Better alternatives to HYP

[OZYU]

Rob's fund: It is a tracker, tracking his own version of a weird index which, he as been told numerous times on TMF, would have maybe worked based on a balanced market, but his chosen one, the ftse350 is hopelessly badly balanced, being dominated by the ftse itself way out of balance.. Result the weights are just a joke, with an endless tail of meaninglessly small holdings, and a very high concentration at the top. An accident waiting to happen imho, just being given a leg up of late by the brext/gbp effect..Everything I do not believe in as an investor since early 1970s.

The picture is even worse if you look at his performance since inception ten years ago. Basically since the SP on the income unit is still below issue, and RPI over the period up by around 31%, a disaster for capital, now if the income was fantastic, no worry, but not a bit of it, yield mundane at most, income growth pathetic. Return net of RPI about 1.5% p.a. Good sensible investors I am familiar with have returned in the range if 5-10% above RPI over the period.

Now if I was in his position, the last thing I would do is to constantly lecture other investors on just about everything, and criticise his fellow professionals as well.

Ozyu

PS My wife's HY ISA, mostly ITs and a few other collectives, hence the nearest comparator we run, has trounced him by a massive amount over the period. But his criticism of ITs too, not just HYP, knows no bounds, despite displaying at times an amazing lack of knowledge of even how they work(loads of examples on this on TMF)!

[OZYU]

@OZYU - To be crystal clear, am I correct that the fund I posted about is run by the poster named ONNA? Thanks.

I believe so.

Ozyu

[tjh290633]

So on the face of it, the whole HYP concept is being judged on the current state of HYP1.

I don't think that's a particular fair position to take, as HYP1 is an outlier portfolio - an experiment that no-one would utilise in the real world, I imagine......

But that leads me back to my fundamental question, if it is not the rule set behind HYP1 then what is the "HYP concept"? Is HYP in 2017 nothing more than a broadbrush statement saying 'buy some equities that yield on average more than a chosen benchmark, buy at least 15 of them in roughly equal proportions and spread them between a reasonanle number of sectors'. It increasingly seems to me that other than these broad statements there is no such thing as HYP, but rather almost as many versions of HYP as there are people saying they follow it.

This is not meant as a criticism of any individual and how they invest, but it does mean that a statement such as the title of this thread is almost pointless, because there is no definitive thing as HYP. Nor is it in anyway an attempt to curtail any debate about other options.

Terry.

As I see it, HYP1 was the initial portfolio, defined to illustrate the possibility of obtaining the effect of an annuity without losing the capital to the annuity provider.

It lost its way when two of the original constituents, ABP and Gallagher, were taken over and 100% of the proceeds were theoretically invested in a single replacement share. This led to a very unbalanced portfolio.

Subsequently others adapted and improved the original concept, by introducing rules of their own, regarding correcting imbalance and discarding shares which no longer met the fundamental HYP criteria. These criteria included low yield and failing to pay dividends. Also avoiding non-UK shares arising from spin-offs and take-overs was a further reason.

Further improvement included a procedure to determine the best way to reinvest cash arisings, such as accumulated dividends and cash from corporate actions.

Nothing is perfect, and no two HYPs are identical - they cannot be. Anybody is free to develop their own portfolio to suit their own preferences and the way in which the market changes.

TJH

[vrdiver]

HYP was set up as an alternative to annuities but there are now much better off-the shelf alternatives. HYP is past its sell-by date, it is obsolete because it has been eclipsed by better alternatives created by the evidence accumulated and demonstrated over the last 100 years.

From viewtopic.php?f=15&t=8516&start=49

Repeated, with emphasis, as the original question remains unanswered. Can anyone provide a link to such an alternative?

VRD

[toofast2live]

Well you could just buy CTY, and MIT for international exposure. And although dealing costs are minimal in a tinker free HYP they are nonexistent after the initial purchase for ITs. You would have got a much smoother increasing income stream.

[moorfield]

Well you could just buy CTY, and MIT for international exposure. And although dealing costs are minimal in a tinker free HYP they are nonexistent after the initial purchase for ITs. You would have got a much smoother increasing income stream.

Smoother yes, but higher no.

CTY.L closed at 243p on 17/11/2000 (source: google CTY.L).

Assuming a £9.95 dealing charge and 0.5% stamp duty Doris would have acquired 30706 shares with her initial £75000, paying an income of £5127 in 2017 against HYP1's £7327, and worth £130039 last week against HYP1's £172485.

M

[moorfield]

Repeated, with emphasis, as the original question remains unanswered. Can anyone provide a link to such an alternative?

Here's an even-higher-yield-fixed-income alternative.

viewtopic.php?f=15&t=432&start=40#p4565

Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did). Her £75000 would now be worth only £85059 but the shares would have returned an annual dividend of £4990, a total of £79840 against HYP1's £68758 over the same 16 year period. "Widows and Orphans" shares I believe The Wise call these, and perhaps with good reason.

[daveh]

My HYP which is basically non tinkered consists of 32 shares and 3 high yield ETFs (covering Europe, Asia/pacific and Emerging markets) with the shares making up 86% of the portfolio. The performance from starting in 2000 has been 8.56%pa (which I consider acceptable) and it is producing a decent and growing income.

There was also a comment that a HYP is not going to be suitable for someone without a large amount of capital - well I started my HYP with no capital, I invested slowly with monthly savings (initially £250per month) and the occasional larger sum from savings when available).

My HYP has so far been non tinker, and SSE did at one point make up nearly 20% of the income (due to it being the first purchase when I increased my holding size, it then going on to perform well on both price and dividend increases and for a while I was automatically reinvesting dividends back into the same share). If I'd been living of the HYP I would have tinkered some away as the risk to income would have been too high for me. However, as I am still in the build phase, that has not been necessary as new money and re-invested dividends mean that it is now below 5% of the capital value and last years dividends were under 7% of the total dividends.

I'm happy with how my HYP has performed and it has worked for me. I will make my usual report on how it is performing at the end of the year.

[hiriskpaul]

Better alternatives to HYP?

I have tried to make it a rule not to comment on anything to do with "HYP", but just this once as someone has asked...

Ignoring all the intricacies of stock selection, etc., the original HYP can be summarised as "Buy a diversified portfolio of 15 large cap equities, listed on the LSE, with above average yields, then hope for the best". Probably the dumbest and most reckless retirement investment strategy I have ever come across. The long term outcome will be highly variable and depend not only on UK share market returns, but upon how many winners are chosen at the outset (or along the way if forced to reinvest due to corporate actions) and the extent to which any winners win. Over the long term the market has a lot more losers than winners, so the strategy will produce widely varying outcomes. Some portfolios will do very badly, some ok and yes, some at the tip of the iceberg will do very well. On boards like TMF and this one you will mostly hear from those on the tip of the iceberg. Irrespective of outcomes, most people who invest this way are likely to experience an unpleasant roller coaster ride and hold a portfolio with increasing risk due to over concentration in a handful of shares.

Now I know that most investors on here do not invest in such a daft way, instead a HYP to most is I believe a managed portfolio of UK higher yielding shares. That still has no interest to me. I invest for total return and take an income from it. I am not going to restrict myself to investing in a limited set of investments - UK listed large cap equities that just happen to have above average yields. In fact, if I wanted to run a portfolio of UK listed shares, which I do not because of the effort involved to do so properly, I would target small caps as these are often simpler to understand and offer much greater potential rewards.

As to what is better, there are many approaches, but no silver bullet. Going for a diversified portfolio of ITs that target an above average and steadily rising income stream is not a bad way, but not without its faults. It will be subject to fund manager risk and the higher costs associated with active fund management. There is also the "Investor Risk", of picking poorly performing funds and trading in and out of them at the wrong times. A passive approach, just taking the market returns, eliminates the fund manager risk, reduces costs and should reduce Investor Risk as there is less reason to trade. However, the drawback with the passive approach is that the natural yield is, at present, likely to be below the amount that many would wish to draw. That means drawing down capital. There are many ways of managing that, but many baulk at the very idea of taking an income from capital withdrawal. For those that can hack selling and don't want to spend too much time managing their investments, I would recommend a passive approach as it reduces the likelihood of poor outcomes (at the expense of exceptional outcomes).

[NeilW]

Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did).

And if Aviva had done an Equitable Life, where would Doris be now?

There are plenty of eggs in one basket winners anybody could have picked with a crystal ball and 20/20 hindsight. The problem is that suffers from survivor bias.

[StepOne]

I would guess the thing about the Munro fund is that it's designed to work across bull and bear markets. The last 4 years have been a bull market, so I would not be surprised if it under-performed a bit. Will be interesting to see how it looks in 5 years.

StepOne

[NeilW]

Going for a diversified portfolio of ITs that target an above average and steadily rising income stream is not a bad way, but not without its faults.

The primary one being that you are once again buying a bunch of shares and hoping for the best - as though Investment trusts are somehow a better judge of business than massive FTSE100 companies that apparently the ITs are invested in and nominally control via their votes.

There are only so many businesses to be in, and ultimately pension income is the share of output of the rest of the economy those doing the producing agree to allow pensioners to have.

Quite why people think that holding a token that represents an arbitrary 100 large shares on the UK index that are traded in and out by capitalisation weight is somehow superior to directly holding 15 to 30 of the same set of shares on an equal weight without churning them is something I find quite bizarre.

HYP is merely a passive investment fund that tracks a different FTSE30 style index.

If there is anything to be said about equity investment at all it is that management of larger companies isn't quite as good as 'free market' theories suggest, and those firms holding investments aren't quite as good at getting their companies to perform as 'free market' theories suggest.

[moorfield]

Doris could have purchased AV.A (Aviva 8.75%) preference shares at 131.50p in February 2001 (on the same day as I did).

And if Aviva had done an Equitable Life, where would Doris be now?

There are plenty of eggs in one basket winners anybody could have picked with a crystal ball and 20/20 hindsight. The problem is that suffers from survivor bias.

My original post was not about eggs in baskets (I selected one out of laziness, but the example could have been extended to a basket of preference shares), but intended to prompt another question: How long does it take for a high and rising dividend income to overtake a higher and fixed dividend income?
viewtopic.php?f=31&t=556&p=5208&hilit=preference#p5208
16-20 years is a long time retired on the average. If "capital doesn't matter", but can be inherited (unlike annuities), would Doris have been just as happy with a higher yield fixed income?

[hiriskpaul]

Going for a diversified portfolio of ITs that target an above average and steadily rising income stream is not a bad way, but not without its faults.

The primary one being that you are once again buying a bunch of shares and hoping for the best - as though Investment trusts are somehow a better judge of business than massive FTSE100 companies that apparently the ITs are invested in and nominally control via their votes.

There are only so many businesses to be in, and ultimately pension income is the share of output of the rest of the economy those doing the producing agree to allow pensioners to have.

Quite why people think that holding a token that represents an arbitrary 100 large shares on the UK index that are traded in and out by capitalisation weight is somehow superior to directly holding 15 to 30 of the same set of shares on an equal weight without churning them is something I find quite bizarre.

HYP is merely a passive investment fund that tracks a different FTSE30 style index.

No, ITs do not buy a bunch of shares and hope for the best. Or if any do, they are ripping off their investors.

When I said "diversified", I did not mean restricted to the FTSE 100! Go global and include assets other than ordinary shares. I would absolutely not advocate investing everything into a FTSE 100 ETF either. FTSE World ETF, possibly, but it would depend on the investor's circumstances.

If there is anything to be said about equity investment at all it is that management of larger companies isn't quite as good as 'free market' theories suggest, and those firms holding investments aren't quite as good at getting their companies to perform as 'free market' theories suggest.

So?

[Charlottesquare]

Can't speak for the other HYPers, but capital growth absolutely does matter, because without it dividend growth is unlikely to happen over any sensible time-frame!
.

Is that not a chicken and egg issue, in the long term, to infinity, surely capital growth arises from dividend (earnings) growth rather than the other way round.

[hiriskpaul]

Can't speak for the other HYPers, but capital growth absolutely does matter, because without it dividend growth is unlikely to happen over any sensible time-frame!
.

Is that not a chicken and egg issue, in the long term, to infinity, surely capital growth arises from dividend (earnings) growth rather than the other way round.

Earnings growth yes, not necessarily dividend growth. Many companies have experienced considerable earnings and share price growth before paying any dividends.

Edit - actually there are some who manage to grow very large with no earnings!

[Itsallaguess]

A passive approach, just taking the market returns, eliminates the fund manager risk, reduces costs and should reduce Investor Risk as there is less reason to trade.

For those that can hack selling and don't want to spend too much time managing their investments, I would recommend a passive approach as it reduces the likelihood of poor outcomes (at the expense of exceptional outcomes).

How can there be 'less reason to trade' if we've now introduced a very necessary 'reason to trade', in that we won't get any income if we don't?

Also, if you 'can't hack selling', isn't a passive strategy that requires it to generate your income going to cause some issues?

I should add that I think your initial view of the 'pure' HYP approach is spot-on, and think that a fire-and-forget strategy is something to be avoided. HYP1 is testament to that, in terms of the current and ongoing concentration of income and capital in a really small number of equities.

That said, I think there's some fairly simple steps that can be taken to help minimise the issues with a HYP1 approach, and doing so can mean that it can be a meaningful approach to income investment for people who really would prefer not to take income from their portfolio capital by way of selling chunks of it to do so.

Cheers,

Itsallaguess

[Charlottesquare]

Is that not a chicken and egg issue, in the long term, to infinity, surely capital growth arises from dividend (earnings) growth rather than the other way round.

Earnings growth yes, not necessarily dividend growth. Many companies have experienced considerable earnings and share price growth before paying any dividends.

Edit - actually there are some who manage to grow very large with no earnings!

I am a firm believer in the Gordon Model that the value of a share is the discounted sum of its dividends to infinity, albeit modified for say Berkshire Hathaway and others where a notional dividend needs to be inserted.

A company with no earnings can only bestow value on its shareholders by being sold though can bestow plenty of value on its directors.

I do appreciate short term varies this concept, hence why I included "to infinity"

[hiriskpaul]

A passive approach, just taking the market returns, eliminates the fund manager risk, reduces costs and should reduce Investor Risk as there is less reason to trade.

For those that can hack selling and don't want to spend too much time managing their investments, I would recommend a passive approach as it reduces the likelihood of poor outcomes (at the expense of exceptional outcomes).

How can there be 'less reason to trade' if we've now introduced a very necessary 'reason to trade', in that we won't get any income if we don't?

Also, if you 'can't hack selling', isn't a passive strategy that requires it to generate your income going to cause some issues?

Ok, I often think "passive" is oxymoronic as well. What I meant was invest in passive collectives, such as a global tracker, Vanguard Life Strategy, or collection of passive trackers. Then rebalance/drawdown according to a mechanical strategy. An approach designed to deliver market returns, with limited scope of the investor shooting himself/herself in the foot. There will of course be trading, but preferably not trading based on anyone's judgement.

I should add that I think your initial view of the 'pure' HYP approach is spot-on, and think that a fire-and-forget strategy is something to be avoided. HYP1 is testament to that, in terms of the current and ongoing concentration of income and capital in a really small number of equities.

That said, I think there's some fairly simple steps that can be taken to help minimise the issues with a HYP1 approach, and doing so can mean that it can be a meaningful approach to income investment for people who really would prefer not to take income from their portfolio capital by way of selling chunks of it to do so.

Perhaps, but it is still going to be time consuming and based on a portfolio that lacks diversification. Stocks unnecessarily restricted to picks from say 4% by value of the world market? No small caps, private equity or growth stocks. No bonds, preference shares or convertibles. I suspect that many of those who go down this route are likely to be taking on far more risk than they need to in order to achieve a satisfactory outcome as well - even with the addition of some sensible portfolio management. And if someone really dislikes having to sell, even if mechanically, then I still think the IT route would be better for most people, despite its shortcomings.

Of course, neither the HYP (managed or not) nor the IT approach can guarantee that the investor will not at some point need to draw income from capital. That is just the desired outcome.

[hiriskpaul]

Is that not a chicken and egg issue, in the long term, to infinity, surely capital growth arises from dividend (earnings) growth rather than the other way round.

Earnings growth yes, not necessarily dividend growth. Many companies have experienced considerable earnings and share price growth before paying any dividends.

Edit - actually there are some who manage to grow very large with no earnings!

I am a firm believer in the Gordon Model that the value of a share is the discounted sum of its dividends to infinity, albeit modified for say Berkshire Hathaway and others where a notional dividend needs to be inserted.

A company with no earnings can only bestow value on its shareholders by being sold though can bestow plenty of value on its directors.

I do appreciate short term varies this concept, hence why I included "to infinity"

Sure, but as you say, the Gordon Model can still be used to value companies that do not pay dividends. Also the Gordon Model does not incorporate anything to evaluate desirable characteristics such as "Moats", or other factors that incorporate risk, but that is going way off topic!