HYP1 is 20 - thread discussing income and capital diversification

[daveh]

Unfortunately the problem with using TJH's portfolio as an example, despite the magnificent records, is the same. We only have the results of one style of management. With TJH it is "Tinkering" and with HYP1, it is "No Tinkering". What we need is the same portfolio at set-up, managed the two different ways going forward from set-up.


Ian

There are a number of HYP-like portfolios that are reported on the portfolio management and review board. For example my Income portfolio can be found here:

viewtopic.php?f=56&t=21155

It started of as a very HYP portfolio, but morphed to include prefs, high yield ETFs, high yield ITs and some VWRL (rather than VHYL due to the formers better TR and not much lower yield). It is an almost no tinker portfolio, with just a couple of sales of SEGRO as it was showing too large a % of both the capital and income streams.

I'll update performance again in January, but income is about 30% down for this calendar year, so far with only a few December dividends still to be declared, it will be down by 25% at best. Capital performance was atrocious down nearly 30% by March, but the vaccine success rally has markedly improved things and capital is down by less than 10%. Looking at accumulation unit value, that peaked at 3.87 at the end of last year, fell to 2.83 at the end of March, but is back at 3.40 today. A fall of 12% from the peak unit value.

My personal view on HYP1 is that it is interesting to see how it has performed, but if I owned it I would have 1) not reinvested the whole of some of the forced share sales into a single new share; 2) would be/have rebalanced some of the over weight shares into either top ups of existing shares or more likely new shares to increase the number of holdings.

[tjh290633]

Unfortunately the problem with using TJH's portfolio as an example, despite the magnificent records, is the same. We only have the results of one style of management. With TJH it is "Tinkering" and with HYP1, it is "No Tinkering". What we need is the same portfolio at set-up, managed the two different ways going forward from set-up.


Ian

You will still end up with the problem of situations which are none of your making. The takeover of ICI, say, or that of Blue Circle. Both were for cash I think, so decisions would have to be made as to how to deploy the arising cash. You can have minimal tinkering, but at some stage decisions about portfolio management will still arise.

The principle is good, but the way ahead may be a difficult one. If a company is taken over for a share exchange, that may present problems, or if it does a Vodafone and splits into a UK company and a US company. If it does like Six Continents and you end up with cash and two different companies, one of which is far from an HYP candidate and keeps giving you back cash, how do you handle that?

I had Allied Domecq, which split off Punch Newco in 1999, and I got a handful of Bass shares plus cash, leaving me with a very small holding of ALLD, sold soon afterwards at a loss, while I put the cash arising into Bass. It's an example of what can happen.

TJH

[Alaric]

Do you know if any of the annual reports on HYP1 have been archived? I tried to search on Google, but could not find anything.

I think I've seen something on the lemonfool site. What you are looking for are links via "the wayback machine" to old TMF articles. I seem to recall someone put up a post giving the links and also links to articles by Stephen Bland at other sites.

[IanTHughes]

Not to defend HYP at all, but this is a symptom demonstrated also by the FTSE100. A very small number of stocks/sectors paying the lions share of dividend. It is a very unhealthy situation. I am not all surprised at what has happened in HYP since it is to a large degree simply a subset of the 100 index anyway. The entire 100 index is now less valuable than some of the single mega-companies in the new economy and is becoming less and less relevant on the world stage anyway.

HYP is designed so that an equal value is invested in each share at purchase. Very different from the FTSE 100.

The different value and income percentages we are now seeing in HYP1 are a result of 20 years of growth by the winners compared with the plodders, not to mention the losers. Of course one could have sold part of those winners, just as soon as they started to diverge from those plodders and losers. But how would the portfolio look now if that had been done?

Of course, no-one knows the answer to that because such an exercise in "trimming the winners" has not been done. However, I am prepared to bet that the resulting portfolio would now be lower in value and would have produced less income over the years.

Mind you, the portfolio would be perfectly balanced - hooray!

I am interested why you would make such a bet. Surely, just because a share has been a "winner" up to any point in time gives little indication that it will continue to be a "winner" in the future? Similarly "plodders" could accelerate after years in the doldrums. What makes you think that in the case of HYP investments past performance suggests what future performance will be? Clearly you could make suggestions as to what could have been done that would fit your side of the bet, but then others could also find alternatives that would result in a better HYP1 outcome than has been the case by not tinkering.

The important point is what one can determine at the time, and for that I do not understand why you think "winners" are more likely than other shares to continue to be "winners". The fact that over time the top 5 shares in HYP1 that have contributed most income have not been constant would seem to be evidence contrary to your side of the bet.

Why make such a bet?

In a word, charges!

My calculations show me that, for a portfolio with an overall yield of 5.00%, for every 10.00% of value that is "re-balanced" one must sacrifice 1.00% of the income for that year in extra Stamp Duty. Now it is true that, when selling low yield for high yield, one may regain that sacrificed income the following year, but what about when one sells simply because the value has outstripped whatever limit one has put on value concentration? In that instance, only being able to buy a similar yield, all you are left with is the income sacrifice with no subsequent gain.

Then one has to think of broker charges. Some brokers do provide some sort of cheap "bulk purchase charge" but sales are generally around £10.00 a pop! In my case a sale and subsequent "bulk buy" costs me £11.45 No problem for a multi-million pound portfolio obviously, but for a portfolio starting out with the relatively small sum of £75,000.00? One single re-balance at a cost of £11.45, assuming an overall yield of 5.00%, would increase that income sacrifice for that year to 1.31%, two re-balances, and it is 1.61%!

I do have some experience of this in the real world management of a family member's portfolio which required a number of "Bed and ISA" transactions in the first few years and I can assure you that the charges were not insignificant, when compared with the annual income.

And on top of all that extra cost, I might sell a winner and buy a loser! Although I do appreciate that that might go either way

I would say that, for an income portfolio under £100,000.00, unnecessary trading should definitely be avoided, and even at levels up to £250,000.00 I would be wary .

So yes, I would take that bet, but if you have other experiences, please do explain.


Ian

[Itsallaguess]

So to me HYP1 is an income strategy run like a growth strategy.

And so not a surprise that it has done well in capital terms (at least when compared with the turgid FTSE-100) whilst failing multiple times on the income front.

I think this is one of the key points that's interesting from the ongoing evolution of the HYP1 income-investment portfolio..

In terms of pure end-to-end 'performance-metrics', it can be shown to have 'delivered results', as some have clearly stated recently, but in terms of it delivering a smooth and hopefully growing dependable income-stream, it's surely not been as plain sailing as Doris might have been initially expecting...

If we look at how each subsequent amount of yearly HYP1 income compares to both the previous yearly income, and also the first 2001 income-delivery of £3451, I think it's an interesting view of the data -



A couple of key points from the above data -

• It took five full years (2001 to 2006) for the yearly HYP1 income to be over 3% higher than the first year's dividend income

• In 8 of the last 20 years, HYP1 has failed to produce a year-on-year income gain of 4% or over when compared to the previous year's dividend income (2002, 2003, 2004, 2009, 2010, 2014, 2016, 2020)

Of course, there are lumpy and large year-on-year income gains seen elsewhere in that data, and I don't suppose we should be all that surprised that a portfolio that's quickly become heavily skewed towards a smaller and smaller sub-set of income-delivering holdings might display the above year-on-year volatile income-characteristics, but I think it helps to see those particular figures when there might be an urge to *just* consider the overall end-to-end performance-metrics, and perhaps ignore the overall initial aim of the income-portfolio itself....

November 6th, 2000 -

Anyone with a lump sum available to invest for income upon which they depend must therefore try and find a source that will grow that income and also offer some easy access to the capital. Inflation is the obvious reason that it is essential, for those that do depend heavily on the income, to try and ensure that it will grow.

https://web.archive.org/web/20140219210446/http://news.fool.co.uk/news/foolseyeview/2000/fev001106c.htm

Cheers,

Itsallaguess

[Alaric]

Anyone with a lump sum available to invest for income upon which they depend must therefore try and find a source that will grow that income and also offer some easy access to the capital. Inflation is the obvious reason that it is essential, for those that do depend heavily on the income, to try and ensure that it will grow.

Investment Trusts or possibly OEICs are what spring to mind. ITs for preference with their facility to smooth dividend payouts. Reliance on investment in individual shares needs cash buffers or other sources of income as possibly demonstrated by the erratic income from HYP1.

[IanTHughes]

So to me HYP1 is an income strategy run like a growth strategy.

And so not a surprise that it has done well in capital terms (at least when compared with the turgid FTSE-100) whilst failing multiple times on the income front.

I think this is one of the key points that's interesting from the ongoing evolution of the HYP1 income-investment portfolio..

In terms of pure end-to-end 'performance-metrics', it can be shown to have 'delivered results', as some have clearly stated recently, but in terms of it delivering a smooth and hopefully growing dependable income-stream, it's surely not been as plain sailing as Doris might have been initially expecting...

If we look at how each subsequent amount of yearly HYP1 income compares to both the previous yearly income, and also the first 2001 income-delivery of £3451, I think it's an interesting view of the data -



A couple of key points from the above data -

• It took five full years (2001 to 2006) for the yearly HYP1 income to be over 3% higher than the first year's dividend income

• In 8 of the last 20 years, HYP1 has failed to produce a year-on-year income gain of 4% or over when compared to the previous year's dividend income (2002, 2003, 2004, 2009, 2010, 2014, 2016, 2020)

Of course, there are lumpy and large year-on-year income gains seen elsewhere in that data, and I don't suppose we should be all that surprised that a portfolio that's quickly become heavily skewed towards a smaller and smaller sub-set of income-delivering holdings might display the above year-on-year volatile income-characteristics, but I think it helps to see those particular figures when there might be an urge to *just* consider the overall end-to-end performance-metrics, and perhaps ignore the overall initial aim of the income-portfolio itself....

November 6th, 2000 -

Anyone with a lump sum available to invest for income upon which they depend must therefore try and find a source that will grow that income and also offer some easy access to the capital. Inflation is the obvious reason that it is essential, for those that do depend heavily on the income, to try and ensure that it will grow.

https://web.archive.org/web/20140219210446/http://news.fool.co.uk/news/foolseyeview/2000/fev001106c.htm

So your point is what exactly? Equity Investment is risky? Relying on Equity Dividends is risky?

With all due respect, most people on these boards already knew that


Ian

[IanTHughes]

Anyone with a lump sum available to invest for income upon which they depend must therefore try and find a source that will grow that income and also offer some easy access to the capital. Inflation is the obvious reason that it is essential, for those that do depend heavily on the income, to try and ensure that it will grow.

Investment Trusts or possibly OEICs are what spring to mind. ITs for preference with their facility to smooth dividend payouts. Reliance on investment in individual shares needs cash buffers or other sources of income as possibly demonstrated by the erratic income from HYP1.

Investment Trusts would smooth out that income generation but, according to my records so far gathered, not one has beaten HYP1 in overall income production. What do you want, smooth income or more income?

Of course, if you have other evidence of an Investment Trust that beats HYP1, please present it


Ian

[Alaric]

What do you want, smooth income or more income?

If using it as a major source of income, I would have thought the additional risk of relying on a handful of shares was better avoided. Pick the right share and a single share would beat a portfolio. That's not generally regarded as a sensible strategy, so a line in the sand on risk is drawn somewhere.

[IanTHughes]

What do you want, smooth income or more income?

If using it as a major source of income, I would have thought the additional risk of relying on a handful of shares was better avoided. Pick the right share and a single share would beat a portfolio. That's not generally regarded as a sensible strategy, so a line in the sand on risk is drawn somewhere.

So, if "using it as a major source of income" you would have relied on a significantly lower income! Really?

[Deletion.]

Ian

Moderator Message:
For heaven's sake! Just limit yourself to the factual and stop chucking in the unnecessary jibes at other posters. It just causes bad feeling and (seemingly futile) work, Jibe deleted. - Chris

[IanTHughes]

What do you want, smooth income or more income?

If using it as a major source of income, I would have thought the additional risk of relying on a handful of shares was better avoided. Pick the right share and a single share would beat a portfolio. That's not generally regarded as a sensible strategy, so a line in the sand on risk is drawn somewhere.

I have the feeling now that a (small) minority of folks would declare "a victory" for their chosen strategy irrespective of reasoned argument or outcome.

There is no reasoned argument against HYP1 achieving its primary goal, that of providing income since set-up. Not when one considers the professional fund managers, whose results I have investigated. HYP1 also wins in many cases when looking at capital value, and is also ahead of many when measured by XIRR.

Of course I have not looked at all available strategies but, so far no-one has presented another that beats HYP1

I am not stupid and do realise that there must be a HYP1 beater out there. What I cannot understand is why none of the anti-HYP Trolls has found one!


Ian

[Lootman]

I am not stupid and do realise that there must be a HYP1 beater out there.

Correct, you are not stupid. A simple investment in a S&P 500 tracker like SPY over the same time period would now give you an investment worth almost exactly £200,000, compared with less than £150,000 for HYP1, before FX. Throw in the FX rate changes and that is £230,000. That is more than 50% more than HYP1.

Of course you will retort that the dividends would be higher with HYP1. And up to a point that is true. But that difference is dwarfed by the vastly superior capital gain from SPY, which of course has also been churning out dividends.

I have not done the sums but would guess a global tracker would give a similar outcome, given that the US and China dominate that index and both have vastly out-performed the UK market.

Now, I am not saying that everyone with a HYP should sell it and go all in on SPY. But you wanted an example of a fund with a better total return and I gave you one. And an index fund at that and not an active portfolio, so presumably any fund that beat the index would also beat HYP1.

At minimum this should suggest a prudent portfolio diversification for those worried about year-on-year 47% drops in income. US dividend cuts have been relatively modest in 2020.

[IanTHughes]

What do you want, smooth income or more income?

If using it as a major source of income, I would have thought the additional risk of relying on a handful of shares was better avoided. Pick the right share and a single share would beat a portfolio. That's not generally regarded as a sensible strategy, so a line in the sand on risk is drawn somewhere.

So, if "using it as a major source of income" you would have relied on a significantly lower income! Really?

[Deletion.]

Moderator Message:
For heaven's sake! Just limit yourself to the factual and stop chucking in the unnecessary jibes at other posters. It just causes bad feeling and (seemingly futile) work, Jibe deleted. - Chris

My apologies. What I should have said:

I will stick to my own financial management, thank you.

How remiss of me!


Ian

[Gengulphus]

The top five shares actually contributed about 42.1% of the forecast income at the outset - ...

Do you know if any of the annual reports on HYP1 have been archived? I tried to search on Google, but could not find anything.

I should have been clearer, what I meant to say was do you know if any of the HYP1 reports from years 1 to 10 have been archived? I was hoping to look and see when the greatest amount of imbalance was caused.

Yes, I archived quite a lot of stuff about HYP1 (among other things) in late 2016 and early 2017, after TMF's boards had been closed for posting but before they vanished entirely. I did offer some time back (more than a year ago, I think, and I doubt I can easily find the posts concerned) to post it, but got little or no enthusiasm for the idea, so didn't bother, as it's not an entirely trivial job to convert it from the somewhat cryptic HTML form in which I've got it to readable posts using BBCode.

But now that the subject's come up again and I know that at least one person wants it, I'll try to do that conversion work and post the links I've got. It will probably take some time, and I'm likely to post them in instalments - I'd guess a year's worth of HYP1 history at a time. Also, I'll post it as a separate thread with a subject such as "HYP1 history references", because it would be silly to do the work only for it to be buried deep in a thread like this one where it will probably be quite hard to find in a few years' time...

Gengulphus

[IanTHughes]

A simple investment in a S&P 500 tracker like SPY over the same time period would now give you an investment worth almost exactly £200,000, compared with less than £150,000 for HYP1, before FX. Throw in the FX rate changes and that is £230,000. That is more than 50% more than HYP1.

Of course you will retort that the dividends would be higher with HYP1. And up to a point that is true. But that difference is dwarfed by the vastly superior capital gain from SPY, which of course has also been churning out dividends.

I have not done the sums but would guess a global tracker would give a similar outcome, given that the US and China dominate that index and both have vastly out-performed the UK market.

Now, I am not saying that everyone with a HYP should sell it and go all in on SPY. But you wanted an example of a fund with a better total return and I gave you one. And an index fund at that and not an active portfolio, so presumably any fund that beat the index would also beat HYP1.

At minimum this should suggest a prudent portfolio diversification for those worried about year-on-year 47% drops in income. US dividend cuts have been relatively modest in 2020.

No, HYP1 is an income portfolio and if you want to claim a superior product you must show how more income could have been produced over the past 20 years.

You have given no details as to the income produced by SPY and nor can I find any. What I can tell you, from Investopedia, is that the S&P index has generated an overall total return of 8.20% over the last 20 years

https://www.investopedia.com/articles/p ... -years.asp

Choosing a Hypothetical Scenario
The most recent 20-year span, from 2000 to 2020, not only included three bull markets and two bear markets, but it also experienced a couple of major black swans with the terrorist attacks in 2001 and the financial crisis in 2008. There were also a couple of outbreaks of war on top of widespread geopolitical strife, yet the S&P 500 still managed to generate a return of 8.2% with reinvested dividends.

So, the S&P index managed to generate a return of 8.20% with reinvested dividends. HYP1 by my calculations, has managed 8.03%, of course with those dividends extracted. I would not consider that as “being dwarfed” at all. If you are correct about the increase in value of the S&P index, and I do believe that you are, the income part of that total return produced over those 20 years would most definitely have been inferior to HYP1, or maybe even “dwarfed” by HYP1’s income production.

So, you are correct, and well done, an investment within the S&P index with dividends re-invested, would have beaten HYP1, when measured by total return, although not by much. But how exactly would one have received the income that is of course the primary aim of the HYP Strategy? Selling part of one’s holding every month/quarter/year? How much value or income would the cost of such management eat up? How much foreign currency risk would one have had to endure!

Sorry, but that does not begin to match the simplicity and straight forward, cost-free, dividend receiving of HYP1, not in my book anyway. In fact to my mind, for anyone seeking income production, as of course HYP1 was designed to do, all you have done is to highlight the success of the simple and cost-effective HYP1 solution, when compared with your S&P solution. A far superior income result with only a slightly smaller total return

Of course, if you can find an income product that has been superior to HYP1 then all on here will be interested I am sure. But you must clearly show how such a product can match or beat HYP1’s income production, costs and all.


Ian

[Alaric]

But how exactly would one have received the income that is of course the primary aim of the HYP Strategy?

Other than what can be established from your posts which are keen on saying what isn't "the HYP Strategy", is this "the HYP Strategy" properly documented anywhere? Evidently that the resulting income should be non-volatile is not part of it as can be seen in the income history of HYP documented earlier. Wouldn't "getting lucky" by selecting a single share or sector out the HYP1 initial 15 have produced even higher levels of income?

[IanTHughes]

But how exactly would one have received the income that is of course the primary aim of the HYP Strategy?

Other than what can be established from your posts which are keen on saying what isn't "the HYP Strategy", is this "the HYP Strategy" properly documented anywhere? Evidently that the resulting income should be non-volatile is not part of it as can be seen in the income history of HYP documented earlier.

The "HYP Strategy" was very clearly laid out by pyad at the time of HYP1's creation and of course it was recognised that dividend income might be variable as of course portfolio value would be too. In fact it was clearly stated at the time that anyone who could not live with that risk should not get involved!

Wouldn't "getting lucky" by selecting a single share or sector out the HYP1 initial 15 have produced even higher levels of income?

The whole point of 15 diversified selections is to reduce the risk imposed upon the overall portfolio performance by any one failure. Once 15 diversified shares are selected, the risk reduction achieved by each further selection is negligible, which is why the number 15 was chosen for diversification purposes.

But, if "getting lucky" is your preferred strategy, then you must go for it, but only at much greater risk. Of course, with your usual dose of hindsight bias, you will no doubt beat HYP1 hands down!


Ian

[Charlottesquare]

deleted

[Charlottesquare]

Of course, if you can find an income product that has been superior to HYP1 then all on here will be interested I am sure. But you must clearly show how such a product can match or beat HYP1’s income production, costs and all.


Ian

What is income?

You measure it, I take it ,as what is distributed, but whether or not distributions happen does not change the underlying income of the investment, it merely directs who gets to hold it, you or the company /IT, and of course ignores the fact that gains may at any time be sold by you or an IT to create spendable cash/realise gains.

Frankly I have found my most stable approach is a meld of some shares with reasonable dividend yields (4-6%), some ITs with reasonable dividend yields (4-7%) and some shares and ITs with very low/virtually no dividends like Mid Wynd, Monks, Fidelity China Spec Sit, Scot Mortgage, JPMorgan Emerge or Indian, Berkshire Hathaway.

When I last bothered to update my schedules the blended dividend yield was running at 3.62% (slightly adrift from my targeted 4% but it will tweak back in due course).

Regarding my investment performance since circa 2006 it is difficult to split it into the different approaches I have taken over the years, I used to carry 70% of my SIPP as a fairly traditional HYP and 30% used to speculatively try to create gains (oil stocks/miners/pharma etc), after trying for a few years I found that I did not like this approach as imho the rewards needed too many risks (per £1 invested my HYP did as well with lower risk, but that is mere reflection on my lack of trading skills), I then morphed mainly to HYP as a safer approach but became disillusioned with its cluster tendencies towards certain types of entities and I wanted to get a wider spread and also greater international exposure so over last five-seven years I have become increasingly more IT less HYP (75/25) which probably suits me as I head towards retirement in another five years. (Though I do not intend to use my SIPP for income, as soon as I am no longer a higher rate taxpayer it will be looted as fast as possible and switched into ISAs)

I cannot calculate all the returns over the years (I do not bother with these sorts of backward records) but roughly £85k has gone in over the years (£40k in 2006, £37k in 2008, £8k roughly evenly over the years, its high point was July 2019 at £264k, its Covid resilience has Jan 2020 at £250k and today it is at £245k so right now only 2% adrift from pre Covid.

What I cannot understand from these boards is why people get so invested in one approach, surely using a blended approach one can cover growth, international exposure and still roughly get 4% dividend yield as an income.

[dealtn]

Of course, if you have other evidence of an Investment Trust that beats HYP1, please present it

Seems an odd thing to ask for.

https://citywire.co.uk/wealth-manager/n ... y/a1309418

But surely that misses the point. Why would anyone want to compare a single historic example of a HYP strategy, with a single (or more) example of an alternative historic strategy?

Unless you really think the HYP strategy, and HYP1 are one and the same, and I can't think that anybody does, or you think your current portfolio matches HYP1, and Again I don't think anybody's does (or wants it to), then its a silly discussion.

Isn't it more useful to consider a HYP strategy, be that tinker (with an agreed set of rules), tinker (when you feel like it), or non-tinker, against other strategies and measured against likely projected outcomes?

Sometimes you get the feeling that the important battle for some is HYP1 vs everything else over the last 20 years, instead of a more useful discussion of (generic) HYP as practiced now vs potential alternatives over the next 20 years.