Mitchells & Butlers open offer

[Gengulphus]

I'm not certain when (if ever!) Mitchells & Butlers (MAB) last qualified as a new HYP purchase, as the only reason I know of for it being in a HYP is because it was demerged out of Six Continents (which was simultaneously renamed as International Hotels Group, and had earlier been named Bass) in 2003. It may well not have survived in many HYPs since then - it will have taken some pretty dedicated non-tinkering to keep it! But it has remained in HYP1 at least up to its 20th anniversary post last November, and AFAIAA since then.

So MAB's recently-announced open offer will be relevant at least to pyad, and possibly to a few other HYPers here. The terms are that shareholders are entitled to subscribe for 7 new shares for each 18 existing shares (as usual, that works proportionately - e.g. someone holding 17 shares is entitled to subscribe for 17 * 7/18 rounded down = 6 new shares) at a price of 210p per new share.

That will probably sound like a rights issue to many HYPers, and they may wonder why it's called an open offer rather than a rights issue. The answer is that it differs from a rights issue because (a) what you get in it is just an entitlement to subscribe, not a right which is a separately tradable security; (b) if you let that entitlement lapse, you lose it completely rather than getting a lapsed-entitlements payment; (c) you can apply to subscribe for more shares at 210p each than you're entitled to (but such excess applications will only be accepted to the extent that they can be matched by other shareholders letting their entitlements lapse).

That presents non-tinkering HYPers with a bit of a quandary. At the present share price of 308p, each entitlement to a share is effectively worth 308p-210p = 98p if you both subscribe and sell, but nothing if you don't subscribe, so failing to subscribe looks like a bad idea. But subscribing without selling results in buying a top-up of a share whose HYP credentials are just about non-existent (3 final dividends and 2 interim dividends paid in the last ten years, the last of them a bit over three years ago, and I don't think its yield went much over 3% even during the few years it was paying them), while subscribing with selling looks an awful lot like tinkering!

My feeling is that subscribing to one's entitlement and at the same time selling exactly the same number of shares is the best way of adhering to at least the spirit of non-tinkering without throwing available money away (the ex-entitlement date has passed, so selling now shouldn't complicate things by changing the size of one's entitlement). But unlike pyad when he's running HYP1, I'm not a dedicated non-tinkerer - so over to him!

Gengulphus

[daveh]

I have a very small holding of M&B in my HYP left over from Six Continents. What I have just done is applied to take up the open offer plus the maximum entitlement of excess shares over and above the open offer shares (which is 0.81 and a bit x the open offer entitlement). If I don't get scaled back I'm going to have to pay less than £100 - so as you can see a very small holding of M&B. I'm going to wait until we see if they get back on their feet when we are through lockdowns and maybe sell out entirely if my holding then is valuable enough to make it worth selling.

[pyad]

Thanks G.

My answer is I can't be [expletive deleted] to take any action over this. MAB is one of the crockstocks in HYP1, worth only around £2,000, which is less than the cost I hold for it after all these years. Consequently the sum involved for a sub and sell trade is nugatory relative to the size of HYP1 (£163,000 right now) and in any case as you say, the portfolio is no-tinker.

Since you've brought up HYP1, more generally, I came across this interesting article very recently showing that HYP1 was in the top five of UK equity income funds, a fact of which I was unaware until I was shown the piece.

https://forum.quidisq.com/t/20-years-of ... esting/112

[MrFoolish]

Since you've brought up HYP1, more generally, I came across this interesting article very recently showing that HYP1 was in the top five of UK equity income funds, a fact of which I was unaware until I was shown the piece.

https://forum.quidisq.com/t/20-years-of ... esting/112

If any random personal portfolio counts as a "UK equity income fund" then how can you possibly know which are the top five? So your comment makes no logical sense I'm afraid.

[IanTHughes]

Since you've brought up HYP1, more generally, I came across this interesting article very recently showing that HYP1 was in the top five of UK equity income funds, a fact of which I was unaware until I was shown the piece.

https://forum.quidisq.com/t/20-years-of ... esting/112

If any random personal portfolio counts as a "UK equity income fund" then how can you possibly know which are the top five? So your comment makes no logical sense I'm afraid.

Quite right!

Logically, all one can say is that an investment spread equally between the 15 shares of the virtual HYP set up 20 years ago by pyad, would have produced a superior return to what might have been produced if the same investment had been put into any one of all but four UK Equity Income Funds!

Why would anyone think differently?


Ian

[MDW1954]

Since you've brought up HYP1, more generally, I came across this interesting article very recently showing that HYP1 was in the top five of UK equity income funds, a fact of which I was unaware until I was shown the piece.

https://forum.quidisq.com/t/20-years-of ... esting/112

If any random personal portfolio counts as a "UK equity income fund" then how can you possibly know which are the top five? So your comment makes no logical sense I'm afraid.

Quite right!

Logically, all one can say is that an investment spread equally between the 15 shares of the virtual HYP set up 20 years ago by pyad, would have produced a superior return to what might have been produced if the same investment had been put into any one of all but four UK Equity Income Funds!

Why would anyone think differently?


Ian

Anyone who thinks that it's not an "apples compared with apples" comparison, perhaps?

The equity funds all have (doubtless hefty) costs. HYP1, none. That's the real lesson.

MDW1954

[moorfield]

The equity funds all have (doubtless hefty) costs. HYP1, none. That's the real lesson.

That, and

But Stephen’s HYP matching the progress of the top 5 of UK Equity Income funds suggests being hands-off might actually be no bad thing.

I conjecture that HYP investors' returns are inversely proportional to their number of posts on discussion forums such as this one. Discuss.

[tjh290633]

I'm not certain when (if ever!) Mitchells & Butlers (MAB) last qualified as a new HYP purchase,

I had Six Continents and so received MAB shares when they demerged on 17 Apr 2003. The price at demerger was about 222p, then they paid a special dividend of 68p and consolidated their shares on 08 Dec 2003, so that you got 0.71 New MAB for every Old MAB held.

If you ignore the special dividend, the first two regular dividends paid were a final of 5.65p and an Interim of 2.85p, 8.3p in total. This gave a starting yield of 3.83% which was acceptable. The share price rose and I decided to sell mine when it reached 596p in October 2006. At that point the yield had fallen to 1.88%, and my general rule was to sell a share if the yield fell below about 2%.

My feeling was that it was a reasonable share to hold at demerger, IHG the other demerged share less so. IHG demerged at 371p with a starting dividend of 13.45p in the first year, giving a yield of 3.64%. They had two returns of capital in December 2004 and June 2005, and the price was rising rapidly, so I sold in August 2005 at 746p, with a yield of 1.92%. I believe that they had further returns of capital after my sale.

TJH

[MDW1954]

I conjecture that HYP investors' returns are inversely proportional to their number of posts on discussion forums such as this one. Discuss.

Well, Doris didn't post here, for sure.

MDW1954

[GrahamPlatt]

I conjecture that HYP investors' returns are inversely proportional to their number of posts on discussion forums such as this one. Discuss.

Well, Doris didn't post here, for sure.

MDW1954

Now there’s a good acronym for pyad to sign off with; DROE (Doris’s Representative On Earth).

[MrFoolish]

Equity income funds (the real commercial ones) are trawling the same seas and will have similar large portfolios. This will clump most of them in the same central portion of the normal distribution curve.

If, however, you have a highly concentrated portfolio (by design or circumstance) you are much more likely to skew to the extremities of the curve. It is probably down to luck if you are at the lower end or the upper end. Not that capital matters, of course!

[tjh290633]

Equity income funds (the real commercial ones) are trawling the same seas and will have similar large portfolios. This will clump most of them in the same central portion of the normal distribution curve.

If, however, you have a highly concentrated portfolio (by design or circumstance) you are much more likely to skew to the extremities of the curve. It is probably down to luck if you are at the lower end or the upper end. Not that capital matters, of course!

I have held a couple of real-world UTs/OEICS for a long time, M&G Dividend since 1975 and what is now Threadneedle UK Equity Income since 1993.

Their IRR are respectively, MGD 8.19% and TNUKEI is 7.63%. MGD was converted into PEP in 1994 and 1996, and its IRR to that time was 19.6%, but since 1987, when my PEP started, its IRR has been 4.6%. My own portfolio since inception in 1987 has an IRR of 9.30%, since 1994 it has been 9.32% and over the same period as TNUKEI, my IRR has been 9.60%.

TJH

[Gengulphus]

If any random personal portfolio counts as a "UK equity income fund" then how can you possibly know which are the top five? So your comment makes no logical sense I'm afraid.

Quite right!

Logically, all one can say is that an investment spread equally between the 15 shares of the virtual HYP set up 20 years ago by pyad, would have produced a superior return to what might have been produced if the same investment had been put into any one of all but four UK Equity Income Funds!

Why would anyone think differently?

Anyone who thinks that it's not an "apples compared with apples" comparison, perhaps?

The equity funds all have (doubtless hefty) costs. HYP1, none. That's the real lesson.

HYP1, very few, but not none. The most frequent in the last decade have been the costs of reinvesting five returns of capital by Intercontinental Hotels.

Other aspects of not comparing apples with apples include:

* Looking at pyad's link https://forum.quidisq.com/t/20-years-of ... esting/112, I notice that the table which is preceded by "Indeed, Stephen’s HYP1 would now be in the top 5 of UK Equity Income funds over 20 years:" has an "Inc/Acc" column and each of the 10 funds it lists says "Acc". I.e. it's comparing the performances of accumulation units in the funds. But the figures it gives for HYP1 aren't for accumulation units: they're for income units plus the income thrown off. That basically assumes that the income thrown off is simply stuck in a zero-interest deposit account and left there, whereas accumulation units reinvest it. And over 20 years that difference can be expected to build up to a large amount!

To illustrate this, I've done a calculation of how HYP1 might have performed with dividend reinvestment, using a simple reinvestment method whose main advantage is that it clearly makes no use of hindsight knowledge (to be clear, it's not a method I would recommend HYPers use in practice - that advantage is only of any real benefit when trying to look at how things might have happened in the past if the portfolio had been run differently). It shows that HYP1 could have grown to £331,280 by its 20th anniversary with dividend reinvestment - a rise of 342%, which is considerably better than the 233% rise to £148,627 capital value plus £101,057 non-earning accumulated income that the article quotes (*). And that 342% would put HYP1 in not just the top 5 if it were an Equity Income fund, but in the top 1!

* The equity funds have industry rules about things like diversification to adhere to. HYP1 doesn't, and it quite simply wouldn't be allowed to build up the imbalances that it has if it were an Equity Income fund. Those imbalances are a classic case of greater expected returns if one accepts higher risk. HYP1's original holding of Bass, which demerged into Intercontinental Hotels and Mitchells & Butlers (with a couple of renamings on the way) illustrates why this is the case. At the time of the demerger, about 60% of the value went into IHG and 40% into MAB, so the IHG holding was worth about 50% more than the MAB holding at that time. By the 20th anniversary report, it was worth 1146% more, and in addition the IHG holding has thrown off far more dividend income than the MAB holding and a whole lot of capital returns, a fair number of which haven't been reinvested in IHG itself, but in other holdings because of IHG's low yield at the time of reinvestment. Basically, IHG has been one of the stars of HYP1, and MAB one of the ... I was going to write 'also-rans', but running considerably overstates what it's done, so I'll settle for pyad's 'crockstocks'! And the key point is that while the IHG holding has increased about sixfold (so by about 500%) from its plausible 60% share of the Bass holding's original £5k (so about £3k) and produced considerably more returns besides, the MAB holding cannot lose more than 100% of its similar £2k share of the original investment. That disparity between the potential positive returns of stars and negative returns of crockstocks will build up more the more one allows portfolio imbalances to build up, increasing the expected returns of the strategy - but at the cost of the stars being able to inflict more damage on the portfolio if they do go wrong.

My point in saying that is that by choosing to use HYP1's strategy, a HYPer is accepting the risk increasing as portfolio imbalances build up in order to get greater portfolio returns. HYPers don't need to make that particular trade-off between risk and expected returns, and many (including me) don't want to and so use HYP strategies that keep portfolio imbalances under greater control (and Equity Income fund investors have no choice but to do that, since the fund manager will keep the imbalances under control for them). So basically, HYPers have some control over the expected returns vs risk trade-off in their HYPs - but they shouldn't expect to be able to get HYP1-like returns without taking the HYP1-like risks! And when (as has happened for HYP1), the risks largely don't materialise (**), they should expect the HYP to outperform Equity Income funds over the long term.

(*) To be fair to the article, it does say "Total return = £75k to £250k over 20 years = 233% = 6.2% CAGR assuming income not reinvested. (Could be nearer 8-9% if reinvested?)". But it doesn't explicitly point out that its "in the top 5" statement is based on a non-apples-with-apples comparison with accumulation units. Incidentally, the 342% rise over 20 years is a CAGR of 7.7%, so it's quite right about the growth rate with reinvestment provided one pays proper attention to the word "nearer"!

(*) I say "largely don't materialise" rather than just "don't materialise" because I do know of a HYP1 portfolio imbalance risk that did materialise to a fair extent: in its year 7 report, BT was its second-largest holding (at 11.8% of portfolio value) and largest income producer (at 19.3% of portfolio income). It was then badly hit by the financial crisis, and although it recovered reasonably well over several years, it's never reached similarly prominent positions in HYP1 again, and has recently been hit badly again by COVID-19.

Gengulphus

[MDW1954]

Quite right!

Logically, all one can say is that an investment spread equally between the 15 shares of the virtual HYP set up 20 years ago by pyad, would have produced a superior return to what might have been produced if the same investment had been put into any one of all but four UK Equity Income Funds!

Why would anyone think differently?

Anyone who thinks that it's not an "apples compared with apples" comparison, perhaps?

The equity funds all have (doubtless hefty) costs. HYP1, none. That's the real lesson.

HYP1, very few, but not none. The most frequent in the last decade have been the costs of reinvesting five returns of capital by Intercontinental Hotels.

Gengulphus

Oh come on, Gengulphus. Expressed as a percentage of the annual total dividends, roughly how many zeros would we see before we got to the first significant figure? Four? Five?

At what point does a number that approximates to zero differ from "none"?

MDW1954

[csearle]

At what point does a number that approximates to zero differ from "none"?

Let me just run this...

double d = 0.000000000001;
if(d==0.0)
{
  printf("MDW is right.");
}
else
{
  printf("G is right.");
}

Chris

[Gengulphus]

Anyone who thinks that it's not an "apples compared with apples" comparison, perhaps?

The equity funds all have (doubtless hefty) costs. HYP1, none. That's the real lesson.

HYP1, very few, but not none. The most frequent in the last decade have been the costs of reinvesting five returns of capital by Intercontinental Hotels.

Oh come on, Gengulphus. Expressed as a percentage of the annual total dividends, roughly how many zeros would we see before we got to the first significant figure? Four? Five?

At what point does a number that approximates to zero differ from "none"?

Oh come on, MDW1954. I'm sure you know the answer to that question: it's the point at which the number is not zero.

And your suggestion that the trading costs expressed as a percentage of the annual total dividends might have four or five zeros before the first significant zero is ludicrous - something you could easily have determined if you'd just observed that HYP1's annual total dividends were below £10k in all but one of its years and not very much above it in the other, and thought about how much money 0.0001% of £10k is... I'd be fairly certain that the actual answer to that question is "One, before the decimal point" - i.e. the percentage of the annual total dividends lies between 0.1% and 1%.

Gengulphus

[MDW1954]

Gengulphus,

I'm surprised, but you're right. Even a single £12.50 trade in a year gobbles up those zeros, using HYP1's dividend stream as a reference point. Fortunately, my own is larger, and similarly non-tinker (I rarely sell), but even so, a couple of trades a year will make a huge difference.

I stand corrected.

MDW1954