Basket of Seven: 2018 review

[Luniversal]

The Basket of Seven (B7) was devised in 2010 for the ignorant and apathetic investor who needs to pay bills as they fall due. The portfolio tries for a flow of income, from equity-based investment trusts, whose purchasing power should grow sedately over time. It should as far as feasible be 'fire and forget'.

Results of the seven chosen ITs are aggregated to a common Mar. year end, since this best fits their various accounting dates. Trends since the B7's backtested launch on Nov. 10, 2000 (also when 'HYP 1' began) are reviewed.

The B7 houses an increasingly eclectic mix of big and small, British and overseas stocks in all lines of business. They are to be bought in equal amounts: Bankers (BNKR), F&C Capital and Income (FCI), JPMorgan Claverhouse (JCH), Lowland Investment (LWI), Mercantile (MRC), Murray International (MYI) and Perpetual Income & Growth (PLI). The new crop of results is for financial years ended between Aug. 2017 and Mar. 2018.

INCOME
The B7 lifted average dividends per share by 9.4% (2017: +6.0%), or by 5.5% (3.6%) after retail price inflation (RPI). This was above the average rise of 4.3% pa during 17 complete years.

The portfolio's average yield at Mar. 29, based on historic or officially forecast payouts, was 3.1% (2017: 3.2%). Such is in line with the average of 3.3% throughout its life, but a half-point below the FT All-Share Index yield; these trusts have become more wanted for income.

Cover for payouts in 2017-18 averaged 1.08 times (previous year 1.09 times), above the B7's whole-life average of 1.04 times. The basket has not distributed uncovered income since the wake of the global financial crisis in 2011-12. Average revenue reserve has been steady at 12-13 months of current payout since the crisis, albeit below the 15-17 months of earlier years.

On the whole these trusts' divi rates-- though presently rising at almost 9% pa-- look prepared for a slowdown in earnings. The more so now that competitive pressure from open-ended and exchange traded funds has squashed the basket's Ongoing Charges Ratio to 0.56% (0.59%) of year-end net asset value (NAV). That is against a 2000-18 average of 0.82%.

Dividends per share since the putative launch tripled, almost doubling in real terms. Income's purchasing power has increased every year. Trusts imposed real cuts, year on year, on 14 of a possible 70 occasions in the past decade, averaging 2.3% nominal.

CAPITAL
Market values have responded over time to the income stream's steadiness. But they were far from proof against general fluctuations: both in NAVs and in sentiment about the trusts themselves, expressed in movements of their share prices relative to NAVs.

For 2017-18 the composite NAV rose by 14.6% (2016-17: 11.6%) nominal, by 10.7% (9.2%) real. Share prices were 14.7% (9.8%) to the good in money terms or 10.8% (7.4%) after inflation. Real changes between year ends since the putative launch averaged a 5.5% gain for assets per share, 5.6% for the price; so the last two years have been rewarding.

The B7 outperformed the All-Share Index by an average 4.1% pa on share price, and in 12 of 16 years. Latest outperformance of 7.9% followed a lag of 3.2%, the worst to date, in 2016-17.

Five of seven members beat the Index in latest accounting years, after five failed the year before. The average is for four of seven to outdo the broad equity market.

The average discount of 7.0% at financial year ends is close to the lifetime 6.5%, barely changed since 2016-17. It has eased a little since the tightest 2.2% discount in 2013-14. That was before jitters about the sustainability of income from 'bond proxy' blue chips set in.

CONSTITUENTS
Briefly, individual trusts' contributions over the last ten years:

First, four income metrics: compound annual dividend growth after inflation (2), number of real cuts year on year, average cover and months in revenue reserve:

BNKR: 6.2%, 1, 1.05x, 21
FCI: 3.7%, 3, 1.09x, 14
JCH: 5.5%, 2, 1.07x, 19
LWI: 7.6%, 2, 1.03x, 12
MRC: 4.5%, 4, 1.01x, 17
MYI: 9.1%, 1, 1.05x, 14
PLI: 6.0%, 1, 1.10x, 11
-----------------------------
B7: 6.1%, 0, 1.04x, 15

Capital metrics: share price change in decade to latest financial year end, number of years behind the index, average yield and discount/premium:

BNKR: +94.1%, 3, 2.9%, 8.3%
FCI: +31.9%, 6, 3.9%, -1.7%
JCH: +40.1%, 6, 3.9%, 7.9%
LWI: +37.9%, 4, 3.4%, 4.6%
MRC: +110.8%, 4, 3.3%, 13.4%
MYI: +91.5%, 3, 4.1%, -2.1%
PLI: +54.6%, 3, 3.7%, 5.1%
-----------------------------------
B7: +70.7%, 3, 3.5%, 6.3%

FCI is still the runt of the litter for dividend and capital growth, yet sold on a premium. Mercantile, with its midcaps focus, has been best for capital growth but much the most volatile. Bankers and Lowland are low-yielding but 'growthy' for income (3), as is Murray International with its foreign flavour. But MYI, and the more orthodox Perpetual more so, grew more erratic and unloved in the past few years-- whereas JPMorgan Claverhouse rallied.

Such twists and turns concern me little. The B7 is an eternity-buy-and-hold job illustrating a method, not setting one permutation in stone. When picked, there was less choice of ITs with track records; today I might chuck a foreign specialist in the mix, whereas FCI was a poor, misidentified pick. Well, most portfolios contain at least one gaffe; it makes this backward-jobbed effort more realistic. No member has blown up. Overall, I am content.

PERFORMANCE 2000-18
Let us see how the B7 would have performed in practice. An investor places the same £75,000 lump sum as Pyad's HYP1, with the same equal weighting and 1% acquisition costs and on the selfsame date: Nov. 10, 2000.

The basket would have collared £6,121 of income last year, a 4.8% increase. (HYP1 got £7,327 in the year to Nov. 2017.) The B7's yield on last Apr. 1's opening capital was 3.3%, close to the historic average of 3.5%. This is competitive with cash or fixed interest, if the collection is viewed as a savings account with some inflation protection for interest and principal. Receipts are free of income tax to the basic-rate payer, or to all within an ISA or the newly reduced £2,000 dividend allowance. After 17.5 years the basket's £75,000 investment would have dispensed £66,644 of regular dividends (1).

Market value grew last year by 3.7% to £189,779, compounding at 5.5% pa or ~2.5% real since 2000; though by Mar. 2009 the B7 was worth less than at purchase. The basket has lost value during five of 18 periods, the All-Share Index during eight. Average annual outperformance of the index has been 4.4 percentage points, 14 times out of 18.

Capital value is aethereal to a never-seller, but signals that the income stream is not being bought at the principal's expense. However faith in the stream may be more about security than expansion of its purchasing power, in the nearer term.

DERISKING
Added safety comes from 'derisking' the income. One mimics an index-linked bond and an income reserve backs it up.

The £75,000 basket here illustrated could have been derisked to pay a 2.75% yield in its first year as spendable income. The initial withdrawal rate was meagre due to 'dividend drag', but the B7's buoyancy would have enabled three revisions: in 2007 (+28%), 2014 (+25%) and 2018 (+20%).

The quasi-bond would henceforth pay 5.3% plus uplifts for inflation. It sits on a reserve worth 14 months of payout at that level. HYP1's income has been bigger but more erratic, so that it could be derisked to a 5.0%+RPI withdrawal rate with the same buffering.

Derisking would have required 12% of the B7's receipts to have been held back, over and above the small amount trusts retained. It is a hypercautious stratagem for those who cannot let their income's buying power waver in the short term.

All B7 trusts distribute quarterly. A cost-effective lump sum would be £10,000 or more gross. With stamp duty of 0.5% and commission of, say, £12.50 a share, ten grand gets a starting income of £322. That is below the market yield, but one pays for stability and 'growthiness'.

No corporate actions would have required a response since 2000. Doris sleeps on.

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(1) Over the years three members declared seven special dividends included in the table, total £675: JCH £73, PLI (five) £533, MRC £69.

(2) Dividends' compound annual growth rate (CAGR) is measured from Apr. 2001, to eliminate arbitrarily different payment times and numbers during the first five months.

(3) Furthermore, Lowland said on Mon. that it will fortify its payout by charging half its expenses to capital, boosting earnings by about a tenth.

[kiloran]

Welcome back, Luni!

--kiloran

[Dod101]

I rub my eyes. That is Luniversal of old is it not? Welcome back indeed with your inimitable style.

Dod

[tjh290633]

Good to see you back, Luni.

TJH

[TahiPanasDua]

Wow! Luni's back!!!

You have been greatly missed.

TP2.

[bonrepos]

Thank you Luni.

Its nice to have the benefit of your endeavors again.

[Raptor]

Hope this is the first of many.

Raptor

[TUK020]

Welcome back. Nice contribution too.
tuk020

[StOmer]

This just doesn't read as written by Luni, perhaps it is just a 'style' thing after so long away. I can't imagine an impostor so welcome back Luni.

[Sobraon]

Thanks Luni, glad to see you posting here. A very timely post for me as I start to plan for de-accumulation income.

[staffordian]

This just doesn't read as written by Luni, perhaps it is just a 'style' thing after so long away. I can't imagine an impostor so welcome back Luni.

I recall a mention by Luni in the old place that he had registered here with his username to prevent imposters using it, but not with the intention of continuing his much appreciated contributions.

I hoped then that it might mean the occasion update, and I'm really pleased to see it has happened.

Thank you Luni.

[StOmer]

This just doesn't read as written by Luni, perhaps it is just a 'style' thing after so long away. I can't imagine an impostor so welcome back Luni.

I recall a mention by Luni in the old place that he had registered here with his username to prevent imposters using it, but not with the intention of continuing his much appreciated contributions.

I hoped then that it might mean the occasion update, and I'm really pleased to see it has happened.

Thank you Luni.

I too remember that message, hence the benefit of the doubt

[Geebert]

Thanks for the B7 update, I've missed these threads.

[Julian]

LUniversal returns!!! This is the news of the week - a LOT more exciting than the world cup.

Welcome back LUniversal.

- Julian

[Itsallaguess]

This just doesn't read as written by Luni..

<AHEM...>

Your Honour, and ladies and gentlemen of the jury....I present to the court -

Exhibit A - "Capital value is aethereal to a never-seller, but signals that the income stream is not being bought at the principal's expense."

Exhibit B - "It is a hypercautious stratagem for those who cannot let their income's buying power waver in the short term. "

Pure Luni, and it's great to both see him back reviewing the Basket portfolios, and of course to also see that the Basket of Seven is continuing to perform so well.

Given the long-term comparisons with HYP1, I'd personally like to also see how the Basket of Seven capital values migrate over time, if indeed they do, just to see if they stick to their original underlying capital weightings in a way that HYP1 so clearly has not over it's lifetime.

It's the long-term income-and-capital lumpiness of HYP1 that led me to walk away from a completely 'no-tinker' HYP-like strategy, but it would be great to see if these Baskets behave better in this area, and perhaps show that a non-tinker approach over many years with this strategy might again remove the need for any potential re-balancing.

I'll cancel the DNA test - I'm really not sure we're going to need it....

Cheers,

Itsallaguess

[BrummieDave]

I was without internet access yesterday and came back today to this very welcome surprise!

Having joined TMF a few months prior to its demise, I read everything I could including Luni's posts and associated comments from others, and plumped for B7a (plus CTY as I have an aversion to odd numbers) and don't regret it. Like the OP above I have concluded it perhaps lacks the degree of global exposure that would be designed into the basket now, and I've since added some other ITs to address this (HFEL, STS, a little EAT).

I'm happy with my basket and the flow of income it's delivering whilst modestly growing the capital, and whilst I'd like to think I took a DYOR approach to my decisions, I certainly owe a great deal to Luni and others for their comments, analysis, and patience in explaining many aspects of the principles behind the subject.

Great to see you back, from one happy Doris.

[Breelander]

This just doesn't read as written by Luni, perhaps it is just a 'style' thing after so long away. I can't imagine an impostor so welcome back Luni.

I recall a mention by Luni in the old place that he had registered here with his username to prevent imposters using it, but not with the intention of continuing his much appreciated contributions.

The TMF post you recall is archived in the WayBack Machine.

I registered at Lemonfool only to save the name from mischief...

https://web.archive.org/web/20161123080 ... 60495.aspx

[stevensfo]

Friday was really terrible and I needed cheering up.

Thanks, Luni! I'm skipping off to bed like Dick Van Dyke auditioning for his role in Mary Poppins after downing ten large G&Ts.


Steve

[Sixo]

Really really great to see you again, I was always hopeful that one day you would pop up and give us quality analysis in a style that made sense to so many of us less sophisticated investors, I for one need you around here and look forward to logging on and seeing more posts from Luniversal

Chisels

[runnygum]

Good stuff, I bought into the B7 in 2015 after following along for a couple of years and having the luck to come into a lump of capital.
No dollar cost averaging, just dump straight in with some limit orders.

Ive been happy with the progress and its held its own against a basket of dividend ETF's.

It represents 1/3 of my FIRE income. Coming up on the 3 year anniversary and the overall basket is up 20.5% (varying buy prices and weights)

Thanks Luni!