HYP investing as a yield trap

[Alaric]

The board guidance does say ITs "can be considered".

High Yield Strategy should reasonably cover Preference Shares and Corporate Bonds, including junk bonds.

Just a thought on diversification. It's suggested that you buy equal weights by initial investment. Particularly with ITs, wouldn't it work better to buy equal weights by income produced, even though it means doing a sum to work out how much to buy? That way if you bought twenty holdings, each would contribute around 5% of your income.

[Raptor]

I was perplexed reading some the previous posts as the guidance for this board states

High Yield Share & Strategies - General
The High Yield Share Strategies board is intended for wide-ranging discussions of ways to obtain high yields from equities. Securities such as preference shares, PIBs, Investment Trusts, ETFs, etc. can be considered. However there are dedicated boards for Investment and Unit Trusts, Gilts and Bonds, and Investment Strategies where some discussions may be better carried out if they relate solely to those securities. In some cases, cross-posting may help others find a discussion of interest, if a mix of types of securities is involvede

Have I missed something?

Raptor

[Itsallaguess]

I guess we had better not dwell on ITs here but I have read the Temple Bar report as I hold it in certificated form.

Well, I think a few mentions are safe enough. The board guidance does say ITs "can be considered". Indeed, people post here if they have a HYP with few naughty additions.

When I read what Dod had said earlier, I simply assumed he might not have realised we were on High Yield Shares & Strategies with this thread....

Cheers,

Itsallaguess

[Arborbridge]

When I read what Dod had said earlier, I simply assumed he might not have realised we were on High Yield Shares & Strategies with this thread....

Cheers,

Itsallaguess

Quite possible - I've certainly done that!

[Charlottesquare]

Whilst ITs reduce the RNS reading, in my experience they bring more into focus different macro economic forecasting issues

That's certainly not been my experience - I'm with the other posters here who have experienced a really quite 'Zen-like' approach once capital has moved from being in a relatively small number of single-company shares and into much more diversified collectives.

Cheers,

Itsallaguess

But it is how you select the collectives , either by activity or geography, that brings in a more macro economic viewpoint, unless you are just aiming at ITs concentrated on UK bluechips.

ITs, imho, lift one's head from just the FTSE so questions of say geographic balance, Asia, China, India, BRICS, US, EU & UK etc, come sharply into focus, or they do re my selections.

[Itsallaguess]

Whilst ITs reduce the RNS reading, in my experience they bring more into focus different macro economic forecasting issues

That's certainly not been my experience - I'm with the other posters here who have experienced a really quite 'Zen-like' approach once capital has moved from being in a relatively small number of single-company shares and into much more diversified collectives.

But it is how you select the collectives , either by activity or geography, that brings in a more macro economic viewpoint, unless you are just aiming at ITs concentrated on UK bluechips.

ITs, imho, lift one's head from just the FTSE so questions of say geographic balance, Asia, China, India, BRICS, US, EU & UK etc, come sharply into focus, or they do re my selections.

Well I'd tend to agree about the selection side of things when it comes to IT's, but I've got to say that beyond that, once they're purchased, the macro side of things simply isn't a 'concern' for me in the same way that many of my earlier single-company purchases continued to be, and it's that post-purchase 'zen-state' that I personally find immensely useful when it comes to these types of collective income-generators....

Cheers,

Itsallaguess

[Charlottesquare]

That's certainly not been my experience - I'm with the other posters here who have experienced a really quite 'Zen-like' approach once capital has moved from being in a relatively small number of single-company shares and into much more diversified collectives.

But it is how you select the collectives , either by activity or geography, that brings in a more macro economic viewpoint, unless you are just aiming at ITs concentrated on UK bluechips.

ITs, imho, lift one's head from just the FTSE so questions of say geographic balance, Asia, China, India, BRICS, US, EU & UK etc, come sharply into focus, or they do re my selections.

Well I'd tend to agree about the selection side of things when it comes to IT's, but I've got to say that beyond that, once they're purchased, the macro side of things simply isn't a 'concern' for me in the same way that many of my earlier single-company purchases continued to be, and it's that post-purchase 'zen-state' that I personally find immensely useful when it comes to these types of collective income-generators....

Cheers,

Itsallaguess

I agree, once they are purchased it tends in the main to be forget and merely monitor the dividend declarations, if you can be bothered, or hopefully receive an unexpected uplift in income if you cannot.

However right now, with world economics being somewhat less than predictable, I do keep an eye on macro news that may impact sector selection more than I might otherwise.

[torata]

Just a thought on diversification. It's suggested that you buy equal weights by initial investment. Particularly with ITs, wouldn't it work better to buy equal weights by income produced, even though it means doing a sum to work out how much to buy? That way if you bought twenty holdings, each would contribute around 5% of your income.

Sorry, can't resist...
<irony mode>
Or, you could buy 20 shares weighted to produce equal weights of income....
And even package that up as a fund?
</irony mode>

Having poked the hornets nest, I'll get my coat.

Seriously though, I like the idea for its simplicity. Would make topping up a doddle.

torata

[moorfield]

Well I'd tend to agree about the selection side of things when it comes to IT's, but I've got to say that beyond that, once they're purchased, the macro side of things simply isn't a 'concern' for me in the same way that many of my earlier single-company purchases continued to be, and it's that post-purchase 'zen-state' that I personally find immensely useful when it comes to these types of collective income-generators....

And what about single-IT purchases? In other words, replacing a large portfolio of (FTSE) shares with just one IT.

For example, would holding your entire savings in City of London IT (CTY) rather than an 20-25 share HYP (*) be a 'concern' ? And what would it be, because it shouldn't be one of diversification.


(*) I ask because this is a direction I am contemplating later in life once I feel my investments are generating "enough" income, so I'm interested in the one vs. basket of ITs view.

[Alaric]

For example, would holding your entire savings in City of London IT (CTY) rather than an 20-25 share HYP (*) be a 'concern' ? And what would it be, because it shouldn't be one of diversification.

Would there not be a concern over fraud or mismanagement? The timing of dividend payments might also be a problem for cash flow.

[kempiejon]

For example, would holding your entire savings in City of London IT (CTY) rather than an 20-25 share HYP (*) be a 'concern' ? And what would it be, because it shouldn't be one of diversification.

Would there not be a concern over fraud or mismanagement? The timing of dividend payments might also be a problem for cash flow.

Of course one can never rule out fraud or other criminal activity but it would not be a massive worry to me regarding my CTY holding. Re timings, CTY is a convenient quarterly payer but a good practice to ameliorate cash flow short comings is to hold a sufficient buffer as cash.

[Dod101]

I would not like to be relying on one manager or even one management company. Just take a look at Neil Woodford. That is surely the risk (and of course the current manager of CTY must retire at some point.)

Dod

[tjh290633]

Just a thought on diversification. It's suggested that you buy equal weights by initial investment. Particularly with ITs, wouldn't it work better to buy equal weights by income produced, even though it means doing a sum to work out how much to buy? That way if you bought twenty holdings, each would contribute around 5% of your income.

Sorry, can't resist...
<irony mode>
Or, you could buy 20 shares weighted to produce equal weights of income....
And even package that up as a fund?
</irony mode>

Having poked the hornets nest, I'll get my coat.

Seriously though, I like the idea for its simplicity. Would make topping up a doddle.

torata

I have a feeling that the rules for collective investments would stop you in your tracks. Somewhere you will find those rules, which mean that it is virtually impossible to construct a fund with as few as 20 holdings. You would be continually adjusting your holdings to stay within the limits, and a takeover would be disaster.

TJH

[Alaric]

I have a feeling that the rules for collective investments would stop you in your tracks. Somewhere you will find those rules, which mean that it is virtually impossible to construct a fund with as few as 20 holdings.

I would have thought an actively managed fund can write its own investment rules. If you held twenty shares, the holdings of which all produce the same amount of dividend, you only have to adjust when one of them increases or reduces its dividend. The relative weights of particular shares in the capital valuation would move all over the place.

The problem with mechanical approaches to selecting dividend producing stocks are that they are apt to seek out what I think of as "junk equity". That's where a high dividend rate has to be offered because no-one would invest in the Company without it. That's parallel to "junk bonds", corporate bonds offering high yields but with poor security against default.

[moorfield]

The problem with mechanical approaches to selecting dividend producing stocks are that they are apt to seek out what I think of as "junk equity". That's where a high dividend rate has to be offered because no-one would invest in the Company without it.

Indeed, mechanical approaches usually select from higher to lower yield (newbie HYPsters would immediately find VOD, CNA, SSE today ...). On another (HYP) thread I wondered if that might be the wrong way round, and one should select from lower to higher (see viewtopic.php?f=15&t=10780&p=127483&hilit=reverse#p127392). I've adopted a yield "ceiling" (see further up this thread) to try and encourage myself not to chase "junk equity" yields, as you put it.

[tjh290633]

I would have thought an actively managed fund can write its own investment rules.

It can, but it still has to abide by the rules concerning weights of holdings. See https://www.handbook.fca.org.uk/handbook/COLLG.pdf page 12/30 et seq.

(3) Within this range of investment assets there are some detailed spreadand concentration rules in the Directive. The main requirements can be summarised as follows:

(a) no more than 5% may be invested in transferable securities or approved money-market instruments with one issuer - this can be raised to 10% but only in respect of a maximum of 40% of the UCITS value;

(b) no more than 20% may be invested in deposits with one body;

If you had equal dividends from each, with 20 holdings you are bound to run foul of these rules.

TJH

[kempiejon]

I would have thought an actively managed fund can write its own investment rules. If you held twenty shares, the holdings of which all produce the same amount of dividend, you only have to adjust when one of them increases or reduces its dividend. The relative weights of particular shares in the capital valuation would move all over the place.

The problem with mechanical approaches to selecting dividend producing stocks are that they are apt to seek out what I think of as "junk equity". That's where a high dividend rate has to be offered because no-one would invest in the Company without it. That's parallel to "junk bonds", corporate bonds offering high yields but with poor security against default.

Do high dividend yields not relate to the market setting the price for the shares rather than the firm paying out more dividends to make the Company investable? If those same high yielders had their prices rise they'd have to keep finding more dividend payout to stay investable?

[Alaric]

If you had equal dividends from each, with 20 holdings you are bound to run foul of these rules.
TJH

The rules seem to say you can go up to 10% and you might need that for a FTSE 100 Tracker.

In the unlikely event that anyone did try to launch a fund with an equal dividend weighting premise, they would probably have to set the stock count at 30 or 40.

[Itsallaguess]

Well I'd tend to agree about the selection side of things when it comes to IT's, but I've got to say that beyond that, once they're purchased, the macro side of things simply isn't a 'concern' for me in the same way that many of my earlier single-company purchases continued to be, and it's that post-purchase 'zen-state' that I personally find immensely useful when it comes to these types of collective income-generators....

And what about single-IT purchases? In other words, replacing a large portfolio of (FTSE) shares with just one IT.

For example, would holding your entire savings in City of London IT (CTY) rather than an 20-25 share HYP (*) be a 'concern' ? And what would it be, because it shouldn't be one of diversification.

(*) I ask because this is a direction I am contemplating later in life once I feel my investments are generating "enough" income, so I'm interested in the one vs. basket of ITs view.

I do appreciate the 'later life' consideration, and this is something that has also partially instructed my initial move into income-Investment Trusts in the first place, and I've got to say that having done so, I think it has potentially huge investment-management benefits both as a living late-life investor, and also with regards to considering those that might be left to pick through the pieces once we fall off our particular twigs...

With that said, I think moving 100% of my income-investment capital into a single Investment Trust would not be something I'd consider, mainly for the reason that some have mentioned already, in the 'single-technical-point-of-failure' area, but mainly because I''ve been investing so long now that I've got a really good feel for what I think 'bothers me' in terms of worrying about my investments, and even ignoring the good level of diversification that might go on 'inside' any given single IT investment, I just know that I'd not be comfortable with a 'single income-IT' arrangement, and that I'd need to perhaps have at least five or six different income-IT's to dilute that concern to something that I could easily live with.

The fact that I'd most probably want to cover a number of different themes with my income-investment approach would most probably suit that solution anyway though, so the fact that those two issues would align into a more diverse set of IT investments seems to sit really quite well with me at the moment, and is something I'll most probably work towards later in life, so long as I get the chance!

Whilst I'm here, I'd just like to say generally that I've really enjoyed following this thread, and the wide-ranging discussions emanating from it.

Cheers,

Itsallaguess

[moorfield]

, I just know that I'd not be comfortable with a 'single income-IT' arrangement, and that I'd need to perhaps have at least five or six different income-IT's to dilute that concern to something that I could easily live with.

... also worth bearing in mind if you hold those five or six different income-IT's with the same broker / nominee account you are swapping one kind of 'single-technical-point-of-failure' risk for another, so presumably you would want to spread them across five or six providers too to eliminate that ...

Yes I agree too it's an interesting thread.