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); 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.