daveh wrote:Better than my performance original purchase in Feb 01 of £1k worth of SXC split approx. 38:62 into MAB and IHG in April 03
IHG now worth ~£1.5k plus £1.3K in dividends/specials which were reinvested elsewhere
MAB now worth ~£170 plus ~£300 in dividends which were reinvested elsewhere
Looks like HYP1 did well to reinvest the dividends back into IHG at least on capital performance
About reinvesting dividends/specials, HYP1 does
not reinvest any ordinary dividends from any of its shares: it takes them all out as income, as in the rather over-simplified view many here take of a HYP being in either the "build phase" or the "drawdown phase".
Special dividends are another matter. The policy it uses is that if they're accompanied by a share consolidation, they're treated as a capital return to be reinvested, since they leave the HYPer with more cash but fewer shares, just like a forced partial sale of the holding would (and the way that the consolidation ratio is generally determined even means that it's very roughly the same amount of cash as a partial sale of that many shares would have produced). Since HYP1 is a non-tinkering HYP and does not want to sell, it treats such special dividends as capital that should go back into the portfolio, just as cash proceeds of more obvious capital returns should. On the other hand, that argument doesn't apply to special dividends that are not accompanied by share consolidations, and HYP1's policy is to treat them as bonus income to be taken out along with the ordinary dividends. (An early and clear statement of this policy that I happen to have come across while writing this post is in
https://web.archive.org/web/20170218051 ... sort=whole.)
I don't guarantee that that policy has been followed without exception over the years, but it's certainly what's been done in the vast majority of cases. And it certainly isn't the case that when a special dividend has been accompanied by a share consolidation, such reinvestments have always gone into the same share: that was certainly what almost always happened prior to about 2010 (*) but more recently it's sometimes gone into a different share. I don't think that was actually a change of policy, just a matter of whether reinvesting in the same share happened to look like a sensible HYP purchase at the time.
In IHG's case, all specials before 2010 were accompanied by consolidations and reinvested in the IHG holding, while those since were either not accompanied by a share consolidation and so not reinvested at all (I think I remember that happening once, though I might be wrong - not checked, because it doesn't affect what this post says), or accompanied by a share consolidation but reinvested elsewhere in the portfolio because IHG's yield was too low for it to be a sensible HYP purchase.
In MAB's case, it has also had a number of specials (the original Bass holding has been an amazingly prolific source of corporate actions over the years!). All of them were before 2010, and IIRC accompanied by share consolidations and reinvested in the MAB holding.
So to try to reconcile HYP1's figures with yours: the original HYP1 Bass purchase in November 2000 was made with £5k rather than £1k, so all HYP1 figures need to be divided by 5 to make them roughly comparable with yours. On that basis, the figures I gave from HYP1's year 18 report are equivalent to about a £3.8k value for IHG and £360 for MAB. I believe the share consolidations accompanying reinvested IHG specials were:
59->50 on the demerger (not strictly an IHG special, but similar in effect)
28->25 in 2004
15->11 in 2005
8->7 in 2006
56->47 in 2007
If those specials hadn't been reinvested, the holding would have been reduced to 50/59 * 25/28 * 11/15 * 7/8 * 47/56 = 0.4075 times its original size, less a few because of rounding down the number of shares to a whole number at each consolidation (though some fractional entitlement payments would have been received along the way to compensate). With the specials actually being reinvested, in theory the returned cash is about the market value of the shares lost and so can be used to repurchase them and completely restore the holding; in practice, one loses a bit each time to the trading costs of the repurchase, the reinvestment of the demerger dividend was split 50:50 and so proportionately speaking slightly favoured MAB at the expense of IHG, and there's also a random factor because of share price fluctuations between the determination of the consolidation ratio and actually having the cash to reinvest. The overall effect of the five reinvested specials was to reduce an original holding of 685 shares to 623, i.e. of 623/685 = 0.9095 times its original size, which averages out as a 1.9% holding size reduction per consolidation, compounded. (The holding size reductions from the individual consolidations ranged from 0.0% to 4.1%, to give an idea of the size of the random factor.)
Anyway, that means that one can expect the effect of reinvesting the specials on the IHG holding to be to have increased it by a factor of about 0.9095/0.4075 = 2.23. That appear to explain the difference between your ~£1.5k and HYP1's ~£3.8k figure well enough: HYP1 has done a bit better than the ~£3.3k that factor would suggest, but the remaining difference is probably just due to Bass having been a bit cheaper in November 2000 than in February 2001.
For MAB, the consolidations accompanying reinvested specials are:
59->50 on the demerger
17->12 in 2003
41->34 in 2006
So without the reinvestment the holding size would have been reduced to 50/59 * 12/17 * 34/41 = 0.4961 times its original size, less rounding effects, and again in principle would have remained unchanged with it. In practice, it reduced from 685 to 683 - a factor of 0.9971 and a very small decrease due to the effect of trading costs having been mostly offset by being favoured in the reinvestment of the demerger dividend (as noted above) and I think also somewhat luckier than IHG on the share-price-fluctuation random factor.
So I'd expect HYP1 to have done better than you by a factor of 0.9971/0.4761 = 2.01 and again that's not a bad match to your ~£170 and HYP1's ~£360, with HYP1 having done a bit better than it implies, probably due to the difference in initial purchase dates.
So to sum up, I think you're right that HYP1's substantially better outcome than yours is due to it reinvesting, but as far as the IHG and MAB holdings are concerned, it's only due to reinvesting specials that can plausibly be regarded as returns of capital at times when they were reasonable HYP purchase. If HYP1 had also been reinvesting ordinary dividends and specials unaccompanied by share consolidations, and doing so regardless of whether doing so could be regarded as sensible HYP purchasing, the differences would have much bigger still!
And as a final cautionary note, while these better-than-doubled performance improvements from reinvesting specials that are accompanied by consolidations are pretty major, they are
not typical! Including all its reinvested specials and not just the ones that were reinvested in itself, IHG is a huge outlier in terms of the number of such corporate actions produced by a HYP1 holding over the years, and I'm fairly certain MAB is above average even though it hasn't generated any that were reinvested in other holdings rather than itself. So don't take this as any sort of indication of the size of the whole-portfolio performance differences to
expect from such policy decisions - it's just indicates what
might happen to an isolated holding!
(*) Very approximate, because HYP1 didn't have any corporate actions to deal with for a few years around then.
Gengulphus
