OZYU wrote:... So ranking on three(yield, value, costs), rather than two(yield, value), which this basically amount to, has its uses as an 'attenuating factor' for top ups, despite the critics.
One needs to be clear that in TJH's top-up system and similar systems, there are
rankings and
limits. They play fundamentally different roles in the system:
limits say "No, you're not buying this no matter how attractive it looks - you've got enough of it already", while
rankings help you choose the share to buy from those not excluded by the limits by providing an indication of which currently looks most attractive.
TJH's system (if I understand it correctly) has limits based on income and purchase cost, as percentages of the portfolio totals, and rankings based on current capital value and yield. So there's actually
four factors involved (cost, income, value, yield) - and it's not unique in that respect, e.g. GDHYP uses the same factors apart from using forecast versions of yield and income in place of historical ones... There's a tendency to think of income and yield as the same thing, but it's very possible for them to produce wildly different indications (e.g. in HYP1, were one to evaluate it for a TJH-style top-up, BATS would be very high compared with the income limit but quite low on the yield ranking).
One thing I did find with GDHYP was that although there are obvious gaps in what it looks at, they tend to be filled in by combinations of what it does look at. In particular, there's the obvious question about why GDHYP only has two limits - shouldn't it also impose limits on current value besides the limits it has on income and on purchase cost? My answer was "No", due to a combination of two issues:
* Since current value = income / yield, a current value limit will only add restrictions that an income limit doesn't if the holding's current value is quite high and its yield is below the portfolio average, and they'll only be significantly more restrictive if the yield is significantly below the portfolio average. But that means that the holding will be quite low on both the current value ranking (which ranks high-value holdings lower than low-value holdings) and the yield ranking (which ranks low-yield holdings lower than high-yield holdings). So
either a high-value holding is also a high-income holding and will be ruled out from being purchased by the income limit,
or it isn't and it's extremely unlikely to be indicated as the purchase to make because it's got an especially low ranking sum. Either way, there's no real need for a current value limit to ensure that it doesn't get purchased. (I should say that there is a bit of "wriggle room" in that argument - a holding that was say 6% of the portfolio by current value might just get high enough to be selected if it only contributed 5% of the forecast income (making its yield a bit low but not grossly so) and a lot of other holdings were ruled out by other limits. So the 5% company limit on income might only end up imposing maybe a 6-7% company limit on current value in practice rather than a 5% limit on it - but that's good enough IMHO, especially given a HYP's focus on income rather than capital value.)
* As a practical consideration for GDHYP as a demo portfolio, what the purchase cost limits say doesn't change at all over the week or so that it takes for GDHYP to select and buy a share, while what the forecast income limits say doesn't usually change very much over that period, and on the rare occasions when it does change by a lot, it's major news that I'm going to have no trouble noticing (e.g. if I were running a GDHYP selection started last week, I would know that Carillion's status with regard to the forecast income limit had changed drastically without having to do any extra work). The net result is that I can say at the start of the selection process which shares are ruled out by my limits and that will remain close enough to being the current status to be left alone for the rest of the procedure, barring news that forces itself on my attention.
The same would not be true of current value limits - it would be very possible for a holding to switch between being disallowed and allowed by a current-value limit during the week or so, by quite a significant margin and without any major news from the company. Possibly even multiple times... So for GDHYP, a current-value limit is one that would either take a lot more work to enforce or require a lot more tolerance of significant failures to enforce it.
That second issue is of course highly specific to GDHYP, but the first issue is pretty general: in a TJH-like top-up system, if you have yield and capital-value rankings and an income limit, having a capital-value limit as well adds very little. A purchase-cost limit does add something, namely a "don't throw too much good money after bad" safety measure - though whether it's the best way to do so is very arguable. (I do use a purchase-cost limit in GDHYP, where I prefer to have something to point to that unambiguously rules out a nomination, rather than having to come up with too-much-risk-of-throwing-good-money-after-bad vetos and deal with a whole lot of special pleadings why someone's preferred nomination doesn't really have such a risk... I don't use a purchase-cost limit in my main HYP.)
Gengulphus