Monday, February 28, 2011

Monthly Review - February 2011

When I entered the data for February, I was expecting to show a loss on my investments and, most likely, a decrease in net worth. Ending the month with a solid gain in net worth came as a considerable surprise and I spent some time reviewing the spreadsheet searching for the error(s). There wasn't one.

So February ended up being a surprising month of positive financial progress. Equities fell, but only slightly with gains at the beginning of the month being only marginally less than the losses at the end of the month. My Australian equities were actually ahead for the month. Commodities rose sharply, especially silver. FX movements were slightly negative with the AUD rising against the HKD/USD and the NZD falling. Cash flow on the properties was positive now that we are back to 100% occupancy. Savings were excellent as expenses were low. I also wrote back some accrued long term expenses which I considered over provided for.

Here are the details:

1. my Hong Kong equity portfolio fell modestly. This month I made a substantial investment in China Gas (HK:384) and a small additional investment in China Construction Bank (HK:939);

2. my ETFs were down with gains in Russia and China being insufficient to offset declines in India, Vietnam and Taiwan;

3. my commodities rose sharply with silver jumping significantly and more modest gains in my commodity ETF and ETC NICK. The ETC HOGS continued to demonstrate the fact the pigs are burrowing animals;

4. all of my properties are now occupied, the tenants are paying on time and there was only one small repair bill (I will have a larger one at some stage on a property suffering from a persistent leak). I have one lease expiring next month and the tenant has not indicated whether he wishes to renew or not. If he does want to renew, he is in for a shock as the last fixing was below market and the current market is more than 30% above his current rent;

5. currency movements were slightly negative, as the decline in the NZD was only partly offset by gains in the AUD;

6. my position in bonds remains small. There were no purchases this month;

7. a put option against the HKD/NZD was exercised against me for a small loss;

8. savings were very strong with low expenses.

My cash position is now high with 26 months of expenses in cash or equivalents (the same as last month). This is much more cash than I need and one of my current tasks is to find somewhere to invest at least half of it.

For the month, my net worth increased 2.52%. The year to date increase is 6.70%.

My target retirement window remains sometime between early 2012 and early 2013. While the possibility of a one year extension exists, it will take some adverse market conditions or other unexpected event to require that. Every passing month brings me closer to my retirement goal - it's possible that I may be handing in my notice less than a year from today.

Thursday, February 24, 2011

Hong Kong Budget - yuck!

The Financial Secretary released the annual budget yesterday. In short, it was a budget which will please no one. The left wing groups will complain that there were not enough hand outs. For my part, it was disappointing to see so much of the taxpayers' money being wasted, a complete failure to address the most pressing fiscal concerns (civil servants and a narrow tax base) and a total failure to return the excess tax revenue to the people who actually paid it.

Leaving aside the fact that it was utterly predictable (which is usually a good thing), on balance it was a spending orientated budget. Huge sums have been allocated to hugely wasteful infrastructure projects and "sweeteners" designed to alleviate the effects of inflation. For the most part, the sweeteners are poorly designed and may well have the effect of increasing demand rather than alleviating inflation.

On the positive side, we will get rates relief up to HK$1,500 per quarter per property (a bad idea), an electricity subsidy (a bad idea) , increased allowances for some dependants and one off contributions of HK$6,000 to our MPF accounts (a really really bad idea). The latter will benefit MPF service providers more than MPF account holders - if the government wanted to help people better prepare for retirement, abolishing MPF would be a good start. Yes, we benefit from these measures but they are very poor and counterproductive tools to address inflation concerns.

Proposals to increase the supply of land to deal with the (alleged) bubble in real estate prices where there (as expected) but were moderate - enough to suggest that future supply of new units will go up but not so much as to risk a repeat of the 1997 supply increase which crashed the market.

Disappointingly, in spite of the excess tax revenues, the government did not propose reducing the tax rates or providing a tax refund - effectively spending the excess rather than giving it back to the people who actually paid it.

There was also not effort to cut back on the bloated and vastly over paid civil service - Hong Kong's most pressing and egregious fiscal and social issue. Likewise, efforts to get commercial tenants of public properties to pay market rents were meaningless - the situation were commercial businesses are benefiting from the tax payers and the public in general seems set to continue indefinitely.

If this is how gutless our government is with only limited democracy, the prospect of greater democracy is a genuine cause for concern. Let's hope it never happens.
So yes, there is money in it for us which is welcome

FX contract closed out at a loss

Last month's HKD/NZD FX contract was closed out at a loss yesterday.

The NZD was sold off after the tragic earthquake, resulting in a current fixing of HK$5.8005 compared to my strike of HK$5.954. The net loss after accounting for the premium I received is 2.03% of the amount invested. I am still holding the NZD and need to decide what to do with them. I can consider some NZD denominated corporate bonds with yields of 6-7% which would go some way towards reducing the volatility associated with my portfolio.

Wednesday, February 23, 2011

Inflation accelerates

Hong Kong's year on year inflation (as measured by the CPI) rose 3.6% in January according to figures released by the Census and Statistics Department yesterday.

This compares to 3.1% in December and consensus forecasts of 3.3%.

The increase was mainly driven by higher food prices and higher private sector rents. Given that food is (largely) a non-discretionary spending category and, for those not in taxpayer subsidised accommodation, rents are (largely) non-discretionary as well, there is relatively little that people can go to avoid the higher cost of living. While sweeteners can be expected in the forthcoming budget, the reality is that the Hong Kong government can't actually do anything meaningful to reduce the underlying inflation without changing the currency peg.

From this investor's perspective this is mixed news. As a net borrower (I still have a mortgage on my home and on most of my investment properties) whose cost of funding is below 1%, I am seeing the real value of my liabilities decline. As a holder of properties and equities, I can expect that, in the long term, that I will do better than an investor who was more heavily weighted towards more conservative investments such as bonds and cash - so long as I can live with the volatility. In the shorter term, I am seeing very noticeable increases in our grocery bills and certain other expenses. It is unclear what the impact will be on my income. However given that I have (I hope!) only this year and, possibly, next year to go before I retire the inflationary impact on my income is of less significance than the effect on my investments and my monthly spending.

I do not plan to make any changes to my investment strategy at this stage. If interest rates start rising I will consider making early repayments on some of the mortgages. If interest rates stay down below the level of inflation, I may come down off the fence and keep the mortgage on our home in retirement.

While rising demand and falling supplies have contributed to inflation (especially in food prices), the US Fed's frenetic running of the printing presses is also a meaningful contributor. It could almost be said that inflation is currently America's fastest growing export.

Sunday, February 20, 2011

Hong Kong Marathon

It was that time of year - my almost annual pretense of being an athletic person when I sign up for 42 kilometres of pain, otherwise known as the Hong Kong marathon.

Near perfect weather (12-15 degrees) made for ideal running conditions. The split starts reduced congestion enabling people to run at close to their desired pace after the first couple of kilometers. The all important drinks stations were well managed (although the sports drink on offer was not one that I would willingly consume if I had a choice) as was the event as a whole.

More due to the good weather than anything else, I managed to lumber around in a few minutes under four hours - nearly half an hour quicker than last year when it felt like I was running in a sauna. A great experience.

Wednesday, February 16, 2011

Leakage update

Last month I reported on a problem I was having with one of my properties . This saga shows little sign of coming to an end and every indication of ending up with a vacant unit and a law suit.


1.denying that the leak had anything to do with them (in spite of having an unambiguous letter from the Buildings Department confirming that their pipe was the only source of the leak);

2. alleging that the pipe leaked because of damage done when my contractor redecorated (the contractor never went into the ceiling spaces and the leak did not materialise until 8-9 months after the work was done);

3. that the leak would not have happened if they had been given prompt access to do the repairs as soon as the leak had occurred (I'm not sure how they expected to be told that there was a leak before it happened or why it is my fault that they refused to accept responsibility or do anything for months after they were notified);

4. alleging that the renovations which I did were illegal (not true (and the Buildings Department have been in the property three times since the work was done) and, even if true, totally irrelevant),

the owner of the upstairs unit eventually did repair their leaky pipe. Or did they? It just kept on leaking but in smaller volumes. Once again they denied that the leak had anything to do with them and, once again, the Buildings Department has inspected, tested and orally confirmed that the leak is solely due to the upstairs unit but I will have to wait three weeks for the written confirmation. The owners of the upstairs unit have been told but are back into denial mode again. Unfortunately, I cannot legally do the repair myself and the nature of the leak prevents me from simply running my own pipe to catch the water and divert it into a drain.

Understandably my tenants are getting rather frustrated with this process (and I do not blame them). They have asked for compensation. My lawyers have confirmed that legally they are not entitled to either compensation from me or to break the lease. Likewise, I have no legal right to recover any voluntary payment from the offending neighbour. I can only recover actual losses which I have incurred such as the cost of repairs. They have been told that they will be sued to recover the damages which they continue to deny have anything to do with them.

That said, my tenants' lease will soon be entering the break period where they have a right to terminate on giving two months notice. I do not particularly want to have a vacancy and have to pay the agent to find me another tenant. I also sympathise with the tenants - a lot.

Accordingly, I intend to offer the tenant a reduction in the monthly rent for part of the balance of the term. The amount and duration of the reduction is still under consideration. This gives them an incentive to remain and avoids a situation where I pay a lump sum and then have them walk anyway. It is also more tax efficient in that a reduced rental income reduces my taxable income whereas the payment of a lump sum on a voluntary basis is not tax deductible.

Hopefully this will avoid a vacancy.

I will demand that the owners of the upstairs unit compensate me for whatever I pay the tenant, but realise that when the time comes to sue them, I will have to drop that part of the claim.

Friday, February 11, 2011

HK to issue TIPS

News reports have suggested that the Hong Kong government will issue inflation indexed bonds.

If the issue actually happens it would be both welcome and unnecessary.

The ability to buy some HKD denominated bonds at better yields than retail investors can get in the secondary market would be welcome. Assuming that they are offered at a real yield in the 2-3 percent range, they would be an attractive addition to the private portfolio as I transition into retirement. The attraction lies not in the expected return (which would still be less than what I would expect on equities), but the the ability to reduce risk.

The unnecessary part is that the Hong Kong government has massive reserves, being a by-product of excess taxation, and has zero need for additional funds. The purported reason for the proposed issue is to enable Hong Kong investors to protect their assets from inflation. Given the reason for the issue, it has been suggested that only retail investors would be eligible to apply. Terms being considered are 3 and 5 years.

CCB purchased #2

This morning I made a small additional purchase of shares in China Construction Bank (HK:939) paying HK$6.64 per share. This compares with my original purchase at HK$6.27 in April/May 2010.

CCB is now my second largest investment in a single company, just ahead of China Gas (HK:384) and Sinopec (HK:386) but a long way behind Hutchison Whampoa (HK:13).

Wednesday, February 09, 2011

12 months to go - maybe

There is now 12 months to go to the earliest date in my retirement window (Feb 2012 - Feb 2014). The reason for the February dates is that is when my employer pays out year end bonuses which are usually worth waiting for.

From a financial perspective, I am firmly on track to hit my number by Feb 2012. It will take a meaningfully bad return on investments this year to change that. Having analysed the numbers to the point of obsession, the two biggest risks (outside of an armageddon scenario) to the financial side are (i) not having the discipline to hold enough cash to ride out a meaningful downturn in equity prices and (ii) higher than expected inflation.

On the non-financial side, things are starting to fall into place. I have my bucket list and have actually started working on it. Mrs traineeinvestor is on board, although predicting that I will become bored and go back to work. I have life insurance in place which will carry on after I retire (although by definition I will not need it). I will not know whether I can carry on with medical cover post-retirement until sometime after I hand in my notice - this remains an uncertainty, although not one that is sufficiently large to derail my plans.

I will do a full medical and dental check up in Q4 2011.

I will take advantage of the office shredder and do a shredding binge in December.

One issue that will need to be addressed is explaining to my children why Daddy is not working and making sure that they are not left with the impression that not working is acceptable.

Tuesday, February 08, 2011

China A50 ETF purchased #2

With the PRC equity markets having under performed for some time, I added some more units in the China A50 ETF (HK:2823) to the privateportfolio this morning. I paid an average of HK$12.68 per unit. This compares with the HK$13.56 paid in October 2010 HK$13.56 paid in October 2010 .

While it has to be acknowledged that China is facing some economic issues with rising inflation squeezing business margins and monetary tightening, there are also some positive economic developments, including the continued expansion in domestic consumer demand, rising wealth levels and Western China playing catch up with the rest of the country. There is also the possibility that the restrictions on property investment may result in more money being invested in the share market.

Wednesday, February 02, 2011

Reviewing accruals

Like many people I make an accrual each month for expenses which are incurred at irregular intervals. This avoids wild swings in the budget in months were substantial payments fall due. It also ensures that I keep enough cash on hand.

Currently I have accruals for:

1. luxuries - usually some over-priced and over-hyped Bordeaux, but I also took my iPad from this accrual. Since this is wholly discretionary, I can say that the accrual is accurate - right up to the point where I overspend;

2. travel/holidays - this is a significant cost item. I have probably under provided for this and will add to this provision this month and slightly increase the monthly accrual going forward;

3. taxes - a necessary evil and the largest accrual by a considerable margin. After going through my estimated tax liability for 2010, I concluded that I have significantly over provided for my taxes;

4. home renovation project - our home will need redecoration at some stage and I started setting aside some money each month in 2009. The kitchen and bathrooms are now 11 years old and the last time it was painted was in 2005. It is likely that we will have to move into a serviced apartment for a couple of months while it is done. Whether this is over provided or under provided for will depend on when the renovation takes place. If this year, there will be a significant shortfall.

Accordingly, I will transfer some of the excess tax accrual to the travel accrual and the home renovation accrual and the balance of the excess is now available for investment - time to go shopping.

Tuesday, February 01, 2011

China Gas purchased #2

Following an announcement from the company providing an update on the investigation following the arrest of the managing director and executive president, I decided to buy more shares in China Gas (HK:384) this morning. Purchase price was HK$2.90 per share.

The announcement has provided sufficient clarity (IMHO) in that:

1. definitive action has been taken or is being taken against the two directors involved;

2. management appears to have a reasonable basis for stating that the maximum (i.e. worst case) loss is HK$178 million which is not material to the company;

3. they have used a "big 4" accounting firm to make an investigation and prepare a report and "they are satisfied with the findings so far";

4. they have provided a loose timetable for the report to be submitted after Chinese New Year;

5. there was confirmation that the company is operating "normally" and that 2010Q4 gross profit margin had improved.

The negatives:

6. it was not definitively confirmed that there were no additional issues;

7. there was no statement regarding appointing replacements for the arrested directors.

Although not as definitive as I, as a shareholder, would like it was a considerably better effort from the company's directors in addressing the issue than some other cases.

Combined with my earlier purchases in July 2009 at HK$1.96, my average purchase price is HK$2.49.