10 Years of HYP - my story

[funduffer]

Ten years ago, I carried out the 1st purchase for my HYP on 7th Feb 2014. I always said that I would review how well it has gone after 10 years, so here it is. (OK, it is a couple of days early!) It is not an altogether happy tale.

HYP Context & Objectives

I retired early at age 58 in December 2013, and I am lucky in that my DB pension meets all my basic living needs, so any income from the HYP can be spent on luxuries, holidays, or re-invested back into the HYP or elsewhere. I purchased the HYP largely in 2014 using a tax free lump sum from my DB pension. The logic of starting a HYP was to avoid higher rate tax when I received my state pension at age 66 (which I received in 2021), by investing part of my lump sum into a HYP (and a separate IT portfolio) using ISAs. I have succeeded over the past 10 years, in converting (using bed and ISA) both the HYP and my IT’s into ISAs progressively. I got it just about right, - by the time I received my state pension, my taxable income has been just below the HRT threshold. (However, I may drift into HRT next financial year, but this has nothing to do with my HYP and everything to do with the frozen tax thresholds!). I added further capital to my HYP (and my IT’s) in 2021 when I received an inheritance from my late mother.

The HYP also helped bridge the gap between early retirement and state pension receipt, although in practice I found I did not need much of the income from the HYP in that period.

I will report on the IT portfolio and how it compared to my HYP elsewhere at a later date.

The previous review of this HYP from 2021 is here:

viewtopic.php?f=15&t=32745&p=469751#p469751

HYP Current Status

The FD HYP currently looks like this (thanks to kiloran and IAAG for their neat HYPTUSS summary tool):

                                                                                 Value     Div    Fcst 
Share                           Epic    Sector                                  %Total  %Total   Yield
Unilever                        ULVR    Food Producers                           6.30%   4.62%   4.00%
BAE Systems                     BA      Aerospace & Defence                      8.97%   4.44%   2.70%
Sainsbury (J)                   SBRY    Food & Drug Retailers                    4.75%   4.09%   4.70%
HSBC Holdings                   HSBA    Banks                                    5.65%  10.56%  10.20%
Vodafone Group                  VOD     Mobile Telecommunications                1.61%   3.04%  10.30%
National Grid                   NG      Multiutilities.                          4.57%   4.69%   5.60%
GlaxoSmithKline                 GSK     Pharmaceuticals & Biotechnology          7.15%   4.98%   3.80%
Legal and General Group         LGEN    Life Insurance                           5.17%   7.95%   8.40%
Imperial Brands                 IMB     Tobacco                                  4.92%   7.48%   8.30%
Lloyds Banking Group            LLOY    Banks                                    1.79%   2.46%   7.50%
Marston's                       MARS    Travel & Leisure                         1.14%   0.00%   0.00%
SSE                             SSE     Electricity                              4.98%   3.29%   3.60%
British Land Company            BLND    Retail REITs                             1.75%   1.89%   5.90%
WPP                             WPP     Media.                                   3.19%   3.04%   5.20%
BHP Group                       BHP     Mining.                                  7.22%   7.54%   5.70%
Vistry Group                    VTY     Household Goods & Home Construction      4.48%   3.94%   4.80%
Rio Tinto                       RIO     Mining.                                  1.89%   2.42%   7.00%
United Utilities Group          UU      "Gas, Water & Multiutilities"            4.22%   3.64%   4.70%
IG Group Holdings               IGG     Financial Services                       3.13%   3.78%   6.60%
abrdn                           ABDN    Financial Services                       1.89%   3.04%   8.80%
B&M European Value Retail S.A.  BME     General Retailers                        2.40%   1.85%   4.20%
Shell                           SHEL    Oil & Gas Producers                      5.94%   5.12%   4.70%
Woodside Energy Group           WDS     Oil & Gas Producers                      2.21%   2.55%   6.30%
Haleon                          HLN     Pharmaceuticals & Biotechnology          1.77%   0.23%   0.70%
LXI REIT plc                    LXI     Retail REITs                             2.91%   3.36%   6.30%

Portfolio Running Yield = 5.46%

                                                  Value      Div
Sector                                           %Total   %Total
Food Producers                                    6.30%    4.62%
Aerospace & Defence                               8.97%    4.44%
Food & Drug Retailers                             4.75%    4.09%
Banks                                             7.44%   13.02%
Mobile Telecommunications                         1.61%    3.04%
Multiutilities.                                   4.57%    4.69%
Pharmaceuticals & Biotechnology                   8.92%    5.21%
Life Insurance                                    5.17%    7.95%
Tobacco                                           4.92%    7.48%
Travel & Leisure                                  1.14%    0.00%
Electricity                                       4.98%    3.29%
Retail REITs                                      4.66%    5.25%
Media.                                            3.19%    3.04%
Mining.                                           9.11%    9.96%
Household Goods & Home Construction               4.48%    3.94%
"Gas, Water & Multiutilities"                     4.22%    3.64%
Financial Services                                5.02%    6.82%
General Retailers                                 2.40%    1.85%
Oil & Gas Producers                               8.15%    7.67%
Total                                           100.00%  100.00%

Note: 1...'Value %Total' is the portfolio value of the share as a % of the total portfolio
      2...'Div %Total' is the expected dividend of the share based on forecast yield
                       as a % of the total portfolio expected dividend

Forecast yield for the HYP is 5.5% overall (as per HYPTUSS), and historic yield is 5.1% (in 2023). The HYP contains 25 shares in total. Sectorial coverage and balance are reasonable, as I do not impose strict limits on these, only rebalancing very occasionally (twice in 10 years).

Recent HYP Activity

In 2022, corporate actions gave me new holdings in Woodside Energy Group (WDS) and Haleon (HLN) following spin-offs from BHP Group (BHP) and GlaxoSmithKline (GSK), respectively. I topped up WDS to a decent size holding and also topped up Imperial Brands (IMB) and the house builder Vistry Group (VTY).

In 2023, I top-sliced BAE Systems (BA.) and put the proceeds into LXI REIT (LXI). All other dividends were withdrawn or invested elsewhere. There were no other sales.

Income

I income-unitise my HYP so I am reporting income per unit, and using 2015 as the base year to overcome most of the dividend drag effects from 2014, when the HYP started and most of the initial buying occurred. Income is the previous calendar year’s total dividends, including specials. The results have been:

2015: 1.21 (Base)
2016: 1.27 (+5%)
2017: 1.37 (+8%)
2018: 1.27 (-7%)
2019: 1.33 (+4%)
2020: 0.86 (-35%)
2021: 0.99 (+15%)
2022: 1.137 (+15%)
2023: 1.131 (-0.5%)

2022 saw further recovery following the pandemic collapse in dividends, but 2023 saw no progress, and this in a period of very high inflation. This leaves income per unit still well short of the high achieved in 2017, and below that in the very full first year.

Altogether not a great performance, and certainly much worse than my IT portfolio, which I will report elsewhere.

Capital

The results of unit price (NB the starting value is arbitrary), looking at the end of each year:

2014: £23.88 (base)
2015: £22.60 (-5%)
2016: £24.88 (+10%)
2017: £24.52 (-1%)
2018: £21.07 (-14%)
2019: £23.29 (+10%)
2020: £18.77 (-19%)
2021: £21.25 (+13%)
2022: £20.85 (-2%)
2023: £22.31 (+7%)

Overall unit price has declined by 6.5% since the end of 2014, in comparison to the FTSE AS which has increased by nearly 20%. A pretty shoddy capital performance, and much worse than my IT portfolio, which has largely kept pace with the FTSE AS.

Overall the IRR for the HYP is 5.6%. Frankly, I am surprised it is as good as this.

What has 10 years of HYP taught me?

1. I am clearly not very good at stock picking, despite trying to follow some self-imposed guidelines. I have usually looked at yield, cover, 5 year dividend record, free cash flow and shorting activity before each purchase, but these have not averted all my disasters.

2. I have picked shares from some terrible sectors. Support Services used to offer great yields, but I have had disasters with Carillion, Capita and Galliford Try along the way. In Travel & Leisure, Stagecoach and Marstons have not turned out well, and in Oil & Gas support, Amec and Wood Group have also performed poorly.

3. I have tried not to tinker too much, averaging 2 sales per year and 6 purchases per year. This includes annual Bed & ISA activity (in the early years), top slicing, top-ups and some corporate activity clean-ups. Overall, I don’t feel I have over-tinkered my HYP.

Has the HYP achieved its aim? Well, if I had left the capital in my DB pension, which is index-linked to just 2.5%, it would now be taxed at 40%, so in that sense the HYP has met its initial aim. I have more net income now than I would have had. However, I would have definitely done much better using other investment vehicles such as IT’s or a tracker.

What next for my HYP?

I have put quite a bit of thought into this. I have considered selling the entire HYP and re-investing the proceeds in IT’s, but I have come to the conclusion that I should keep the HYP for now but get back to basics. I already have a portfolio of IT’s and some tracker funds, so keeping a HYP is just one of several investment vehicles.

So my plan for the HYP is:

1. Add no more capital to the HYP.

2. Withdraw all dividends to spend or invest elsewhere

3. Reset the HYP back to 15 shares in 15 sectors (remember that old recipe?). I intend to sell off the dead wood, remove sector duplicates and concentrate the capital in my best performers in each sector. My preliminary thoughts are to sell MARS, VOD, RIO, WDS, HLN, BLND, BME, LLOY, ABDN and SSE and re-distribute the proceeds into the remaining 15 shares (in 15 sectors): BA., HSBA, BHP, GSK, SHEL, LXI, ULVR, SBRY, WPP, VTY, UU., IGG, IMB, LGEN, NG.

4. I estimate this will cost me 0.25% of my capital in costs, but also increase the portfolio yield by 0.25%, i.e. paying for itself in a year.
I will report further on my HYP reset when I actually carry it out.

Thanks for reading if you got this far, and I would be interested in any comments.

FD

[spiderbill]

Interesting summary funduffer, thanks for sharing it.

1. I am clearly not very good at stock picking, despite trying to follow some self-imposed guidelines. I have usually looked at yield, cover, 5 year dividend record, free cash flow and shorting activity before each purchase, but these have not averted all my disasters.

I think you're being a bit hard on yourself there. We've seen a number of major crises during that time - Covid, Ukraine, Liz Truss, interest rates, various oil crises, and that's just the last four years. Not to mention the effects of Brexit and a general decline in the UK economy.
Very hard to steer a clear course through that lot!

2. I have picked shares from some terrible sectors. Support Services used to offer great yields, but I have had disasters with Carillion, Capita and Galliford Try along the way. In Travel & Leisure, Stagecoach and Marstons have not turned out well, and in Oil & Gas support, Amec and Wood Group have also performed poorly.

I've learned (the hard way) that these are inevitable - I've also had Carillion, Galliford (now doing much better), Marston, and Petrofac + now Regional REIT is looking unfortunate. Sectors do drift in an out of favour even without calamities. These sectors were doing fine until situations changed in ways that few private investors have the insights to predict.

I have put quite a bit of thought into this. I have considered selling the entire HYP and re-investing the proceeds in IT’s, but I have come to the conclusion that I should keep the HYP for now but get back to basics. I already have a portfolio of IT’s and some tracker funds, so keeping a HYP is just one of several investment vehicles.

I would certainly keep it. I've tried to spread my investing across different channels - I also have some ITs, some ETFs, and some OEICs and while some of them rise and fall in synch, others tend to run on different cycles.
Whether, and how much, to prune it is obviously a personal choice but be careful not to throw out some good with the bad.

3. Reset the HYP back to 15 shares in 15 sectors (remember that old recipe?). I intend to sell off the dead wood, remove sector duplicates and concentrate the capital in my best performers in each sector. My preliminary thoughts are to sell MARS, VOD, RIO, WDS, HLN, BLND, BME, LLOY, ABDN and SSE and re-distribute the proceeds into the remaining 15 shares (in 15 sectors): BA., HSBA, BHP, GSK, SHEL, LXI, ULVR, SBRY, WPP, VTY, UU., IGG, IMB, LGEN, NG.

I would agree with many of the sales in principle, with the exception of RIO - which has done well for me and which I see as likely to improve from the current modest year, and probably SSE - which seems ot have put itself on a much former foundation than in it's previous versions and while the dividend will be lower it should be sounder in terms of capital.
What I would suggest however is waiting a few months before selling some of these. With interest rates being a critical factor at the moment and quite big movements happening on any news on them either way, the general expectation for cuts at some point in the year could see some of those improve - I'm thinking of BLND here and to some extent VOD and LLOY, which fall into the "can't get any worse so they might get better" category.

Of the ones you're planning to keep I personally wouldn't touch SBRY or WPP, while UU would worry me as regards its water operations once the Tories are no longer in office to protect them, and I've become skeptical about ULVR's direction. But that's just my opinion so feel free to ignore it.

I'll be interested in hearing about the performance of your ITs when you post it on the relevant board, and whether/what you're proposing to add.

best of luck whatever you decide to do and whatever your timing is.

Spiderbill

[moorfield]

2. I have picked shares from some terrible sectors. Support Services used to offer great yields, but I have had disasters with Carillion, Capita and Galliford Try along the way. In Travel & Leisure, Stagecoach and Marstons have not turned out well, and in Oil & Gas support, Amec and Wood Group have also performed poorly.

I was also a Carillion holder. I think the real lesson here that I reflected on after that was written into the Scrolls right from the start:

Rank the FTSE100 or maybe the 350 shares by descending yield

https://web.archive.org/web/20160609102 ... 050304.htm

Stick to FTSE 100 companies

https://web.archive.org/web/20140219210 ... 01106c.htm

and

I went marginally outside the FTSE 100 index

https://web.archive.org/web/20140528041 ... 01113c.htm


Had I been more disciplined about that, I don't think I would have ever picked CLLN in the first place. HYP, like TV cooking and baking programs, is in essence a very simple and boring idea, that folk try to keep interesting by adding more and more "twists", not all necessarily for the better.


So stick to the FTSE 100. Perhaps pyad was right all along ?

[Bubblesofearth]

2. I have picked shares from some terrible sectors. Support Services used to offer great yields, but I have had disasters with Carillion, Capita and Galliford Try along the way. In Travel & Leisure, Stagecoach and Marstons have not turned out well, and in Oil & Gas support, Amec and Wood Group have also performed poorly.

I was also a Carillion holder. I think the real lesson here that I reflected on after that was written into the Scrolls right from the start:

Rank the FTSE100 or maybe the 350 shares by descending yield

https://web.archive.org/web/20160609102 ... 050304.htm

Stick to FTSE 100 companies

https://web.archive.org/web/20140219210 ... 01106c.htm

and

I went marginally outside the FTSE 100 index

https://web.archive.org/web/20140528041 ... 01113c.htm


Had I been more disciplined about that, I don't think I would have ever picked CLLN in the first place. HYP, like TV cooking and baking programs, is in essence a very simple and boring idea, that folk try to keep interesting by adding more and more "twists", not all necessarily for the better.


So stick to the FTSE 100. Perhaps pyad was right all along ?

Depends how many shares you buy. The FTSE250 has done slightly better over the past 10 years than the FTSE100 and significantly better over the last 20. The issue is that markets are asymmetric, and more so the smaller the capitalisation of the shares within any given market. So 15 shares may be sufficient diversification for FTSE100 shares but not for FTSE250. Certainly adding only one or two from the FTSE250 carries a high risk of missing any decent performers.

BoE

[Dod101]

2. I have picked shares from some terrible sectors. Support Services used to offer great yields, but I have had disasters with Carillion, Capita and Galliford Try along the way. In Travel & Leisure, Stagecoach and Marstons have not turned out well, and in Oil & Gas support, Amec and Wood Group have also performed poorly.

I was also a Carillion holder. I think the real lesson here that I reflected on after that was written into the Scrolls right from the start:

Rank the FTSE100 or maybe the 350 shares by descending yield

https://web.archive.org/web/20160609102 ... 050304.htm

Stick to FTSE 100 companies

https://web.archive.org/web/20140219210 ... 01106c.htm

and

I went marginally outside the FTSE 100 index

https://web.archive.org/web/20140528041 ... 01113c.htm


Had I been more disciplined about that, I don't think I would have ever picked CLLN in the first place. HYP, like TV cooking and baking programs, is in essence a very simple and boring idea, that folk try to keep interesting by adding more and more "twists", not all necessarily for the better.


So stick to the FTSE 100. Perhaps pyad was right all along ?

You seem to be implying that sticking to the FTSE100 would let you avoid shares like Carillion. It would have stopped you holding Carillion but do you really think that membership of the FTSE100 would stop directors behaving as the Carillion directors did? The FTSE100 is no more than a measure of the size of the company. As I said at the time, contractors are bad news and should be avoided at all costs.

Dod

[Charlottesquare]

You seem to be implying that sticking to the FTSE100 would let you avoid shares like Carillion. It would have stopped you holding Carillion but do you really think that membership of the FTSE100 would stop directors behaving as the Carillion directors did? The FTSE100 is no more than a measure of the size of the company. As I said at the time, contractors are bad news and should be avoided at all costs.

Dod

Yes, the FTSE100 is mere market cap, but as these companies are more closely observed than those further down the food chain (far more analysts monitoring them etc) one suspects poor governance might sometimes be spotted earlier.

[Dod101]

You seem to be implying that sticking to the FTSE100 would let you avoid shares like Carillion. It would have stopped you holding Carillion but do you really think that membership of the FTSE100 would stop directors behaving as the Carillion directors did? The FTSE100 is no more than a measure of the size of the company. As I said at the time, contractors are bad news and should be avoided at all costs.

Dod

Yes, the FTSE100 is mere market cap, but as these companies are more closely observed than those further down the food chain (far more analysts monitoring them etc) one suspects poor governance might sometimes be spotted earlier.

That may be so but like RBS during the financial crisis, the problems with Carillion were standing out a mile for months before they went bust.And come to think of it, RBS was presumably a FTSE100 company but it did not stop Fred from wrecking it. No, it is a huge mistake to think that size has anything to do with reckless management. I avoided both RBS and Carillion; RBS because I did not like George Mathewson the Chairman nor for that matter the antics of Fred: Carillion simply because it was a contractor and I would not touch them with the proverbial barge pole. ( I note that you said ‘sometimes’ and I agree more or less with that)

Dod

[funduffer]

You seem to be implying that sticking to the FTSE100 would let you avoid shares like Carillion. It would have stopped you holding Carillion but do you really think that membership of the FTSE100 would stop directors behaving as the Carillion directors did? The FTSE100 is no more than a measure of the size of the company. As I said at the time, contractors are bad news and should be avoided at all costs.

Dod

Yes, the FTSE100 is mere market cap, but as these companies are more closely observed than those further down the food chain (far more analysts monitoring them etc) one suspects poor governance might sometimes be spotted earlier.

I imposed a lower limit of £1bn market cap for my HYP, which would include roughly the top half of the FTSE250. The bottom of the FTSE 100 is about £3.7bn market cap. I agree FTSE 100 companies are more closely scrutinised, so today I would probably pick £3bn as the minimum market Cap.

I also agree with Dod though:

contractors are bad news and should be avoided at all costs.

.

I learned the hard way.

FD

[Dod101]

Well we all learn through experience. My expensive lessons were back in the tech boom and bust of 2000. The important thing is to learn from these experiences and act on them.

However, to get back on topic, I think that funduffer’s idea of cutting down the number of holdings is a good one. His choice of those to cull would pretty much be mine as well, although I would retain SSE, but it does have a fairly modest dividend these days. It is a well run operation though.

Thanks to him though for his detailed report. Very interesting.

Dod

[Charlottesquare]

Yes, the FTSE100 is mere market cap, but as these companies are more closely observed than those further down the food chain (far more analysts monitoring them etc) one suspects poor governance might sometimes be spotted earlier.

That may be so but like RBS during the financial crisis, the problems with Carillion were standing out a mile for months before they went bust.And come to think of it, RBS was presumably a FTSE100 company but it did not stop Fred from wrecking it. No, it is a huge mistake to think that size has anything to do with reckless management. I avoided both RBS and Carillion; RBS because I did not like George Mathewson the Chairman nor for that matter the antics of Fred: Carillion simply because it was a contractor and I would not touch them with the proverbial barge pole. ( I note that you said ‘sometimes’ and I agree more or less with that)

Dod

I had caveated my comment with "sometimes".

[Arborbridge]

That may be so but like RBS during the financial crisis, the problems with Carillion were standing out a mile for months before they went bust.
Dod

You're looking with perfect hindsight. I well remember the Carillion debacle being caught by it, and the story at the time both on these boards and the financial press do not support your comment. Indeed, the opposite was true: that there were hidden and possibly criminal events happening which even the business community didn't spot or simply didn't know about until too late. If they had known, the share price would have plunged much earlier.

Indeed, this was a good case where anyone watching the share price chart with a stop loss would have been saved from the eventual disaster which broke. Unfortunately, by that time, I had given up looking at charts, because chart warnings often do not develop into anything significant..

Arb.

[Dod101]

I am writing from my own position. I am certain that I wrote on this site about the perils of investing in Carillion. The financial press were just as short sighted with Carillion as they were with RBS. This is all history now but I never held either of them.

Dod

[Bubblesofearth]

You're looking with perfect hindsight.
Arb.

How dare you, Arb! Don't you know that there are several genius investors on here?

BoE

[Arborbridge]

I am writing from my own position. I am certain that I wrote on this site about the perils of investing in Carillion. The financial press were just as short sighted with Carillion as they were with RBS. This is all history now but I never held either of them.

Dod

Well, you are fortunate in knowing more than very many others. But you were going by "culture" so that caused you to avoid Carillion altogether, rather than being an investor and getting out at the right time. There was nothing in the figures nor business itself which waved a red flag or stood out a mile - otherwise they would have had no investors left a year before!

The culture may have led to the criminal (or was it almost criminal) activities in the accounting which no one could spot, not even you.

Just pass round the crystal ball when you've finished.

Mind you, it doesn't always get it right does it? Think CSN, PHP or SSE which you sold out of and then jumped back in to a short while later.

Arb.

[Dod101]

I am writing from my own position. I am certain that I wrote on this site about the perils of investing in Carillion. The financial press were just as short sighted with Carillion as they were with RBS. This is all history now but I never held either of them.

Dod

Well, you are fortunate in knowing more than very many others. But you were going by "culture" so that caused you to avoid Carillion altogether, rather than being an investor and getting out at the right time. There was nothing in the figures nor business itself which waved a red flag or stood out a mile - otherwise they would have had no investors left a year before!

The culture may have led to the criminal (or was it almost criminal) activities in the accounting which no one could spot, not even you.

Just pass round the crystal ball when you've finished.

Mind you, it doesn't always get it right does it? Think CSN, PHP or SSE which you sold out of and then jumped back in to a short while later.

Arb.

My goodness, what have you been eating? CSN unfortunately shares its unpopularity with the other financial shares such as Phoenix Holdings and Legal and General. There seems nothing wrong with these companies and they throw off excellent dividends so I am content to hold in the hope that the share price will wake up eventually. PHP has been discussed many times but I think is suffering from high interest rates giving a low valuation for their future earnings. These seem to me to be perfectly secure and as interest rates fall the NAV should rise. There is concern about the level of borrowings but I think they have it under control.

SSE is a well run company and I have no concerns about it whatever. We are on the HYP Board after all, and it is all about income.

Dod