HYP1 is 18

[Lootman]

Incidentally I've seen income reserves characterised very misleadingly as "derisking" (but only around here and previously on TMF, not in the real investment world).

What is this "real investment world" you refer to?

HYP is barely discussed outside of TMF and TLF, so any claim to know about how such investment methods work elsewhere is speculative, or at least subjective. There are of course many dividend-based methods of investment out there, although I'm not sure which ones you are referring to. But for example equity income investment trusts hold back income to smooth out dividends. I don't particularly value that attribute but it could certainly be regarded as a form of derisking.

In practice the universe of HYP is confined to a couple of websites, and its denizens. Beyond that, we cannot credibly make claims about what is "real".

[Lootman]

In effect, one is running one's winners by not rebalancing, whereas most of our ideas about rebalancing seem to do the opposite: trimming back a winner because it has become too big and often backing a share which has fallen so the yield has increased.

This is counter-intuitive and definitely against the usual advice.

The question at the heart of this conflict is: which is the least risky way of proceeding?

Seems to me that this un-managed portfolio has behaved as one might expect. It failed to maintain or grow dividends each year, and suffered a horrific fall in income. But it eventually got bailed out of that by something the portfolio was not aiming for - capital growth from a small number of its holdings.

Now you have something that is highly unbalanced, with an elevated risk profile - the very opposite of what this method claimed to offer.

This performance is a good advert for "running your winners", which is a well known mantra for traders anyway. But as a smooth ride for pensioners it seem unsuitable in its present state. It has been lumpy, volatile and rather random.

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk. And I suspect that Luni is correct - a UK equity income IT might have given similar returns with less stress and risk.

[Luniversal]

Incidentally I've seen income reserves characterised very misleadingly as "derisking" (but only around here and previously on TMF, not in the real investment world). In fact it's nothing of the sort, the risks to income remain the same whether you reserve some or not.

There may be a misunderstanding here.

As used by me, the term derisking refers to the proportion of dividend income received which can be safely spent, compatible with at least preserving the income's purchasing power (adjusted for RPI) from year to year regardless of companies' cuts or freezes. It is like investment trusts' revenue reserving, which has permitted some to maintain or increase dividends for half a century without fail.

Whether one holds back some of the inevitably erratic inflow rests on how important it is to one's finances that a HYP should never falter in supplying such purchasing power- whether it is a luxury or a necessity.

If such a reserve is needed, my tests of HYPs with lives of a decade or longer found that a safe average is to reserve 10-15% pa of the raw inflow. For HYP1 it would have been c. 11% over 18 years; for my FTSE 100 portfolio, 17% over seven years.

Normally this safety-margin percentage would shrink over time, because dividends outpace inflation. This also permits the withdrawal rate to be increased without seriously or protractedly reducing the income reserve.

Derisking HYP1 by my method would have made it yield an average 5.6% pa+RPI on the original £75,000 invested, with a rather full reserve of 19 months' current income after the latest Persimmon surge. (ITs' experience suggests 12 months suffices for safety.)

The 'LuniHYP100' has yielded 5.3%+RPI pa with 14 months now in reserve. HYP1 has seen a more volatile income flow from more concentrated sources than my effort; but HYP1 is more than twice as old, so who knows how mine will evolve?

[Arborbridge]

With regards to the "cash reserve" comment, I'm glad posters opted to add smilies to their posts. I wonder why I bother coming here at all sometimes.

Ian.

I wouldn't want to offend anyone here, least of all you, Ian.

And one reason you come here, is that people like me enjoy reading your posts: long may you continue.

Arb.

Oh, and cheer up

[Arborbridge]

As used by me, the term derisking refers to the proportion of dividend income received which can be safely spent, compatible with at least preserving the income's purchasing power (adjusted for RPI) from year to year regardless of companies' cuts or freezes. It is like investment trusts' revenue reserving, which has permitted some to maintain or increase dividends for half a century without fail.

In effect, that's the same as the Safety Margin.


Arb.

[Bouleversee]

With regards to the "cash reserve" comment, I'm glad posters opted to add smilies to their posts. I wonder why I bother coming here at all sometimes.

Ian.

I wouldn't want to offend anyone here, least of all you, Ian.

And one reason you come here, is that people like me enjoy reading your posts: long may you continue.

Arb.

Oh, and cheer up

Hear, Hear! Was only teasing. You do a great service with your daily reports input.

[idpickering]

Arb & Bouleversee, thank you for your kind comments. No harm done, so let's move on.

Ian.

[funduffer]

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk.

So would I.

It seems TJH's approach is diametrically opposed to the pyad HYP1 no-tinker approach, in that it routinely top-slices winners, re-invests in higher yielding constituents, and culls poor performers, based on well-defined limits.

I would suspect TJH's approach gives higher income growth but less capital growth compared to HYP1, but I may be wrong of course!

It is obviously difficult to generalise based on a comparison of 2 specific portfolios, but it sure would be interesting to know which approach gives 'better' income flow (by which I mean low volatility, and above inflation increase).

FD

[Arborbridge]

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk.

So would I.

It seems TJH's approach is diametrically opposed to the pyad HYP1 no-tinker approach, in that it routinely top-slices winners, re-invests in higher yielding constituents, and culls poor performers, based on well-defined limits.

I would suspect TJH's approach gives higher income growth but less capital growth compared to HYP1, but I may be wrong of course!

It is obviously difficult to generalise based on a comparison of 2 specific portfolios, but it sure would be interesting to know which approach gives 'better' income flow (by which I mean low volatility, and above inflation increase).

FD

No doubt TJH will be on here soon, but as I remember it, TJH's HYP fell slightly more than HYP1 in the worst year, and took seven year's to recover the income - about a year or two longer than HYP1. Whether TJH was less volatile in general, I do not remember.

Arb.

[Itsallaguess]

The unbalanced nature, arising from being a tinkerfree zone, is its very strength.

Hmm.....what was it that Mandy Rice-Davies said again?

Joking aside, I understand why you say it's a strength, but that doesn't detract from the fact that being 'tinker-free' also generates inherent risk-points as well, and so I do hope you don't mind a little poke under the bonnet just so we can gain some insight into what those risks might be...

For instance, as well as recognising that 75.6% of HYP1 income is being generated from just 5 companies, it's worth noting that 46.4% of HYP1 income is being generated by just two (Persimmon and BATS) -



I do believe that many people would be uncomfortable holding an income-portfolio with that income-delivery profile..

I also believe that even if we might agree (for the sake of this discussion...) that tinkering might not add value, per-se, in terms of performance, we might also agree that a trade-off might exist where pure-value (in income terms) might well be seen as a valid sacrifice, if doing so might reduce some of the above concentration-risk...

Cheers,

Itsallaguess

[Lootman]

I do believe that many people would be uncomfortable holding an income-portfolio with that income-delivery profile..

I also believe that even if we might agree (for the sake of this discussion...) that tinkering might not add value, per-se, in terms of performance, we might also agree that a trade-off might exist where pure-value (in income terms) might well be seen as a valid sacrifice, if doing so might reduce some of the above concentration-risk...

That concentration risk also applies to sectors. The top six holdings provide 80% of the income but 3 of those 6 are in natural resources - a notoriously cyclical sector where dividend cuts are not unusual when commodity prices fall.

It's interesting to see how, left untouched, the original HYP now more resembles a hedge fund portfolio, with large concentrated bets on just a handful of shares.

One thing is for sure. It would be reckless to start a HYP with those holdings in those proportions. So the question then is why you would keep it?

[Walrus]

I don't understand how this is even a HYP portfolio in it's current form. If/when Persimmon and/or Bats collapse you are busted.

Crazy if you ask me. I don't know how anyone on here can advocate this as a sensible strategy going forward and highlights the dangers of a no tinker rule.

[moorfield]

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk. And I suspect that Luni is correct - a UK equity income IT might have given similar returns with less stress and risk.

That would be comparing kumquats to apples, since pyad is most definitely not a medianic tinkerer. A better comparison here might be against an Investment Trust such as CTY, as mooted above, but I agree the answer is likely to be obvious without needing to run the numbers: a non-tinker HYP can buy a higher starting yield than an IT, but at the expense of a less reliable income flow.

[Lootman]

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk. And I suspect that Luni is correct - a UK equity income IT might have given similar returns with less stress and risk.

That would be comparing kumquats to apples, since pyad is most definitely not a medianic tinkerer.

He may be, but what's more important is what the original stated goal of this strategy was i.e. to provide an alternative to a safe annuity income stream for a hypothetical Doris. In that context her current portfolio is woefully risky, unbalanced and dangerous.

Pyad appears wed to his "no tinkering" rule and, as a result, is now running a "bet the farm" hedge fund portfolio and lauding what he once dismissed - capital growth.

[Arborbridge]

It's interesting to see how, left untouched, the original HYP now more resembles a hedge fund portfolio, with large concentrated bets on just a handful of shares.

One thing is for sure. It would be reckless to start a HYP with those holdings in those proportions. So the question then is why you would keep it?

No one wouldn't, to that question. It has always been the generally accepted argument on here, that some sort of balance should be maintained - within fairly loose limits perhaps. If equal capital and diversity are important in year one, they are logically equally important in later years too. One cannot get away from that.

However, with regard to HYP1, let us not forget that this was a deliberate experiment set up to see how a non-tinker HYP would fair. In that case, it would not be fair to throw stones at Pyad if only because he has done something useful here, and probably unique. Such a shame he did not do the same with his subsequent HYPs.

HYP1 almost certainly does not reproduce a real life HYP, for there cannot be many investors who would let a real HYP become so distorted. But we probably won't ever find out!

Arb.

[Arborbridge]

I don't understand how this is even a HYP portfolio in it's current form. If/when Persimmon and/or Bats collapse you are busted.

Crazy if you ask me. I don't know how anyone on here can advocate this as a sensible strategy going forward and highlights the dangers of a no tinker rule.

I don't understand how this is even a HYP portfolio in it's current form. I'm sorry but it is a HYP. It is one of the few HYPs which have been set up and left to run, and as such is very valuable. Not only is it a HYP, but it's the very defining model of a HYP as it is the original.
You may think its not "sensible" and many would agree however, that's a different matter to alleging it isn't a HYP in its current form. Of course it is, in the same way that a child and an adult are both human beings, so this HYP grew from it's childhood form.

Arb.

[Walrus]

I don't understand how this is even a HYP portfolio in it's current form. If/when Persimmon and/or Bats collapse you are busted.

Crazy if you ask me. I don't know how anyone on here can advocate this as a sensible strategy going forward and highlights the dangers of a no tinker rule.

I don't understand how this is even a HYP portfolio in it's current form. I'm sorry but it is a HYP. It is one of the few HYPs which have been set up and left to run, and as such is very valuable. Not only is it a HYP, but it's the very defining model of a HYP as it is the original.
You may think its not "sensible" and many would agree however, that's a different matter to alleging it isn't a HYP in its current form. Of course it is, in the same way that a child and an adult are both human beings, so this HYP grew from it's childhood form.

Arb.

Not in my eyes it's not. it's a high risk punt

[Itsallaguess]

It's interesting to see how, left untouched, the original HYP now more resembles a hedge fund portfolio, with large concentrated bets on just a handful of shares.

One thing is for sure. It would be reckless to start a HYP with those holdings in those proportions. So the question then is why you would keep it?

No one wouldn't, to that question. It has always been the generally accepted argument on here, that some sort of balance should be maintained - within fairly loose limits perhaps. If equal capital and diversity are important in year one, they are logically equally important in later years too. One cannot get away from that.

However, with regard to HYP1, let us not forget that this was a deliberate experiment set up to see how a non-tinker HYP would fair. In that case, it would not be fair to throw stones at Pyad if only because he has done something useful here, and probably unique. Such a shame he did not do the same with his subsequent HYPs.

HYP1 almost certainly does not reproduce a real life HYP, for there cannot be many investors who would let a real HYP become so distorted. But we probably won't ever find out!

I appreciate that it's easy to do with this board-software Arb, but I just wanted to make it clear, in case there's any chance of a misunderstanding, that even though my name is quoted in your reply above, the text that you are actually replying to is sourced from Lootman in this instance.

Cheers,

Itsallaguess

[Bouleversee]

Doesn't it all go to show how big a part luck plays? Who knew (certainly not me) that Help to Buy would boost PSN's profits and hence s.p. and yield so much, though to be fair to myself I always thought they were a better bet than TW and some of the other housebuilders? Who knew (though one could have anticipated) that events, dear boy, would cause the s.p. to drop a lot today, but heck there's still that huge divi. to look forward to and the same applies to SSE (also overweight in that one) though the consequences of today's events (McDonnell seems to expect May to simply cede control to Labour without the bother of an election) may have a more permanent effect on that s.p. and yield. Who knows what will happen in the future? Brexit might disappear into the ether and we might be glad of all those foreigners when we need someone to care for us.

Trimming one's winners might be the best thing to do sometimes but letting them run might be the best thing to do at other times. It's all a gamble and maybe Doris can be fairly sanguine about it if, like me, she has an annuity obtained at a very high rate (albeit many years ago and fixed) which provides her with all her basic needs and HYP (or whatever) is just the icing on the cake. Derisking? I can't even take credit for that, however, as it was forced on us by the Equitable Life debacle.

We can only do our best, keep calm and carry on, not taking too much credit if things turn out well or too much self-blame if they don't.

[tjh290633]

I'd be interested to see TJH's unit performance for the same time period, knowing that he keeps impeccable records and because he takes the opposite approach - regularly re-balancing to reduce risk. And I suspect that Luni is correct - a UK equity income IT might have given similar returns with less stress and risk.

I take it that we are talking about dividend per unit. My accounting periods are different, in that I work on the financial year.

These figures are not exactly comparable, but they will have to do:

Year    HYP1 Income   Rebased   TJH     Rebased   Difference
 2001      3,451.00      1.00   11.39      1.00         0.00
 2002      3,474.00      1.01   12.46      1.09         0.09
 2003      3,197.00      0.93   11.68      1.03         0.10
 2004      3,205.00      0.93   11.13      0.98         0.05
 2005      3,546.00      1.03   13.03      1.14         0.12
 2006      4,131.00      1.20   14.21      1.25         0.05
 2007      4,452.00      1.29   15.18      1.33         0.04
 2008      5,040.00      1.46   20.19      1.77         0.31
 2009      3,187.00      0.92   21.60      1.90         0.97
 2010      3,297.00      0.96   11.91      1.05         0.09
 2011      3,843.00      1.11   16.28      1.43         0.32
 2012      4,289.00      1.24   19.15      1.68         0.44
 2013      5,828.00      1.69   20.92      1.84         0.15
 2014      5,601.00      1.62   21.35      1.87         0.25
 2015      6,093.00      1.77   22.43      1.97         0.20
 2016      6,124.00      1.77   22.78      2.00         0.23
 2017      7,327.00      2.12   25.38      2.23         0.10
 2018      8,882.00      2.57   28.40      2.49        -0.08
                                                            
Total     84,967.00     24.62             28.04

So my total is 3,42 higher than that of HYP1, and is higher in every year except the last.

TJH