LuniHYP100: Year 7 review

[Luniversal]

Here is a seventh-birthday report on LuniHYP100, or 'My HYP' as it was called on The Motley Fool boards (1). It tests vintage-2000 Pyadic principles: fifteen FTSE 100 stocks, equal weights, sound payout records, above-average yields, sectorally varied, all bought within a week, no unforced tinkering.

LuniHYP100's holdings were acquired on Jul. 12, 13 and 18, 2011: total gross cost £17,902. No money added or withdrawn afterwards.

Original purchases:

BAe Systems (BA.)
British American Tobacco (BATS)
Centrica (CNA)
Glaxo SmithKline (GSK)
ICAP (IAP), renamed NEX (NXG) in 2016.
Pennon (PNN)
Reckitt Benckiser (RB.)
Reed Elsevier (REL)
Royal Dutch Shell (RDSB)
SSE (SSE)
Standard Life (SL.), renamed Standard Life Aberdeen (SLA) in 2017
Tesco (TSCO)
TUI Travel (TT.), exchanged for its parent TUI AG (TUI) in 2015
Unilever (ULVR)
Vodafone (VOD)

Nothing went bust or was gobbled except TUI Travel, whose parent remains London-listed; but see 'Takeover' below.

Small stakes in Indivior (INDV) and TP ICAP (TCAP) are spin-offs by Glaxo and NEX respectively in 2014 and 2016.

Vodafone and Standard Life returned cash in 2014-15 and Standard Life again this Jul., reducing weights in the portfolio. A purist might have held proceeds back for 'tail-swallowing' reinvestment. I treated them like special dividends.


INCOME

The initial historic yield for the 15 averaged 4.6% against a benchmark (Footsie) yield of 3.1%: fairly High as in 'H'YP.

In 12-month periods, dividends declared (some paid after year end) were:

2011-12: £808, missing £92 due to 'dividend drag'. (2010-11 equivalent: £809.)
2012-13: £988
2013-14: £960
2014-15: £2,172
2015-16: £915
2016-17: £1,016
2017-18: £1,290

Total so far £8,149 including £1,541 in one-offs(2). The spike in 2014-15 was down to VOD's and SL.'s returns of value totalling £1,182. In the past three years one-offs totalled only £183, including zilch in 2016-17.

Regular dividends compounded, jerkily, at 6.7% pa versus inflation (RPI) of c. 3%. In real terms recurrent payouts fell in Years 4 and 5 by c.5%. Income reserve needed if smooth flow sought; see 'derisking' later.

Ten shares gave steadily if slowly rising payouts: BA., BATS, PNN, RB., RDSB, REL, SSE, SLA, ULVR and VOD. For RDSB, ULVR and VOD this was usually magnified by sterling weakness against the dollar or euro, though that can always reverse. TUI's absorption produced a permanent dividend boost even after horrid non-reclaimable German withholding tax.

Tesco alone halted payments; in 2017-18 they resumed minimally. Centrica imposed a severe cut; another may follow. Glaxo and NEX lapsed to freezes, which continue. SSE's and VOD's dividends hae their doots.


CAPITAL

Though not planning ever to sell, I follow values. Were they to lag revenue growth, it might portend trouble for the revenue stream-- prices pushed down on fears of reductions.

Anniversary values were:

Jul. 2011: £17,902 (purchase)
Jul. 2012: £18,088, +1.0% year on year
Jul. 2013: £23,039, +27.4%
Jul. 2014: £22,779, -1.1%
Jul. 2015: £24,311, +6.7%
Jul. 2016: £25,281, +4.0%
Jul. 2017: £27,559, +9.0%
Jul. 2018: £28,411, +3.1%

No big declines from year to year yet, though that goes for the market as well.

In real terms, the portfolio fell slightly last year but was worth a third more than when invested: +59% nominal where its FTSE 100 benchmark was +33%. LuniHYP100 beat the index in four of seven years. In 2013-14 it lagged by 2.9 points, in 2016-17 by 1.6 and in 2017-18 by 0.9. Lately its 'value' blue chips have been somewhat out of favour among punters.

Biggest winners on price were TUI (+260% equivalent), Reed Elsevier (+204%), BAe (+123%) and Unilever (+107%). The duds were divi-slashers: Tesco, down 38%, and Centrica, -53%.


BALANCE

Ignoring Indivior and TP ICAP, a perfectly equilibrial portfolio would be 6.7% (one-fifteenth) in value per shareholding. After seven years this HYP houses two which account for more than one-tenth of total worth: Reed Elsevier, 13%, and TUI, 15%. Three holdings are worth less than half the ideal one-fifteenth: Centrica, Vodafone (albeit after a meaty return of value) and Tesco. Distribution not too distorted, methinks.

Likewise income. Excluding the tiddlers, ideally equal payouts from the 15 between 2011 and 2017 would have totalled £521 apiece. The three top contributors-- Standard Life with £1,172, Vodafone's £1,124 and TUI with £689-- contributed 38% of income, which might sound too much for comfort. The weakest three-- Tesco with £140, Reckitt's £327 and Centrica on £363-- supplied 11%. However more than half the Standard Life-plus-Vodafone total arose from isolated specials. No cause for insomnia there.

I once theorised that Pyad's theory was prone to lead to ever-greater, more perilous divergences. With HYP1 it seems stock selection was more to blame. Neither extensive back- and forth-testing of paper portfolios on TMF nor LuniHYP100's or LuniHYP250's experiences imply that gross skews are inevitable.


TAKEOVER

NEX is on an agreed bid in shares and equity from Chicago. Not relishing a small parcel of low-div dollar stock, I purpose to sell NEX (with the spun-off TP ICAP holding) in the market once the offer goes unconditional. Around £1,800 should come, plus dividends of £401, from an investment of £1,197. So-so.

Added to the c.£740 of 'unallocated' capital, however, the sales cover a substitute purchase at the £1,200 gross unit price. I hover over Legal & General: overlaps SLA but Footsie stalwart with rising payouts, initial yield 5%, properly dull. Or something a mite hairier: ad agent WPP, racked by scandal but with payout history intact?

The other corporate event in the pipeline is SSE's division.


DERISKING

The process was outlined in last month's Basket of Seven update on the ITs board. It aims to convert lumpy income delivery into a quasi-index-linked withdrawal; purchasing power is preserved by setting cash aside for dipping into if dividends dwindle. There is scope for occasional increases in the inflation-safeguarded spendable sum.

LuniHYP100 began on a withdrawal rate of 4.0%+RPI. Inflation being low, after three years the difference between income received and spent already amounted to nine months' spending. The SL. and VOD windfalls equated to more than a year's extra income. They swelled the reserve to 19 months' worth by Jul. 2015, so it felt safe to boost the withdrawal rate to 5.6%, leaving 16 months in the kitty by Jul. 2018. Thus far 19% of LuniHYP100's revenue has been stashed against income droughts.

The goal was to add an average of one month extra to the buffer each year until 12 months was reached. Pessimistically predicting that dividends will be flat in 2018-19, the reserve would reduce to 13 months. Nothing to sweat over, after seven years.

Should income growth halt altogether, against an inflation rate of ~3% pa-- the average since the early Eighties-- the reserve will be kaput by 2030 unless the 5.6% withdrawal rate is trimmed back. But derisking seeks to obviate trimming. To envisage a permanently frozen inflow argues against relying on UK equity income, not specifically against using a HYP to get it. To assume nary an uplift from Pyad's 'market trading' (corporate events) is gloomy as well.


CONCLUSION

The 5.6%+RPI derisked yield suffices and feels pretty safe. (Ditto 5.7% from my Midcaps HYP, launched a year later and reviewed on Jul. 13.) Starting with only 15 holdings has not capsized it. Pyad's contention that 'market trading' tends a portfolio better than intervention suits my passive temperament, and has not been traduced by LuniHYP100.

So would I sink more than demo dosh into such a HYP? Ahem.

My doubts concern the 'disruptable' vulnerabilities of big companies, even if international in scope as are most FTSE 100 members. Dividend cover thinned, though is now modestly improving; gearing swells, yet investors clamour for more on the nail. The consensus is that for some years the outlook is for sluggish divi boosts at best (many more 2-5% hikes than the 5-10% ones seen c. 2010-15). And who knows how many Tescos may be lurking?

Granted, Pyad tells us not to peer far ahead: 'nobody knows anything', like Hollywood. Qualms may be overdone. Black moods change, e.g. the two Big Oils and the banks are back in favour as income machines.

There is reason to deem UK-focused companies oversold, particularly small caps for robustly growing payouts: Diverse Income Trust and Chelverton Smaller Companies are faring OK. Moreover income fund managers increasingly find giants readier to cough up in Europe, the States, Japan, even India. Henderson International Income (HINT) reports today that foreigners' payout growth is now far outrunning Britain's:

http://citywire.co.uk/investment-trust- ... k/a1139031

All this takes us outwith the classic HYP which trawls London's Big Board. Intending to live another 30 years or longer, I incline to investment trusts that major more on the sustainability and momentum of their earnings than on the plump headline yield. Besides, ITs are less bother to run. This lazy Lemon grows older, dozier and fonder of the basket principle.
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(1) Renamed to avoid confusion. There are already several 'My HYPs' on TLF.

Two other all-Footsie HYP variants from Motley Fool days, 'HYP v.2.0' and 'GRYP', have been liquidated because their results were not different enough from the central case. I may use their proceeds for other HYP-like notions, e.g. one based on 'alt-inc.' such as infrastructure funds, debt funds, foreign divis and specialised REITs.

(2) That is 19% of total income from one-offs; whereas in LuniHYP250 with its much busier history of 'market trading' it was 27%. The bigger the stocks, the quieter Doris's life.

[BrummieDave]

Very interesting, and particular thanks for including the views you've expressed within the Conclusion.

[HYPMonkey]

Great thread.

This has confirmed my thoughts and also my views on the biggest mistake of my investing life which sadly I cannot rectify now as its too late.

I HYP'd 10 years too early.

In hindsight, what I should have done is gone for a maximum capital strategy (leveraged macro) from 2008 until now, then cashed out and go into a income strategy based on ITs.

Bottom line -- lost capital opportunity with HYP as well as wipeouts from Carillion et al.

[Gengulphus]

(1) Renamed to avoid confusion. There are already several 'My HYPs' on TLF.

Very sensible - thanks. Basically, "my HYP" is just a description, not a name! And a particularly confusing description when you used it on TMF, given the number of HYPs you had there... ;-)

Gengulphus

[OhNoNotimAgain]

The benchmark should be the FT All Share.

[MDW1954]

Thanks, Luni. Very, very, interesting. And -- once again -- it's good to see you back.

MDW1954

[PinkDalek]

The benchmark should be the FT All Share.

This Board's Guidance includes:

If selected, such shares should have a dividend yield above the average for the FTSE100 index and be drawn from the constituents of the FTSE 350 index.

There is nothing that I can see which states categorically what benchmark should be used, if any.

It also includes A post is available in the Biscuit Bar should any comment be needed viewtopic.php?f=21&t=8653 should benchmarking be something you want to mention over there.

[Raptor]

The benchmark should be the FT All Share.

Surely the "benchmark" can be different depending on what you have in your portfolio. I used to measure against All Share, then realised that all my portfolio was FTSE250, so measured against that. Personally, I do not think there is a"rule" on what you measure against on HYP as long as we know what you are measuring against.

Raptor.

[Luniversal]

The benchmark should be the FT All Share.

...but all purchases were from the FTSE100.

Anyway the important, practical test of success is the inflation-protected withdrawal rate: income that keeps on trucking.

[Gengulphus]

Here is a seventh-birthday report on LuniHYP100 ...
...
BALANCE

Ignoring Indivior and TP ICAP, a perfectly equilibrial portfolio would be 6.7% (one-fifteenth) in value per shareholding. After seven years this HYP houses two which account for more than one-tenth of total worth: Reed Elsevier, 13%, and TUI, 15%. Three holdings are worth less than half the ideal one-fifteenth: Centrica, Vodafone (albeit after a meaty return of value) and Tesco. Distribution not too distorted, methinks.

Likewise income. Excluding the tiddlers, ideally equal payouts from the 15 between 2011 and 2017 would have totalled £521 apiece. The three top contributors-- Standard Life with £1,172, Vodafone's £1,124 and TUI with £689-- contributed 38% of income, which might sound too much for comfort. The weakest three-- Tesco with £140, Reckitt's £327 and Centrica on £363-- supplied 11%. However more than half the Standard Life-plus-Vodafone total arose from isolated specials. No cause for insomnia there.

I once theorised that Pyad's theory was prone to lead to ever-greater, more perilous divergences. With HYP1 it seems stock selection was more to blame. ...

HYP1 has been going for over 17 years, not just 7. It experienced 4 takeovers for cash in its first seven years (of Blue Circle, Associated British Ports, Gallaher and Alliance Boots), compared with none for LuniHYP100. It re-invested cash takeover proceeds in a single replacement share regardless of how much they were, which twice (for Associated British Ports and Gallaher) led to it buying holdings that were considerably more than 1/15th of the portfolio value and contributed considerably more than 1/15th of its income.

So it's not at all clear to me that stock selection seems to be to blame for its imbalances: the passage of more years, greater corporate activity and a reinvestment policy that ignored diversification all seem to me to be strong contenders!

Gengulphus

[StepOne]

Vodafone and Standard Life returned cash in 2014-15 and Standard Life again this Jul., reducing weights in the portfolio.

Hi Luni,

What happened with Standard Life this July?

Regards,
StepOne

[monabri]

We've not seen any cash from SLA but they're planning to.

viewtopic.php?f=15&t=11928&hilit=Standard


And ( I think) resolution #2 ( yes vote )

https://www.londonstockexchange.com/exc ... 92406.html

I wish that they had returned the money...it would have gone some way to explaining the ski slope share price which has developed over the last few months.

[Luniversal]

Vodafone and Standard Life returned cash in 2014-15 and Standard Life again this Jul., reducing weights in the portfolio.

Hi Luni,

What happened with Standard Life this July?

Regards,
StepOne

What happened, alas, is that I have jumped a gun.

I glanced at the timetable in May and blithely inferred that SLA's return of cash would be done and dusted by Jul.18, the Year 7 close. But it ain't. The min. £165.33 of special income I credited to 2017-18 must wait till 2018-19.

Reared as an accountant on the Accrual Concept, I have chastised myself by forgoing my chocolate biscuit with afternoon tea. The error will be corrected in any Year 8 report. Thank you for noticing it.

[StepOne]

No problem, it wasn't meant as a criticism, but I'm an SLA holder and had completely missed that piece of news, which happened when I was away on holiday celebrating(?) the fact that I was 43 years older than the LuniHYP

It's likely that when the money does turn up I'll just reinvest in SLA, but I've got a wee while to think about it.

Cheers,
StepOne

[Arborbridge]

Vodafone and Standard Life returned cash in 2014-15 and Standard Life again this Jul., reducing weights in the portfolio.

Hi Luni,

What happened with Standard Life this July?

Regards,
StepOne

What happened, alas, is that I have jumped a gun.

I glanced at the timetable in May and blithely inferred that SLA's return of cash would be done and dusted by Jul.18, the Year 7 close. But it ain't. The min. £165.33 of special income I credited to 2017-18 must wait till 2018-19.

Reared as an accountant on the Accrual Concept, I have chastised myself by forgoing my chocolate biscuit with afternoon tea. The error will be corrected in any Year 8 report. Thank you for noticing it.

Luni, we have so missed you and your humour, not to mention erudite contributions.
Arb

[Luniversal]

"I purpose to sell NEX (with the spun-off TP ICAP holding) in the market once the offer goes unconditional. Around £1,800 should come, plus dividends of £401, from an investment of £1,197. So-so.

"Added to the c.£740 of 'unallocated' capital, however, the sales cover a substitute purchase at the £1,200 gross unit price. I hover over Legal & General: overlaps SLA but Footsie stalwart with rising payouts, initial yield 5%, properly dull. Or something a mite hairier: ad agent WPP, racked by scandal but with payout history intact?"
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Curses! Forgot the timetable, and NEX's quote was cancelled early in Nov. the moment the court approved CME's cash-and-paper offer. So for my 145 NXG I had to take a fiver a share in cash plus, reluctantly, six of CME's common stock-- listed in Berlin, valued in dollars, trading at about £143.42 each. I cannot sell this rump holding without posting a form to the Yank taxman, and like Doris cannot be bothered.

TCAP, a relic of previous corporate reshuffling, raised £335 net by selling 118 at 292.4p yesterday. Hence total proceeds, with £725 cash from NXG and CME valued at £860, are £1,920. That is a 60% gain from acquiring Tullett Prebon at launch in Jul. 2011.

CME only yields 1.5% but I made up for that with the substitute: not WPP or Legal & General (the latter's business is moving too close to Standard Life Aberdeen in the portfolio) but a short-tail insurer, Direct Life (DLG).

Bought today at 369p, my 321 shares yield 8.5%-- way beyond the Optimal/Goldilocks Zone, but those rules do not apply in the LuniHYPs. DLG has a rising five-year payout trend and generates plenty of cash, with specials now and again. Like Admiral, which I did well out of.

[dspp]

fwiw, there is also a lonely post of mine over viewtopic.php?f=33&t=14709 wondering of anyone else has NEX >> CME, and if so what to do. Nice to see Luni has the same problem

Personally I hold in the hope that they will continue to grow the business (and shareprice) the same way they have for the last 9-years ($38 > $186), but without too many fiddly US dividends.

regards, dspp

[Arborbridge]

CME only yields 1.5% but I made up for that with the substitute: not WPP or Legal & General (the latter's business is moving too close to Standard Life Aberdeen in the portfolio) but a short-tail insurer, Direct Life (DLG).

Bought today at 369p, my 321 shares yield 8.5%-- way beyond the Optimal/Goldilocks Zone, but those rules do not apply in the LuniHYPs. DLG has a rising five-year payout trend and generates plenty of cash, with specials now and again. Like Admiral, which I did well out of.

Luni,

Did you sell Admiral? What was the reason, if so and why is DLG preferable?

Arb.

[Luniversal]

"Luni,

Did you sell Admiral? What was the reason, if so and why is DLG preferable?"

Sold it as a member of 'HYP v2.0', one of my other two FTSE 100 demo portfolios. As stated in the OP, these were not performing differently enough from the first one to be worth keeping.

Admiral cost £1185 in Jul. 2011. Net proceeds £1424, plus £451 total divs. Fair enough, though payout growth has eased.

Thought of buying it back this week. Preferred to try something zonally 'dangerous'.