How Unbalanced is your HYP?
Posted: February 26th, 2024, 4:57 pm
In revamping my HYP as I described in the 10 year review I posted recently (viewtopic.php?f=15&t=42330), I got to thinking how much effort should I put into balancing up the capital and income from the portfolio. Now, some HYPers here aim for quite a strict balance using top slicing, topping up or adding capital to keep capital and income from each portfolio constituent within strict limits. Others, including pyad with the famous HYP1, allow the portfolio to go wherever it takes itself, leading to quite unbalanced contributions from each constituent over time.
So, is there a measure of how unbalanced a portfolio is? I decided to create one myself! I introduce to you two ideas of how to characterise your portfolio – the ‘fundiagram’, and the ‘funbalance coefficient’ (patents pending, copyright applied for!).
Let us use HYP1, as described in the Nov 2023 review to illustrate these. (viewtopic.php?f=15&t=41459).
HYP1 is often criticised for being very unbalanced and I expect that all portfolios left to their own devices over a 20+ year period will become like HYP1. So, let us look at the fundiagram and funbalance coefficient for HYP1. These can be calculated for both capital and income, but let us start with income. (Exactly the same process can be used for capital).
We start by writing down the portfolio in descending order of annual income, then calculate the % of income. Then we accumulated these percentages. We then calculate the cumulative percentages from a perfectly balanced portfolio with the same number of constituents. Finally we subtract the balanced cumulative percentages from the HYP1 cumulative percentages, sum them up and divide by the number of constituents and multiply by 2. This gives us the funbalance coefficient! This will vary between 0% for a perfectly balanced portfolio, to 100% for one where just one constituent provides all the income.
Here are the details for HYP1:
HYP1 Income
This produces an income funbalance coefficient of 54%. You can interpret this to mean it is roughly halfway between a perfectly balanced portfolio and one where just 1 share provides all the income, and the others provide none!
The position can be shown visually on a fundiagram:
I have added my own portfolio (FD HYP) to this chart, which lies between HYP1 and the perfectly balanced portfolio. The income funbalance coefficient for FD HYP is 30%.
The fundiagram for capital looks like this:
I have added a line for tjh’s portfolio as reported recently. (viewtopic.php?f=15&t=25337)
The capital funbalance coefficient for HYP1 is 47%, for FD HYP it is 30% and for tjh’s HYP it is 10%, reflecting the top slice / top up system he operates.
You may ask, how is this useful?
I would argue that it is useful for comparing portfolios of different sizes and numbers of constituents. It could also be used to monitor how imbalanced a portfolio becomes over time, and perhaps being useful to consider rebalancing when a chosen threshold is reached.
For me, if the funbalance coefficient exceeds 25%, I start to get uncomfortable about concentration risk, so I might do something, as I am about to with my HYP. Others, like pyad, probably see this all as a waste of time, and would accept any value!
Anyway, I hope I haven’t bored you too much.
Fun question for the mathematicians amongst you – how many shares would you need to own to get a funbalance coefficient of exactly 100%?
FD
So, is there a measure of how unbalanced a portfolio is? I decided to create one myself! I introduce to you two ideas of how to characterise your portfolio – the ‘fundiagram’, and the ‘funbalance coefficient’ (patents pending, copyright applied for!).
Let us use HYP1, as described in the Nov 2023 review to illustrate these. (viewtopic.php?f=15&t=41459).
HYP1 is often criticised for being very unbalanced and I expect that all portfolios left to their own devices over a 20+ year period will become like HYP1. So, let us look at the fundiagram and funbalance coefficient for HYP1. These can be calculated for both capital and income, but let us start with income. (Exactly the same process can be used for capital).
We start by writing down the portfolio in descending order of annual income, then calculate the % of income. Then we accumulated these percentages. We then calculate the cumulative percentages from a perfectly balanced portfolio with the same number of constituents. Finally we subtract the balanced cumulative percentages from the HYP1 cumulative percentages, sum them up and divide by the number of constituents and multiply by 2. This gives us the funbalance coefficient! This will vary between 0% for a perfectly balanced portfolio, to 100% for one where just one constituent provides all the income.
Here are the details for HYP1:
HYP1 Income
This produces an income funbalance coefficient of 54%. You can interpret this to mean it is roughly halfway between a perfectly balanced portfolio and one where just 1 share provides all the income, and the others provide none!
The position can be shown visually on a fundiagram:
I have added my own portfolio (FD HYP) to this chart, which lies between HYP1 and the perfectly balanced portfolio. The income funbalance coefficient for FD HYP is 30%.
The fundiagram for capital looks like this:
I have added a line for tjh’s portfolio as reported recently. (viewtopic.php?f=15&t=25337)
The capital funbalance coefficient for HYP1 is 47%, for FD HYP it is 30% and for tjh’s HYP it is 10%, reflecting the top slice / top up system he operates.
You may ask, how is this useful?
I would argue that it is useful for comparing portfolios of different sizes and numbers of constituents. It could also be used to monitor how imbalanced a portfolio becomes over time, and perhaps being useful to consider rebalancing when a chosen threshold is reached.
For me, if the funbalance coefficient exceeds 25%, I start to get uncomfortable about concentration risk, so I might do something, as I am about to with my HYP. Others, like pyad, probably see this all as a waste of time, and would accept any value!
Anyway, I hope I haven’t bored you too much.
Fun question for the mathematicians amongst you – how many shares would you need to own to get a funbalance coefficient of exactly 100%?
FD