Comparisons with HYPertension

[Wizard]

Below are a couple of comparisons to the HYPertension update, hopefully of interest to some. The original thread to which this relates can be found here: viewtopic.php?f=15&t=15334

Comparison to an IT

Looking at the overall portfolio, as the exam question was to create an income generator with minimal need for maintenance. The comparison I picked here was to have put the whole £75k in to City of London Investment Trust (CTY). By my calculation £75k spent on CTY on 18th December 2015 would now be worth £75,836, it would have thrown off cash of £10,168 and the dividend would have increased 11.8%. Looking at the net result for cash the Hypertension portfolio is ahead of CTY, as the cash thrown off (+£1,833) more than makes up for the weaker capital performance (-£1,384). With its higher dividend growth rate CTY has been catching up, in 2016 the cash it returned was only just over 80% of that generated by HYPertension, but by 2018 this had closed and it generated over 89% of the cash from HYPertension. I look forward to seeing next year's results to see the comparison then.

Comparison to Preference Shares

Moorfield's comment raised another thought in my mind. If the objective of the HYPertension portfolio is not to at least increase income in line with RPI / or if it is it has fallen significantly short of that, how does the performance over three years compare to a fixed income portfolio, which will also not be increasing income?

There is not a huge amount of choice in terms of perpetual preference shares and PIBS from building societies, but a portfolio of 15* can be constructed. Minimising duplication of issuer means there is little choice, which at least means the risk of hind sight bias is lowered. I did duplicate BP as an issuer including both the 8% and 9% preference shares they have in issuance, I did this as the bias to financials is such that it helps to have as many non-financial issuers as possible.

The result of the 15 preference share / PIBS portfolio if purchased on 18th December 2015 would have been a capital gain of £365 and income over the three year period of £14,960. For total cash generated of £15,325. Clearly the dividend payment is not rising, but the only reason for thinking of looking at this comparison is because to any meaningful extent nor is HYPertension. Over the three years covered the fixed income portfolio is £3,871 ahead of HYPertension, which generated a net (capital loss and dividends) of £11,454. Again, will be interesting to see if the relative performance has changed at the end of next year.

Terry.


* The preference shares I used for the comparison were:
Lloyds 9.25% PRF
NatWest 9% PRF
Standard Chartered 7 3/8% PRF
R.E.A. 9% PRF
Aviva 8 3/4% PRF
Ecclesiastical 8.625% PRF
Bristol & West 8.125% PRF
Newcastle 12.625% PIBS
Northern Electric 8.061% PRF
BP 8% PRF
RSA Insurance 7 3/8% PRF
Bristol Water 8.75% PRF
Santander 8 5/8% PRF
General Accident 8 7/8% PRF
BP 9% PRF

[monabri]

Thanks for compiling & sharing. It does make me wonder if one should simply buy an IT (or a basket thereof) rather than try to cherry pick individual companies which seems to lead to copious amounts of 'pickering'.

[IanTHughes]

Wizard

Apart from the obvious point, which I am sure you are aware of, that you are using the perfect 20/20 vision of Hindsight to cast aspersions on HYP, there are a couple of other criticisms of your analysis that spring to mind:

By my calculation £75k spent on CTY on 18th December 2015 would now be worth £75,836, it would have thrown off cash of £10,168 and the dividend would have increased 11.8%. Looking at the net result for cash the Hypertension portfolio is ahead of CTY, as the cash thrown off (+£1,833) more than makes up for the weaker capital performance (-£1,384).
The result of the 15 preference share / PIBS portfolio if purchased on 18th December 2015 would have been a capital gain of £365 and income over the three year period of £14,960. For total cash generated of £15,325.

1) HYP is an income generation strategy so the only valid comparison is the level of that income year by year. "Cash Generation" does not include Capital Gain, whether positive or negative. It is simply Cash.

2) You are obviously aware of the bias toward Financials with your selection of PIBs, but it is extreme. 7 are issued by Banks or Building Societies and a further 3 are other financials. By the way, I know nothing about R.E.A or Ecclesiastical but 66% coming from financials is not diversified at all. And yet you compare it to HYP which must be diversified. Surely if you want a fair comparison you would have to allow HYP to be as un-diversified and concentrated on the highest yields irrespective of Business Category? How would that change the results?

Clearly the dividend payment is not rising, but the only reason for thinking of looking at this comparison is because to any meaningful extent nor is HYPertension.

3) A rising Income, year on year, is a fundamental aim of HYP. How can one make a serious comparison with a strategy where that is not even possible, let alone an aim?

4) Three years is nowhere near long enough a time-period with which to make meaningful comparisons. Again, I am sure you are aware of that but I do think it should be clearly stated.


Don't get me wrong, as an HYper I am always open to comparisons with other strategies that may give me what I am looking for - a high starting and rising annual income. If I ever find a significantly better strategy that I can easily follow, I would definitely be open to switching. But we have to make those comparisons realistic


Ian

[Wizard]

Wizard

Apart from the obvious point, which I am sure you are aware of, that you are using the perfect 20/20 vision of Hindsight to cast aspersions on HYP...

No attempt to cast aspersions on anything, just an attempt to make some comparisons. One of those comparisons gave less income but that income was rising faster than HYPertension, the other gave more income but that income was not rising. Which is 'best' will depend on individual circumstances and objectives for a portfolio.

Terry.

[IanTHughes]

Apart from the obvious point, which I am sure you are aware of, that you are using the perfect 20/20 vision of Hindsight to cast aspersions on HYP...

No attempt to cast aspersions on anything, just an attempt to make some comparisons.

Point taken about casting aspersions, my apologies.

Which is 'best' will depend on individual circumstances and objectives for a portfolio.

I cannot agree. Any comparison of which is best should be based on the attainment or otherwise of the same objectives, a high starting and annually rising Income


Ian

[Wizard]

Apart from the obvious point, which I am sure you are aware of, that you are using the perfect 20/20 vision of Hindsight to cast aspersions on HYP...

No attempt to cast aspersions on anything, just an attempt to make some comparisons.

Point taken about casting aspersions, my apologies.

Which is 'best' will depend on individual circumstances and objectives for a portfolio.

I cannot agree. Any comparison of which is best should be based on the attainment or otherwise of the same objectives, a high starting and annually rising Income


Ian

Well in the first three years HYPertension has not provided a rising income in real terms and barely in absolute terms, I am sure other HYPs will have done so not even all HYPs will behave in the same way. I also suspect investing in the preference shares and then reinvesting the surplus of income over that generated by HYPertension would have given a greater increase over the three years, but I have not done that maths so may be wrong.

We will have to agree to disagree on deciding which is 'best'. Maybe if this board were limited to HYP that would be true, but I'm not even sure that would be the case. Bit illustrate what I was thinking about, one investor may expect to have many years ahead of them, in that case dividend growth to at least match inflation is likely to be important; another investor may have been given only five years to live, for them a higher starting income may be more important than growth in income over time. Obviously this is just kne example there will, IMHO, be many other circumstantial points that will influence what is the right approach.

Terry.

[IanTHughes]

Bit illustrate what I was thinking about, one investor may expect to have many years ahead of them, in that case dividend growth to at least match inflation is likely to be important; another investor may have been given only five years to live, for them a higher starting income may be more important than growth in income over time. Obviously this is just kne example there will, IMHO, be many other circumstantial points that will influence what is the right approach.

Of course, but that is why you should make clear the "Circumstances and Objectives" you are considering when undertaking any study to determine which strategy would deliver the best result.

To state afterwards that Strategy X is better because you amended the aim to Objective Y renders the whole exercise rather pointless in my view


Ian

[Itsallaguess]

Three years is nowhere near long enough a time-period with which to make meaningful comparisons.

I think the Investment Trust comparison, with a single investment into CTY (which is, of course a wide-ranging, diversified trust in it's own right...) is a fantastic way to both encourage the continued tracking of the HYPertension HYP, as well as the continued comparison with CTY.

I've long been an advocate of income-investing via Investment Trusts, and I think the almost daily struggles that we see on the HYP Practical Board, where single-company investment seems to be a difficult thing to manage for some posters there, does show that whilst a HYP will often inevitably 'act' like an Investment Trust, some people do seem to find it difficult to treat it like one, and to simply let it get on with it's job....

I think a great deal of that 'struggle' simply disappears when we invest our capital into Investment Trusts, and we seem able to turn a blind-eye to the internal mechanics of those types of income-investments in a way that we're sometimes not able to when we've specifically chosen the components of our own HYP's.

I hope both CryptoPlankton and Wizard are able to continue the tracking of their comparable portfolios.

Cheers,

Itsallaguess

[Walrus]

Below are a couple of comparisons to the HYPertension update, hopefully of interest to some. The original thread to which this relates can be found here: viewtopic.php?f=15&t=15334

Comparison to an IT

Looking at the overall portfolio, as the exam question was to create an income generator with minimal need for maintenance. The comparison I picked here was to have put the whole £75k in to City of London Investment Trust (CTY). By my calculation £75k spent on CTY on 18th December 2015 would now be worth £75,836, it would have thrown off cash of £10,168 and the dividend would have increased 11.8%. Looking at the net result for cash the Hypertension portfolio is ahead of CTY, as the cash thrown off (+£1,833) more than makes up for the weaker capital performance (-£1,384). With its higher dividend growth rate CTY has been catching up, in 2016 the cash it returned was only just over 80% of that generated by HYPertension, but by 2018 this had closed and it generated over 89% of the cash from HYPertension. I look forward to seeing next year's results to see the comparison then.

Comparison to Preference Shares

Moorfield's comment raised another thought in my mind. If the objective of the HYPertension portfolio is not to at least increase income in line with RPI / or if it is it has fallen significantly short of that, how does the performance over three years compare to a fixed income portfolio, which will also not be increasing income?

There is not a huge amount of choice in terms of perpetual preference shares and PIBS from building societies, but a portfolio of 15* can be constructed. Minimising duplication of issuer means there is little choice, which at least means the risk of hind sight bias is lowered. I did duplicate BP as an issuer including both the 8% and 9% preference shares they have in issuance, I did this as the bias to financials is such that it helps to have as many non-financial issuers as possible.

The result of the 15 preference share / PIBS portfolio if purchased on 18th December 2015 would have been a capital gain of £365 and income over the three year period of £14,960. For total cash generated of £15,325. Clearly the dividend payment is not rising, but the only reason for thinking of looking at this comparison is because to any meaningful extent nor is HYPertension. Over the three years covered the fixed income portfolio is £3,871 ahead of HYPertension, which generated a net (capital loss and dividends) of £11,454. Again, will be interesting to see if the relative performance has changed at the end of next year.

Terry.


* The preference shares I used for the comparison were:
Lloyds 9.25% PRF
NatWest 9% PRF
Standard Chartered 7 3/8% PRF
R.E.A. 9% PRF
Aviva 8 3/4% PRF
Ecclesiastical 8.625% PRF
Bristol & West 8.125% PRF
Newcastle 12.625% PIBS
Northern Electric 8.061% PRF
BP 8% PRF
RSA Insurance 7 3/8% PRF
Bristol Water 8.75% PRF
Santander 8 5/8% PRF
General Accident 8 7/8% PRF
BP 9% PRF

Interesting post, though I do wonder if I'd be less or more worried with a 100 percent investment in City. I've been doing this HYP for about 5 years now and I'm increasingly finding as the pot builds, it's getting more difficult to manage and taking up more of my time. Ie also the magnitude of daily swings are more disconcerting ;(

Generally I don't much mess with the HYP shares but I do find myself thinking about doing something far more than I should. I'm considering moving to a passive index approach for additional funds now.

[Wizard]

Interesting post, though I do wonder if I'd be less or more worried with a 100 percent investment in City. I've been doing this HYP for about 5 years now and I'm increasingly finding as the pot builds, it's getting more difficult to manage and taking up more of my time. Ie also the magnitude of daily swings are more disconcerting ;(

Generally I don't much mess with the HYP shares but I do find myself thinking about doing something far more than I should. I'm considering moving to a passive index approach for additional funds now.

Walrus

Not sure I would like to be seen as advocating putting everything in one IT. But as HYPertension fished in only the UK pool (which as an HYP compliant portfolio it had no choice but to do) which is where CTY fishes IIRC and because CTY has been mentioned by some other posters as a benchmark for such shares it seemed an obvious choice to me. If I had tried to construct a broader portfolio of several ITs the risk of hind sight bias would be significantly increased IMHO.

Terry.

[Lootman]

as HYPertension fished in only the UK pool (which as an HYP compliant portfolio it had no choice but to do) which is where CTY fishes

Technically neither of those statements are completely true.

CTY has a 4.9% allocation to the US, 2% in Switzerland, 1.7% in Germany and smaller positions in France, Holland and Hong Kong. It's about 90% in the UK and 10% overseas.

Also it is not a universal rule of HYP that it can only contain UK shares. Rather it was decided by TLF that discussions about foreign shares in a HYP can only be on the Strategies Board, which happens to be this one!

I run a high yield portfolio which has UK, US, Canadian and Swiss shares in it.

[moorfield]

Comparison to Preference Shares
Moorfield's comment raised another thought in my mind. If the objective of the HYPertension portfolio is not to at least increase income in line with RPI / or if it is it has fallen significantly short of that, how does the performance over three years compare to a fixed income portfolio, which will also not be increasing income?

Terry

You've reminded me of a post I wrote here two years ago now - that table might interest you here.

[88V8]

There is not a huge amount of choice in terms of perpetual preference shares and PIBS from building societies, but a portfolio of 15* can be constructed..... Over the three years covered the fixed income portfolio is £3,871 ahead of HYPertension, which generated a net (capital loss and dividends) of £11,454. Again, will be interesting to see if the relative performance has changed at the end of next year.

* The preference shares I used for the comparison were:
Lloyds 9.25% PRF
NatWest 9% PRF
Standard Chartered 7 3/8% PRF
R.E.A. 9% PRF
Aviva 8 3/4% PRF
Ecclesiastical 8.625% PRF
Bristol & West 8.125% PRF
Newcastle 12.625% PIBS
Northern Electric 8.061% PRF
BP 8% PRF
RSA Insurance 7 3/8% PRF
Bristol Water 8.75% PRF
Santander 8 5/8% PRF
General Accident 8 7/8% PRF
BP 9% PRF

I hold most of these, and more.
I sold RE.B (the REA 9% Pref) because it's a one-trick pony in palm oil, and imho overly vulnerable to fashion and the crude oil price.

Fixed Interest provides a solid underpinning to one's income. Barring disaster, or skulduggery such as Aviva's efforts, the divis will not be cut.
Example: the Balfour Beatty BBY ords divi was stopped, but the BBYB Pref divi was not.
FI is a key part of my HYP.

Currently, FI yields better than 6% are easily achievable. When equities were typically yielding around 4%, this differential took many years before the equity hare caught the FI tortoise in terms of annual income, and many many years before the accumulated income caught up.

For me in my 60s, it's likely the hare will never overtake the tortoise. For someone younger, not such a good idea, especially at present with equity yields unusually high. The difference between FI and Shell for instance, makes FI less attractive.

As to TR, the spreads on Prefs tend to be wide so there is a paper loss of 3-5% immediately on purchase, and as interest rates rise so FI prices will decline. Over the next few years I expect a capital loss.
But I'm only here for the income.

V8

[moorfield]

I sold RE.B (the REA 9% Pref) because it's a one-trick pony in palm oil, and imho overly vulnerable to fashion and the crude oil price.

and

Fixed Interest provides a solid underpinning to one's income. Barring disaster, or skulduggery such as Aviva's efforts, the divis will not be cut.
Example: the Balfour Beatty BBY ords divi was stopped, but the BBYB Pref divi was not.
FI is a key part of my HYP.

Eh? That looks very muddled thinking to me V8.

RE.B, like BBYB, is a cumulative pref, and currently priced sub-par - a bargain.

Can you share your analysis that has led you to your conclusions on RE.B? I'm interested because I hold these, currently contributing 7.7% of my overall HYRP (note, not a HYP) income.

[88V8]

I sold RE.B (the REA 9% Pref) because it's a one-trick pony in palm oil, and imho overly vulnerable to fashion and the crude oil price.

and

Fixed Interest provides a solid underpinning to one's income. Barring disaster, or skulduggery such as Aviva's efforts, the divis will not be cut.

Eh? That looks very muddled thinking to me V8.
RE.B, like BBYB, is a cumulative pref, and currently priced sub-par - a bargain.
Can you share your analysis that has led you to your conclusions on RE.B? I'm interested because I hold these, currently contributing 7.7% of my overall HYRP (note, not a HYP) income.

Haha.
The divi will not be cut so long as the issuer remains in business. And if they've gone bust, 'cumulative' doesn't help either. One has no preferential rights in a winding up.

When the oil price was on the floor, REA were making a loss. They're not a substantial outfit, and I decided I didn't want that sort of exposure. Plus in the developed world there is a well-merited downer on palm oil.
Overly cautious on my part perhaps.

Even Raven Russia - Raven Property as they're now called - has a lower yield than REA.

As Luni said, albeit not in this context, don't chase the yield.

V8

[moorfield]

When the oil price was on the floor, REA were making a loss. They're not a substantial outfit, and I decided I didn't want that sort of exposure. Plus in the developed world there is a well-merited downer on palm oil.
Overly cautious on my part perhaps.

Fair enough, I do agree their cashflow statement hasn't looked rosy for a while, and I've never quite understood how their accounting of "Biological Assets" works.

However, the opposing view when such opinions prevail is that distressed preference share prices can be worth watching and bagging (SAN at 80p anyone? )

Coincidentally, I've just had a notification that the RE.B dividend - always my last of the calendar year - has just dropped into my account today while writing this!

Happy New Year to You.