Basket of Eight: 2020 review
Posted: September 23rd, 2020, 9:29 pm
The Basket of Eight (B8) 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 UK equity-based investment trusts. Its purchasing power should at least be constant over time. It should as far as feasible be 'fire and forget'.
B8 members were to be bought in equal amounts: City of London (CTY), Dunedin Income & Growth (DIG), Edinburgh (EDIN), Invesco Income Growth (IVI), Merchants Trust (MRCH), Murray Income (MUT), Schroder Income Growth (SCF) and Temple Bar (TMPL). Latest results are for financial years closing between Jul. 2019 and Jun. 2020.
Results are aggregated to a common Jun. year end, since this best fits accounting dates. Trends since the B8's backtested launch on Nov. 10, 2000 (also when pyad's 'HYP 1' began) are reviewed.[1]
INCOME
The B8 lifted regular dividends per share by 4.0% in 2019-20 (2019: +3.6%), or by 2.9% (0.7%) after retail price inflation (RPI). This was twice the average real rise of 1.4% pa during the basket's lifetime, partly thanks to falling inflation during the shamdemic. It may be the best for some time.
The portfolio's yield at Jun. 30-- based on historic or officially forecast payouts and £75,000 gross invested-- was 5.5% (2019: 4.4%). This is substantially cheaper than the average yield of 3.9% throughout its life; the B8 yielded 0.8 of a percentage point more than the FT All-Share Index (FTAS) at the year end, as at end-Jun. 2019. The average difference over its whole life is about the same. For all the talk of value/high yield shares being left behind in the past few years, their 'bond proxy' reputation for trustworthy income has gradually made them dearer.
After the latest market setback, the B8's prospective yield is nudging 6%, reflecting doubts about the robustness of payouts. One member has just announced a dividend cut of a quarter, the worst such setback in the B8's existence-- though this is more about its peculiar woes.
The basket distributed income not quite covered by current earnings for the first time since the wake of the global financial crisis in 2011-12: average cover was 0.98 times. Five out of eight constituents drew on revenue reserves. Preparations for a squeeze thus stood the B8 in good stead during the dividend massacre since Mar. Trumpeting 'dividend hero' merits, trusts had quietly shifted to bolstering asset backing while curbing distributions' growth rates.
We can only hope that reserves will last until covered payouts become feasible again, which means in no more than two or three years. Otherwise trusts will either have to 'rebase' or begin to supplement earnings with handouts of realised capital gains-- an expedient hardly any have wanted to resort to since it was legalised in 2014.
Throughout its lifespan the B8 has covered dividends 1.03 times. The average revenue reserve rose from 13 to 14 months of current payout in the composite year: still below its 16 months just before the global financial crisis, and before the latest post-virus payouts-- all were at least maintained before today's TMPL shocker-- began to gnaw into reserves. For example, Murray Income had a year's worth at Jun. 30, but the proposed final divi knocks the kitty down to eight months.
Boards have pressed managers to renegotiate fees downward and scrap incentive payments. The basket's Ongoing Charges Ratio was a shade higher at 0.58% of barely changed year-end net asset values (NAV), but this is below the whole-life 0.63%. Revenue expenses, which come off distributable income, reduced from 5.7% of the payout to 5.4%, the lightest yet. There has been some bounce from refinancing of costly structural debt contracted in the early 1980s. A few more will follow, e.g at CTY and MRCH.
Dividends per share since the putative launch are up 27% in real terms, compounding at 4.2% pa against inflation of 3% [2]. Progress has been hiccuppy. Trusts imposed real cuts, year on year, on 31 of a possible 70 occasions in the past decade, averaging 1.8% real. No member avoided such interruptions, hence a spread of as many as eight seems advisable.
Income's purchasing power peaked in 2009-10 (29% higher than in the first full year) and so has not been quite fully restored from that point. Dividends' real value shrank year on year four times out of nine since the crisis' worst fallout-- when it was down by one-eighth-- though never by more than 2.3% between years, and not since 2016-17.
History as well as the likelihood of more squalls recommends extra reserving in the owner's hands, if income is not an optional and variable extra: see 'Derisking' below. I suggested back in 2010 that a basket might sit on top of State and/or private pension income for less than vital spending. If so, to take the lean with the fat may be tolerable.
CAPITAL
Capital value is academic to a never-seller such as your correspondent. Still, for it to keep pace with dividend raises over a long span implies that the income stream is not being bought at the principal's expense. Faith in the stream for now probably rests more on its security than its exuberance, and that security has been bruised. Such is the drawback of 'juiciness' rather than the 'growthiness' of the Basket of Seven. The B7 customarily yields ~1 per cent less in the beginning, but exhibits much speedier income growth.
A portfolio founded on large British companies has been more resilient in the slump since Mar. than one full of midsized and small shares. But only relatively: already dull as sentiment favoured FAANGs and such, high-yield blue chips lost their chief recommendation almost overnight when the CO-VID cuts blizzard struck. So the B8 took quite a knock on realisable value before the FTSE 100 index rallied in the spring, ending on Jun. 30 more rough than smooth.
After inflation NAV per share averaged a 3.6% contraction per constituent over their varied financial years (2019: down 8.0%). Discounts altered little. Share prices' fall averaged 2.2% real (2019: down 6.2%), albeit most financial years closed before the virus crash.
Real changes between year ends since the putative launch have averaged a gain of 2% for assets per share, 1% for the share price. This was a mite better than the closet Footsie tracker which UK Equity Income funds are often wrongly assumed to resemble. The basket has outperformed the All-Share Index by an average 0.6% pa on share price, beating it half the time and running level last year. Yet only one such index-beating year has occurred since 2013-14.
Four of eight members surpassed the Index in latest accounting years, after five the year before. That is no departure from the longtime norm.
However the average discount to NAV of 4.3% at latest financial year ends is half a point under the lifetime 4.7%, and has shrunk by 1.4 points from 2019-20's 5.7%. The tightest average discount, 2.0%, was in 2012-13, when shattered nerves sought solace by holding big, safe, dull Footsie stocks.
Issued capital expanded slowly but without interruption: shares in issue are up by more than one-fifth since Jun. 2009, when near the market bottom. Private investors want them for income despite price vagaries.
CONSTITUENTS
Briefly, individual trusts' contributions over ten years. Comparisons with the lower-yield, faster-income-growth Basket of Seven are appended. For the B7 the composite year was to Mar., deferring some Covid damage:
First, four income metrics: compound annual real dividend growth after inflation (1); number of real cuts year on year; average cover; months in revenue reserve after latest years' payouts:
CTY: 1.4%, 1, 1.03x, 7
DIG: -0.8%, 4, 1.03x, 17
EDIN: 0.5%, 2, 1.04x, 18
IVI: -0.0%, 2, 1.02x, 12
MRCH: -1.1%, 8, 1.01x, 13
MUT: -0.7%, 7, 1.01x, 13
SCF: 0.2%, 4, 1.06x, 17
TMPL: 1.4%, 3, 1.03x, 13
--------------------------------------
B8: -0.2%, 6, 1.03x, 14
B7: 3.1%, 2, 1.06x, 15
Capital metrics: share price change in decade to latest financial year end; number of years trailing the index; average yield; average discount/premium over ten years:
CTY: +41.3%, 4, 4.3%, -0.4%
DIG: +70.1%, 6, 4.7%, 7.4%
EDIN: +9.5%, 5, 4.3%, 6.4%
IVI: +24.7%, 4, 4.1%, 9.1%
MRCH: +62.3%, 4, 5.4%, 7.3%
MUT: +44.1%, 5, 4.3%, 5.0%
SCF: +65.2%, 4, 4.3%, 3.9%
TMPL: +95.2%, 4, 3.6%, 2.8%
-----------------------------------------
B8: +56.7%, 4, 4.2%, 4.7%
B7: +97.6%, 4, 3.5%, 4.6%
There has been no reversion to the mean in recent times. The same trusts show the same diverse behaviour as in mid-decade. The fallacy that because stock picks overlap substantially outcomes must cluster narrowly is further refuted by variant falls in share prices since the market rout began at the end of Feb.:
CTY: -21.6%
DIG: -12.1%
EDIN: -19.6%
IVI: -23.9%
MRCH: -22.8%
MUT: -18.8%
SCF: -17.0%
TMPL: -46.9%
---------------------
B8: -22.8%
B7: -22.0%
If attribution analyses were a compulsory disclosure, it would be better understood how choice of shares usually influences capital results less than gearing, discount control, option writing etc . ITs are not OEICs.
Accreted results are what matter, so I need not discuss individual pros and cons in detail. High and low lights of an atypically eventful time:
CTY has run its revenue reserve down to seven months at Jun. but has forecast a 55th consecutive annual divi rise, while muttering about its vast untouched capital gains. Most holders would, I suspect, prefer they remain untouched. Manager Job Curtis has helped the revenue account by quietly shifting the portolio to growthier if lower payers and/or foreign stocks, but UK is still 85% of it. No longer quite the hero of heroes it seemed a year ago.
EDIN: Mark Barnett of Invesco was sacked as manager after a run unimpressive whether one remains convinced that Value will out or not. Into the fire goes Edinburgh with Majedie, which has been upending the portfolio but pledges not to alter the leopard's spots too much. Terrible on capital, not half bad on income.
IVI: Survived a continuation vote on Sep. 10, but one-fifth of holders opted to kill it. (Doris forgot to vote.) Steady on payouts, weak on price and discount. Overall the nearest to a closet tracker.
MUT: In process of absorbing Perpetual Income & Growth (PLI) from the Basket of Seven-- to the disgruntlement of this writer, who owns both and loathes upheaval. Today's progress report and annual results were good on NAV, but that came with an uncovered and barely raised, sub-inflationary dividend. Taking PLI on board will bulk up the portfolio to over £1bn and should assist expenses, but merger technicalities mean that future income increases may have to draw on realised capital gains. I feel PLI should have cleaned its own house.
TMPL: Another veteran manager of Value (and contrarian) stripe, Ninety One's Alastair Mundy, took sick in Apr. He has been supplanted after 18 years by an outfit unknown to me, RWC Asset Management. Its two mavens are said to have sixty years' experience in this area of equities between them.
Temple Bar crashed in 2020 in a manner most unusual for a dull old IT; now the board is to chop the dividend by a quarter pending more news about the new boys' plans in Oct. Value will not be jettisoned, and it is implied that this may be the dark before the dawn; British shares are 'trading at their greatest discount to World equities for fifty years' and the Value subset at their biggest ever discount against Growth.
Note that TMPL was level-pegging with CTY as the strongest dividend grower over ten years, and the winner on share price. Mr Mundy has suffered for short-term flaws.
PERFORMANCE 2000-20
Let us see how the B8 would have performed in practice. An investor places the same £75,000 lump sum as the original High Yield Portfolio, with the same equal weighting and 1% acquisition costs and on the same date: Nov. 10, 2000.
The basket would have collared £5,265 of income last year, a 4.0% increase. (HYP1 got £10,557 in the year to Nov. 2019 and the B7 £6,930, but read on.) The B8's yield from Jul. 2019's opening capital was 4.8% against the historic average of ~4%. This is competitive with cash or fixed interest, if the basket be viewed as a savings account... with some inflation protection for interest and less for principal. After 19.5 years the basket would have dispensed £74,645 of regular dividends, all but matching what was subscribed.
Market value fell in the year to Jun. by 18.2% to £96,243 (2019 down 2.7%), compounding at 1.3% pa from £75,000 in Nov. 2000. This is well below the cost of living, c. 3%, so real capital eroded. The B7's compound growth rate was 3.9% and the All-Share Index a dismal 0.7%. Total return would make the All-Share look worse, since it furnishes smaller dividends.
The Basket of Eight depreciated during eight of 19 composite years. Average annual outperformance of the FTAS has been 1.4 percentage points, nine times out of 19. But half the shortfalls, as mentioned, are recent.
How frisky is the B8, for better or worse? In 235 monthly changes from launch to Jun. 2020, its market value has risen or stood still 139 times at an average +2.9%, and fallen 96 times averaging -3.8%. Four-fifths of the time the basket gained or lost value by 5% or less between months. Respective figures for the All-Share are 134 times on the up, also averaging 2.9%; 101 going down, by 3.8% average. In other words, almost identical to the B8, which stayed ahead of the index without added bumpiness.
FE Trustnet's risk score-- a measure of volatility over the past three years loaded towards the present-- has the basket at 114 where the FTSE 100 index is 100 and cash 0. The score was 98 a year ago; it has shot up on the tribulations of Temple Bar (now 168) in particular, but all members except Murray Income score over 100 now. This is historically wayward and possibly portends more strain for income generation, making that 6% yield a treacherous temptation. Nevertheless, pessimist as I am, it is hard to see the forward yield nosediving below the historical average of 4%, and that is with talk of negative base rate in the air.
In 2000-20 the B7 produced £80,292 against the B8's £74,645. The Eight's inflow arrived earlier and was then worth more after inflation, whereas the Seven covered their initial nominal investment sooner. As time passes the income gap should keep widening and the B7's aggregate purchasing power outstrip the B8's. The difference in capital values should widen likewise.
Thus the Eight are more for those who want immediate gratification or have short life expectancy, and who can bear the heightened risk implied by current stats. The B7 as a whole-- with the present exception of MUT's takeover target, Perpetual Income & Growth-- rests calmer. It is for the wide blue yonder, e.g. for 20-30 years of retiral.
DERISKING
Added safety comes from 'derisking' the income. One mimics an index-linked bond and an income reserve backs it up [3].
Using rceipts for the same years as HYP1, to Nov., the £75,000 basket here illustrated could have been derisked to give a 3.0% yield in its first eight months' operation as spendable income, against a historic All-Share yield of 2.2% at inception. That would have absorbed all collections in the inaugural 'stub' period (eight months to Jun. 2001); but the B8's income in its infancy could have combined inflation protection for the 3% return with a reserve growing to 12 months by Jun. 2006. Thereupon an increase of one-fifth in the withdrawal rate to 3.9%+RPI would have been compatible with 10 months' reserve after ten years, at Jun. 2007.
The buffer has held steady since then, but not risen enough to warrant any more increases in the withdrawal rate. After the first of Temple Bar's impaired dividends, Year 20's receipts to Nov. 2020 should still exceed last year's. Assuming inflation stays low (0.5% in Aug.) the reserve will inch up to 11 months: some comfort in these times.
The B8's inflation-protected 3.9% for most of the its existence compares with a similarly derisked 5.2% from HYP1. The latter shelled out a far larger gross income, tempered by the need to iron out its ups and downs by setting more aside. (Only fair to add that by Nov. 2019 HYP1 had a bigger reserve: 19 months compared with about 17 for the B8, i.e. the trusts' plus its own.)
Derisking would have required 6% of the basket's receipts to be held back, over and above the ~3% which trusts retained. It is a hypercautious gambit for those who cannot let income's buying power wobble. Such savers might opt to accept the lower initial yield of a 'growthier' income portfolio, unless they expect to drop off the twig fairly soon.
All B8 members shell out quarterly: dosh arrives little and often, about every 12 days. A cost-effective lump sum would be £10,000 or more gross. With stamp duty of 0.5% and commission of £12.50 a share, ten grand gets a starting income of £598 at today's prices, averaging £18.68 for 32 dividends a year. Receipts are free of income tax to the basic-rate payer, or to all within an ISA or using the £2,000 dividend allowance.
Since the launch the only book-keeping would be to ensure that dividends appeared on time. I have found brokers efficient at remitting them.
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[1] Review for 2019:
viewtopic.php?f=54&t=19695&p=257088&hilit=Basket+of+Eight#p257088
Latest B7 review to Mar. 2020:
viewtopic.php?f=54&t=23743&p=323358&hilit=Basket+of+Seven#p323358
[2] Dividends' compound annual growth rate is measured from Apr. 2001, to ignore arbitrarily different payment dates and numbers during the first eight months.
[3} Unsure why, but last year's derisking sums look all wrong.
B8 members were to be bought in equal amounts: City of London (CTY), Dunedin Income & Growth (DIG), Edinburgh (EDIN), Invesco Income Growth (IVI), Merchants Trust (MRCH), Murray Income (MUT), Schroder Income Growth (SCF) and Temple Bar (TMPL). Latest results are for financial years closing between Jul. 2019 and Jun. 2020.
Results are aggregated to a common Jun. year end, since this best fits accounting dates. Trends since the B8's backtested launch on Nov. 10, 2000 (also when pyad's 'HYP 1' began) are reviewed.[1]
INCOME
The B8 lifted regular dividends per share by 4.0% in 2019-20 (2019: +3.6%), or by 2.9% (0.7%) after retail price inflation (RPI). This was twice the average real rise of 1.4% pa during the basket's lifetime, partly thanks to falling inflation during the shamdemic. It may be the best for some time.
The portfolio's yield at Jun. 30-- based on historic or officially forecast payouts and £75,000 gross invested-- was 5.5% (2019: 4.4%). This is substantially cheaper than the average yield of 3.9% throughout its life; the B8 yielded 0.8 of a percentage point more than the FT All-Share Index (FTAS) at the year end, as at end-Jun. 2019. The average difference over its whole life is about the same. For all the talk of value/high yield shares being left behind in the past few years, their 'bond proxy' reputation for trustworthy income has gradually made them dearer.
After the latest market setback, the B8's prospective yield is nudging 6%, reflecting doubts about the robustness of payouts. One member has just announced a dividend cut of a quarter, the worst such setback in the B8's existence-- though this is more about its peculiar woes.
The basket distributed income not quite covered by current earnings for the first time since the wake of the global financial crisis in 2011-12: average cover was 0.98 times. Five out of eight constituents drew on revenue reserves. Preparations for a squeeze thus stood the B8 in good stead during the dividend massacre since Mar. Trumpeting 'dividend hero' merits, trusts had quietly shifted to bolstering asset backing while curbing distributions' growth rates.
We can only hope that reserves will last until covered payouts become feasible again, which means in no more than two or three years. Otherwise trusts will either have to 'rebase' or begin to supplement earnings with handouts of realised capital gains-- an expedient hardly any have wanted to resort to since it was legalised in 2014.
Throughout its lifespan the B8 has covered dividends 1.03 times. The average revenue reserve rose from 13 to 14 months of current payout in the composite year: still below its 16 months just before the global financial crisis, and before the latest post-virus payouts-- all were at least maintained before today's TMPL shocker-- began to gnaw into reserves. For example, Murray Income had a year's worth at Jun. 30, but the proposed final divi knocks the kitty down to eight months.
Boards have pressed managers to renegotiate fees downward and scrap incentive payments. The basket's Ongoing Charges Ratio was a shade higher at 0.58% of barely changed year-end net asset values (NAV), but this is below the whole-life 0.63%. Revenue expenses, which come off distributable income, reduced from 5.7% of the payout to 5.4%, the lightest yet. There has been some bounce from refinancing of costly structural debt contracted in the early 1980s. A few more will follow, e.g at CTY and MRCH.
Dividends per share since the putative launch are up 27% in real terms, compounding at 4.2% pa against inflation of 3% [2]. Progress has been hiccuppy. Trusts imposed real cuts, year on year, on 31 of a possible 70 occasions in the past decade, averaging 1.8% real. No member avoided such interruptions, hence a spread of as many as eight seems advisable.
Income's purchasing power peaked in 2009-10 (29% higher than in the first full year) and so has not been quite fully restored from that point. Dividends' real value shrank year on year four times out of nine since the crisis' worst fallout-- when it was down by one-eighth-- though never by more than 2.3% between years, and not since 2016-17.
History as well as the likelihood of more squalls recommends extra reserving in the owner's hands, if income is not an optional and variable extra: see 'Derisking' below. I suggested back in 2010 that a basket might sit on top of State and/or private pension income for less than vital spending. If so, to take the lean with the fat may be tolerable.
CAPITAL
Capital value is academic to a never-seller such as your correspondent. Still, for it to keep pace with dividend raises over a long span implies that the income stream is not being bought at the principal's expense. Faith in the stream for now probably rests more on its security than its exuberance, and that security has been bruised. Such is the drawback of 'juiciness' rather than the 'growthiness' of the Basket of Seven. The B7 customarily yields ~1 per cent less in the beginning, but exhibits much speedier income growth.
A portfolio founded on large British companies has been more resilient in the slump since Mar. than one full of midsized and small shares. But only relatively: already dull as sentiment favoured FAANGs and such, high-yield blue chips lost their chief recommendation almost overnight when the CO-VID cuts blizzard struck. So the B8 took quite a knock on realisable value before the FTSE 100 index rallied in the spring, ending on Jun. 30 more rough than smooth.
After inflation NAV per share averaged a 3.6% contraction per constituent over their varied financial years (2019: down 8.0%). Discounts altered little. Share prices' fall averaged 2.2% real (2019: down 6.2%), albeit most financial years closed before the virus crash.
Real changes between year ends since the putative launch have averaged a gain of 2% for assets per share, 1% for the share price. This was a mite better than the closet Footsie tracker which UK Equity Income funds are often wrongly assumed to resemble. The basket has outperformed the All-Share Index by an average 0.6% pa on share price, beating it half the time and running level last year. Yet only one such index-beating year has occurred since 2013-14.
Four of eight members surpassed the Index in latest accounting years, after five the year before. That is no departure from the longtime norm.
However the average discount to NAV of 4.3% at latest financial year ends is half a point under the lifetime 4.7%, and has shrunk by 1.4 points from 2019-20's 5.7%. The tightest average discount, 2.0%, was in 2012-13, when shattered nerves sought solace by holding big, safe, dull Footsie stocks.
Issued capital expanded slowly but without interruption: shares in issue are up by more than one-fifth since Jun. 2009, when near the market bottom. Private investors want them for income despite price vagaries.
CONSTITUENTS
Briefly, individual trusts' contributions over ten years. Comparisons with the lower-yield, faster-income-growth Basket of Seven are appended. For the B7 the composite year was to Mar., deferring some Covid damage:
First, four income metrics: compound annual real dividend growth after inflation (1); number of real cuts year on year; average cover; months in revenue reserve after latest years' payouts:
CTY: 1.4%, 1, 1.03x, 7
DIG: -0.8%, 4, 1.03x, 17
EDIN: 0.5%, 2, 1.04x, 18
IVI: -0.0%, 2, 1.02x, 12
MRCH: -1.1%, 8, 1.01x, 13
MUT: -0.7%, 7, 1.01x, 13
SCF: 0.2%, 4, 1.06x, 17
TMPL: 1.4%, 3, 1.03x, 13
--------------------------------------
B8: -0.2%, 6, 1.03x, 14
B7: 3.1%, 2, 1.06x, 15
Capital metrics: share price change in decade to latest financial year end; number of years trailing the index; average yield; average discount/premium over ten years:
CTY: +41.3%, 4, 4.3%, -0.4%
DIG: +70.1%, 6, 4.7%, 7.4%
EDIN: +9.5%, 5, 4.3%, 6.4%
IVI: +24.7%, 4, 4.1%, 9.1%
MRCH: +62.3%, 4, 5.4%, 7.3%
MUT: +44.1%, 5, 4.3%, 5.0%
SCF: +65.2%, 4, 4.3%, 3.9%
TMPL: +95.2%, 4, 3.6%, 2.8%
-----------------------------------------
B8: +56.7%, 4, 4.2%, 4.7%
B7: +97.6%, 4, 3.5%, 4.6%
There has been no reversion to the mean in recent times. The same trusts show the same diverse behaviour as in mid-decade. The fallacy that because stock picks overlap substantially outcomes must cluster narrowly is further refuted by variant falls in share prices since the market rout began at the end of Feb.:
CTY: -21.6%
DIG: -12.1%
EDIN: -19.6%
IVI: -23.9%
MRCH: -22.8%
MUT: -18.8%
SCF: -17.0%
TMPL: -46.9%
---------------------
B8: -22.8%
B7: -22.0%
If attribution analyses were a compulsory disclosure, it would be better understood how choice of shares usually influences capital results less than gearing, discount control, option writing etc . ITs are not OEICs.
Accreted results are what matter, so I need not discuss individual pros and cons in detail. High and low lights of an atypically eventful time:
CTY has run its revenue reserve down to seven months at Jun. but has forecast a 55th consecutive annual divi rise, while muttering about its vast untouched capital gains. Most holders would, I suspect, prefer they remain untouched. Manager Job Curtis has helped the revenue account by quietly shifting the portolio to growthier if lower payers and/or foreign stocks, but UK is still 85% of it. No longer quite the hero of heroes it seemed a year ago.
EDIN: Mark Barnett of Invesco was sacked as manager after a run unimpressive whether one remains convinced that Value will out or not. Into the fire goes Edinburgh with Majedie, which has been upending the portfolio but pledges not to alter the leopard's spots too much. Terrible on capital, not half bad on income.
IVI: Survived a continuation vote on Sep. 10, but one-fifth of holders opted to kill it. (Doris forgot to vote.) Steady on payouts, weak on price and discount. Overall the nearest to a closet tracker.
MUT: In process of absorbing Perpetual Income & Growth (PLI) from the Basket of Seven-- to the disgruntlement of this writer, who owns both and loathes upheaval. Today's progress report and annual results were good on NAV, but that came with an uncovered and barely raised, sub-inflationary dividend. Taking PLI on board will bulk up the portfolio to over £1bn and should assist expenses, but merger technicalities mean that future income increases may have to draw on realised capital gains. I feel PLI should have cleaned its own house.
TMPL: Another veteran manager of Value (and contrarian) stripe, Ninety One's Alastair Mundy, took sick in Apr. He has been supplanted after 18 years by an outfit unknown to me, RWC Asset Management. Its two mavens are said to have sixty years' experience in this area of equities between them.
Temple Bar crashed in 2020 in a manner most unusual for a dull old IT; now the board is to chop the dividend by a quarter pending more news about the new boys' plans in Oct. Value will not be jettisoned, and it is implied that this may be the dark before the dawn; British shares are 'trading at their greatest discount to World equities for fifty years' and the Value subset at their biggest ever discount against Growth.
Note that TMPL was level-pegging with CTY as the strongest dividend grower over ten years, and the winner on share price. Mr Mundy has suffered for short-term flaws.
PERFORMANCE 2000-20
Let us see how the B8 would have performed in practice. An investor places the same £75,000 lump sum as the original High Yield Portfolio, with the same equal weighting and 1% acquisition costs and on the same date: Nov. 10, 2000.
The basket would have collared £5,265 of income last year, a 4.0% increase. (HYP1 got £10,557 in the year to Nov. 2019 and the B7 £6,930, but read on.) The B8's yield from Jul. 2019's opening capital was 4.8% against the historic average of ~4%. This is competitive with cash or fixed interest, if the basket be viewed as a savings account... with some inflation protection for interest and less for principal. After 19.5 years the basket would have dispensed £74,645 of regular dividends, all but matching what was subscribed.
Market value fell in the year to Jun. by 18.2% to £96,243 (2019 down 2.7%), compounding at 1.3% pa from £75,000 in Nov. 2000. This is well below the cost of living, c. 3%, so real capital eroded. The B7's compound growth rate was 3.9% and the All-Share Index a dismal 0.7%. Total return would make the All-Share look worse, since it furnishes smaller dividends.
The Basket of Eight depreciated during eight of 19 composite years. Average annual outperformance of the FTAS has been 1.4 percentage points, nine times out of 19. But half the shortfalls, as mentioned, are recent.
How frisky is the B8, for better or worse? In 235 monthly changes from launch to Jun. 2020, its market value has risen or stood still 139 times at an average +2.9%, and fallen 96 times averaging -3.8%. Four-fifths of the time the basket gained or lost value by 5% or less between months. Respective figures for the All-Share are 134 times on the up, also averaging 2.9%; 101 going down, by 3.8% average. In other words, almost identical to the B8, which stayed ahead of the index without added bumpiness.
FE Trustnet's risk score-- a measure of volatility over the past three years loaded towards the present-- has the basket at 114 where the FTSE 100 index is 100 and cash 0. The score was 98 a year ago; it has shot up on the tribulations of Temple Bar (now 168) in particular, but all members except Murray Income score over 100 now. This is historically wayward and possibly portends more strain for income generation, making that 6% yield a treacherous temptation. Nevertheless, pessimist as I am, it is hard to see the forward yield nosediving below the historical average of 4%, and that is with talk of negative base rate in the air.
In 2000-20 the B7 produced £80,292 against the B8's £74,645. The Eight's inflow arrived earlier and was then worth more after inflation, whereas the Seven covered their initial nominal investment sooner. As time passes the income gap should keep widening and the B7's aggregate purchasing power outstrip the B8's. The difference in capital values should widen likewise.
Thus the Eight are more for those who want immediate gratification or have short life expectancy, and who can bear the heightened risk implied by current stats. The B7 as a whole-- with the present exception of MUT's takeover target, Perpetual Income & Growth-- rests calmer. It is for the wide blue yonder, e.g. for 20-30 years of retiral.
DERISKING
Added safety comes from 'derisking' the income. One mimics an index-linked bond and an income reserve backs it up [3].
Using rceipts for the same years as HYP1, to Nov., the £75,000 basket here illustrated could have been derisked to give a 3.0% yield in its first eight months' operation as spendable income, against a historic All-Share yield of 2.2% at inception. That would have absorbed all collections in the inaugural 'stub' period (eight months to Jun. 2001); but the B8's income in its infancy could have combined inflation protection for the 3% return with a reserve growing to 12 months by Jun. 2006. Thereupon an increase of one-fifth in the withdrawal rate to 3.9%+RPI would have been compatible with 10 months' reserve after ten years, at Jun. 2007.
The buffer has held steady since then, but not risen enough to warrant any more increases in the withdrawal rate. After the first of Temple Bar's impaired dividends, Year 20's receipts to Nov. 2020 should still exceed last year's. Assuming inflation stays low (0.5% in Aug.) the reserve will inch up to 11 months: some comfort in these times.
The B8's inflation-protected 3.9% for most of the its existence compares with a similarly derisked 5.2% from HYP1. The latter shelled out a far larger gross income, tempered by the need to iron out its ups and downs by setting more aside. (Only fair to add that by Nov. 2019 HYP1 had a bigger reserve: 19 months compared with about 17 for the B8, i.e. the trusts' plus its own.)
Derisking would have required 6% of the basket's receipts to be held back, over and above the ~3% which trusts retained. It is a hypercautious gambit for those who cannot let income's buying power wobble. Such savers might opt to accept the lower initial yield of a 'growthier' income portfolio, unless they expect to drop off the twig fairly soon.
All B8 members shell out quarterly: dosh arrives little and often, about every 12 days. A cost-effective lump sum would be £10,000 or more gross. With stamp duty of 0.5% and commission of £12.50 a share, ten grand gets a starting income of £598 at today's prices, averaging £18.68 for 32 dividends a year. Receipts are free of income tax to the basic-rate payer, or to all within an ISA or using the £2,000 dividend allowance.
Since the launch the only book-keeping would be to ensure that dividends appeared on time. I have found brokers efficient at remitting them.
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[1] Review for 2019:
viewtopic.php?f=54&t=19695&p=257088&hilit=Basket+of+Eight#p257088
Latest B7 review to Mar. 2020:
viewtopic.php?f=54&t=23743&p=323358&hilit=Basket+of+Seven#p323358
[2] Dividends' compound annual growth rate is measured from Apr. 2001, to ignore arbitrarily different payment dates and numbers during the first eight months.
[3} Unsure why, but last year's derisking sums look all wrong.