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A HYP-othetical portfolio: Year 15 review

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Luniversal
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A HYP-othetical portfolio: Year 15 review

#371847

Postby Luniversal » December 31st, 2020, 11:37 pm

HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and backtested (to tempt fate) from Fri., Jan. 13, 2006.

It was conceived as a lump-sum investment to gauge how a purist iteration of Stephen Bland's (aka pyad's) system would have faced the crash of 2007-09. Dividends were hammered for several years while the portfolio was young. Could it overcome early setbacks.

The deviser's guidelines were followed, except that 20 shares were fictitiously bought in equal amounts, rather than his 15. By 2011 most practitioners seemed to be seeking safety in numbers. All shares were in the FTSE 100 index and were the highest current yielders subject to fundamental filtering: chiefly, five years of rising dividends and not too much debt. Only one company could hail from each sector-- HYP's vital safety feature. No deviation or repetition allowed.

The result was full of perennially high-paying blue chips such as Tesco, Unilever, British American Tobacco and Vodafone. The demo was meant to give characteristic, not brilliant results: it plugged a chronological hole between pyad's HYP1 of Nov. 2000 and my real-money Footsie job, 'LuniHYP100', acquired in Jul. 2011.

HYP06 was to undergo 'light, judicious tinkering', such as selling a share if it stopped paying dividends but not if it cut them. There would be no trimming to correct biases which might evolve in supplying income. Later I grew more averse to meddling and forgave what might transpire to be temporary lapses of payouts, e.g. Tesco.

The pretend portfolio, accounted to Dec. 31, has been front-tested twice as long as it was jobbed backward. Its progress was reported annually on The Motley Fool until 2016. An update for 2017-19 is here:

viewtopic.php?f=15&t=21168&p=275629#p275629

MEMBERSHIP (deletions italicised)

BAe Systems (BA.)
BHP (BHP)- bought 2012
BOC International (BOC)- bid 2006
BAT Industries (BAT)
Centrica (CNA)
Compass (CPG)
Diageo (DGE)- bought 2008
DSG International (DSGI)- sold 2008 (dividend passed)
GKN (GKN)- sold 2009 (dividend passed)
GlaxoSmithKline (GSK)
IMI (IMI)- bought 2009
International Power (IPR)- bought 2006, bid 2012
Kelda (KEL)- bid 2006
Land Securities (LAND)
Legal & General (LGEN)
National Grid (NG.)
Next (NXT)- bought 2010
Pearson (PSON)
Persimmon (PSN)- sold 2008 (dividend passed)
Rexam (REX)- sold 2009 (dividend passed)

Royal Dutch Shell B (RDSB)
Scottish & Newcastle (SCTN)- bid 2008
Severn Trent (SVT)- bought 2008
South32 (S32)- BHP spinoff 2015
Standard Chartered (STAN)
Tesco (TSCO)
Unilever (ULVR)
Vodafone (VOD)


INCOME

2006 (from Jan. 13): £2,939
2007: £3,149 +7.1% change year/year
2008: £3,239 +2.9%
2009: £2,990 -2.7%
2010: £3,235 +8.2%
2011: £3,646 +12.7%
2012: £4,127 +13.2%
2013: £4,239 +2.7%
2014: £5,608 +32.3%
2015: £4,907 -12.5%
2016: £4,708 -4.1%
2017: £5.866 +24.6%
2018: £4.960 -15.4%
2019: £5,075 +2.3%
2020: £4,177 -17.7%

TOTAL TO DATE: £62,866


The same sum as Pyad used for HYP1, £75,000 gross, would have produced £4,177 after the epidemic of dividend cuts in 2020, the worst outcome since 2012. The latest haul includes £26 instant-withdrawal-account interest, at a beggarly 0.5%, on capital receipts from past corporate actions yet to be recycled.

Dividends were down 17.7% from 2019. They vanished, for the time being anyway, at Centrica, Compass, Next and Standard Chartered. Land Securities skipped two quarterlies and came back on a lower rate. Shell 'rebased' severely. IMI delayed its final dividend, skipping the subsequent interim. Only BAe Systems had merciful second thoughts, resuming normal service a few months after reconsidering the panic.

Another sign of crisis was bonuses drying up. No special payouts came in last year except £2 from South32, the BHP spinoff; 2019 had seen only £3, also from S32. A sad change from when companies such as Next furnished substantial extras.

Pyad said in HYP's early days that he did not think a year-on-year fall of more than one-fifth would ever arise: not so for his model portfolio, but true of HYP06 in both money and real terms. Its biggest nominal dip previously was 15.4% in 2018, followed by 12.5% in 2015. The Retail Prices Index inflation rate was 0.9% in the year to Nov. 2020, assumed to be the same in the calendar year.

HYP06's cumulative income, 2006-20, is £62,866 including £695 interest from uncommitted cash. It stacks up to more than four-fifths of what was invested. Last year the return on the capital's brought-forward market value was down from 4.2% to 3.0%, compared with an average 3.8% over the portfolio's lifespan.

Revenue has compounded at 2.5% pa nominal, -0.4% real, hence purchasing power in 2020 was slightly below Year 1's. Income rose nominally in nine of 15 years.


CORPORATE ACTIONS

The last capital changes were BHP's special distribution two years ago and National Grid's in Jun. 2017. Admin has been light. No bids since International Power seven years back, so little sleep deprivation for the legendary Doris.

Pyad thought what he called market trading-- letting irresistible events sift and reorder portfolios-- would likely give better results than gratuitous fiddling. Thus it has been for HYP06.

A rule imposed by me-- to provide for uptake of rights issues and placings without injecting more capital-- was that no brand-new share could be acquired until the Unallocated bank amounted to 150% of unit cost. For HYP06 the trigger was £5,625: one-twentieth of £75,000 plus 50%. Given my lifelong disdain for cash calls, this stipulation now feels too stringent and has been scrapped for my LuniHYPs, which redeploy windfalls pronto.

HYP06's idle capital is £5,024-- enough to finance a 21st constituent, but damned if I know what. Suggestions welcome; must be in a new sector, no cuts since c. 2015. Do such beasts exist?


BALANCE

Divergences among holdings' value or income contributions vex many HYPers. Not me. My yardstick is that a stake worth more than twice average weight (5%, one-twentieth) is obese and one worth 2.5% is anorexic, but I lose no sleep if they wax or wane.

At year end the most valuable holding was Compass at 19.2% of HYP06's value, followed by Next (10.7%). It was the same a year ago, despite both having imposed dividend cuts: the two cover 26.5% of realisable value, but at end-2019 it was 28.5%. Next has handled the retail crisis and shifts to online trade better than most shopkeepers; Compass is grievously injured by the worldwide shutdown of industrial and aviation catering, but with hopes of a post-vaccine bounce back.

Apart from South32, the five least valuable holdings-- all defined above as underweight-- are Centrica (0.5%), Vodafone (1.2%, but after capital reductions), Standard Chartered (1.2%), Land Securities (1.3%) and Shell (2.0%). Their combined capital contribution is 6.2%, a lot less than either of the porkers. At end-2019 the bottom 5 had amounted to 8.9%, with Tesco instead of Shell. The former has continued to restore its payout, whereas the latter chopped for the first time since doodlebugs.

Centrica is the closest to a forlorn hope. It tries patience, having outdone BT by royally screwing up the hand dealt by a privatisation monopoly as soon as competition emerged. Dividends remain a bare possibility. Vodafone's history since it was Racal's diadem is almost as dispiriting as BT's: jam tomorrow in perpetuity. But since none of the five underachievers is a wholly lost cause, they will be left to cure themselves or be plucked by predators.

Income is potentially less skewed since Compass and Next reverted to regular payouts only. In 2019 BATS was the biggest payer with 11.8% of the haul; this year it led again with 14.8%. However in Year One Vodafone had chipped in 16.4%, and during the last decade Next was supplying almost one-quarter, thanks to a spate of specials. The average annual top payout in 2006-20 was 14.6% of the total. BATS is in line, no more.

No sign is discernible of a relentless creep towards dangerous over-dependence on an unvarying handful of members. Among 13 survivors from the original 20 constituents, it is true, seven were either over- or under-achievers last year compared with a lifetime average of three; but these are exceptionally turbulent times for equity income, likely to polarise results more than usual.

Taking an overall view, in 2006-20 the only average underachiever on income among the 13 originals has been Land Securities, while only Compass persisted as long as an overachiever. Both have just provided a lot less than in 2019, so no pattern there.


DERISKING

One way to defend purchasing power is to fix a withdrawal rate and increase the sum spent only by inflation each year, regardless of how much faster receipts increase. The surplus goes into an income reserve against future cuts and suspensions. Once the reserve is full enough-- say one year of current spendable income-- a higher index-linked withdrawal rate can be contemplated.

For HYP06 the initial withdrawal was set at 3.55%+RPI, steered by an All-Share Index yield of 2.9% at the launch in Jan. 2006 and the portfolio's actual historic yield of 3.9% at end-2006 from the first 11.5 months' receipts. The withdrawal rate stuck for seven years; but by end-2013 ten months of spendable income reposed in the kitty and specials were flowing in.

It appeared feasible to raise the rate to 4.26%+RPI, a 20% hike. Receipts continued so buoyant that the enhanced rate did not prevent the income reserve rising from 9 to 16 months between Years 8 and 10.

A year back I continued: "Another uplift was justifiable, by 15%, giving 4.90%+RPI. That has lowered the reserve to 14 months, which feels a plump enough cushion; nonetheless the dim immediate vista for divis militates against further rises. I could live with almost 5% plus cost-of-living protection for some time (1)."

Now I am getting the jitters-- the latest withdrawal rate hike feels too sanguine after WuFlu. That 14 months of income reserve has dropped to my comfortable minimum of 12 (£5,184), compared with 17 four years ago. Last year drained it by £1,168 against £435 over the previous two years, the only previous abstractions. The kitty could empty soonish at this pace.

Suppose inflation worsens in Years 16-20 from 1% to 3% pa, and receipts rise by one-tenth in 2021 as cuts begin to be unwound, followed by annual increases of 4% (1% real) in a subdued economic environment. That would reduce the reserve steadily to 2 months in 2025, virtually worthless. This would be the fault of 2017's increased withdrawal rate. Had it been lifted by 5% rather than 15%, the reserve after 20 years on the same inflation and income projections would be a tolerable 11 months, sustaining a 4.5%+RPI pa payout.

A one-time cut in the withdrawal rate (though derisking is intended to avoid such hardship) may be unavoidable. Say only 85% of the present spendable income is taken in 2021, and thereafter index-linking is honoured. On the stated assumptions the reserve would swell to 11 months at end-2025: not quite a full year's backing, but as much as in the previous illustration. The new withdrawal rate would be 4.2%+RPI. If the one-off cut was only one-tenth, 8 months in reserve plus 4.4%+RPI would be the outcome.

Maybe it is time to get that 21st share working, and to pray that the promised special from Tesco after selling its Asian business can assist HYP06's revenue.


CAPITAL

2006 (Jan. 13): £75,000 before 1% purchase costs
2006: (Dec. 31) £86,941 +15.9%
2007: £89,948 +3.5%
2008: £71,587 -20.4%
2009: £76,848 +7.3%
2010: £90,581 +17.9%
2011: £95,192 +5.1%
2012: £105,428 +10.8%
2013: £126,767 +20.2%
2014: £126,439 -0.3%
2015: £119,199 -5.7%
2016: £130,544 +9.5%
2017: £137,178 +5.1%
2018: £121,984 -11.1%
2019: £141,312 +15.8%
2020: £124,239 -12.1%


High Yield Portfolios are proverbially where capital does not matter, but market values reveal their horsepower as income generators. A selection whose dividend stream widely outpaces its realisable value may be headed for trouble, chomping its capital covertly.

HYP06 would have been worth £124,239 at Dec. 31: a 12.1% drop, after a 15.8% rise in 2019 to its peak value. The portfolio is still nominally worth two-thirds more than at its putative launch; it has compounded at 3.5% pa against 2.9% pa inflation. The gravest erosion between year ends was 20.4% in 2008. The Covid-19 scare has been shrugged off faster than the Global Financial Crisis.

For relativists, the portfolio beat or equalled the FTSE 100 index in ten of 15 years and by 2.3 (3.8) percentage points last year, after trailing it in 2015-18 when big-divi blue chips were way out of vogue. HYP06's sole bad undershoot of the Footsie was in 2009, during the 'dash for trash' which benched HY shares; although it put on 7.3%, recovery plays fared far better. Recent relative weakness has been against momentum and growth picks. Value may show them a clean pair of heels if virus and Brexit concerns fade, though that may not do much for dividends.
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(1) Derisking produces current withdrawal rates of 6.3%+RPI for pyad's HYP1 after 20 years; 4.3% for the 'Basket of Seven' and 3.9% for the 'Basket of Eight' after the same span as HYP06. As in other comparative tests, derisked HYP income emerged materially greater than from collections of investment trusts, even after wider dividend variability from a HYP's narrower selection of equities. That is the method's best argument.

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Re: A HYP-othetical portfolio: Year 15 review

#371858

Postby Gengulphus » January 1st, 2021, 12:14 am

Luniversal wrote:HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and backtested (to tempt fate) from Fri., Jan. 13, 2006.

So it can only have been bought by someone in January 2006 if they had a working time machine, a working crystal ball or the ability to read what was in your mind a bit over 5 years later. For anyone else, it is a few months short of meriting even a 10-year review...

We're supposed to be dealing with HYP practicalities here, and the idea that someone in 2006, before the financial crisis of 2008-2009, would have selected their HYP according to the criteria you felt made sense in 2011, after that financial crisis, is quite simply not such a practicality.

Gengulphus

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Re: A HYP-othetical portfolio: Year 15 review

#371929

Postby moorfield » January 1st, 2021, 10:20 am

Luniversal wrote:HYP06's idle capital is £5,024-- enough to finance a 21st constituent, but damned if I know what. Suggestions welcome; must be in a new sector, no cuts since c. 2015. Do such beasts exist?


From the FTSE 100 you could add Sage (SGE) - Software & Computer Services - which has the requisite dividend history and yields 3.0%.

Alternatively, top up the highest yield holdings to a maximum of one fifteenth of current portfolio value (£124,239/15 = £8,283).

Happy New Year to you!

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Re: A HYP-othetical portfolio: Year 15 review

#371954

Postby 88V8 » January 1st, 2021, 10:46 am

Interesting to see how little the income has dropped year-on-year. 2020 the worst year, 17.7%
Just as well the capital doesn't matter, far more variance.

Gengulphus wrote:We're supposed to be dealing with HYP practicalities here, ....

Mmmm, but its genesis is transparent, and it's always interesting to see the unfolding of a portfolio even if it involved Dr Who.
One wouldn't want to see it Exterrrrminated :D

V8

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Re: A HYP-othetical portfolio: Year 15 review

#371964

Postby IanTHughes » January 1st, 2021, 11:05 am

Luniversal wrote:HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011

So in actual fact it is only a 10 Year Review!

It does still retain the 5 years "hindsight" benefit which was baked into it from its inception which, as you have clearly stated, was March 2011!


Ian
Last edited by IanTHughes on January 1st, 2021, 11:09 am, edited 2 times in total.

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Re: A HYP-othetical portfolio: Year 15 review

#371966

Postby Itsallaguess » January 1st, 2021, 11:07 am

Luniversal wrote:
HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and back-tested (to tempt fate) from Fri., Jan. 13, 2006.

INCOME

2006 (from Jan. 13): £2,939
2007: £3,149 +7.1% change year/year
2008: £3,239 +2.9%
2009: £2,990 -2.7%
2010: £3,235 +8.2%
2011: £3,646 +12.7%
2012: £4,127 +13.2%
2013: £4,239 +2.7%
2014: £5,608 +32.3%
2015: £4,907 -12.5%
2016: £4,708 -4.1%
2017: £5.866 +24.6%
2018: £4.960 -15.4%
2019: £5,075 +2.3%
2020: £4,177 -17.7%

TOTAL TO DATE: £62,866

Pyad said in HYP's early days that he did not think a year-on-year fall of more than one-fifth would ever arise: not so for his model portfolio, but true of HYP06 in both money and real terms. Its biggest nominal dip previously was 15.4% in 2018, followed by 12.5% in 2015. The Retail Prices Index inflation rate was 0.9% in the year to Nov. 2020, assumed to be the same in the calendar year.

Revenue has compounded at 2.5% pa nominal, -0.4% real, hence purchasing power in 2020 was slightly below Year 1's. Income rose nominally in nine of 15 years.


Interesting results from a back-tested HYP - I mean, if that's as good as it gets by cheating...

Chart here of the HYP06 income from 2006 to 2020 -

Image

That seems to show a similar level of structural income-volatility to the ARBHYP chart here -

https://www.lemonfool.co.uk/viewtopic.php?f=31&t=26214&start=120#p358283

Given the above, it's an interesting hypothetical exercise, but probably not for the originally-intended reason..

Cheers,

Itsallaguess

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Re: A HYP-othetical portfolio: Year 15 review

#372101

Postby Gersemi » January 1st, 2021, 4:09 pm

Luniversal wrote:
INCOME

2006 (from Jan. 13): £2,939
2007: £3,149 +7.1% change year/year
2008: £3,239 +2.9%
2009: £2,990 -2.7%
2010: £3,235 +8.2%
2011: £3,646 +12.7%
2012: £4,127 +13.2%
2013: £4,239 +2.7%
2014: £5,608 +32.3%
2015: £4,907 -12.5%
2016: £4,708 -4.1%
2017: £5.866 +24.6%
2018: £4.960 -15.4%
2019: £5,075 +2.3%
2020: £4,177 -17.7%

TOTAL TO DATE: £62,866




I note the two large decreases in income follow two large increases, suggesting some unusual activity in those years (2014 & 2017). Luniversal can you explain where the large increases in income came from? Was it from a source that was not repeated in the following year?

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Re: A HYP-othetical portfolio: Year 15 review

#373118

Postby midgesgalore » January 4th, 2021, 6:29 pm

Thanks Luniversal for including your discussion on the practicalities of DERISKING (and to all the other contributors raising this subject from time to time).
Very much appreciated.
I always reserve an income as a lump sum. My happy amount is way more than I have historically read about since I started taking an interest in this, as far back as Motley Fool days. For me it is 3 years minimum and I will also recharge the pot with between 15% to 20% income. Those are my personal levels and not saying that is what everyone else should do. If I get a special dividend I don't assume it should be amalgamated into the annual total however the Admiral specials I have included after their custom and practice. Otherwise the specials are directed to top-ups if the reserve is full.

The recent collapse in dividend payments from March 2020 would otherwise have put me in defcon - brown, as I was unable to consider a significantly reduced income at that time. Happily with reinstatement of most dividends (excludes BT, Marstons, LLoyds & HSBC bank) and a few market rallies things have very much recovered since, without me resorting to tinkering.

midgesgalore

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Re: A HYP-othetical portfolio: Year 15 review

#373229

Postby miner1000 » January 5th, 2021, 4:46 am

Gengulphus wrote:
Luniversal wrote:HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and backtested (to tempt fate) from Fri., Jan. 13, 2006.

So it can only have been bought by someone in January 2006 if they had a working time machine, a working crystal ball or the ability to read what was in your mind a bit over 5 years later. For anyone else, it is a few months short of meriting even a 10-year review...

We're supposed to be dealing with HYP practicalities here, and the idea that someone in 2006, before the financial crisis of 2008-2009, would have selected their HYP according to the criteria you felt made sense in 2011, after that financial crisis, is quite simply not such a practicality.

Gengulphus


Yes, we have had this argument made many many times in the past. I think I will just forget about the time machine and study what the author is actually trying to show. i.e. that a portfolio can recover from a crash, but not without damage.

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Re: A HYP-othetical portfolio: Year 15 review

#373396

Postby Gengulphus » January 5th, 2021, 11:50 am

miner1000 wrote:
Gengulphus wrote:
Luniversal wrote:HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and backtested (to tempt fate) from Fri., Jan. 13, 2006.

So it can only have been bought by someone in January 2006 if they had a working time machine, a working crystal ball or the ability to read what was in your mind a bit over 5 years later. For anyone else, it is a few months short of meriting even a 10-year review...

We're supposed to be dealing with HYP practicalities here, and the idea that someone in 2006, before the financial crisis of 2008-2009, would have selected their HYP according to the criteria you felt made sense in 2011, after that financial crisis, is quite simply not such a practicality.

Yes, we have had this argument made many many times in the past. I think I will just forget about the time machine and study what the author is actually trying to show. i.e. that a portfolio can recover from a crash, but not without damage.

Of course a portfolio selected after a crash but "backtested" to a date before it can recover from that crash. Equally, I could have selected a HYP in 2011 and "backtested" it to a starting date in 2006 to 'show' that such a portfolio can still be seriously damaged now, nearly 10 years after it was selected. And someone else could have done the same to 'show' that such a portfolio could have survived the crash with little or no damage. None of them actually shows anything worthwhile about recovery from a crash.

And if Luniversal is actually trying to show that a portfolio can recover from a crash, he would (or at least should) have chosen the thread title to reflect that. The thing I find worth pointing out is him indicating in the thread title that it's a 15-year review when it's no such thing. It's a not-quite-10-year review of a portfolio selected in 2011; ignoring the "not-quite" part of that as probably not making much difference, the relevant income record is:

2011: £3,646
2012: £4,127 +13.2%
2013: £4,239 +2.7%
2014: £5,608 +32.3%
2015: £4,907 -12.5%
2016: £4,708 -4.1%
2017: £5.866 +24.6%
2018: £4.960 -15.4%
2019: £5,075 +2.3%
2020: £4,177 -17.7%

and the relevant capital record is:

2010: £90,581
2011: £95,192 +5.1%
2012: £105,428 +10.8%
2013: £126,767 +20.2%
2014: £126,439 -0.3%
2015: £119,199 -5.7%
2016: £130,544 +9.5%
2017: £137,178 +5.1%
2018: £121,984 -11.1%
2019: £141,312 +15.8%
2020: £124,239 -12.1%

The CAGR of the income is 1.5% and that of the capital is 3.2%. Or since this last year has been pretty exceptional, one might prefer to look at last year's corresponding figures, which are 4.2% for income and 5.1% for capital.

The selection method in 2011 was the distinctly unusual one of selecting the shares according to what Luniversal thinks he would have selected for a HYP in 2006, trying (but not necessarily succeeding) to avoid being influenced by hindsight, and buying them in proportion to what equal holdings would have grown (or shrunk) to by 2011. I'm doubtful whether that selection method really qualifies as a 'HYP approach' on this board, but my main comment on the OP isn't that: it's that it's misleadingly titled as a 15-year review when it's no such thing.

Gengulphus

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Re: A HYP-othetical portfolio: Year 15 review

#402108

Postby Luniversal » April 6th, 2021, 6:16 pm

To absorb cash which has sat around earning nothing for more than a year, today I feigned to buy Admiral (ADM) at the standard unit cost of £3,750 gross. At £31.22 and 1% for expenses, this brings in 119 shares on a prospective yield of c.5%: adequately above the FTSE100's 3.11%, as estimated by dividenddata.co.uk.

Admiral becomes HYP06's 21st holding. Its payout history, absent specials, is progressive. As a short-tail insurer it would not duplicate Legal & General, which has morphed into an investment manager. Admiral should add £175 or so to portfolio income now running at upwards of £4,000 pa.

The acquisition leaves £1,427 of cash unallocated. Not nearly enough for a 22nd share eligible by pyad's original tests; but where in the Footsie could such a one be found these days?


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