HYP1 is 16

[foxy]

Terry

HYP1 was as far as I recall a rehash of some investing truisms put together in a brilliantly succinct fashion.

15 large cap high yield FTSE stocks max of two per sector with a minimum dividend cover of two meant as a replacement to an annuity.

I would therefore compare it with an annuity income stream of the same vintage.

Your income stream is I presume based upon your trading rules which could be applied to any other asset class and in themselves are fairly typical. Also as I recall you have changed them over time. If so could you clarify this to avoid misleading information.

Capital and income hindsight comparisons are utterly pointless. To get them to anything near possibly interesting you have to run such data across different discrete time intervals and market conditions for a century or so.

Perhaps the board could be self moderated by a couple of its rational dwellers to avoid boring the rest of us with time warp discussions.

[grimer]

Watching the FTSE100 through the 1990s, 2000s and now 2010s, my suspicion is that the sector(s) dominating the FTSE100 at any given time tend to be those that have risen the most due to fashion/sentiment

I seem to remember that at one point Vodafone 'broke' the concept of a Unit Trust because they weren't permitted to have more than 10% invested in any one share and Vodafone was worth more than 10% of the FTSE100.

[Breelander]

I seem to remember that at one point Vodafone 'broke' the concept of a Unit Trust because they weren't permitted to have more than 10% invested in any one share and Vodafone was worth more than 10% of the FTSE100.

It's interesting to look at the relative sizes of the ftse100 members. Currently Royal Dutch Shell represents 9% of the ftse100. In fact more than 50% of the ftse100 is made up from just thirteen shares (seven of which I hold).

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Rank  Epic         Name                   % of ftse100   Market Cap.(m)

 1    RDSA+RDSB    Royal Dutch Shell          9.03%       £168,600.90
 2    HSBA         HSBC Holdings              6.62%       £123,557.80
 3    BP.          BP                         4.91%        £91,658.80
 4    BATS         British American Tobacco   4.58%        £85,441.50
 5    GSK          GlaxoSmithKline            4.24%        £79,240.40
 6    AZN          AstraZeneca                3.24%        £60,408.70
 7    VOD          Vodafone Group             3.22%        £60,095.30
 8    DGE          Diageo                     2.95%        £55,125.00
 9    RB.          Reckitt Benckiser Group    2.71%        £50,614.20
10    ULVR         Unilever                   2.37%        £44,317.80
11    SHP          Shire                      2.36%        £44,039.00
12    LLOY         Lloyds Banking Group       2.14%        £39,883.60
13    NG.          National Grid              2.12%        £39,529.00

source data: http://www.stockchallenge.co.uk/ftse.php

[Gengulphus]

My take is

1. HYP is pretty good for those who want to buy and forget.
2. There may be investing strategies with greater returns than HYP
3. Most other investing strategies probably require more time and analysis
4. To improve on HYP, you need to think you are better than the market, and be very clever or lucky, or both
5. HYP generally provides a better income than a cash interest account
6. HYP is likely (but is not guaranteed) to provide capital gain over a significant period of time

--kiloran

Interestingly, if you substitute the word 'index tracker' for 'HYP' in the above list you are pretty close to conventional wisdom.

Interestingly, if you add "7. HYP generally provides a better income than an index tracker" to the list, that's no longer the case... ;-)

Gengulphus

[Gengulphus]

HYP1 was as far as I recall a rehash of some investing truisms put together in a brilliantly succinct fashion.

15 large cap high yield FTSE stocks max of two per sector with a minimum dividend cover of two meant as a replacement to an annuity.

You need to leave out the dividend cover requirement and add requirements for a rising dividend record and reasonably low debt:

https://web.archive.org/web/20160605224455/http://news.fool.co.uk//news/foolseyeview/2000/fev001113c.htm

which contains:

To obtain a little more choice, I went marginally outside the FTSE 100 index and set £1.5b as my minimum capitalisation filter. This brings in a few shares that are just below the index. The other filters were an increasing dividend over the last five years and net gearing of under 50%. However I did relax the gearing filter because I wanted to bring in a utility. They have high yields but often high borrowings as well. I therefore went outside a purely mechanical approach on occasion and exercised a little personal judgement of my own. However, all the shares satisfy the increasing dividend and minimum cap rule.

And neither that article nor the previous week's first instalment https://web.archive.org/web/20160606015 ... 01106c.htm mentions annuities. That first instalment does mention insurance company products, but the specific example it gives is guaranteed income bonds:

Conventional wisdom on this topic from IFAs will tend to propel you in the direction of some kind of insurance company product such as guaranteed income bonds or the like.

Yet somehow nobody ever says that HYP1 was intended as a guaranteed income bond substitute...

Gengulphus

[Itsallaguess]

Income

BA Tobacco remains, as it has for years, the single largest income contributor with 22.0% of total income but Persimmon is not far behind in contributing 19.0% followed by BT Group third at 13.0%. At the other end, the smallest sums arose from Mitchells & Butlers on 0.8%, RSA 0.9% and Lloyds 1.0%. All of these are recovering from slashed or suspended payouts in earlier years.

As we can see from the table below, the reliance on a small sub-set of HYP1 shares for the vast bulk of dividend income became even more skewed again this year, with each of the 5/6 share-categories growing by 2% of overall income over the past 12 months -

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HYP1 Income-reliance comparison 2015/2016 -

2015 -
Income from top 5 shares = 69.7% of total
                6 shares = 77.3%

2016 -
Income from top 5 shares = 71.9% of total
                6 shares = 79.5%

Doris may have slept soundly, being ignorant of the make-up of the income she was spending, but anyone taking an interest in where their money was coming from will have quickly learnt that HYP1 had soon become extremely reliant on a small number of companies from both an income and capital aspect.

I personally prefer to take Terry's approach to HYP portfolio-management, and will manage my HYP in such a way that trims income-and-capital reliance, to keep my overall HYP portfolio much more balanced in both areas. I also take the initial view that 15 shares is too small a number of HYP components, and that such a small number of income-generators, if left un-managed, will become similarly skewed over a relatively short period of time.

I've very much preferred to build my HYP into a larger portfolio in terms of the number of companies in it. The margins for action being required in terms of income or capital reliance are such that a very low level of maintenance has been required over the years.

Cheers,

Itsallaguess

[Bubblesofearth]

Interestingly, if you add "7. HYP generally provides a better income than an index tracker" to the list, that's no longer the case... ;-)

Gengulphus

Well, yes, the phrase 'An index tracker generally provides a better income than an index tracker' would be hard to justify

I think the reason HYP1, and no doubt other HYP's, has outperformed the index from both an income and capital pov is down to the equal weighting of constituents. Which, if true, is a powerful learning in itself.

BofE

[Wizard]

Forgive a question from somebody not steeped in the history of these debates on TMF in the past.

When you reference comparisons versus an index, for example the comparison of HYP1 vs FTSE250 it is a comparison of a static group of shares with an index that is changing on a fairly regular basis. Is the assumption that FTSE250 is the index, i.e. that when a share leaves the FTSE250 and another joins the comparator to HYP1 also changes, or sticks with the same portfolio of shares that was in the FTSE250 at the time the period of comparison starts?

If the FTSE250 comparator is assumed to change with the composition of the FTSE250 how does a comparison take into account the frictional costs of keeping the portfolio updated, such as dealing costs and any taxes on net gains when shares are sold? It seems to me that without considering these the performance of the FTSE250 is being somewhat overstated.

Or are there passive trackers out there that do this for you and allow a single investment? If so there must be fees and have these been taken into account when using the FTSE250 as a comparator?

As I say, sorry if this is a bit of a basic / dumb question.

Terry.

[Raptor]

As I say, sorry if this is a bit of a basic / dumb question.

Terry, as far as we are concerned no "question is basic or dumb". But you have hit the nail on the head, what is a fair comparison to a HYP. Bear in mind that nowadays there is no "simple" HYP (IMHO) as there are a lot of different criteria people now apply. HYP1 is of the "doris" type, where unless corporate events occur the shares are held forever.

I gave up comparing my HYP or others against any index other than "rising income" and beating "rpi". In my case the bulk of my dividends are re-invested as I have 3 accounts now, a dealing account, ISA and SIPP. The later 2 are re-invested and the first divis are paid off into my savings, which allow me to "upgrade" my holidays and pay for my monthly "soirees" with my daughter. To confound it the ISA and SIPP have different "costs".

Problem is we should not be comparing "capital" either and some do (interesting debate there as well on which index).

Welcome to the world of HYP.

Raptor.

[Bubblesofearth]

Forgive a question from somebody not steeped in the history of these debates on TMF in the past.

When you reference comparisons versus an index, for example the comparison of HYP1 vs FTSE250 it is a comparison of a static group of shares with an index that is changing on a fairly regular basis. Is the assumption that FTSE250 is the index, i.e. that when a share leaves the FTSE250 and another joins the comparator to HYP1 also changes, or sticks with the same portfolio of shares that was in the FTSE250 at the time the period of comparison starts?

If the FTSE250 comparator is assumed to change with the composition of the FTSE250 how does a comparison take into account the frictional costs of keeping the portfolio updated, such as dealing costs and any taxes on net gains when shares are sold? It seems to me that without considering these the performance of the FTSE250 is being somewhat overstated.

Or are there passive trackers out there that do this for you and allow a single investment? If so there must be fees and have these been taken into account when using the FTSE250 as a comparator?

As I say, sorry if this is a bit of a basic / dumb question.

Terry.

I think it's entirely reasonable to compare any portfolio of shares (HYP or otherwise) with the wider market from which those shares have been selected. For most HYP's this would be either the FTSE 100 or FTSE all-share, the performance of which will tend to be similar thanks to the high capital weighting of the top 100. Comparison to the FTSE 250 doesn't seem that relevant to me.

Comparison with a FTSE100 or FTSE all-share tracker is reasonable for 2 main reasons;

1. Efficient market hypothesis would suggest that the market cannot on average be beaten.
2. Investment in a tracker is the cheapest and easiest way of gaining whole market exposure. Any portfolio of shares, even one that is largely left alone, will require more effort to maintain.

So to justify the added risk of holding less shares than the market along with the extra work it seems reasonable to expect a higher return.

Note, I'm not saying that a higher return cannot be generated (I actually believe it can) but that comparison with a (relevant) market tracker does have merit in determining whether this is indeed the case.

BoE

[Bubblesofearth]

The FT100 is a mechanical selection method that tilts heavily into few stocks, often with large tilt also to particular sectors. It is not IMO representative of the broader total market. The FT All Share is little better as it weights heavily into the FT100. If you initially equal weight more evenly across stocks and sectors then a index that is structured similar is a better proxy. If you don't tweak then again a index that doesn't tweak is also a better benchmark. There are however no such indexes and as such a more equal weighted index such as FTSE 250, that like any equal weighted index tilts more towards mid/smaller caps than does FTSE100/FT All Share, or a fund that follows similar rules is a more like-for-like comparison which to benchmark against.

There is no point whatsoever in comparing to a benchmark that doesn't even contain the investments you are making. You might as well compare to an equal weighted basket of commodities as the FTSE250.

Every portfolio of UK shares is necessarily selected from the all-share index. What you are saying when you pick such a portfolio is that there is a reason why you are doing so rather than going for a tracker and that reason ultimately has to come down to an expected uplift in performance. It may be you believe equal weighting will give you that performance or it may be faith in your stock-picking abilities. Or whatever other criteria you choose to use. But whatever the criteria the best judge of performance is vs the whole market index.

That's not a soft target by the way. Beating the market (which is what we are talking about here) is what every active fund manager or private investor (except those in trackers) is trying to achieve!

BofE

[Arborbridge]

The two most useful posts in this "practical" thread are (from my point of view) pyad's table and TJH's table.

Here we can find the income experience of two HYPs ( albeit run very differently) through the financial crisis and use it for some budget planning of our own. Looking at the variation in income and the likely falls and recuperation speed, one can calculate the likely size of income reserve required to tide one over the bad periods. I dare say history will never repeat exactly, but at least these examples give us some idea what we might expect.

I'm not bothered about the index with which to compare HYP - I'm more interested in the practical aspects of survival using HYP.


Arb.

[idpickering]

I'm not bothered about the index with which to compare HYP - I'm more interested in the practical aspects of survival using HYP.


Arb.

Well said Arb. Have a virtual rec.

Regards,

Ian

[tjh290633]

Terry

HYP1 was as far as I recall a rehash of some investing truisms put together in a brilliantly succinct fashion.

15 large cap high yield FTSE stocks max of two per sector with a minimum dividend cover of two meant as a replacement to an annuity.

I would therefore compare it with an annuity income stream of the same vintage.

Your income stream is I presume based upon your trading rules which could be applied to any other asset class and in themselves are fairly typical. Also as I recall you have changed them over time. If so could you clarify this to avoid misleading information.

Capital and income hindsight comparisons are utterly pointless. To get them to anything near possibly interesting you have to run such data across different discrete time intervals and market conditions for a century or so.

Perhaps the board could be self moderated by a couple of its rational dwellers to avoid boring the rest of us with time warp discussions.

My trading rules have gradually evolved. The first evolution was in 1997 when LLOY and Zeneca rose above 10% of the portfolio value. I trimmed them back below the 10% level and set that as the limit for any one holding. At this time I had about 20 holdings, so that was about twice the average holding value. The next time I had to trim was in 1999 when Marconi, BT and Pru all rose above the limit and I trimmed back by about 20%. Marconi was trimmed again in 2000 and BT in 2001. Eventually I changed my rule to twice the median holding value and then, as holdings got to higher values overall, I cut it back to 1.5 times the median holding value.

The next change was when some shares rose so much that the yield fell below 2% and I decided that it was worth selling them completely and reinvesting in shares with a higher yield. Marconi was one of the first to succumb, but that was because it stopped paying dividends and was about to disappear. The first one to be sold for a low yield was BG Group in 2006, followed by Whitbread in the same year.

So you can summarise this by saying that shares which rise above 1.5 times the median holding value are trimmed back by 20-25%. If a share rises so much that its yield falls below about half the market yield, or 2%, then I sell completely. Likewise if a share stops paying dividends with no chance of resuming in the forseeable future, then that is sold. I have found that it is better not to sell immediately, because the market often overreacts, and a better opportunity will come some time later. If I am convinced that a share will recover and start paying dividends again, I may hold onto it as a recovery share, and did that with Lloyds Bank and Taylor Wimpey. Currently I am holding Tesco for that reason. I don't invest fresh money into a share which is not paying a dividend, except that I added to both Indivior and South32 when they were demerged, so that I had a more comfortably saleable holding. In fact both have rewarded me with capital growth, and also dividends.

One rule is always to reinvest any money arising from trimming in shares with a higher yield than the source share. It is a way of ratchting up the income.

TJH

[grimer]

There have been a few mentions of defensives in the IT recently. Due to the low beta, they tend to be avoided by fund managers - they may under perform a 'bull' market. Investors are rewarded for accepting this 'risk' and defensives tend to be consistently under priced.

The 'typical' HYP tends to include a larger than 'normal' (compared to FTSE) proportion of defensive shares, so perhaps that is one secret to the HYP's success - it is exploiting a 'known' market feature?

http://www.investorschronicle.co.uk/2016/09/29/your-money/portfolio-clinic/don-t-take-big-bets-on-individual-shares-o2UdV6vb5TYZN3cSQny8AN/article.html

[moorfield]

Capital
This is irrelevant or secondary depending on your viewpoint. If it's primary, you possibly shouldn't be in this strategy at all. As people who have followed me over the years will be aware, I've always advised that it be ignored. However I know that readers do want to see it.

Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did). Her £75000 would now be worth only £85059 but the shares would have returned an annual dividend of £4990, a total of £79840 against HYP1's £68758 over the same 16 year period. "Widows and Orphans" shares I believe The Wise call these, and perhaps with good reason.

M

[grimer]

Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did). Her £75000 would now be worth only £85059 but the shares would have returned an annual dividend of £4990, a total of £79840 against HYP1's £68758 over the same 16 year period. "Widows and Orphans" shares I believe The Wise call these, and perhaps with good reason.

I don't know much about preference shares, but I presume the yield is fixed in cash terms and will be eroded by RPI over time? Would Doris be risking grinding poverty as she enters her twilight years?

[GrahamPlatt]

I don't know much about preference shares, but I presume the yield is fixed in cash terms and will be eroded by RPI over time? Would Doris be risking grinding poverty as she enters her twilight years?

Quite right grimer, they are as you say, fixed. So that £85059 needs rebasing cf 2001 prices. However, compare it with any fixed annuity... Anyway, neither Doris nor I'm sure Muirfield would have more than a few of these eggs in their two-dozen plus basket. I've had three or four in mine, lost to redemptions by those greedy banks, and very sorry I was to see them go.

[Breelander]

I don't know much about preference shares, but I presume the yield is fixed in cash terms and will be eroded by RPI over time?

Yes it's fixed...

but...

You weren't a Fool back in 2012 when this question was the subject of a 69 post thread, we're you?

Back then, in the wake of the financial crisis yield in double-digits were available. 12% was not uncommon. Unsurprisingly some Prefs were nominated for Gengulphus' GDHYP. The argument was that with yields like that it was possible to simulate a 'share' with a growing income by reinvesting part of that yield. For a while the argument was finely balanced...

Given how long-term my objectives for this HYP are, it really does need to be able to grow the income like the other shares in the portfolio. The only way to do that with preference shares is to reinvest at least part of the dividend income they produce. (Not necessarily in the same share, by the way - as long as the reinvested dividends go into an income-generating share, the share that generated them is responsible for an appropriate fraction of the income increase resulting from that purchase. Indeed, every single penny of reinvested dividend income in my demo HYP so far has gone into a different share to the one that generated it...)

Pyad's opinion was...

HYPs are about equity investing for income. Preference shares are not equity but a form of fixed interest investment. End of story.

Which must not be interpreted to mean that I have anything in principle against fixed interest securities like prefs, gilts or corporate bonds. I most certainly do not and have found that they suit many income investors, either wholly or as part of a mixed HYP/FI portfolio.

Gengulphus thought long and hard...

Two conflicting arguments here, both based on my wish for the demo HYP to be a demonstration of running a HYP in practice. One says that a real HYPer might well feel a bit painted-into-a-corner at this stage in the portfolio's construction and be willing to stretch things a bit, especially given that this board's FAQ does explicitly permit a bit of stretching. The other says that stretching things into preference shares dilutes it as a demonstration of a HYP, and additionally complicates things in practice. I.e. one places a bit more emphasis on the "running a HYP in practice" part of my wish and the other a bit more emphasis on the "demonstration" part... I'm going to have to make up my mind which of the two I wish to emphasise!

but in the end ruled them out...

Conclusions: I'm still undecided about the question of allowing preference shares in general into the demo HYP. I've sorted out some questions about them in my mind - in particular, that their yield needs to be high enough to cover both required income generation and required income growth over the long term. But I need to make up my mind about the in-principle question raised in this thread of exactly what I wish the demo HYP to demonstrate, and there is still the in-practice issue of good data sources about preference shares - specifically, ones that allow me to provide the safety-factor information about their issuers that I normally put in the 'candidates' and 'final run-off poll' posts, or some sort of reasonable equivalent. Both of those will need to be resolved before I allow any preference shares (I'm not willing to let them in in an ad hoc way, based on special-case arguments).

https://web.archive.org/web/20121011041 ... sort=whole

With prefs yielding nowhere near what they did back in the day, the question is easier to answer now - no, they're not really suitable. Those of us who have the odd pref in our HYP did so at yields double that of other shares available at the time - sufficiently high for 'simulated' income growth, but at the price of perpetual maintenance in the way of ongoing reinvestment...

...This is when and what I bought:

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Date          Share         Price(p)    Yield at purchase
20 Sep.        LLPD [1]       77.2        0.0% (12.6%)
30 Nov.        LLPD [1]       82.35       0.0% (12.0%)
[1] Not strictly HYP, more a Value play with a potential yield of over 12% in 2012.


https://web.archive.org/web/20161104222 ... 40506.aspx

[foxy]

Terry

HYP1 was as far as I recall a rehash of some investing truisms put together in a brilliantly succinct fashion.

15 large cap high yield FTSE stocks max of two per sector with a minimum dividend cover of two meant as a replacement to an annuity.

I would therefore compare it with an annuity income stream of the same vintage.

Your income stream is I presume based upon your trading rules which could be applied to any other asset class and in themselves are fairly typical. Also as I recall you have changed them over time. If so could you clarify this to avoid misleading information.

Capital and income hindsight comparisons are utterly pointless. To get them to anything near possibly interesting you have to run such data across different discrete time intervals and market conditions for a century or so.

Perhaps the board could be self moderated by a couple of its rational dwellers to avoid boring the rest of us with time warp discussions.

My trading rules have gradually evolved. The first evolution was in 1997 when LLOY and Zeneca rose above 10% of the portfolio value. I trimmed them back below the 10% level and set that as the limit for any one holding. At this time I had about 20 holdings, so that was about twice the average holding value. The next time I had to trim was in 1999 when Marconi, BT and Pru all rose above the limit and I trimmed back by about 20%. Marconi was trimmed again in 2000 and BT in 2001. Eventually I changed my rule to twice the median holding value and then, as holdings got to higher values overall, I cut it back to 1.5 times the median holding value.

The next change was when some shares rose so much that the yield fell below 2% and I decided that it was worth selling them completely and reinvesting in shares with a higher yield. Marconi was one of the first to succumb, but that was because it stopped paying dividends and was about to disappear. The first one to be sold for a low yield was BG Group in 2006, followed by Whitbread in the same year.

So you can summarise this by saying that shares which rise above 1.5 times the median holding value are trimmed back by 20-25%. If a share rises so much that its yield falls below about half the market yield, or 2%, then I sell completely. Likewise if a share stops paying dividends with no chance of resuming in the forseeable future, then that is sold. I have found that it is better not to sell immediately, because the market often overreacts, and a better opportunity will come some time later. If I am convinced that a share will recover and start paying dividends again, I may hold onto it as a recovery share, and did that with Lloyds Bank and Taylor Wimpey. Currently I am holding Tesco for that reason. I don't invest fresh money into a share which is not paying a dividend, except that I added to both Indivior and South32 when they were demerged, so that I had a more comfortably saleable holding. In fact both have rewarded me with capital growth, and also dividends.

One rule is always to reinvest any money arising from trimming in shares with a higher yield than the source share. It is a way of ratchting up the income.

TJH

Thank you for taking the time to put down that extensive reply. I forgot to add in my original post the never sell rule which appealed to me. I post from memory as the original concept evolved against a background of decreasing interest rates. This form of rebalancing can come in many guises. A general caveat is that rebalancing may increase returns. I think it was Swedroe who suggested a 25%/5% rebalancing rule on a tracker portfolio carried out quarterly. For 15 HYP holdings that equates to a tolerance band of 5% to 8.5% on each holding and a whole lot more trading costs I guess. Your approach seems much more gentler akin to your personality.

One outstanding point I have myself not resolved satisfactorily is what happens to stocks that fail which you have also covered in the above. I tend to put them in hospital on the never sell approach as they oft recover which means that you do have to replace them with new money or rebalancing in the interim. I am sure that was probably covered somewhere. My method leads to two portfolios HYP and something else.

Thank you.