HYP1 is 19 - thread discussing income and capital diversification

[Alaric]

A) In the long run, it isn't realistic to expect to run a HYP in a completely 'hands-off' way, because cash takeovers and returns of capital are basically one-way routes back to cash whose effect is cumulative.

In practice, someone retired and using the income from a HYP might treat takeovers etc. as a windfall and an excuse for some personal expenditure. So just continuing without the removed shares is also something that it's plausible to monitor.

[daveh]

The thing about HYP1 is that I don't imagine many people run a strict no-tinkering portfolio like it. And if there are any 'Dorises' around, they're not reading TLF.

Almost everyone reading these boards will have state pension entitlement plus company pension schemes. So having something HYP-like in addition to those is not as risky as it might seem. Personally I let my HYP picks get on with it, and I quite enjoy the fact that I never have to worry about how they are doing, or whether it's time to tinker. I've got another, trading, portfolio for things like that, and so far it's under-performing my 'risky' HYP

StepOne

I'm probably quite close, as I almost never tinker. But I didn't buy in one go so can/did rebalance with new money and re-invested dividends, I haven't re-invested the large gains from a forced sell all in one share (like HYP1 did in the past), I've always bought new holdings at no more the median size. Plus in the last couple of years when I've been adding less new money and one holding got rather large (SEGRO) I top sliced to re-balance. Also as StepOne says I have state pension and company pension entitlements. If HYP1 was my income source I would have rebalanced years ago, but it is an interesting exercise in how a one shot, no tinker portfolio can develop*.

What my HYP has allowed me to do is build up an income source that I would now be able to live off (just) that is not limited to beeing taken at a specific age. For me this is good as I work in Science on short term contracts, so no longer do i need to worry if my contract isn't renewed. I have an income that would tie me over to retirement or a new job without worry.


* It will be interesting to see how Ian's two versions of PYADs latest portfolio develop over the years especially if they can be comapred against the original in say 10 years time. It will aslo be interesting to compare HYP1 with the continuity HYP1 Gengulphus was maintaining after PYAD left MF where different choices were made with forced events.

[TUK020]

So I'm not criticising HYP1 for failing to be a completely 'hands off' HYP, since I don't think running such a HYP is a realistic aim

So what would you propose for a Dorisian portfolio? Basket of ITs?

[moorfield]

On my own portfolio reports I have always stripped out specials when computing income weightings. I don't assume the same specials will be paid again in a subsequent year.

The specials will make for a lumpy payment profile, but if you strip them out, I think you've double-removed them.

My logic is that if the company hadn't paid a special, it would have had that money to reduce debt, invest in the business or increase the regular dividend by a smaller amount, spread over multiple years, thus improving your future returns one way or another. By removing the special from your receipts record you have lost both the current cash receipt and been penalised by losing the alternative future use of that money.

My logic is that RIO's yield is normally quoted without special dividends, ie. (492.65p - 233.37p) / 4154.50p = 6.2%; my income forecast for the next twelve months assumes just the ordinary dividend of 259.28p, until announced otherwise.

(Edit: special dividends are normally counted in an "extras" row on my spreadsheet, which are stripped out of the overall total for computing income weightings of ordinary dividends of individual holdings.)

[Itsallaguess]

and the crown this year goes to Rio Tinto and Persimmon, who between them paid out a huge 47.65% of overall HYP1 income -

But remember Rio's contribution has been grossly skewed by the special dividends this year. According to my own records Rio has paid 492.65p per share this year, of which 233.37p were specials.

Stripping out those adjusts pyad's income to £1,340.47 or 14.3% of £9,350.76 overall.

On my own portfolio reports I have always stripped out specials when computing income weightings. I don't assume the same specials will be paid again in a subsequent year.

Well I very much tend to agree that specials should not automatically be considered as part of an income-portfolio's regular 'income', but I'm also very keen to take a 'straight-bat' approach to these yearly diversification statistics, and if pyad is happy to include the specials in the HYP1 income-stats (and of course, I understand why he might wish to take that approach...), then I think it's only fair to consider them in the same way for the stats in this thread.

For the ongoing performance-tracking of my own income-portfolio, I don't tend to use specials as part of my long-term projection plans, as I know that doing so would be likely to skew the results of those results and long-term projections....

Cheers,

Itsallaguess

[Itsallaguess]

I continue to believe that the developing concentration-risks to income and capital of taking such an approach

Yet after 19 years there is no evidence of the manifestation of this theoretical risk, and in that time we had the biggest financial crisis since 1929.

19 years is a retirement. You retire at 67 and you'd be 86 by then end of the period - and probably dead.

Which says that whatever risk level you are seeing falls into the same level of risk as having an operation and failing to recover from it. Would you turn down the operation?

I'd suggest HYP has proved it is 'good enough' and the approach is sufficient to render the risk mitigated for all practical purposes.

Regarding your final line above, I would simply refer you to this wikipedia page on the subject -

Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways.

https://en.wikipedia.org/wiki/Survivorship_bias

Cheers,

Itsallaguess

[Itsallaguess]

I always multiply everything by 10 on those 75k portfolio's because then they fit my criteria, which is enough to live off from the start. HYP1 is a success it did what was intended, maybe it's been lucky but had you upscaled it by 10 you'd being having a pretty comfortable retirement.

But I don't like the concentration or the income volatility which gradually evolved.

So I drew three lessons.

15 shares wasn't enough for me, I wanted a lot more. I accept I'm pretty much certain to pick the dogs, which I think ends up impacting capital value more than income. But it should mitigate my two main worries at the macro level.

Cash buffer was necessary. I accept lower income as a consequence. But mitigates my income concern on micro scale.

IT's and pref shares would also feature, I accept I'm not a purist.

I would absolutely agree that all three of those lessons that we might take from witnessing the HYP1 approach, and the resulting concentration of income and capital over a very small number of shares, are ones worth very strong consideration.

If the 'cost' of heeding those lessons might perhaps be a slight reduction in overall portfolio yield, then I'd personally consider that a 'cost' well worth paying for an improved 'peace of mind' approach...

Cheers,

Itsallaguess

[Itsallaguess]

I think HYP1 is a great experiment in how a completely 'hands-off' income-portfolio might develop, ...

Sorry, but I disagree, because HYP1 has not been run in a completely 'hands-off' way.

...

So I'm not criticising HYP1 for failing to be a completely 'hands off' HYP, since I don't think running such a HYP is a realistic aim - I'm just saying that HYP1 isn't one. It would be more accurate to describe it as a non-tinkering HYP, though the small number of voluntary sales it as done mean that that isn't a fully accurate description either.

Perhaps calling it an admin-tinkering-only HYP would be best, since the common theme of the few voluntary sales it has done is avoiding admin to do with multi-stage corporate actions, tiny holdings, foreign holdings, etc.

Thanks Gengulphus, and I agree that my use of the term 'hands-off' wasn't strictly true, although I hope the intention behind such wording will have been clear to those familiar with pyad's income-portfolio.

I shall attempt to use more appropriate phrasing in future.

Cheers,

Itsallaguess

[Gengulphus]

I continue to believe that the developing concentration-risks to income and capital of taking such an approach

Yet after 19 years there is no evidence of the manifestation of this theoretical risk, and in that time we had the biggest financial crisis since 1929.

On the contrary, there is such evidence from those 19 years of HYP1, in the following forms:

* The maximum concentration of capital in any single HYP1 company has risen from 6.7% originally to 16.3% now.

* The maximum concentration of income generation in any single HYP1 company has risen from about 9.5% originally (based on the forecast yields in https://web.archive.org/web/20140528041 ... 01113c.htm) to 24.1% now.

* HYP1 had quite a bit of concentration risk in pyad's November 2007 review, with BT being 11.8% of its capital value and providing 19.3% of its income. His November 2010 review (*) shows that that risk actually manifested in the financial crisis over the following three years, with the income from the holding falling by £466 - which is the largest contribution to HYP1's income drop over those three years, despite three companies cancelling their dividends entirely. In fact, no other company was producing as much as £466 income in 2007, so none of them even could have contributed that much to the fall!

So there is evidence of the risk being there at present, and of it having manifested in the past. There isn't evidence of it currently manifesting (which I suspect may be what you mean), but the idea of dismissing it until and unless there is such evidence strikes me as about as good as the idea of leaving the stable door unbolted until the horse is halfway out and bolting at full speed! The risk is currently there - one just needs to look at the percentages in single companies to see that - and if it needs acting on, it's better acted on before it materialises. Note though that I'm neither saying that it does need acting on nor that it doesn't - because that's a decision each HYPer needs to make for themselves about their own HYP, in the light of their own circumstances (e.g. how dependent are they on their HYP's income?) and preferences (especially how risk-averse they are).

(*) I would like to have used his November 2008 and November 2009 reviews as well, but AFAIAA he never produced a November 2008 review, and his November 2009 review didn't give an income breakdown by company. There was a November 2008 breakdown produced by kool4kats, who also produced one for 2009 a couple of replies into the first of those links, but that's not "from the horse's mouth" and it was for a somewhat different portfolio (the one later known as CHYP1). For what it's worth, I'm reasonably certain those breakdowns' BT dividend figures are correct, since this and this (a couple of TMF posts) confirm that the BT share count is correct - but the portfolio totals are not.

Gengulphus

[Bubblesofearth]

Only on here could there be a discussion about this portfolio without consideration of how it has managed to give a performance so vastly in excess of the FTSE 100 from which it was derived. There are fund managers out there who would give their eye teeth for, and be praised to the rafters for, such an index-beating performance and no doubt charging clients exorbitant fees for the privilege of participating!

Think about it. There has been no active management in the sense that the term is usually intended, no forensic poring over company accounts or trying to predict which companies are best placed to do well in the future. No regular hopping in or out of sectors or companies depending on what happens to be flavour of the month. In short a very simple, easy to copy strategy that has beaten the FTSE 100 hands-down. By my reckoning the capital has risen by an approximate annualised 4% compared to 1% for the FTSE 100 overate 19 years.

The key question is whether this is down to pure luck, down to an acceptance of significantly higher risk, or whether there are some specific and reproducible characteristics that any investor can learn and profit from in future.

What are the biggest differences between this portfolio approach and investing in the FTSE 100 (or tracker thereof)?

1. 15 shares not 100
2. Equal weighting on purchase

There are other differences but these two are, IMO, by far the biggest.

By focussing solely on income, drilling down into factors such as lumpiness of income and an emerging skewness of capital and income, we are missing the wood for the trees. If anyone told me I could beat the FTSE 100 in this manner over such an extended period I'd want to know how!

BoE

[Alaric]

What are the biggest differences between this portfolio approach and investing in the FTSE 100 (or tracker thereof)?

Back in 2000, the FTSE 100 Index contained what in retrospect were over-valued shares that also didn't offer high dividend yields. Selecting income producing stocks with possibly under valued share prices would have avoided the worst of the subsequent serious fall.

If at the height of the 2008 crisis, the assets of HYP1 had been switched into a FTSE 100 Tracker ETF, what would the comparable values be today?

If it's asserted that you cannot beat the market without taking on extra risk, it follows that you can beat the market if prepared to do so.

For active managers, there are usually rules about how much concentration risk they are allowed. We saw the effects of trying to circumvent those rules with the collapse of the Woodford funds and investment management firm.

[toofast2live]

Luck.

No fund manager would be allowed to take on such risk - unless you’re Woody and own the company!

[Arborbridge]

What are the biggest differences between this portfolio approach and investing in the FTSE 100 (or tracker thereof)?

1. 15 shares not 100
2. Equal weighting on purchase

There are other differences but these two are, IMO, by far the biggest.

By focussing solely on income, drilling down into factors such as lumpiness of income and an emerging skewness of capital and income, we are missing the wood for the trees. If anyone told me I could beat the FTSE 100 in this manner over such an extended period I'd want to know how!

BoE

3. yield when chosen compared with FTSE100.

Arb.

[Arborbridge]

What are the biggest differences between this portfolio approach and investing in the FTSE 100 (or tracker thereof)?

If at the height of the 2008 crisis, the assets of HYP1 had been switched into a FTSE 100 Tracker ETF, what would the comparable values be today?

What's the answer, then? You seem to have an interest in trackers, so perhaps you could compute?

Arb.

[Itsallaguess]

Think about it.

There has been no active management in the sense that the term is usually intended, no forensic poring over company accounts or trying to predict which companies are best placed to do well in the future. No regular hopping in or out of sectors or companies depending on what happens to be flavour of the month.

In short a very simple, easy to copy strategy that has beaten the FTSE 100 hands-down.

Of course the question remains unanswered as to whether the above precis is the holy grail of income investment, or simply a post-mortem for a death that has yet to occur...

I hope that this ongoing study into what's going on underneath the HYP1 bonnet can perhaps help to answer the above question.

The key question is whether this is down to pure luck, down to an acceptance of significantly higher risk, or whether there are some specific and reproducible characteristics that any investor can learn and profit from in future.

Well I'm a great believer in the 'Occam's Razor' principle myself.....

Cheers,

Itsallaguess

[Wizard]

Probably heresy, but it could just be that the performance of HYP1 has had a large slice of luck in it. As an experiment it is merely a single data point. I would have thought that to draw any meaningful conclusions it would be necessary to have selected a number of different portfolios starting at different points in time and to then have looked at the results across all of them.

I know any effort to look back at the starting point of HYP1 and pick a slightly different basket of shares would be impossible to do completely objectively given we know (or could look up) what happened in the next 19 years to each share. But could only 1 or 2 different picks of shares that would have been contenders at the time have radically changed the outcome? Could the start point being six months earlier or six months later have made a big difference to what was selected and to subsequent performance?

IMHO taking the performance of HYP1 and saying it validates the methodology is a bit like saying if everyone had followed the same lifestyle choices as Iggy Pop they would still be going strong and performing live in front of pretty decent sized audiences. And for the avoidance of doubt I am not advocating anyone follow Iggy Pop's lifestyle choices

[Itsallaguess]

I thought it might be worth taking a look at some of the Forecast Yield figures for the above five HYP1 components, which as we know are currently paying out 77.86% of the yearly dividends -

Company                    Forecast Yield
Rio Tinto                       8.5%
Persimmon                       9.5%
British American Tobacco        7.4%
BT Group                        8.0%
Shell B                         6.4%

All of the above yields have been taken from the Sharecast website.

Cheers,

Itsallaguess

[Bubblesofearth]

wizard

Of course HYP1 is a single portfolio example. But in science if you have some data, or an observation, that looks interesting you might formulate a hypothesis and then look for more data/observations that support or refute that hypothesis in order to arrive at a more robust theory. What I'm saying is that HYP1 is extremely interesting because of its performance over 19 years. Interesting enough to merit further investigation.

Such an investigation is not impossible nor need it suffer from bias if done rigorously enough. If. for example, the hypothesis that 15 shares from different sectors, equal weight on purchase and maybe (another suggestion) above average FTSE 100 yield are the ingredients for outperformance then careful backtesting should be able to either strengthen or refute such a hypothesis. What would be needed would be reliable enough share performance data to allow such backtesting across different portfolios set up at different start times.

The biggest hurdle is finding accurate performance data. The rest is number crunching.

BoE

[kempiejon]

HYP2, 3 and 4 were started and didn't pyad mention HYP4 recently? I tried to find their inceptions but this is the best I could spot. https://www.fool.co.uk/investing-basics ... portfolio/

[Gengulphus]

First of all, if I remember correctly, HYP1 was not set up as being the only income stream available to its owner. On the contrary, the original investment amount of £75,000 was arrived at because it was then the maximum amount allowable for withdrawal from a Personal Pension scheme. ...

Why rely on memory when one can still read archived copies of the articles in which it was set up? They are:

* Pyad's first original article (6 November 2000), in which he set out the strategy.

* Pyad's second original article (13 November 2000), in which he selected the shares but didn't give any holding sizes.

* Pyad's first review of the portfolio (1 June 2001), in which he still didn't give any holding sizes.

* Pyad's second review of the portfolio (27 July 2001), in which he got around to giving holding sizes.

In the last of those, his explanation of the holding size chosen was "The main addition is that I have assumed an initial investment of £5,000 in each share. This is an income portfolio, so one would need that sort of money at least to derive much of a useful income. Then from this I have allowed for purchase costs of about 1%." The second of them says that HYP1 was chosen on a forecast portfolio yield of 4.8%, so the "useful income" being contemplated was about 4.8% * 15 * £5,000 = £3,600. That was nowhere near being enough income to live off on its own in 2000, but it was certainly a useful chunk (maybe 10%-30% of what would be needed, depending on the HYPer's needs).

Also, the first of those articles starts "Let's say you have retired with a lump sum available from your pension plan, or maybe have been made redundant with a payoff. Alternatively ,perhaps you have been saving hard for a long time and have created a fund to invest for income. ..." So there wasn't a fixed idea about the source of the lump sum being invested in the HYP - just that there was one available to invest.

So you're quite right about HYP1 not having been set up to be the only income stream available to its owner - but I'm afraid your reason is well off the mark!

The problem with relying on memory for facts about what originally happened is that human memory is quite malleable: even if one experienced the original events oneself, later encountering incorrect versions of them is liable to modify one's memory of them - especially if it's the same incorrect version on multiple occasions. A good example is the idea that a lot of people seem to have that HYP was originally intended as a replacement for an annuity. Looking at the first of those links, though, a bit further down it says:

"Conventional wisdom on this topic from IFAs will tend to propel you in the direction of some kind of insurance company product such as guaranteed income bonds or the like. A lot of literature on the subject of retirement investing for income suggests that, even if you have been saving through equity vehicles of some kind up until now, there should be some switch away from equities just because you have retired.

Advisers make such comments because of the perceived risk of keeping money in shares, it being felt by them that at the age of, say, 60, one should be taking less risk than before with savings. From what I have seen, the great majority of retirement lump sums end up either in insurance company investments, or simply in National Savings and bank and building society deposits.

My proposition is that far from avoiding equities, retirement income seekers should actively migrate to this form of investment, ..."

While annuities are an insurance company product, the insurance company product that is actually mentioned is guaranteed income bonds. And actually, a HYP is much more convincing as a replacement for a guaranteed income bond than for an annuity, since both HYPs and guaranteed income bonds fit the role of producing income without permanently losing access to the capital. But unfortunately, so many people have said that HYPs were originally intended to be annuity replacements that it's become part of the 'folklore' of HYPs... Which is fair enough, as long as one remembers that folklore includes myths as well as facts!

Gengulphus