'Quality Income' - strategy [a HYP variant]

[DiamondEcho]

I came upon this today, and as I'm reading through various articles on it I thought I'd share them, as a bookmark for me, and because it should have wider interest.

This article [dd 18-Oct] is where I first came upon the QI strategy. http://www.iii.co.uk/articles/452931/10 ... -investors
Extract: 'One answer is to take inspiration from a successful approach used by a handful of investment firms, such as Societe Generale, Fidelity and Investec. It's called Quality Income, and as the name suggests it zeroes in on high yields in good quality stocks. What does financial quality look like?
The simple idea behind Quality Income is that financially strong firms don't often have to slash their dividend payouts. '

The approach seems closely aligned with 'classic HYPP', but it goes beyond HYPs basic, still undefined, metrics and adds a couple of newer derivative metrics such as Piotroski F-Score and Altman Z-Score. I have come across both before, they're used for running a health-check on a share. But they're still perhaps more professional level metrics, and IME sites that list them usually charge for access. The above-linked gives it's top-10 pick-list using the QI approach, so provides a recent/free snapshot for anyone in need of ideas for the pick-list.

Curious re: how SG, Fidelity etc approached picking stocks I came upon:
http://www.londonstockexchange.com/pric ... 6-sgqi.pdf
Another description of the above SG fund:
https://www.etfstrategy.co.uk/lyxor-lau ... etf-84123/
How SG themselves put it:
https://sglistedproducts.co.uk/SGQE
I searched for the Fidelity product, but could only find one covering global shares, so OT for me.

[DiamondEcho]

[Edit to add: I can see the table in preview, but when I post it's not there - hmmm!? So I've posted it with broken formatting, which shows the share names, but is not that simple to interpret. The previously linked III articles has the table in clear form.]

Apols for the formatting, but I trust it can be interpreted.
*This is a measure used by Stockopedia
It's sorted top-down by FY%. I haven't looked at it in enough detail yet to divine the balance between FY%, F-Score, and Quality Rank, that would assist with homing in on 'The One/s' to pick.

Name Mkt Cap £m - Forecast Yield % - Piotroski F-Score (fin strength from 1-9) - Quality Rank* - Sector
Stagecoach 922.5 7.5 7 67 Industrials
Taylor Wimpey 6,622 7.3 8 97 Consumer Cyclicals
Centrica 9,765 7.1 7 59 Utilities
SSE 14,198 6.9 7 65 Utilities
Royal Mail 3,874 6.3 8 90 Industrials
Barratt Dev 6,879 6.1 7 86 Consumer Cyclicals
BP 97,213 6 7 62 Energy
Dixons Carphone 2,168 5.7 7 69 Consumer Cyclicals
Marks+ Spencer 5,700 5.4 7 82 Consumer Cyclicals
Rio Tinto 65,961 4.7 7 80 Basic Materials

[tjh290633]

Try this:

Name                   Mkt Cap £m   Forecast Yield %   Piotroski F-Score (financial strength from 1-9)   Quality Rank   Sector            
Stagecoach                  922.5                7.5                                                 7             67   Industrials       
Taylor Wimpey               6,622                7.3                                                 8             97   Consumer Cyclicals
Centrica                    9,765                7.1                                                 7             59   Utilities         
SSE                        14,198                6.9                                                 7             65   Utilities         
Royal Mail                  3,874                6.3                                                 8             90   Industrials       
Barratt Developments        6,879                6.1                                                 7             86   Consumer Cyclicals
BP                         97,213                  6                                                 7             62   Energy            
Dixons Carphone             2,168                5.7                                                 7             69   Consumer Cyclicals
Marks and Spencer           5,700                5.4                                                 7             82   Consumer Cyclicals
Rio Tinto                  65,961                4.7                                                 7             80   Basic Materials

It runs off the side of the screen, but it's all there.

TJH

[Breelander]

Try this...

or this...

* This is a measure used by Stockopedia

[Lootman]

I like the idea and I try and run a similar idea myself, where I favour shares with a lower but more sustainable dividend and strong rates of dividend growth. Rather than just picking shares with the highest yield. This has worked well for me, at least if you take capital returns into account, which I do but I know some do not.

That said, the ten names cited are dubious to me, in the sense that 7/8 of the 10 are in cyclical sectors. And the yields look scarily high to me. I'd prefer to see more defensive names and lower yields.

[DiamondEcho]

That said, the ten names cited are dubious to me, in the sense that 7/8 of the 10 are in cyclical sectors. And the yields look scarily high to me. I'd prefer to see more defensive names and lower yields.

I don't think it's a 'buy + hold forever' strategy, at least that's a characterisitic I picked up from the prev/linked articles. But then to qualify for 'B+HF-O' you'd have to be compromising on risk/return and cyclicality perhaps to a material extreme. This QI seems to benefit from periodic revisits/rebalances, which is what quite a number of HYPers seem to do anyway.

[Wizard]

Try this...

or this...

* This is a measure used by Stockopedia

I find some of the scores here very much at odds with some of the prevailing wisdom on this site. RMG stronger than BP and RIO, SGC stronger than SSE. It would be interesting to see the Altman Z scores for these selections as well.

Terry.

Disclosure: I hold RMG, RIO, SGC and SSE.

[monabri]

I had a free 2 week subscription to Stockopedia in Feb this year. I made a note of the quality scores/Piotroski-F values and share price in Feb
I have arranged the scores on the doors in order of "Quality".
If a method is being put forward, then it should apply in retrospect.



Some observations
- Interesting how the view on TW has changed (Piotroski score) in such a relatively short time - has the business of house building changed (I would have thought it should deteriorate with building material costs increases due to Brexit?). However, looking at BDEV - I'm guessing that House Builders are the current supermodels.

- Unilever - Share price up 132% (Heinz). Modest P-F score of 5 and Quality score of 72%. However, Carillion with similar scores....let's not go there!

- Petrofac - Quality score of 95% - stick your money in there... ..... (Share price less than 50% of what it was in Feb)

-VOD - Poor P-F and Quality score but share price (and divi) looking good.

- Standard Life (as was). We didn't see the major changes coming with the "merger" (cough) with ADM.

- Provident Finance - Yep, that was predicted (P-F score of 6 but a poor quality score of 39%). Clearly no one told Woody (and I ignored it too!).
The only one who called it right was Ian of Pickering fame - Our Northern Representative.

-For HYPers, we want a reliable, hopefully rising divi. Others who use Stockopedia might want their shares to be "multibaggers" - the traders.

Perhaps we need other measures?


In short - I would not rely too heavily on this method in isolation as it is not a panacea to investing soundness (IMHO )

monabri

[monabri]

Based on Terry's posting, I added Altmann-Z scores (and included British Telecom). Arranged by Alt-Z scores

(Altman Z-Score, a statistical bankruptcy indicator generated from a set of balance sheet ratios. If the meter is in the safe zone (*indicating a Z-Score greater than 3*) the financial health of the company is good, whereas a company is in serious trouble if the meter is in the distress zone (*indicating a Z-Score less than 1.8*).

FEBRUARY 2017 DATA (unless stated otherwise)



Maybe (Maybe) Altmann Z is more indicative of health than the other measures for non-financial companies (N/A for score). Then we have the likes of VOD with a negative score in Feb 17..

[DiamondEcho]

Perhaps we need other measures?

But no one seems willing to 'stick their necks out' and define contemporary HYP metrics.

[Bialystock]

I had a free 2 week subscription to Stockopedia in Feb this year. I made a note of the quality scores/Piotroski-F values and share price in Feb
I have arranged the scores on the doors in order of "Quality".
If a method is being put forward, then it should apply in retrospect.



Some observations
- Interesting how the view on TW has changed (Piotroski score) in such a relatively short time - has the business of house building changed (I would have thought it should deteriorate with building material costs increases due to Brexit?). However, looking at BDEV - I'm guessing that House Builders are the current supermodels.

- Unilever - Share price up 132% (Heinz). Modest P-F score of 5 and Quality score of 72%. However, Carillion with similar scores....let's not go there!

- Petrofac - Quality score of 95% - stick your money in there... ..... (Share price less than 50% of what it was in Feb)

-VOD - Poor P-F and Quality score but share price (and divi) looking good.

- Standard Life (as was). We didn't see the major changes coming with the "merger" (cough) with ADM.

- Provident Finance - Yep, that was predicted (P-F score of 6 but a poor quality score of 39%). Clearly no one told Woody (and I ignored it too!).
The only one who called it right was Ian of Pickering fame - Our Northern Representative.
J
-For HYPers, we want a reliable, hopefully rising divi. Others who use Stockopedia might want their shares to be "multibaggers" - the traders.

Perhaps we need other measures?


In short - I would not rely too heavily on this method in isolation as it is not a panacea to investing soundness (IMHO )

monabri

The Change % column is wrong, need to deduct 100 from each entry, e.g first entry should be 44% not 144%.

[Arborbridge]

This is very interesting approach, but the thread does contain some jargon which I'm struggling with. It's rather like quoting tickers without company names - of which I am definitely guilty! For example, one has to to know whether high scores or low scores are good (until monabri thankfully defines it near the end) or whether a high rank or low rank is good or bad, and what is 'B+HF-O'?

To just by the list, many traditional HYPers are living very dangerously indeed and it's disturbing to see such apparently solid companies on the list of near backrupts. What occurs to me, is: is there compelling evidence that any of these metrics would have worked for us in the past? How reliable is the warning of trouble given? or do such poor metric come and go during a HYPer's time horizon. I see monabri has tried to answer some of this in his snapshot, but that is, of course very limited, though valiant.

There are so many metrics and ideas I've come across in 40 years investing, that I'm not particularly enthusiastic about chasing about them. Mostly, they slip through your fingers just when you believe you have a firm grip: however, each one seems quite rational and useful.

However, give me something which would avoid a Carillion, etc etc and I'd certainly praise that to the hilt. But as monabri's comments see, to suggest, there are too many pitfalls to call the ideas reliable. Unpredictabe market conditions, merger events, management reactions to adversity all cloud the issue.
So, should all HYPers now sell off the ones which are apparently on the verge of bankruptcy? If the situation were that dire, wouldn't the market already be telling us? (Well for BT you could say it is!)

Forgive the early morning rambling, but it's all interesting "food for thought" as we say so often.
Arb.

[DiamondEcho]

... [1] and what is 'B+HF-O'?
...[2A] What occurs to me, is: is there compelling evidence that any of these metrics would have worked for us in the past? How reliable is the warning of trouble given? [2B] or do such poor metric come and go during a HYPer's time horizon.

[1] That was me, 'Buy+Hold Forever'.
[2A] The links [per previous^] to the various companies that operate QI funds suggest their back-testing has proven it works. You'd need to read them to see how they did their tests, their conclusions and caveats.
[2B] It's not Buy and Hold Forever, but neither does it encourage active trading. When I was reading the various articles on it the impression I got was it might be a strategy, and hence portfolio, that I might wish to re-crank with updated input data perhaps annually. That wouldn't mean I would expect to trade annually, just that I could have a refreshed view of how the various shares are positioned, and if needs be flip from something beginning to look stressed into something stronger.

[richfool]

Isn't the essence of the article referred to in the OP, to select higher quality stocks with resultant lower yields? (which I believe is what Nick Train does with his Finsbury G&I trust [FGT]).

That is closer to the strategy I follow with my portfolio, in that I look for higher quality, albeit lower yielding stocks, with good dividend growth prospects (and growth prospects), that I can hold for the long term. Stocks like: Unilever, Compass, Prudential and IT's like FGT.

[tjh290633]

So, should all HYPers now sell off the ones which are apparently on the verge of bankruptcy? If the situation were that dire, wouldn't the market already be telling us? (Well for BT you could say it is!)

Forgive the early morning rambling, but it's all interesting "food for thought" as we say so often.
Arb.

Sometimes the market does, but more often it is reflecting the sentiment of a few major traders, or it is down to some algorithm or other reacting to price movements.

We are back to Luni's "Danger Zones" and similar doom mongering predictions here. Does anyone seriously think that BT is on the verge of bankruptcy? If interest rates were raised to a sensible level, then most of the pension fund worries would disappear. Given that there are very few Defined Benefit schemes left, the actuaries must be worried about their jobs.

I'm just looking at the price movement of my holdings since the start of the year:

EPIC   Change since 1 Jan 17
BA.    -1.44%
NG.    -3.83%
RB.    -4.41%
TATE   -4.52%
BLND   -4.69%
MKS    -5.91%
UU.    -8.21%
WMH   -10.27%
KGF   -11.62%
SSE   -12.11%
GSK   -13.03%
TSCO  -13.17%
IMB   -13.34%
PSON  -14.72%
MARS  -19.63%
BT.A  -30.88%
CLLN  -80.41%

Those are the ones which have fallen. Ignoring CLLN, although maybe one shouldn't, which of those are on the verge of bankruptcy? IMB, for example, has been increasing its dividend by 10% per year. So was BT.A until the current year. MARS by over 4%, PSON has reduced theirs, TSCO has just resumed, GSK has been static, SSE at about the rate of inflation, KGF increasing at about 3%, WMH just raised their interim, UU. keeping pace with inflation, MKS are static, BLND rising at 3%, TATE has just raised its interim, RB. is running at over 10% increases, NG. keeping pace with inflation and BA. likewise.

My feeling is that there are a lot of Dismal Jimmies about.

Never mind the quality, feel the width, as they used to say.

TJH

[DiamondEcho]

Isn't the essence of the article referred to in the OP, to select higher quality stocks with resultant lower yields? (which I believe is what Nick Train does with his Finsbury G&I trust [FGT]).

From the original iii.co.uk article:
'Finally, Societe Generale, which was an architect of Quality Income strategies, looks for high (but not excessive) yields in firms with strong balance sheet health and low bankruptcy risk. It's a strategy that has worked impressively well since it was launched as an index in 2012.

[Gengulphus]

However, give me something which would avoid a Carillion, etc etc and I'd certainly praise that to the hilt. ...

That's easy: don't buy shares.

Gengulphus (expecting to be praised to the hilt! :-J)

[Arborbridge]

However, give me something which would avoid a Carillion, etc etc and I'd certainly praise that to the hilt. ...

That's easy: don't buy shares.

Gengulphus (expecting to be praised to the hilt! :-J)

LOL, well - yes, have a thanks

And also to DE and others who answered my points.

My feeling is still that such metrics might be worth considering, but I'm not sure how much it would help me in practice. Given that I'd probably need to subscribe to some website to find out, inertia will possible keep me where I am at present. If there was an easy routine way of checking these metrics, I might just bear them in mind and they could influence my choice of shares - not that (with a settled HYP) there is much choosing to do very often. Over and above that is my feeling that I have seen some many wonderful ideas come and go in forty years, and as soon as I try them they stop working, that I've grown rather cynical - both of the schemes and my ability to apply them. HYP for me was an answer that seemed to work, and I found it does, tolerably well.

And, by the way, if I invested all my in FGT or similar low yielders, I would not have been able to retire. Yes, I know capital withdrawal (one would argue) could fill the gap, but that's only by benefit of hindsight. When I started, I could not know that FGT would prove to be one of my best growth investments amongst the ITs I chose, and in the meantime I couldn't have paid the bills.

Arb.

[BarrenWuffett]

And, by the way, if I invested all my in FGT or similar low yielders, I would not have been able to retire. Yes, I know capital withdrawal (one would argue) could fill the gap, but that's only by benefit of hindsight. When I started, I could not know that FGT would prove to be one of my best growth investments amongst the ITs I chose, and in the meantime I couldn't have paid the bills.

Arb.

I picked up FGT in several tranches in 2009/10 for an average of ~220p. The shares were paying a dividend of ~8p per share so a yield of 3.6%. The dividend has steadily increased to currently over 14p and the share price to 760p which means the current yield is under 2%. However, the point I want to make is that the actual amount received from my dividends covers my bills just as easily as a basket of self-selected shares I may have chosen for my HYP but in addition, I have far more capital appreciation which I can draw down as and when needed.

[Lootman]

And, by the way, if I invested all my in FGT or similar low yielders, I would not have been able to retire. Yes, I know capital withdrawal (one would argue) could fill the gap, but that's only by benefit of hindsight. When I started, I could not know that FGT would prove to be one of my best growth investments amongst the ITs I chose, and in the meantime I couldn't have paid the bills.

I picked up FGT in several tranches in 2009/10 for an average of ~220p. The shares were paying a dividend of ~8p per share so a yield of 3.6%. The dividend has steadily increased to currently over 14p and the share price to 760p which means the current yield is under 2%. However, the point I want to make is that the actual amount received from my dividends covers my bills just as easily as a basket of self-selected shares I may have chosen for my HYP but in addition, I have far more capital appreciation which I can draw down as and when needed.

Indeed. If a more modest yield increases the universe and quality of shares that a fund can invest in, including those with better covered dividends and greater rates of earnings and dividend growth, then a higher total return can reasonably be expected along with a lower risk profile - a free lunch.

It doesn't work for those have a greater need for immediate income, such as Arb describes, and who wish to retire on a smaller capital sum. But perhaps as one might expect, if you are in a position to forgo that extra jam today, then there should be more jam in the long run.

You can even see that within the Finsbury ITs. LTI has similar management, a still lower yield, and my position in it has quadrupled since 2008. Whereas any number of higher yielding income ITs have shown lower total returns.

Therein lies the true cost of a HY strategy. Rather like selling call options against long share positions, you boost your running income by effectively borrowing from future growth and dividends. Where the crossover point happens depends on various factors, so how long you plan on living is relevant too.