HYP1 is 23 - Total Return

[XFool]

If I may very briefly butt in on this 'private' HYP conversation.

Just out of curiosity, I ran the OP figures for HYP1 through an XIRR table on my spreadsheet. I simply took the annual income figures as all being delivered on 12 November every year (other assumptions would lead to other results).

Using that method, the figure I got for HYP1 was XIRR = 8.63%

[simoan]

If I may very briefly butt in on this 'private' HYP conversation.

Just out of curiosity, I ran the OP figures for HYP1 through an XIRR table on my spreadsheet. I simply took the annual income figures as all being delivered on 12 November every year (other assumptions would lead to other results).

Using that method, the figure I got for HYP1 was XIRR = 8.63%

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

[Bubblesofearth]

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

Are you making the assumption that the income would have yielded zero during that time? That would be the case if it were spent but I'm not sure CAGR calculations are valid for such a scenario.

BoE

[jaizan]

The opening post is pretty clear.

1 There is a HYP, selected from large caps.
2 The capital appreciation is compared with the FTSE100 & it has trounced that.
3 I suspect the income beats the FTSE100, since by definition, it starts with a higher yield.

This is a perfectly reasonable result & is likely to have beaten the kind of FTSE100 trackers suggested for some pension funds.

One could do far worse.
One could also do far better. Although writing about what has done better with hindsight is of limited value.

So, thank you for creating this portfolio and writing about the performance.

[simoan]

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

Are you making the assumption that the income would have yielded zero during that time? That would be the case if it were spent but I'm not sure CAGR calculations are valid for such a scenario.

BoE

What can I say, I’m a total return investor. You can cheat whichever way you like by pretending you’d be getting interest income on the dividends but you’re only kidding yourself that the result after 23 years is adequate for the risk taken. It’s not.

[Lootman]

Seeing this is a one-off investment of £75k made 23 years ago that has provided a total return of £277k, I think you can afford to be more simplistic. On a total return CAGR basis this is 5.85%. That’s in line with most people’s idea of the long-term return from UK equities being around 6%. If you think that’s acceptable, then so be it. But on a risk/reward basis it wouldn’t do for me, particularly given the very low interest rates that have been pre-dominant within the 23 year period in question, which have been extremely helpful to equity investment. And right now, the 5.85% is little more than the risk free rate you can get in a savings account.

Are you making the assumption that the income would have yielded zero during that time? That would be the case if it were spent but I'm not sure CAGR calculations are valid for such a scenario.

If instead we assume the higher 8.63% annualised return figure that was claimed, that is still within the 8% to 10% range of average long-term returns from equities that is often cited in studies that go back up to 100 years. (Closer to 8% for the UK and closer to 10% for the US. In fact the US has given you over 15% annualised for the last 15 years).

In that context 8.63% is OK but nothing to write home about. And the other side of that is risk, as Simoan noted. The strategy first restricts itself to a universe of shares that is just 2% of the global share universe. And then it holds them in wildly unbalanced proportions. The result is a level of risk and volatility that should surely be earning you an above-average return and not just an average return. Or else why take on all that additional risk?

Such a strategy might make more sense where you are regularly adding in new money. You would then benefit from higher volatility through pound cost averaging. And you would be effectively re-balancing the portfolio constantly to get rid of that skew caused by having a handful of share dominate the portfolio.

[1nvest]

I note that the HYP1 total return, assuming dividends reinvested at the ongoing rate of portfolio capital gain, compared near identically to the FTSE 250 total return. Could have been invested in either to near equal effect/outcome.

FT250 had pulled ahead up to the end of 2021, but has had a worse couple of years over the last two years that has seen it pulled back down into alignment with HYP1.

A factor is how income was actually drawn. If you just dropped HYP1 dividends into a interest paying cash deposit account then that would have accumulated to a substantial amount, haven't worked the exact figure but perhaps somewhat like holding a 90/10 stock/cash portfolio asset allocation, that might generally be expected to broadly lag a 100/0 stock/cash allocation.

Also you're taking on more risk, 15 (whatever) stocks and higher weightings into individual stocks (that had risen to become relatively highly weighted), compared to a broader index that automatically dynamically adjusts itself over time (winners are ejected out of the top into the FT100, losers fall out of the bottom to be replaced with risers). i.e the same reward but with higher risk = lower Sharpe Ratio for the HYP1.

Another risk, for those who haven't their portfolio fully contained with a ISA or suchlike tax exempt/deferred account is that higher dividend yield = greater exposure to regular taxation.

Generally, a diverse basket of UK stocks broadly has compared, a notable exception is that of the FT100 which has been more the exception (relatively bad) choice. Got hurt more in the 2000 dot com bubble burst, and again in the 2008/9 financial crisis and 2020 Covid periods. Is perhaps indicative that a top (large) cap that has stocks feed in/fall out of the bottom, no 'top slicing' such as best performers from the FT250 being ejected into the FT100 ... isn't perhaps the best choice of approach/style. And/or that over concentration into largely older sectors ... can be a relatively hgher risk factor.

[Bubblesofearth]

Are you making the assumption that the income would have yielded zero during that time? That would be the case if it were spent but I'm not sure CAGR calculations are valid for such a scenario.

BoE

What can I say, I’m a total return investor. You can cheat whichever way you like by pretending you’d be getting interest income on the dividends but you’re only kidding yourself that the result after 23 years is adequate for the risk taken. It’s not.

CAGR is calculated assuming profits are reinvested. Google it if you don't believe me.

BoE

[TUK020]

Not sure that arguing about CAGR in nominal terms makes a lot of sense.
Real, i.e. inflation adjusted, terms are what are meaningful.

[simoan]

[
CAGR is calculated assuming profits are reinvested. Google it if you don't believe me.

BoE

You can use CAGR to describe any compound growth rate. It doesn’t have to entail re-investment although I take your point it generally does with regard to portfolio performance. But then a normal portfolio would involve some re-investment of dividends.

The point is that the approach of HYP1 is specifically NOT to re-invest dividends, so best assume the dividends were spent the same day they hit the bank account. I don’t see a problem because I’m not comparing the CAGR of HYP1 with anything other than the APR of cash on deposit; a 100% safe investment. Given the BoE bank rate was 6% when it was started and 5.25% now, the overall return of a 15 share HYP over 23 years has been terrible. You can try to dress it up anyway you like but on a risk adjusted basis it’s been a dreadful failure.

[XFool]

CAGR is calculated assuming profits are reinvested. Google it if you don't believe me.

You can use CAGR to describe any compound growth rate. It doesn’t have to entail re-investment although I take your point it generally does with regard to portfolio performance. But then a normal portfolio would involve some re-investment of dividends.

The point is that the approach of HYP1 is specifically NOT to re-invest dividends, so best assume the dividends were spent the same day they hit the bank account.

I was not anticipating posting again on this topic however, I just realised that for the XIRR calculation to make sense it would, IMO, be based on an assumption the income from the HYP was taken out of the portfolio. If retained, then a simple CAGR should do the job.

I forgot to consider that in my OP. Sorry.

[Bubblesofearth]

You can use CAGR to describe any compound growth rate. It doesn’t have to entail re-investment although I take your point it generally does with regard to portfolio performance. But then a normal portfolio would involve some re-investment of dividends.

The point is that the approach of HYP1 is specifically NOT to re-invest dividends, so best assume the dividends were spent the same day they hit the bank account. I don’t see a problem because I’m not comparing the CAGR of HYP1 with anything other than the APR of cash on deposit; a 100% safe investment. Given the BoE bank rate was 6% when it was started and 5.25% now, the overall return of a 15 share HYP over 23 years has been terrible. You can try to dress it up anyway you like but on a risk adjusted basis it’s been a dreadful failure.

OK let's just look at the capital. If you had spent the dividends from your HYP then it's reasonable to compare that to spending the income, i.e. interest, from cash on deposit. HYP1 capital has roughly doubled whilst cash on deposit would have remained the same.

We've also had a long period, from around the GFC to recently, where cash on deposit would have yielded very little interest.

You can dress this up any way you like but HYP1 has been much more profitable than cash on deposit.

BoE

[simoan]

You can dress this up any way you like but HYP1 has been much more profitable than cash on deposit.

BoE

I'm sorry, you have completely missed my point. Why does no-one on this forum understand risk and in particular the meaning and importance of risk adjusted returns? Sheesh. I give up. Last input from me as I have no interest in discussions with the delusional.

[dealtn]

You can dress this up any way you like but HYP1 has been much more profitable than cash on deposit.

BoE

I'm sorry, you have completely missed my point. Why does no-one on this forum understand risk and in particular the meaning and importance of risk adjusted returns? Sheesh. I give up. Last input from me as I have no interest in discussions with the delusional.

No-one?

That's a bit harsh.

[simoan]

I'm sorry, you have completely missed my point. Why does no-one on this forum understand risk and in particular the meaning and importance of risk adjusted returns? Sheesh. I give up. Last input from me as I have no interest in discussions with the delusional.

No-one?

That's a bit harsh.

Apologies! You are of course right to correct - there are a few contributors that understand the importance of risk. It just feels like no-one because you see absolute returns discussed literally everywhere with no consideration for the amount of risk taken. Fancy investing in 15 shares and congratulating yourself on beating cash after 23 years I'll be feeling smug after beating a 5 year old at arm wrestling before you know it...

[Bubblesofearth]

I'm sorry, you have completely missed my point. Why does no-one on this forum understand risk and in particular the meaning and importance of risk adjusted returns? Sheesh. I give up. Last input from me as I have no interest in discussions with the delusional.

Of course shares are riskier (more volatile) than cash but you have been rewarded with a doubling of capital and almost certainly more income. You made a fundamental error in your comparison of CAGR when comparing the two forms of investment. I guess terminating input is easier than admitting a mistake.

BoE

[Tedx]

No-one?

That's a bit harsh.

Apologies! You are of course right to correct - there are a few contributors that understand the importance of risk. It just feels like no-one because you see absolute returns discussed literally everywhere with no consideration for the amount of risk taken. Fancy investing in 15 shares and congratulating yourself on beating cash after 23 years I'll be feeling smug after beating a 5 year old at arm wrestling before you know it...

So the riskiest investment over 23 years is cash?

[Bubblesofearth]

No-one?

That's a bit harsh.

Apologies! You are of course right to correct - there are a few contributors that understand the importance of risk. It just feels like no-one because you see absolute returns discussed literally everywhere with no consideration for the amount of risk taken. Fancy investing in 15 shares and congratulating yourself on beating cash after 23 years I'll be feeling smug after beating a 5 year old at arm wrestling before you know it...

HYP1 hasn't just beaten cash though, it's beaten the FTSE100 hands-down which is the index from which the components were taken. And plenty of studies have shown that once you get much beyond 10 shares (volatility) risk is close to whole market risk.

BoE

[tjh290633]

You can dress this up any way you like but HYP1 has been much more profitable than cash on deposit.

BoE

I'm sorry, you have completely missed my point. Why does no-one on this forum understand risk and in particular the meaning and importance of risk adjusted returns? Sheesh. I give up. Last input from me as I have no interest in discussions with the delusional.

I'm not sure that you understand risk. If you rely on cash you have the risk to your capital, which will remain static, and the rate of interest which may well be below the rate of inflation. If you compound the interest you are still likely to lag inflation and so will be losing purchasing power.

If you invest in a basket of equities, you have two possibilities, first that the capital value may fall, or may lag the rate of inflation. The second is that the dividend income may dry up, fall, or fail to keep up with inflation. Over the years the principal measure of inflation has been the Retail Price Index (RPI), with the government preferring to use alternatives with lower rates of inflation in recent years. Unlesss you have some other magic formula, we can take the RPI as the yardstick by which we can measrue progress.

With cash, there is no case to answer, as interest rates have failed to keep up with inflation, except for the odd years when pricecs actually fell. This was the case in March to October in 2009, when the annual RPI change was negative each month. My records go back to 1982, and that was the only time when the annual change was negative. You will no doubt recall the trouble which a low RPI gave George Brown and led to the introduction of a minimum 2.5% increase in pensions.

Looking now at equities, the need is for the capital value of your basket of equities to increase in capital value by more than the RPI, and for the income from those equities to increase by more than the RPI over the years. Either may fall back for a period, but taken over the years the increase has to be ahead of the RPI. Here is the progress of my portfolio, essentially a tinkered HYP since it began as a PEP in 1987:

.        .   Income Units              Accumulation   Rebased   Rebased   April   Rebased
Year to      Unit Value     Div/Unit   Unit Value     FT30      FT100     RPI     RPI    
21-Apr-87            1.00       0.00           1.00      1.00      1.00   1.018      1.00
05-Apr-88            0.91       2.86           0.94      0.92      0.91   1.058      1.04
05-Apr-89            1.18       2.72           1.28      1.10      1.05   1.143      1.12
05-Apr-90            1.21       4.24           1.40      1.13      1.14   1.251      1.23
05-Apr-91            1.34       5.42           1.69      1.28      1.26   1.331      1.31
05-Apr-92            1.30       7.52           1.75      1.24      1.26   1.388      1.36
05-Apr-93            1.51       6.91           2.13      1.44      1.46   1.406      1.38
05-Apr-94            1.70       6.27           2.50      1.65      1.65   1.442      1.42
05-Apr-95            1.66       7.48           2.55      1.57      1.62   1.490      1.46
05-Apr-96            1.95       7.38           3.13      1.80      1.90   1.526      1.50
05-Apr-97            2.16       8.40           3.62      1.85      2.21   1.563      1.54
05-Apr-98            3.31      10.00           5.72      2.45      3.05   1.626      1.60
05-Apr-99            3.44       8.46           6.12      2.47      3.21   1.652      1.62
05-Apr-00            3.32      11.33           6.13      2.42      3.35   1.701      1.67
05-Apr-01            3.29      12.42           6.32      2.05      2.89   1.731      1.70
05-Apr-02            3.37      13.02           6.76      1.65      2.69   1.757      1.73
05-Apr-03            2.29      12.10           4.85      0.85      1.85   1.812      1.78
05-Apr-04            2.92      13.38           6.56      1.22      2.25   1.857      1.82
05-Apr-05            3.46      13.06           8.10      1.33      2.51   1.916      1.88
05-Apr-06            4.30      17.42          10.57      1.68      3.06   1.965      1.93
05-Apr-07            4.91      19.42          12.63      1.90      3.31   2.054      2.02
05-Apr-08            4.14      24.32          11.21      1.58      2.93   2.140      2.10
05-Apr-09            2.28      21.17           6.46      0.87      2.01   2.115      2.08
05-Apr-10            3.69      11.06          10.86      1.33      2.91   2.228      2.19
05-Apr-11            4.16      16.71          12.76      1.43      3.03   2.344      2.30
05-Apr-12            4.40      17.73          14.19      1.33      2.96   2.408      2.37
05-Apr-13            5.27      21.83          17.01      1.54      3.29   2.476      2.43
05-Apr-14            5.34      23.05          18.88      1.75      3.38   2.557      2.51
05-Apr-15            5.91      24.98          21.84      1.91      3.47   2.580      2.53
05-Apr-16            5.92      22.67          21.72      1.79      3.17   2.614      2.57
05-Apr-17            6.62      26.21          25.47      2.10      3.76   2.706      2.66
05-Apr-18            6.12      33.19          24.66      1.79      3.62   2.797      2.75
05-Apr-19            6.35      31.25          27.04      1.95      3.82   2.856      2.81
05-Apr-20            4.60      31.57          26.64      1.44      2.77   2.926      2.87
05-Apr-21            5.99      22.54          29.07      1.76      3.46   2.960      2.89
05-Apr-22            6.70      26.76          34.29      1.69      3.86   3.346      3.29
05-Apr-23            6.22      40.34          34.18      1.73      3.93   3.728      3.66
27-Nov-23            6.10      26.54          34.17      1.70      3.84   3.778      3.71 Latest data, part year

You can see that currently the income unit value is almost twice the increase in the RPI, the FTSE100 is comparable with the RPI, and the dividend income has risen by almost 10-fold. The accumulation unit value, which assumes that all income is reinvested, is now 34 times its original value. In its early years, from 1987 to 1993, the income unit was roughly in line with the RPI, but thereafter was well in advance. 2009 and 2020 saw a temporary fall back in capital value, but recovery was swift. Notable falls in dividend income can be seen in 1999, 2010 and 2021. Again recovery was swift.

Please explain your concept of risk, and hoqw you can demonstrate the higher risk of an equity portfolio.

TJH

[simoan]

Apologies! You are of course right to correct - there are a few contributors that understand the importance of risk. It just feels like no-one because you see absolute returns discussed literally everywhere with no consideration for the amount of risk taken. Fancy investing in 15 shares and congratulating yourself on beating cash after 23 years I'll be feeling smug after beating a 5 year old at arm wrestling before you know it...

HYP1 hasn't just beaten cash though, it's beaten the FTSE100 hands-down which is the index from which the components were taken. And plenty of studies have shown that once you get much beyond 10 shares (volatility) risk is close to whole market risk.

BoE

Firstly, risk is not the same as volatility. Really important. Risk is the probability of permanent capital loss. If you pick high yielding shares then that risk is already heightened i.e. you are taking on more than market risk and as we have seen with HYP1 the risk increases over time if you do not rebalance because the capital becomes concentrated in a small number of companies. If you want to use the FTSE 100 as your benchmark, then you've already set the bar very low. I'm sure you can understand this - other global indices are available! The FTSE 100 and HYP1 have not even beaten the ultimate safe haven of Gold which is up about 300% since HYP1 started. Let's not even mention the S&P500. Anyway, if you are happy with the risk/reward HYP1 has provided for 23 years, there is really nothing more I can do to help. Any sane investor would not follow the approach used by HYP1 and the results conclusively prove why.