One share per sector, or two?

[andyalan10]

Whilst I don't adhere strictly to the HYP rules, one of the things I stick too fairly rigidly is "one share per sector" . I'm also pretty good at "strategic ignorance" in so far as I'll buy the higher yielder in the sector unless something else, like dramatically lower cover, makes it seem unwise.

When people in the past have said "by having two holdings I reduce the chances of a company specific disaster" I have always muttered under my breath "yes and you halve the benefit of a company specific boost" such as a takeover or whatever.

In the past I've been all BP through the Gulf of Mexico disaster, but now I am all Imperial Brands when BATS has taken a bath due to exposure to US menthol cigarette sales. And that looks to have led to a significant BATS underperformance -43% over 12 months against IMB at -13%. Thinking about it my all GSK, no AZN is also looking better recently, although not on a 12 month view.

So, does the panel think one share per sector is adequate, and would you contemplate switching horses within a sector after a significant change in relative performance?

Cheers all

Andy

[moorfield]

Hi Andy

I adopt a limit of 10% capital or income weight per sector (ICB classification), rather than one share, which gives me some flexibility to play with that question, viz (from my last portfolio update), 3 banks, 2 tobacco, 1 oil, and so on ...

[88V8]

When people in the past have said "by having two holdings I reduce the chances of a company specific disaster" I have always muttered under my breath "yes and you halve the benefit of a company specific boost" such as a takeover or whatever.
In the past I've been all BP through the Gulf of Mexico disaster, but now I am all Imperial Brands when BATS has taken a bath due to exposure to US menthol cigarette sales. And that looks to have led to a significant BATS underperformance -43% over 12 months against IMB at -13%. Thinking about it my all GSK, no AZN is also looking better recently, although not on a 12 month view.
So, does the panel think one share per sector is adequate, and would you contemplate switching horses within a sector after a significant change in relative performance?

The aim of an HYP is to accrue a reliable income.
SP changes such as you mention are of peripheral concern. although they may of course indicate an upcoming disaster.

In general I would seek two or more per sector, so as to protect my income from being torpedoed by company-specific issues. However, I would not buy two unless each was of itself worth of inclusion.
We hold for example BATS and IMB, BP and Shell, RBS and Lloyds, Phoenix and Chesnara. Also unfortunately SSE and Centrica; they seemed a good idea at the time.

Nor would I engage in what Luni called 'sectoral philately'. No housebuilders. No retailers.

As to changing horses, I have in the past dumped cutters and more so those that have stopped their divii. Nothing is forever, nor any share.

V8

[Itsallaguess]

When people in the past have said "by having two holdings I reduce the chances of a company specific disaster" I have always muttered under my breath "yes and you halve the benefit of a company specific boost" such as a takeover or whatever.

If you have one company per sector, and I have two, and if you have double the potential benefit, then do I have double the odds of half-a-benefit?

Cheers,

Itsallaguess (holds more than one company per sector in many cases...)

[andyalan10]

If you have one company per sector, and I have two, and if you have double the potential benefit, then do I have double the odds of half-a-benefit?

Cheers,

Itsallaguess (holds more than one company per sector in many cases...)

Yes, you do. And double the odds of half a disaster too. I think what I am saying is that diversification across 15 or so sectors and shares is enough in itself to mitigate the effects of single company problems without the need for also holding multiple shares per sector. But having said that, purchases at different times have resulted in my having multiple shares in some sectors and I wonder about consolidating back to one, as well as switching from a serial outperformer to a serial underperformer if it increases income.

Andy

[Itsallaguess]

If you have one company per sector, and I have two, and if you have double the potential benefit, then do I have double the odds of half-a-benefit

Yes, you do. And double the odds of half a disaster too.

But also half the odds of a full disaster? This does get a bit confusing, but it's clear that somewhere in there, on that risk-spectrum, is a happy-position for most, I'd think....

I think what I am saying is that diversification across 15 or so sectors and shares is enough in itself to mitigate the effects of single company problems without the need for also holding multiple shares per sector.

So long as we accept that much of what might be said on an interesting thread like this will undoubtedly be coloured by our own individual experiences of such 'benefits and disasters' throughout our investment periods, then it's great to get feedback on this type of subject, but we also need to accept that luck (both good and bad...) might have played a huge part in forming those current opinions, and luck has a funny habit of changing from time to time, which may well affect future positions in this area...

Personally, I moved quite quickly away from a single-company-per-sector position, as I was happy to play the odds games we've been discussing and finding my own place of comfort on that risk-spectrum, but then over recent years I've been investing more and more into more highly-diversified income-vehicles like Investment Trusts, which are off-topic for this board but will hopefully at least explain my approach to this type of company and sector risk, and also explain my almost complete disregard of trying to take any real advantage from any sort of take-over benefits, or other similar 'non-income performance boosts', that single-company holdings might offer at a more granular level.

Cheers,

Itsallaguess

[Dod101]

I do not stick to the one company per sector argument, in fact I do not worry much about sectors at all. For a start it is very difficult to define a sector. The financial sector could be just one sector in fact by definition it is but even if you divide it up between banks and insurers say, what is the insurance sector? Admiral and Legal and General may be in the insurance sector but they are as different as chalk from cheese and Chesnara and Phoenix are alike but very different from other insurers.

So I simply pick shares that I like. For the record, I have always seen Standard Chartered and BP as accident prone and so have never held either, but I do hold HSBC and also Shell. HSBC is my only bank and Shell my only oil share. I have a number of insurers, Chesnara, Phoenix, Admiral and Legal and General, and happily held Amlin as well, until it was taken over. I hold both tobacco shares and the two big Pharma shares.

I now have only National Grid in the utilities sector and will probably keep it.

So I think shares are what matter not sectors.

Dod

[idpickering]

As I have mentioned hereabouts many times, I do prefer to double up in a sector if possible, and worthwhile. I couldn’t pick the better between BP. Or RDSB, so why try to be to clever when I can just as well hedge my bets between them?

Ian

[moorfield]

Admiral and Legal and General may be in the insurance sector but they are as different as chalk from cheese and Chesnara and Phoenix are alike but very different from other insurers.

I find it useful also to apply a weight limit at the broader (ICB) Industry level (20%), as well as the Sector level, to help resolve this and give myself flexibility to hold duplicate and multiple related sectors as you do the insurers, viz:



But I do agree the focus should be selection of the share over collection of the sector. The classifications are just another useful tool to encourage myself to not to become too concentrated in any one area.

[SDN123]

Hi,

I like to have two shares per sector when I can because I doubt I’m a great stock picker. Although I think HYP is a good system for me, I’m very sure that the highest yielding share in any given day isn’t necessary the “best” income share for the next 30 to 40 years.

There is also a challenge not mentioned so far in this thread of “sector risk”. I bought Carrillion in an “out sourcing” sector (a sector in my mind, not any formal system) and I doubled up with Interserve. I would have had more fun, and probably kept more money, if I had just burnt fivers on bonfire night.

But that doesn’t make the approach (doubling up) wrong. A mistake may have been investing in an industry that I knew I didn’t understand. Other mistakes may have been not selling at first signs of trouble or refusing to sell an “underwater” share. The lesson learned has been that, for me, sector limits are very important (in this case they contained my losses).

This is all easy for me to analyse because I’m very clear on why I want a HYP - to produce the maximum reliable income within my personal risk tolerance. If I was reaching for maximum capital growth I’d have to have a serious rethink.

SDN

[tjh290633]

Trying to work out how and why I have duplication in sectors is not easy, but some of it derives from the time when I had to run an ISA alongside my existing PEP. I decided that I did not want to replicate the existing holdings, so used the same selection method, but chose the next best share where appropriate. This was before I had heard of the HYP system, so I used the "Beat the Dow" method, but based on the FT30 constituents. I decided to have 6 holdings at the outset,

This gave me Tate & Lyle, RSA, Allied Domecq, British Airways and Blue Circle, to which I added Stagecoach as a wild card. So I had two transport companies, albeit from very different subsectors.

Sector duplication from the PEP was Cadbury Schweppes in food, Prudential in insurance, Imperial Tobacco (who owned Courage) and Whitbread in brewing and hospitality, and Pilkington and Hanson in building materials.

Inside the PEP, apart from those already mentioned, I had Lloyds TSB and Halifax (from demutualisation) in banking, BP. and BG in gas and oil, ICI and BOC in chemicals, Marks & Spencer and Tesco in retail, and that was the extent of duplication in a total of 25 holdings. Some was by happenstance, by Hanson splitting up, for example. In most cases I considered that I was in a different subsector, like retail banking and mortgage lending for example.

The real point is that there is real difficulty in getting to the minimum 15 holdings without duplication. When you get to 20 or more it is unavoidable. Sometimes it is wished on you. I had Forte, taken over by Granada, merged with Compass, split again into ITV and Compass, and the hotels sold off. British Gas first spun off Centrica (not retained) and then Lattice (which merged with National Grid), leaving just the holes in the ground, later to be taken over by Shell. Life is never simple.

For various reasons I now have 35 holdings. That makes the average weight about 3%, so even with triplication, getting much above 10% in a sector is hard work. Usually there will be subsectors to take into account, although I have three miners thanks to BLT splitting off South32.

I think it comes down to the amount invested. At, say, £20,000, duplication can be avoided with about 15 shares. At £200,000 it is a different matter and at £2 million, different again. What size of holding are you happy with? £1,000, £5,000, £20,000 or what? Can you sleep easily if you had a farm bet of £100,000?

TJH

[88V8]

Can you sleep easily if you had a farm bet of £100,000?

I do, but in something safe. Or which I believe to be safe. >5% yield but not an equity.

Taking this topic ad absurdum, why not buy just one share. Shell, Or IMPS. Or another Sturdy. Put all your money into it. Don't fancy that?
Then it's a matter of degree. How much to diversify.

I'm with Dod. The share, not the sector. Although I do have regard to supersectors, in my case Financials. When the next crash comes, I don't want to be totally sunk.

But two per sector? Sure, if they're both good.

V8

[IanTHughes]

I think it comes down to the amount invested. At, say, £20,000, duplication can be avoided with about 15 shares. At £200,000 it is a different matter and at £2 million, different again. What size of holding are you happy with? £1,000, £5,000, £20,000 or what? Can you sleep easily if you had a farm bet of £100,000?

Surely, if the amount invested is £2 million, £100,000 is not a farm bet? Diversification is about limiting the percentage of a portfolio's capital concentrated in one holding or sector. The actual amount that limit is will be determined by the overall size of the portfolio.

Or am I missing something here?


Ian

[idpickering]

Surely, if the amount invested is £2 million, £100,000 is not a farm bet? Diversification is about limiting the percentage of a portfolio's capital concentrated in one holding or sector. The actual amount that limit is will be determined by the overall size of the portfolio.

Or am I missing something here?


Ian

Not at all imho Ian. To my mind it's all relative, we're all different, and manage our HYPs as we each see fit. I wouldn't feel comfortable with just 15 shares, and certainly not a mini HYP with only a handful of holdings. I'm quite happy, and can sleep at night, in my 32 different holdings HYP skin.

Ian.

[IanTHughes]

So, does the panel think one share per sector is adequate, and would you contemplate switching horses within a sector after a significant change in relative performance?

Yes, but one should also aim for a sufficient number of different Business Sectors. Stephen Bland (PYAD) originally suggested that an HYP bought in entirety at one point of time should contain 15 separate holdings and only one or at most two duplications of Business Sector. Some on this board will agree with that whilst others will suggest that the number of holdings should be more, that is very much a personal viewpoint. Obviously the main point to consider is how much capital or income loss one could stomach in the event of a total loss occurring to one holding. The answer to that question will differ from HYPer to HYPer.

In my case, as someone who is continuing to build an HYP and therefore re-investing the dividends as well as adding new money, I restrict the Capital Value of any one holding to no more than 6.50% of the total valuation. Therefore the smallest number of separate holdings that I will allow is 16. Furthermore, I limit the Capital Value of any one Business Sector to no more than 12.00%, at least 9. So my allowed diversification across Business Sectors is not quite as strict as PYAD would have recommended and I am sure some other contributors to this board would also suggest more diversification. As I said it is a personal decision.

Please note however, my limits do not mean I trim back any overweight Holding or Business Sector, simply that I do not add further funds until concentration is once again within limit.

But within those limits I am quite happy to hold only one holding per sector. I will purchase a second or third holing within the same Business Sector, but only if each such holding is the highest sustainable yield available at the time of purchase, and does not over-concentrate the capital invested in that particular Business Sector.

However, it should be noted that whilst the strictness of diversification is a matter for debate, some level of diversification is a very important safety feature for an Income Strategy like HYP. Although Dod1010 suggests otherwise, he is not an HYPer, preferring instead some sort of Value Strategy that grows or at least maintains the Capital Value invested. He also appears confident of his ability to avoid the occasional selection disaster that all portfolios will surely suffer from time to time.

Anyway, I hope that helps and good luck with your HYP


Ian

[tjh290633]

I think it comes down to the amount invested. At, say, £20,000, duplication can be avoided with about 15 shares. At £200,000 it is a different matter and at £2 million, different again. What size of holding are you happy with? £1,000, £5,000, £20,000 or what? Can you sleep easily if you had a farm bet of £100,000?

Surely, if the amount invested is £2 million, £100,000 is not a farm bet? Diversification is about limiting the percentage of a portfolio's capital concentrated in one holding or sector. The actual amount that limit is will be determined by the overall size of the portfolio.

Or am I missing something here?


Ian

Yes, you are missing the point that the size of a holding is not determined by the size of the portfolio.

The two are unconnected.

TJH

[IanTHughes]

I think it comes down to the amount invested. At, say, £20,000, duplication can be avoided with about 15 shares. At £200,000 it is a different matter and at £2 million, different again. What size of holding are you happy with? £1,000, £5,000, £20,000 or what? Can you sleep easily if you had a farm bet of £100,000?

Surely, if the amount invested is £2 million, £100,000 is not a farm bet? Diversification is about limiting the percentage of a portfolio's capital concentrated in one holding or sector. The actual amount that limit is will be determined by the overall size of the portfolio.

Or am I missing something here?

Yes, you are missing the point that the size of a holding is not determined by the size of the portfolio.

The two are unconnected.

Well yes, I know that but that was not what I was suggesting. All I was saying is that the value at which a holding is considered "overweight" will depend on the capital value of the portfolio. At least that was what I was trying to say


Ian

[tjh290633]

Surely, if the amount invested is £2 million, £100,000 is not a farm bet? Diversification is about limiting the percentage of a portfolio's capital concentrated in one holding or sector. The actual amount that limit is will be determined by the overall size of the portfolio.

Or am I missing something here?

Yes, you are missing the point that the size of a holding is not determined by the size of the portfolio.

The two are unconnected.

Well yes, I know that but that was not what I was suggesting. All I was saying is that the value at which a holding is considered "overweight" will depend on the capital value of the portfolio. At least that was what I was trying to say

That has nothing to do with the question that I put. Would the portfolio holder be happy with a farm bet of £100,000? I did not specify the size of his portfolio.

TJH

[IanTHughes]

Yes, you are missing the point that the size of a holding is not determined by the size of the portfolio.

The two are unconnected.

Well yes, I know that but that was not what I was suggesting. All I was saying is that the value at which a holding is considered "overweight" will depend on the capital value of the portfolio. At least that was what I was trying to say

That has nothing to do with the question that I put. Would the portfolio holder be happy with a farm bet of £100,000? I did not specify the size of his portfolio.

Well, I can only answer for myself which is to say that the answer to that question very much depends on the overall size of the portfolio in question. If you still fail to understand that I really cannot help and will not further respond

Ian

[AJC5001]

Would the portfolio holder be happy with a farm bet of £100,000? I did not specify the size of his portfolio.

TJH

I thought that a farm bet of £100,000 meant that the size of the portfolio was also £100,000?

What do you mean by farm bet?

Adrian