HYP1 is 18

[Bouleversee]

TJH -

I presume you are aware that IHG makes rather a habit of returning capital to shareholders and consolidating holdings, yet has still made sufficient growth to leave it overweight which makes that low dividend somewhat unrepresentative of the real return to shareholders in cash terms. I can see some possible merit in trimming but can't see, as a long term holder myself, why it would be a good idea to get rid of it completely and swap it for either of the two you suggest, especially a bookie. However, I bow to your superior expertise so no doubt you can put me straight.

Coincidentally, I hold all of HYP1 (though I haven't checked when I bought them) apart from Dixons, RSA and Pearson, and many more besides, which for me makes the weighting less of an issue.

[Itsallaguess]

To those of you who believe that HYP1 at 18 is dangerously unbalanced and that a proportion of the capital of the largest holdings should be redeployed, can you please explain where you would redeploy that capital?

To help you decide, the forecast yields of the top 4 holdings by value are:

Persimmon PLC (PSN) – 11.04%
British American Tobacco Group (BATS) – 7.21%
Rio Tinto PLC (RIO) – 5.79%
BT Group (BT-A) – 6.04%

I do appreciate that there are some other high yields on offer above 6.00% but such a re-balancing would surely reduce the forecast income of the Portfolio. An odd suggestion for what is first and foremost an Income Strategy.

Yes, it's an income-strategy, but it's not supposed to be an 'income-at-any-cost' strategy....

As soon as you start chasing yields, and demanding that you need to do so because you 'need the income' that they deliver, then I think at that point you actually start making the case for highlighting the HYP1 risk yourself, rather than actually defending the current approach...

At a HYP1 dividend income of £8,882.33, from a capital base of £155,583, that gives an overall portfolio yield of 5.7%.

Looking at the current FTSE 100 yields (https://tinyurl.com/y8uzcbnl) shows us that this is perhaps achievable with a much more balanced approach, although I decided personally many years ago to go for a slightly lower portfolio yield, and to blend a large amount of portfolio capital (currently around 40%) into income-related Investment Trusts.

Looking at my overall HYP yield currently, it's around 4.7%, and whilst I might well be able to squeeze my investment-capital much harder to provide some additional income if I wanted to, I choose to balance that approach with one that delivers a portfolio that I worry not a jot about, due to it carrying a relatively tiny amount of single-company-risk, which is much more than I can say if were I currently owning the current list of HYP1 constituents....

When HYP1 set off on it's 15-share journey, those single companies, both in capital and income terms, accounted for around a 6.7% slice of the overall portfolio deliverables.

Personally, I think that's too high a proportion from the outset, although I agree that on a single-shot-basis, where a large amount of capital might want to be deployed at once to deliver such a portfolio, it might be difficult to achieve a much larger blend initially.

But that's just from the outset - what we've seen since has been a steady and inevitable gravitation towards the hugely imbalanced HYP1 structure we see today, where 47% of overall income is being delivered by just 2 companies, and 80% by just six....

I think HYP1 is a fantastic experiment, and I'll always applaud Pyad for promoting the simplicity of income-investment, but I personally think the most important outcome of the multi-year experiment has been to highlight the very strong gravitational nature of a no-tinker strategy, and how taking a totally hands-off approach will, over time, completely change the single-company risk-profile of what was initially sold as a strategy that was specifically constructed to manage that single-company risk-profile, by spreading initial capital (and the income demands of that capital) around a much wider investment universe...

I'll end with one question of my own Ian, if I may - if you inherited £155,583 tomorrow, would you go happily out and invest it all in HYP1 as it currently stands?

If you wouldn't, could you please explain the reasons why?

Cheers,

Itsallaguess

[Dod101]

I think that ITH is being controversial as even he must know that such an unbalanced portfolio is high risk, and whilst any rebalancing/trimming may reduce the portfolio yield, that is the cost we bear for a more balanced and less risky portfolio. I do not think that it is intended as a recommendation for a real life situation but we should applaud pyad for showing us the possible outcome from a truly non tinker portfolio, not an outcome I think that many of us would want.

Dod

[idpickering]

I think that ITH is being controversial as even he must know that such an unbalanced portfolio is high risk, and whilst any rebalancing/trimming may reduce the portfolio yield, that is the cost we bear for a more balanced and less risky portfolio. I do not think that it is intended as a recommendation for a real life situation but we should applaud pyad for showing us the possible outcome from a truly non tinker portfolio, not an outcome I think that many of us would want.

Dod

Well said Dod. I couldn't agree more. HYP1 was, and still is, a great demonstration of how a no touching HYP can work. I hope Stephen continues with his invaluable HYP1 reviews. For me though, as I mentioned before, I prefer more holdings than 15.

Ian.

[IanTHughes]

To those of you who believe that HYP1 at 18 is dangerously unbalanced and that a proportion of the capital of the largest holdings should be redeployed, can you please explain where you would redeploy that capital?

To help you decide, the forecast yields of the top 4 holdings by value are:

Persimmon PLC (PSN) – 11.04%
British American Tobacco Group (BATS) – 7.21%
Rio Tinto PLC (RIO) – 5.79%
BT Group (BT-A) – 6.04%

I do appreciate that there are some other high yields on offer above 6.00% but such a re-balancing would surely reduce the forecast income of the Portfolio. An odd suggestion for what is first and foremost an Income Strategy.

Yes, it's an income-strategy, but it's not supposed to be an 'income-at-any-cost' strategy....
I'll end with one question of my own Ian, if I may - if you inherited £155,583 tomorrow, would you go happily out and invest it all in HYP1 as it currently stands?

If you wouldn't, could you please explain the reasons why?

Well obviously you are fully aware that the answer to that question is of course a resounding no. The reasons for which are, as I am sure you know, I would not invest more than 6.50% in any one holding nor more than 12.00% in any one Business Sector.

But with respect, your question is not very relevant as the owner of HYP1 is not in the position of holding cash, he/she is holding HYP1!

Interestingly enough, if I were to purchase a one-shot HYP with the same amount of capital as is currently invested in HYP1, using the same restrictions – 15 holdings, FTSE100, different sectors – I might achieve a forecast yield somewhere above 7.00%, an improvement on that offered by HYP1. Others of course might well be more cautious and reject some of my selections, but it does appear that one could at least match the income enjoyed by HYP1 with a more balanced, well …. fully balanced, portfolio. But of course to move HYP1 to that would involve selling all the low yielding holdings as well as trimming those that are overweight.

I think that ITH is being controversial as even he must know that such an unbalanced portfolio is high risk, and whilst any rebalancing/trimming may reduce the portfolio yield, that is the cost we bear for a more balanced and less risky portfolio.

Look, I can understand the idea of replacing low yielding holdings with higher yields, I have even done it myself a couple of times, as such action will definitely increase your forecast income. What I am struggling with is the idea that one should cut back a holding that is of a high enough yield that one would consider it a valid HYP candidate, because the risk of an income cut is too great. In essence what is being said is that, in order to lower the risk of a cut to the income that will be received, one must cut the income that will be received! That makes no sense to me at all.

As I stated in a previous post, I am still building my HYP so any overweighting that does occur can be at least minimised by deploying new money and reinvested dividends elsewhere. But at some point I will be in withdrawal and no doubt will be faced with an overweighting problem that I am no longer able to mitigate without tinkering. In those circumstances I am not yet convinced that selling out any holdings that are otherwise valid HYP candidates will improve my income prospects going forward.


Ian

[funduffer]

Thanks to pyad and TJH in providing data on the HYP1 and TJH portfolio performance in response to my eawrlier question about tinkering v non-tinkering.

Now obviously, we are just comparing 2 particular portfolios here, and cannot generalise from this, but nonetheless:

Income (2001-2018)

HYP1 has increased by x2.57
TJH (income per unit) has increased by x2.49

about the same.

Capital (2001-2018)

HYP1 has increased by x2.07
TJH (income unit price) has increased by x1.72

I.e. HYP1 considerably more.

On the face of it, HYP1 has had better performance, at the expense of a higher risk from the unbalanced portfolio.

I doubt we can read too much into this, but it is interesting to me.

FD (who cannot decide if tinkering is worth it!)

[bionichamster]

The unbalanced nature, arising from being a tinkerfree zone, is its very strength. It's why it has done what it's done, on both income and capital.

Not convinced by that argument, if you really believe the current portfolio position is evidence of fundamental strength, tell me if you were starting from scratch would you buy those stocks in those relative proportions?

No, me neither. The strength was/is the initial diversity, the strength is most definitely not the unbalanced nature.

BH

[bionichamster]

To those of you who believe that HYP1 at 18 is dangerously unbalanced and that a proportion of the capital of the largest holdings should be redeployed, can you please explain where you would redeploy that capital?
Ian

And if you don't think it is dangerously unbalanced would you actually create a portfolio from scratch that had that portfolio as its starting point if you wanted to achieve the stated aims of HYP1?

It is enough to say that if it was my portfolio I would have trimmed and adjusted it a few times over the years, I can't tell you when or how because I wasn't running it and it would have depended on many different factors (not least the random dates on which I might have reviewed the portfolio) none of which are possible to replicate now that they are corrupted by hindsight (obviously I would have sold on peaks and bought at lows )Would it have achieved the same outcome income wise? Who knows, my guess is probably not, but then as others have noted, a big chunk of the current income is thanks to a couple of companies, which might easily go the other way at some point. To some degree HYP1 has been very lucky in the last year and luck can run both ways.

With a portfolio as unbalanced as HYP1 luck may play greater role in future performance than many would be comfortable with.

BH

[moorfield]

What I am struggling with is the idea that one should cut back a holding that is of a high enough yield that one would consider it a valid HYP candidate, because the risk of an income cut is too great. In essence what is being said is that, in order to lower the risk of a cut to the income that will be received, one must cut the income that will be received! That makes no sense to me at all.

Increasing overall income is the primary objective an HYP, so I don't think one needs to be too neurotic about such action unless it reduces overall income compared to previous year.

[pendas]

In practise I suspect most investors even in withdrawal mode would retain some income within the portfolio which coupled with a more considered approach to using the proceeds of any corporate actions would have mitigated the imbalance that has arisen.

[Dod101]

What I am struggling with is the idea that one should cut back a holding that is of a high enough yield that one would consider it a valid HYP candidate, because the risk of an income cut is too great. In essence what is being said is that, in order to lower the risk of a cut to the income that will be received, one must cut the income that will be received! That makes no sense to me at all.

If your last sentence was what was meant, it would not make much sense in itself, but of course that is not what is meant. What we are saying (and I cannot believe that you do not understand this) is that the income from a given share or in this case 2 shares out of 15 is producing 46.4% of the total income from the portfolio. That is in most people's eyes, too high a reliance on two shares, irrespective of how good they may be. It just takes one of them to fall off its perch to cause a serious shortfall. No one is suggesting that we must cut the income; just that it should not come from only two shares. In a reasonably balanced 15 share portfolio, one might expect the most reliable 5 shares say, to produce not more than half of the income at most, not as in this case over 75%. Any portfolio should be reasonably balance in order to try to ensure that a problem with any one share will unduly affect the entire portfolio. If you still struggling with this concept there is not much more that I can do.

Dod

[IanTHughes]

What I am struggling with is the idea that one should cut back a holding that is of a high enough yield that one would consider it a valid HYP candidate, because the risk of an income cut is too great. In essence what is being said is that, in order to lower the risk of a cut to the income that will be received, one must cut the income that will be received! That makes no sense to me at all.

If your last sentence was what was meant, it would not make much sense in itself, but of course that is not what is meant. What we are saying (and I cannot believe that you do not understand this) is that the income from a given share or in this case 2 shares out of 15 is producing 46.4% of the total income from the portfolio. That is in most people's eyes, too high a reliance on two shares, irrespective of how good they may be. It just takes one of them to fall off its perch to cause a serious shortfall. No one is suggesting that we must cut the income; just that it should not come from only two shares. In a reasonably balanced 15 share portfolio, one might expect the most reliable 5 shares say, to produce not more than half of the income at most, not as in this case over 75%. Any portfolio should be reasonably balance in order to try to ensure that a problem with any one share will unduly affect the entire portfolio. If you still struggling with this concept there is not much more that I can do.

Oh please, may I crave your indulgence just one more time?

1) You maintain that there is a worry that too high a concentration of income - £4,123.65 (46.43%) – is derived from just two shares with a combined capital value of £50,047 (32.17%).
2) You recommend redeploying some of the capital in those two holdings to other holdings.
3) Let me assume that you want an income of no more than 10.00% (£888.23) to be derived from any one holding
4) The portfolio must therefore sell 64.24% (£15,712) of the holding in Persimmon PLC (PSN) and 45.83% (£11,727) of the holding in British American Tobacco PLC (BATS). This will decrease the Forecast Income by £2,347
5) Now assume that the capital is redeployed in to one or more probably more holdings yielding on average 6.00%. This will increase the Forecast Income by only £1,646
6) The Portfolio income has decreased by £700 (8%)
7) You are now content that there is no longer a worry that too high a concentration of income is derived from just two shares.

Do you see now how you have eased your worry about a cut in the Forecast Income by ……. well …… cutting that Forecast Income?


Ian

[Walrus]

What I am struggling with is the idea that one should cut back a holding that is of a high enough yield that one would consider it a valid HYP candidate, because the risk of an income cut is too great. In essence what is being said is that, in order to lower the risk of a cut to the income that will be received, one must cut the income that will be received! That makes no sense to me at all.

If your last sentence was what was meant, it would not make much sense in itself, but of course that is not what is meant. What we are saying (and I cannot believe that you do not understand this) is that the income from a given share or in this case 2 shares out of 15 is producing 46.4% of the total income from the portfolio. That is in most people's eyes, too high a reliance on two shares, irrespective of how good they may be. It just takes one of them to fall off its perch to cause a serious shortfall. No one is suggesting that we must cut the income; just that it should not come from only two shares. In a reasonably balanced 15 share portfolio, one might expect the most reliable 5 shares say, to produce not more than half of the income at most, not as in this case over 75%. Any portfolio should be reasonably balance in order to try to ensure that a problem with any one share will unduly affect the entire portfolio. If you still struggling with this concept there is not much more that I can do.

Oh please, may I crave your indulgence just one more time?

1) You maintain that there is a worry that too high a concentration of income - £4,123.65 (46.43%) – is derived from just two shares with a combined capital value of £50,047 (32.17%).
2) You recommend redeploying some of the capital in those two holdings to other holdings.
3) Let me assume that you want an income of no more than 10.00% (£888.23) to be derived from any one holding
4) The portfolio must therefore sell 64.24% (£15,712) of the holding in Persimmon PLC (PSN) and 45.83% (£11,727) of the holding in British American Tobacco PLC (BATS). This will decrease the Forecast Income by £2,347
5) Now assume that the capital is redeployed in to one or more probably more holdings yielding on average 6.00%. This will increase the Forecast Income by only £1,646
6) The Portfolio income has decreased by £700 (8%)
7) You are now content that there is no longer a worry that too high a concentration of income is derived from just two shares.

Do you see now how you have eased your worry about a cut in the Forecast Income by ……. well …… cutting that Forecast Income?


Ian

Surely you can see that if Persimmon was to cut its dividend to zero you would incur a massive income cut if running this portfolio.

[IanTHughes]

1) You maintain that there is a worry that too high a concentration of income - £4,123.65 (46.43%) – is derived from just two shares with a combined capital value of £50,047 (32.17%).
2) You recommend redeploying some of the capital in those two holdings to other holdings.
3) Let me assume that you want an income of no more than 10.00% (£888.23) to be derived from any one holding
4) The portfolio must therefore sell 64.24% (£15,712) of the holding in Persimmon PLC (PSN) and 45.83% (£11,727) of the holding in British American Tobacco PLC (BATS). This will decrease the Forecast Income by £2,347
5) Now assume that the capital is redeployed in to one or more probably more holdings yielding on average 6.00%. This will increase the Forecast Income by only £1,646
6) The Portfolio income has decreased by £700 (8%)
7) You are now content that there is no longer a worry that too high a concentration of income is derived from just two shares.

Do you see now how you have eased your worry about a cut in the Forecast Income by ……. well …… cutting that Forecast Income?

Surely you can see that if Persimmon was to cut its dividend to zero you would incur a massive income cut if running this portfolio.

Yes I can see that. If PSN were to go bust, or otherwise reduce its dividend to zero, HYP1 would suffer an income drop of 27.97%. If the re-balancing was achieved as discussed above that figure would be reduced to 10.00% plus of course the 8.00% already sacrificed by the re-balancing, a total of 18%. If the dividend were to be halved rather than reduced to zero, the loss to the portfolio would be almost the same before and after the re-balancing.

If BATS were to go bust, or otherwise reduce its dividend to zero, HYP1 would suffer an income drop of 18.46% without the re-balancing and a total of 18% with the re-balancing, not much of a saving there.

On top of that, there would be probably 3 more holdings to worry about with regard to going bust or otherwise reducing a dividend to zero. An increased risk in by book

What I do see is that the certainty of an income sacrifice of 8% is not gaining me very much with regard to decreased risk.


Ian

[Dod101]

What I do see is that the certainty of an income sacrifice of 8% is not gaining me very much with regard to decreased risk.

I would not have allowed HYP1 to get to the stage it is now at anyway (nor would many I suspect, possibly including yourself) so what may be termed an insurance premium of 8% is unrealistic but some loss of income would be acceptable to me if it were to produce a better spread source of income. Your 8% sacrifice as you put it is only meaningful if you inherited HYP1 as it currently stands.

In fact your argument is so artificial that it is not worth further discussion because most would have trimmed the big contributors and /or sold the very small contributors long ago and replaced them with something more meaningful.

Dod

[Itsallaguess]

What I do see is that the certainty of an income sacrifice of 8% is not gaining me very much with regard to decreased risk.

That's because you've picked a specific example to highlight your worst-case rebalancing-scenario.

If, as Terry has already pointed out, part of any round-trip process also included re-allocating the capital from those shares yielding less that 2%, and perhaps even more work at the lower-end of the yield-scale, then that 8% 'income-sacrifice' in your example could be mitigated, at the same time as achieving an improvement in the income-profile.

You've already said that you wouldn't buy HYP1 as it stands, so surely it make sense to suggest that if you had gone many years in 'Doris-mode', and then happened to take a look under your income-bonnet, then you'd take action regarding the income and capital profile that you'd suddenly discovered, at the same time as perhaps muttering 'well, I'm fairly sure that this situation wasn't explained in the instructions.....'

Cheers,

Itsallaguess

[IanTHughes]

What I do see is that the certainty of an income sacrifice of 8% is not gaining me very much with regard to decreased risk.

I would not have allowed HYP1 to get to the stage it is now at anyway (nor would many I suspect, possibly including yourself) so what may be termed an insurance premium of 8% is unrealistic but some loss of income would be acceptable to me if it were to produce a better spread source of income. Your 8% sacrifice as you put it is only meaningful if you inherited HYP1 as it currently stands.

Not at all, what you are now suggesting is that the extra income generated by HYP1, and the capital for that matter, would have been sacrificed in small stages along the way.

The overall Portfolio Income and Capital would be lower, but it would be beautifully balanced!


Ian

[IanTHughes]

What I do see is that the certainty of an income sacrifice of 8% is not gaining me very much with regard to decreased risk.

That's because you've picked a specific example to highlight your worst-case rebalancing-scenario.

Well, I picked HYP1 because it was the subject of this thread and the 10% limit on income from any one holding was suggested here:

In a reasonably balanced 15 share portfolio, one might expect the most reliable 5 shares say, to produce not more than half of the income at most, not as in this case over 75%. Any portfolio should be reasonably balance in order to try to ensure that a problem with any one share will unduly affect the entire portfolio.

If, as Terry has already pointed out, part of any round-trip process also included re-allocating the capital from those shares yielding less that 2%, and perhaps even more work at the lower-end of the yield-scale, then that 8% 'income-sacrifice' in your example could be mitigated, at the same time as achieving an improvement in the income-profile.

As I stated here in fact:

Look, I can understand the idea of replacing low yielding holdings with higher yields, I have even done it myself a couple of times, as such action will definitely increase your forecast income.

Maybe, just replacing the low-yielders while leaving those overweight, would be the best strategy? As well as increasing the forecast yield that would also help somewhat with the “balancing” problem. Of course, I do not know for sure but it would make more sense to me assuming one’s aim is to maximise income generation going forward.

You've already said that you wouldn't buy HYP1 as it stands, so surely it make sense to suggest that if you had gone many years in 'Doris-mode', and then happened to take a look under your income-bonnet, then you'd take action regarding the income and capital profile that you'd suddenly discovered, at the same time as perhaps muttering 'well, I'm fairly sure that this situation wasn't explained in the instructions.....'

Well, if I were minded to take such action then surely I would be doing so all along. But I do accept, as I previously pointed out, that a 15 shot HYP set up tomorrow might well have a higher forecast yield than HYP1. It would also be well-balanced.


Ian

[csearle]

Moderator Message:
Can I just point out that posts regarding tinkering versus non-tinkering within one's HYP are ok. It has long been the case that there is room for both variants within the HYP strategy so please try not to get too hot under the collar about posters doing it the other way (maybe worth consulting The Oracle on this), or about discussions here regarding that particular nuance. - Chris

[tjh290633]

TJH -

I presume you are aware that IHG makes rather a habit of returning capital to shareholders and consolidating holdings, yet has still made sufficient growth to leave it overweight which makes that low dividend somewhat unrepresentative of the real return to shareholders in cash terms. I can see some possible merit in trimming but can't see, as a long term holder myself, why it would be a good idea to get rid of it completely and swap it for either of the two you suggest, especially a bookie. However, I bow to your superior expertise so no doubt you can put me straight.

Coincidentally, I hold all of HYP1 (though I haven't checked when I bought them) apart from Dixons, RSA and Pearson, and many more besides, which for me makes the weighting less of an issue.

Yes, I am aware of that, Lorna, and is one the reasons that prompted me to dispose of my holding. Successive returns of capital looked likely to reduce my holding to a lower value than I considered to be viable. My records are not to hand at the moment, but the low yield made it unsuitable for topping up.

Regarding the replacement, the obvious choice was Compass, but the yield is again too low. I could not see anything suitable in the hospitality sector, which is why I suggested a bookie.

I don't know what was done with the returns of capital from IHG, but I would not be surprised to find they were reinvested in IHG.

TJH