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Brexit defence - High yield portfolio strategy.

General discussions about equity high-yield income strategies
funduffer
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Brexit defence - High yield portfolio strategy.

#149249

Postby funduffer » July 1st, 2018, 11:48 am

We are 9 months away from Brexit day, and without wanting to start a Leave v Remain debate, it is a nervous time for me as we seem a long way from getting a deal with the EU.

I am wondering if there is going to be a shock to the market around Q1 next year, if the probability of a no/poor deal rises, and how to defend my HYP and high yield IT portfolios in this circumstance.

I am thinking that if there is a sharp market correction, then this would be a good time to bag some bargains in large companies that derive most of their revenue from international sales - the likes of Unilever, Shell, BP, Imperial brands, HSBC etc...which are likely to be less sensitive to the type of deal we end up with.

So I think my strategy for the next 9 months is to accumulate all dividends as cash and see what happens in Q1 2019, rather than do my usual top-ups every 2 months or so. Then if there is a big correction, bag the bargains whilst they are on offer. The worst that can happen is that I accumulate a bit more cash than usual which I re-invest later rather than earlier.

Otherwise, I am leaving the 2 portfolios well alone as I am not clever/confident enough to do anything more drastic!

Is there any logic in this, or are there other approaches that people are considering?

FD

Itsallaguess
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Re: Brexit defence - High yield portfolio strategy.

#149260

Postby Itsallaguess » July 1st, 2018, 12:29 pm

funduffer wrote:
So I think my strategy for the next 9 months is to accumulate all dividends as cash and see what happens in Q1 2019, rather than do my usual top-ups every 2 months or so. Then if there is a big correction, bag the bargains whilst they are on offer. The worst that can happen is that I accumulate a bit more cash than usual which I re-invest later rather than earlier.

Otherwise, I am leaving the 2 portfolios well alone as I am not clever/confident enough to do anything more drastic!

Is there any logic in this, or are there other approaches that people are considering?


This is more or less my default position now, where I expect to carry around 15% near-cash equivalents for the foreseeable future.

The only difference between us, I think, is that you seem to be planning for a specific scenario, whereas I'm simply more comfortable allowing myself to 'not know' what might bring on a major market-crash, so I simply plan for one all the time....

This approach allows me, like you, to leave the rest of my invested-portfolio alone, and covers a couple of important aspects for me personally -

1. It assuages my 'fully invested' worries, as I never really am. This helps me sleep at night.

2. It allows me to cater for a major correction without the need to actually trade out of and back into already-owned investments. This is important, as I don't want to have to make those particular decisions, either now whilst markets are relatively benign, or later during a correction if one occurs.

The only real decisions I'll therefore have to make is if an actual correction occurs, and they'll be purchase-decisions. I've had a bit of experience over the years of making such purchases, and I find that I luckily don't suffer from the 'rabbit in headlights' effect, and am quite capable of putting money into turbulent markets, and doing so has worked out well in the past.

Cheers,

Itsallaguess

SalvorHardin
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Re: Brexit defence - High yield portfolio strategy.

#149266

Postby SalvorHardin » July 1st, 2018, 12:45 pm

You could buy foreign shares, rather than limiting yourself to multinationals listed in London. Arguably there's not much more currency risk for some foreign shares because their businesses and sales have a similar geographical distribution to their UK quoted counterparts.

Procter & Gamble, which is basically America's Unilever without food, currently yields 3.7% less 15% withholding tax (which in turn can be offset against UK taxes).

The problem is that overseas markets generally don't yield as much as the UK. There are of course exceptions, such as Telecoms and American REITs. If you haven't already got some, have a look at Henderson Far East Income IT, currently 5.8% yield.

The problem in waiting for a big correction is that it is quite likely that the multinationals' share prices wiill rise because of their overseas interests, whilst the UK-focused companies' share prices fall. This happened after the Brexit vote; falling sterling caused the share prices of Unilever and other multinationals to rise, UK-focused companies' share prices generally fell whilst foreign shares made huge gains for UK investors thanks to sterling's fall.

The week after the Brexit vote was my most successful ever, in sterling terms, thanks to sterling falling sharply against the US dollar.

77ss
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Re: Brexit defence - High yield portfolio strategy.

#149355

Postby 77ss » July 2nd, 2018, 1:02 am

funduffer wrote:We are 9 months away from Brexit day, and without wanting to start a Leave v Remain debate, it is a nervous time for me as we seem a long way from getting a deal with the EU.

I am wondering if there is going to be a shock to the market around Q1 next year, if the probability of a no/poor deal rises, and how to defend my HYP and high yield IT portfolios in this circumstance.

I am thinking that if there is a sharp market correction, then this would be a good time to bag some bargains in large companies that derive most of their revenue from international sales - the likes of Unilever, Shell, BP, Imperial brands, HSBC etc...which are likely to be less sensitive to the type of deal we end up with.

So I think my strategy for the next 9 months is to accumulate all dividends as cash and see what happens in Q1 2019, rather than do my usual top-ups every 2 months or so. Then if there is a big correction, bag the bargains whilst they are on offer. The worst that can happen is that I accumulate a bit more cash than usual which I re-invest later rather than earlier.

Otherwise, I am leaving the 2 portfolios well alone as I am not clever/confident enough to do anything more drastic!

Is there any logic in this, or are there other approaches that people are considering?

FD


That's one approach. I have been taking a different tack - moving into Investment Trusts largely focussed on non-UK businesses. Something I had started before the Brexit vote anyway, for diversification reasons - I have just been accelerating it a bit lately. I am now about 19% in cash and foreign businesses. The IT yields are rather modest - not really qualifying for the 'high yield' of this board - but better than cash!

Dod101
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Re: Brexit defence - High yield portfolio strategy.

#149370

Postby Dod101 » July 2nd, 2018, 7:42 am

We are all doing pretty much the same thing except that I live off my dividends (most of them anyway) Like Itsallaguess I am never fully invested in that I have about 3/4 years of living expenses in cash but that is asset allocation rather than a deliberate decision not to be fully invested. It is held in Index Linked NSCs. I also have a small 'buffer' of about 3 month's expenses to cover shortfalls in certain months.

Consequently I am doing nothing over any sort of 'Brexit Defence'. This is where pyad's Strategic Ignorance comes into its own. I am not sure about the Strategic bit mind you, it is not a strategy on my part; it is rather forced upon me because like the Government apparently, I do not have a clue how Brexit will end up.

I must look at Henderson Far East.

Dod

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Re: Brexit defence - High yield portfolio strategy.

#149387

Postby Quint » July 2nd, 2018, 9:00 am

Like Salvor said, I think if we have no deal then there may well be a mini run on the pound so the value of overseas shares and multi nationals will rise, and their income with it.

If we avoid no deal then things carry on as now.

Raptor
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Re: Brexit defence - High yield portfolio strategy.

#149390

Postby Raptor » July 2nd, 2018, 9:09 am

I have been looking more at purchasing overseas IT's in consideration of Brexit (whichever way it goes) and have now a full compliment of MCT, for Nth American and will now start purchasing JETI for European. Already have HFEL and a few others with overseas looking portfolios. But, for my HYP I am just going to carry on as before (OK High Yield criteria has changed recently and a move to compare against FTSE 250 rather than FTSE All shares), as I have no idea which way shares will go no matter what happens with Brexit and prefer a 5.95% dividend income to 0.5% for cash.... Maybe that will change going forward.....

Raptor.

Gengulphus
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Re: Brexit defence - High yield portfolio strategy.

#149445

Postby Gengulphus » July 2nd, 2018, 11:41 am

funduffer wrote:Is there any logic in this, or are there other approaches that people are considering?

I'd recommend a look at a 5-year FTSE 100 chart, especially with regard to the time of the Brexit referendum (just about halfway through 2016) and the lead up to it and the aftermath of it. There were all sorts of dire predictions beforehand as to what would happen if the referendum result was "leave", but what did actually happen when it turned out (rather to most commentators' surprise) that it actually was "leave" ? The low point for the entire five years was several months earlier, around January/February 2016, and the immediate reaction in late June 2016 was a very roughly 5% fall, similar in size to many other falls over the 5 years: I really don't think anyone looking at the chart would pick it out as in any way special if they didn't know to look for it. And it was recovered from pretty quickly (within about a week IIRC) and the FTSE hasn't dropped back to pre-referendum levels since!

Similar charts of the FTSE 350 and FTSE 350 High Yield indices show similar pictures. One of the FTSE 250 index shows a significantly bigger immediate post-referendum fall (over 10%) that does stand out a bit, but not very prominently, and that too was recovered from quite quickly (a month or slightly over) and again the index hasn't since fallen to pre-referendum levels.

It's also instructive to look at what those charts do around the time of Trump's win of the US presidential election in late 2016, which is another case of an outcome that was widely predicted by commentators to have dire results if it were to happen and which was a bit of a surprise when it did happen. Again, while it is visible in the charts if you know where to look, it really doesn't stand out and the indices have continued to make progress (and the shares themselves would be paying dividends on top of that capital progress) since.

Personally, I'm betting on the outcome of the Brexit negotiations having a similar 'damp squib' effect on the stockmarket. If I were a currency speculator, I wouldn't be anything like as sanguine: exchange rate charts do show a very pronounced major event around the time of the referendum result. But as far as the stockmarket is concerned, my view is that it simply isn't worth worrying about - especially if you're only going to bet on it with the next 9 months of dividends: they're probably around 4% of the portfolio value, so exploiting a 5% drop in the market is only worth about 0.2% on your portfolio value. And if you get the bet wrong and the market instead rises by 5%, then it's worth about -0.2% of your portfolio value... Basically, if you're going to regard rises and falls in your portfolio value of that magnitude as worth worrying about at all, you're probably not suited to HYP investing at all, as your portfolio probably rises or falls in value by more than that amount most trading days... (Though in that case, whether you're not suited to stockmarket investing at all or suited to a much shorter-term trading strategy, I don't know.)

There is a lesson to be drawn from the rather bigger effect of the referendum result on the FTSE 250, I think. The FTSE 250 does have a greater concentration of companies whose operations and markets are based in the UK (and less of companies whose operations and markets are based internationally) than the FTSE 100. Such companies will mainly have been affected by the exchange rate changes through the effect on the prices of their supplies - directly in the case of imported supplies, indirectly in the case of supplies whose prices rise due to things used in making them. Those effects are negative, so the companies concerned will tend to have been adversely affected by the exchange rate changes, though how much by will depend of how much their supplies are (directly or indirectly) imported. Companies with significant overseas operations and markets and not using much in the way of imported supplies will tend to have been positively affected, and between those two types, there is likely to be a range of less extremely positively and negatively affected companies. Anyway, the greater concentration of the FTSE 250 on 'UK-based' companies compared with 'internationally-based' ones does seem to have produced less of a good balance of positively and negatively affected companies than the FTSE 100 and so a sharper immediate fall - though I should emphasise that that was a pretty short term effect: the FTSE 250 has been doing better than the FTSE 100 since, both on a capital-only basis and on a total-return basis.

I'm not saying that the lesson is "pile into the FTSE 100 and avoid the FTSE 250 like the plague": it isn't, for two reasons. Firstly, there are plenty of exceptions (in both directions) to the general tendency for FTSE 250 companies to be more 'UK-based' and FTSE 100 companies to be more 'internationally-based'. Secondly, over-concentration on 'internationally-based' companies is just as capable of producing poor results in the event of a good Brexit negotiations outcome as over-concentration on 'UK-based' companies is in the event of a poor Brexit negotiations outcome. So the lesson I would draw is basically a diversification one: aim for a good balance of 'UK-based' and 'internationally-based' companies, with the intention being to get a substantial 'swings and roundabouts' balance of good and poor individual company results no matter what the Brexit negotiations outcome. (This does assume the normal HYP mindset of avoiding bad outcomes for the portfolio as a whole even if it means also avoiding unusually excellent outcomes as well. If you have another mindset, such as wanting to make a prediction about the Brexit negotiations outcome and put money at stake on it, so that you will get an excellent portfolio outcome if your prediction is right, willingly taking the risk of a decidedly poor portfolio outcome if your prediction is wrong, you need different advice - and a different advisor: I have no real idea what the outcome of the Brexit negotiations will be and so simply cannot help anyone with such an aim! Apart from the above observation about the size of the bet, that is: if one is at all serious about that aim, one really needs to put more than 9 months of dividends at stake on it.)

One other thing to emphasise is the reason why I'm saying 'UK-based' and 'internationally-based' in quotes: they are about where the company has its operations and markets, not where it is headquartered or listed on stockmarkets.

So my approach is basically business just about as usual with regard to reinvesting dividends, though possibly with even more attention than normal paid to diversification, and especially to the balance between 'UK-based' and 'internationally-based' companies.

And finally, I would make the point that although the Brexit negotiations outcome will be an important event, it's by no means that only important event that will happen in the future. There is a sort of 'future' counterpart to "recent events syndrome", which might be called "next anticipated big event syndrome": people tend to exaggerate the importance of that event relative to other future events (and they're very ably assisted by the media in that exaggeration IMHO!). There will be plenty of big events after Brexit, and I think the odds are high that something else will quickly become the thing that people are worrying about and wondering whether they should delay investing because of it. Certainly I don't remember any significant period that in the ~17.5 years since pyad's original HYP articles that people haven't been expressing such worries on the TMF or TLF boards!

Gengulphus

Itsallaguess
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Re: Brexit defence - High yield portfolio strategy.

#149463

Postby Itsallaguess » July 2nd, 2018, 12:29 pm

Gengulphus wrote:
There will be plenty of big events after Brexit, and I think the odds are high that something else will quickly become the thing that people are worrying about and wondering whether they should delay investing because of it.


Absolutely.

In fact with Trump's trade-war shenanigans, it might be argued that the 'something else' is here already....

Cheers,

Itsallaguess

funduffer
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Re: Brexit defence - High yield portfolio strategy.

#149726

Postby funduffer » July 3rd, 2018, 3:04 pm

Thanks for the useful discussion.

I have Henderson Far East (HFEL) and Murray International (MYI) in my IT portfolio, so if I do any top-up's in the next 9 months I will probably concentrate on these two, though I am inclined to hoard dividends for a while longer as the Brexit scene unfolds in the next few weeks and months.

I see the point that: when the EU referendum result was announced, the pound fell, but the FTSE 100 rose, because of the foreign earnings of several of the largest companies, and the same may happen again if a no/poor deal Brexit leads to a further fall in the pound (whether temporarily or permanently). So expecting a higher yield here may not be the best strategy. On the other hand, the FTSE 250, with more UK-focused companies, may offer up juicier yields in the event of a no/poor deal, but maybe this will be for a reason - they are vulnerable! So international IT's do have a certain logic in these circumstances.

I accept the point that Trump's tariffs may 'trump' any Brexit deal considerations!

FD

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Re: Brexit defence - High yield portfolio strategy.

#149841

Postby richfool » July 3rd, 2018, 10:37 pm

After the Brexit referendum result, I deliberately increased my exposure to larger FTSE100 companies and more particularly overseas stocks (through IT's), to capitalise on overseas earnings and sterling weakness.

Earlier this year, I took the view that UK stocks and particularly smaller company domestically focussed stocks had been overly depressed due to Brexit concerns and uncertainties. I have therefore been adding to my UK smaller companies and mid cap IT's, (as well as a technology focussed global growth trust [a sector I had little exposure to]).

Accepted that there may well be further uncertainty and weakness until Brexit is finally achieved.

funduffer
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Re: Brexit defence - High yield portfolio strategy.

#169781

Postby funduffer » September 28th, 2018, 11:08 am

Sorry to raise this old thread again, but I think it may becoming more relevant - the probability of Brexit 'no deal' seems to be rising, and Trump has escalated the international trade war.

I am now sitting on a decent amount of dividend cash in my ISA account and hovering between sitting on my hands a bit longer, or investing it in an international IT (MYI would be my choice). I don't feel confident to top/up or add to my HYP at the moment, but if I did I think I would stick to the big international companies - the likes of RDSB, HSBA, IMB perhaps.

Sit on hands and wait for November I think, when perhaps we will all get some more clarity (I live in hope.....)?

Any new thoughts?

FD

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Re: Brexit defence - High yield portfolio strategy.

#169965

Postby DiamondEcho » September 28th, 2018, 10:04 pm

There seems to nothing useful to do with cash, Premium Bonds, Deposit a/c's etc.
A top up in Imperial/IMB looks like the next step and best option for me, though no mad rush....


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