income I received last year (this year zero), the increase in income from investments should be more like 8%.

Looking ahead, I can see increased costs from 2019 onwards as my younger daughter moves from a heavily subsidised public school in Hong Kong to join her elder sibling in boarding school. This should be partially offset by the completion of my university studies in mid-2019. Looking a bit further ahead, we have two mortgages which will be paid off in early 2020 and mid-2021 which will make a huge difference to our cash flows. The maturity dates for our remaining mortgages are much further out.

Which brings me back to the present where the HSI is down YTD and some shares are starting to look more attractively priced. With that in mind, I have taken out a new small twenty year mortgage on one of our apartments and will look to reinvest the proceeds for (hopefully) yields higher than the interest rate I am paying on the loan. Total household gearing will still be below 10%.

Short version: as I approach the 5th anniversary of my retirement, our finances are in good shape.


Financial Review – June, 2018

June saw a fall in net worth with declines in all asset classes (apart from small gains in Au and NZ equities in local currencies) compounded by adverse currency movements. The end result was a 3.85 percent increase in net assets.

For the year to date, the portfolio is down 1.08 percent. The adjusted change from when I retired in September 2013 is a 25.37 percent increase. Hong Kong liquidity stands at 38.96 months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to net asset sales. 

Here are the details:

1. my Hong Kong equities fell. I made a small additional investment in Cheung Kong Holdings (HKEX: 001);

2. my AU/NZ equities were were down. I made a small additional investment in Colonial Motor Company (NZX: CMO);

3.my equity ETFs were down (India, Hong Kong and China) in line with the local markets;

4. my position in silver was down;

5. all tenants are paying on time and all properties are let. However, three tenants will move out in July. I have secured replacement tenants at slightly higher rents for two of the properties and the third is on the market;

6. the AUD and NZD were down against the USD/HKD;

7. my position in bonds remains modest. There were no additional purchases this month and one bond matured – proceeds were applied to a partial repayment of my margin facility. Recent interest rate increases have pushed the holding values of some of my bonds to  below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income;

8. expenses were high as I paid for an air ticket for a recent trip to New Zealand later this year and some of the expenses for our family's summer holiday;

My HK cash position fell slightly during the month. I currently hold 38.96 months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 8.81% of total assets. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised. 

Thursday, May 31, 2018

Financial Review – May, 2018

May saw a small increase in my position with gains in my equities largely offset by weakness in the AUD, NZD and bonds. Silver was more or less flat for the month. The end result was a 1.21 percent increase in net assets.

For the year to date, the portfolio is up 2.07 percent. The adjusted change from when I retired in September 2013 is a 29.47 percent increase. Hong Kong liquidity stands at 38.13* months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to net asset sales. 

Here are the details:

1. my Hong Kong equities rose. There were no transactions this month other than taking a trivial loss on the IPO of Good Doctor;

2. my AU/NZ equities were were up. I sold my shares in Caltex (ASX: CTX) after becoming concerned about increased headwinds and losing some conviction in management's strategy. Purchased the shares more or less trebled between 2009 and 2015 but have gone sideways over the last three years. I reinvested the sale proceeds in AGL Energy (ASX: AGL) which offers a higher dividend;

3.my equity ETFs were up (India, Hong Kong and China) in line with the local markets;

4. my position in silver was more or less unchanged;

5. all tenants are paying on time and all properties are let. However, one long standing tenant will move out at the beginning of July so I will have a vacancy and the inevitable repaint/repair/agency expenses then. A second tenant has also given notice;

6. the AUD and NZD were down against the USD/HKD;

7. my position in bonds remains modest. There were no additional purchases this month. Recent interest rate increases have pushed the holding values of some of my bonds to  below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income. However, the spread between the interest earned and the interest paid has narrowed to about 2.1% and will likely narrow again as interest rates increase further;

8. expenses were high as I paid for an air ticket and hotel accommodation for a recent trip to New Zealand;

My HK cash position fell slightly during the month. I currently hold 38.13* months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 9.27% of total assets. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised. 

*The liquidity number reported for April, 2018 was a typo.

Monday, April 30, 2018

To remortgage or not?

The last payment on one of my mortgages is due to be paid in June this year. The net cost of borrowing is currently around 2.3% which compares favourably with the margin facility currently costing about 2.9% (and compounding monthly), the yield on good quality short term bonds at around 4-5% and there are many equities which offer yields above 4%.

The other factor in favour of taking out a new mortgage is that the only storage space available for the title deeds is a filing cabinet at home – there is no room in my safe deposit box. I understand that lost title deeds cannot be replaced effectively making the property unsellable and unmortgageable. Taking out a new mortgage mitigates that risk.

The negatives are (i) the interest rate is a floating rate and will cost me more as interest rates rise and (ii) it's a P+I mortgage which will have an impact on cash flow. That said, it's a small property and the mortgage will be correspondingly small.

I'm currently inclined to take out a mortgage for a relatively small amount ... assuming the bank will lend to someone with no employment income.




Financial Review – April, 2018

April saw a small rebound in my position with gains in my equities largely offset by weakness in the AUD, NZD and bonds. Silver was more or less flat for the month. The end result was a 0.34 percent increase in net assets.

For the year to date, the portfolio is up 1.09 percent. The adjusted change from when I retired in September 2013 is a 28.19 percent increase. Hong Kong liquidity stands at 48.36 months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to net asset sales.

Here are the details:

1. my Hong Kong equities rose. The only transactions this month were purchasing a small shareholding in ND Paper (HK: 2689) and subscribing for shares in the IPO of Good Doctor (results of application not known);

2. my AU/NZ equities were were up, largely due to gains in New Zealand offsetting declines in Australia. I added some additional shares in Marsden Maritime Holdings (NZX: MMH) to the portfolio;

3.my equity ETFs were up (India, Hong Kong and China) in line with the local markets;

4. my position in silver was more or less unchanged;

5. all tenants are paying on time and all properties are let. However, one long standing tenant will move out at the beginning of July so I will have a vacancy and the inevitable repaint/repair/agency expenses then;

6. the AUD and NZD were down against the USD/HKD;

7. my position in bonds remains modest. I added one additional 3 year USD bond to the portfolio – this is intended to be a replacement for a bond that matures in June. Recent interest rate increases have pushed the holding values of some of my bonds to  below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income. However, the spread between the interest earned and the interest paid has narrowed to about 2.1% and will likely narrow again as interest rates increase further;

8. expenses were low with no major items being incurred this month. In contrast, next month will have high expenses as I will be booking and paying for several travel related expenses;

My HK cash position fell slightly during the month. I currently hold 48.36 months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 9.35% of total assets, with the increase from last month due to borrowing to buy a bond. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised. 

Thursday, March 29, 2018

Financial Review – March, 2018

March saw a further erosion of January's gains with declines in my equities compounded by weakness in the AUD. Bonds, silver and the NZD were more or less flat for the month. Positive cash flows from investments, were not enough to offset the mark-to-market losses and the end result was a 1.70 percent decrease in net assets.

For the year to date, the portfolio is up 0.82 percent. The adjusted change from when I retired in September 2013 is a 27.84 percent increase. Hong Kong liquidity stands at 41.74 months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to asset sales.

Here are the details:

1. my Hong Kong equities fell. The only transaction this month was subscribing for and selling one board lot (2,000) shares in Most Kwai Chung in its IPO for a small profit;

2. my AU/NZ equities were were down, largely due to declines across the board in Australia and Fletcher Building in New Zealand. There were no transactions this month;

3.my equity ETFs were down (India, Hong Kong and China) in line with the local markets;

4. my position in silver was more or less unchanged;

5. all tenants are paying on time and all properties are let. I had to fork out for a pointless window inspection this month (delayed by an uncooperative tenant);

6. the AUD was down and the NZD flat against the USD/HKD;

7. my position in bonds remains modest. Recent interest rate increases have pushed the holding values of some of my bonds to slightly below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income. However, the spread between the interest earned and the interest paid has narrowed to about 2.1% and will likely narrow again as interest rates increase further;

8. expenses were low with no major items being incurred this month.

My HK cash position fell slightly during the month. I currently hold 41.71 months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 8.79% of total assets. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised. In March, total debt declined but the gearing ratio increased due to declines in asset values.

Thursday, March 01, 2018

Financial Review – February, 2018

February saw a partial reversal of January's gains with declines in my equities, bonds and commodities being compounded by declines in the AUD and NZD. Positive cash flows from investments, were not enough to offset the mark-to-market losses and the end result was a 2.75 percent decrease in net assets.

For the year, the portfolio is up 2.21 percent. The adjusted change from when I retired in September 2013 is a 29.65 percent increase. Hong Kong liquidity stands at 42.01 months of estimated outgoings, significantly increased from the start of the year's 26.68 months due to asset sales.

Here are the details:

1. my Hong Kong equities fell. I sold some of my shares in China Gas (HK:384). This has been my most profitable equity investment since I resumed buying equities in 2009. Between the partial sale proceeds and dividends, I have had my original investment back several times over and still hold about half the number of shares originally purchased. It was simply a case of having too much money in one share. I have partially reinvested the proceeds in a few more shares in HSBC and a transfer to Australia (see below);

2. my AU/NZ equities were were marginally down. With the weakening AUD, I transferred some money to Australia and purchased shares in Inghams (ASX: ING) which offers an expected yield above 5% and whose board is considering capital management options after a fabulous first half result. I have also spent some of my NZD on additional shares in NZ Refining (NZX: NZR) again, based on the very attractive yield on offer – over the next 14 months I should receive two final and one interim dividend which I expect will collectively be about 10% of the current share price with expectations of higher dividends in following years once the 2018 maintenance shut down is completed;

3.my equity ETFs were down (India, Hong Kong and China) in line with the local markets;

4. my position in silver fell slightly;

5. all tenants are paying on time and all properties are let. I had several maintenance bills this month and will have to fork out for the pointless window inspection next month (delayed by an uncooperative tenant);

6. the AUD and NZD were were down against the USD/HKD. I shifted some money to Australia in response;

7. my position in bonds remains modest. Recent interest rate increases have pushed the holding values of some of my bonds to below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income. However, the spread between the interest earned and the interest paid has narrowed to about 2.1% and will likely narrow again as interest rates increase further;

8. expenses were high due to the completely unnecessary purchase of an antique map.

My HK cash position fell slightly during the month. I currently hold 42.01 months of expenses in HKD cash or equivalents (up from 26.68 months on 1 January). 

Total household gearing ((debt+accruals)/assets) is 8.77% of total assets. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end and I do not net off cash. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised.

Sunday, February 18, 2018

New Zealand's Property Market – dysfunctional by design

The affordability of housing in New Zealand or lack thereof has been the subject of endless commentary and it is undeniable that, relative to income levels, housing in parts of New Zealand, specifically Auckland, is very expensive both to buy and to rent. Demands that the government do something to make housing more affordable for buyers and renters alike have been continuous for probably the best part of a decade now. In spite of which, house prices have continued to march upwards as have rents to a much lesser degree.

Both the centre-left National government which held office until the 2017 election and the far-left Labour led coalition which subsequently took power took a number of steps with the announced intention of making housing more affordable and raising the quality of rental accommodation. These are laudable objectives. Unfortunately, the actions taken or announced by both parties have had, and were always going to have, precisely the opposite effect. Put simply, the laws of supply and demand have, time and again, proven to be more powerful than government decree.

Taxes make housing more expensive

It remains a rather inconvenient fact that capital gains taxes act as a deterrent to selling. People don't line up to pay taxes that they can legitimately avoid by not selling. New Zealand experienced this with the 1972 Labour Government's disastrous "property speculation" tax which did more to push property prices higher than the OPEC led double digit inflation of the time. Far from punishing speculators, it made them rich at the expense of people trying to get a foothold on the property ladder. The causative link between capital gains taxes and higher property prices has been a near-universal experience. Australia in the 1990s and Hong Kong over the last decade serve as other examples. There's an academic study by the Swiss National Bank which essential explains that people respond to incentives. So it should come as no surprise that when the National government introduced a two year bright line test, property prices continued higher. Labour is extending the bright line test to five years because, in the words of Revenue Minister Stuart Nash   "This proposal will ensure residential property speculators pay income tax on their gains and makes property speculation less attractive." Nash is also promising a "comprehensive" capital gains tax regime. Leaving aside the fact that Nash is in ignorance of existing tax laws which make activities carried on for the purpose of making a gain taxable so that any one who carries on business as a property speculator should already paying tax, history and Economics 101 will tell us that, absent other factors, these taxes will have the opposite effect on housing prices.

The only example I can think of where capital gains taxes co-incided with lowering of property prices is Singapore. However, Singapore also introduced draconian transaction taxes on foreign buyers and domestic investors as well as ensuring a significant increase in the supply of new housing. The former would have reduced demand and the latter made more stock available to the smaller pool of potential buyers – so no surprise that prices fell.

The rental market is also subject to the law of supply and demand

New Zealand also suffers from a shortage of good quality rental accommodation at affordable rental levels. Or so politicians, the media and other groups keep telling us. And yes, there is some really awful rental stock out there. With the announced intention of either removing "unfair" tax advantages held by property investors or making sure that rental properties are warm and safe for tenants, a succession of legislative changes were made including the abolition of depreciation allowances (even though depreciation is a very real expense) and mandatory requirements for the installation of smoke detectors and insulation.  We now have proposals to increase the required notice period to evict a tenant and to have an annual "warrant of fitness" requirement for rental accommodation. All of these are a significant cost which is supposedly going to be cheerfully borne by the wealthy landlords along with rates demands which seem to increase by more than the rate of inflation every year. Unfortunately, as any economics student will be able to explain in jargon-free English, increased costs lead to reduced supply. Given that some of the expenses are flat fee items rather than percentage items, the impact will be felt most acutely at the lower end of the market (i.e. where more rental accommodation is most needed). Expect to see more articles about New Zealand's Rental Crisis and the Reduction in Rental Stock as this plays out and the incentives to invest in residential real estate are inverted into disincentives.

As a real example, after paying rates, agency fees, repairs, taxes etc only 37% of the gross rent received on my single Auckland rental property ended up in my pocket. Based on the latest rates valuation, that's a yield of less than 0.6% (six tenths of one percent). And that's in a good year with 52 weeks' occupancy and no major repair bills. Even if I doubled the rent, it's still a lousy investment.

And government policy is to make the situation worse

The shiny new government's announced initiatives include scrapping a number of plans to expand existing roads or build new ones as well as building new low-cost housing areas on the far fringes of Auckland. It's not hard to predict the outcome: the already desperately congested roads will become even more congested with a combination of population growth and people having to commute longer distances to work adding to the number of cars on the roads. The uncosted light railway to Auckland Airport will be an ultra-expensive irrelevance to almost all commuters.

And the proposed prohibition on foreign investment in New Zealand residential property, the one thing the Labour government promised which would have had some impact on the demand for property is, I am told, being reconsidered.

Short version

Investing in rental property in New Zealand is discouraged as a matter of government policy and government practice. Expect to see rental accommodation continue to become more expensive and harder to find as rational investors invest elsewhere.

As an investor myself, I have abandoned plans to invest further in New Zealand residential property but will keep my existing property as a store of wealth and a portfolio diversifier in spite of the almost non-existent yield.



Thursday, February 01, 2018

Financial Review - January, 2017

January saw 2018 off to a good start with gains in Hong Kong and emerging markets, combining with positive cash flows from investments, appreciation in commodities and favourable FX movements more than offsetting small declines in my Australian and New Zealand equities and bonds to produce a 4.41 percent increase in net assets.

For the year, the portfolio is up 4.41 percent. The adjusted change from when I retired in September 2013 is a 32.52 percent increase. Hong Kong liquidity stands at 26.67 months of estimated outgoings, almost unchanged from the start of the year's 26.68 months.

Here are the details:

1. my Hong Kong equities appreciated. I sold my shares in Dynamic Japan (HK6889) at a 19% loss. The shares were purchased in the expectation that Japan would introduce casinos and the the company would be a front runner for one of the first batch of casinos to be built. The Japanese government has effectively stalled the necessary regulatory reform and there is no timetable for when it will resume (if at all). The company is well run but its existing businesses are in a declining industry denominated in a weak currency so I see no reason to keep holding. Most of the sale proceeds were reinvested in Hua Xian REIT (HK:87001). At the end of the month I sold a small number of shares in CNOOC (HK:883);

2. my AU/NZ equities were were marginally down. There were no trades this month. I currently have too high a proportion of my New Zealand assets in cash;

3.my equity ETFs were up (India, Hong Kong and China) in line with the local markets;

4. my position in silver rose slightly;

5. all tenants are paying on time and all properties are let. I had several maintenance bills this month and will have to fork out for the pointless window inspection next month (delayed by an uncooperative tenant);

6. the AUD and NZD were were up against the USD/HKD;

7. my position in bonds remains modest. Recent interest rate increases have pushed the holding values of some of my bonds to below par - since I intend holding to maturity (other than a solitary perpetual) this is not a problem. I unsuccessfully bid on two short term bond offerings and lost out on pricing showing that the demand for reasonably credit risk at the short end of the duration curve is very strong. I have a margin facility in place and my carry trade is doing its thing and generating a small amount of additional income. However, the spread between the interest earned and the interest paid has narrowed to about 2.2% and will likely narrow again on the next roll over date in February, 2018;

8. expenses were low.

My HK cash position fell slightly during the month. I currently hold 26.67 months of expenses in HKD cash or equivalents (down from 26.68 months on 1 January). This will increase once the CNOOC sale proceeds are received.

Total household gearing ((debt+accruals)/assets) is 8.73% of total assets. Property prices are as at 1 January, 2018 and will not be marked-to-market until year end. With a mark-to-market of equities, bonds and FX this number will fluctuate even if the amount of debt is being slowly amortised.

Monday, January 15, 2018

The US estate tax trap

The US is still the world's largest economy and home to some of the world's best companies and a huge array of investment opportunities in real estate, fixed income, equities and other assets. And just about everything is denominated in USD which, in spite of the best efforts of the Federal Reserve and successive administrations of spendthrift politicians, is still the world's reserve currency of choice.

It's a great place to invest but non US-persons should take the time to familiarise themselves with an egregious provision of US tax law. US citizens get a lifetime federal estate and gift tax exemption USD5.49 million for an individual.  For non-US citizens the exemption is USD60,000 – most US situated assets will then be taxed at the relevant rate of estate duty which is currently 40 percent. They will also have the not inconsiderable pain-in-the butt of having to fill in and file the US's typically mind-numbingly confusing returns with the IRS (and possibly state authorities as well) and may well need a lawyer to handle the paper work.

A simple example: If I purchased a property in the US for USD1.0 million in cash today and died tomorrow, my estate would be faced with a USD376,000 federal tax bill even though no profit or gain has been made on the investment.

Two useful plain-English links:US Tax 1 and US Tax 2 are provided with a laundry list of disclaimers including that I am totally unqualified to advise on tax laws (or anything else), that I do not endorse the information in the links and that the information should be checked to see if it is up to date, correct etc.

For my purposes, the risk of my heirs receiving an unexpected tax bill can be mitigated by not investing directly in the US. For US equities, I would invest in a non-US equity fund and for real estate, I would invest through an offshore company.

Unfortunately, I did not become aware of this until after I had invested in some land banking syndicates. They're in Mrs Traineeinvestor's name so I've made it clear that she is not allowed to die until after we have fully exited. I've also made the decision not to add to our existing investments in this area.





Monday, January 01, 2018

Previewing 2018

After a financially fabulous 2017, my primary focus for 2018 is simply to avoid messing up by becoming overconfident.

Equity markets are at levels ranging from very expensive (USA) to moderately valued (several emerging markets). The same can be said about real estate prices. Cheap is hard to find and I have no expectations that further capital gains will be achieved in 2018. Accordingly, my focus will be on cash flow from investments. Specifically, I would like to see my net cashflow from investments grow by enough to compensate for inflation (say, 3%) without simply reaching for yields that may not be sustainable over the longer term.

Part of this growth should come from companies paying higher dividends. The balance will come from a combination of deploying cash into new investments and some from recycling existing investments. I am not factoring in any increase in rental levels. Given the dividend expectations for my larger equity holdings, one small mortgage being paid off later this year and the proposal to reduce the corporate tax rate on small businesses the target increase of 3% appears almost too easy but ....

.... all properties are currently leased but some leases fall into break periods this year and, if the tenants move out, not only will there be a loss of rental income but there will also be the not insignificant cost of redecorating and finding a new tenant; and

.... I am considering buying a completely unnecessary car which will involve not only shifting the cost of the car from an income producing asset to a cost generating liability but also the loss of income from a car parking space; and

.... I received a small consultancy fee in 2017 and it uncertain whether that will be repeated in 2018; and

.... FX changes can have an impact.

Later in 2018 a small mortgage will be paid off. I am considering whether to remortgage the property and invest the money elsewhere. I some respects, applying for a new mortgage would be a test as to whether the banks will still lend to me now that I am no longer employed?

Longer term, I still wish to acquire an additional property in Hong Kong but high prices and the double stamp duty make this a non-starter at present. I also wish to buy another property in Auckland but, once again, high prices are a deterrent.

On non-financial matters, I have reluctantly accepted that I will not be doing the Hong Kong marathon this year but hope to be able to train for 2019. Also on the list is self publishing my second novel  (hugely optimistic) and completing both the substantive chapters of my thesis and my remaining coursework credits by year end.