x-post from HYP Practical - Investment Trust for greater HYP diversification

[ZipserSir]

Hello all, first topic I have started on Lemon Fool, and already wondering if I am off-topic for HYP Practical.

Some years ago I set-up a PEP and for various reasons I cannot roll it into the other ISAs that I now hold. I don't want to add to the funds held in this ISA. Over several years I have run it as if it were a HYP, but with just seven or eight holdings and no new funds it is more vulnerable to the vagaries of the stock market than a proper HYP. I have recently sold a holding after a long period of inactivity, and along with some cash already in the account I am ready to make a new investment.

However, rather than add a regular HYP share, I am interested in investing in an investment trust. For information, this ISA already contains BP, BAT, Centrica, GSK, SSE and UU.

The idea is an IT would give the account a greater degree of diversification. I am not expert in ITs, but looking at my own list of HYP prospects, the top IT on my list is Murray International Trust (MYI). On the face of it, it looks OK: FTSE350, high yielding, rising dividend yield since 2012, and prospective yield of 4.09% (dividenddata.co.uk). The fly in the ointment is that it is so international, and does not give me the kind of diversification I was expecting from an IT that invests in UK equities, such as City Of London Investment Trust (CTY) which came out second on my list. Having said that I actually really like the idea of greater international diversification.

I probably won't invest for a week or two, so I would welcome any input from the esteemed posters here.

[richfool]

ZipserSir, I/we don't know how much you have available to invest, but to me a logical approach would be to split your investment across both sectors you refer to, and ideally to hold 2 trusts in each sector. For example, to hold two Global G&I trusts, such as Murray International trust (MYI) and perhaps JP Morgan Growth & Income trust (JPGI) and two UK G&I trusts, such as CTY (that you mention) and one other, perhaps Temple Bar (TMPL). You then gain exposure to the two sectors you refer to, and also spread your risk a bit more across those sectors.

Note that many of the larger FTSE 100 companies held by UK G&I IT's are international companies trading throughout the world, so you do get international exposure with those too.

I hold all four trusts referred to and a significant number of others across most sectors.

[ZipserSir]

Thank you for your thoughts richfool. I don't have much to invest at this point, certainly not enough for two investments now. My inclination is to invest in MYI; I'm a little smitten that a HYP candidate can contain so many new exotic companies that are not on my radar for regular HYP investing. Not very scientific, but we're only around once, so why not?

It sounds as if you have a trust based portfolio. Would be interested to know what your motivations are and what would be your recommendation for a portfolio for someone starting out on the trust route. If you have written this before a link to a post somewhere would suffice. Thank you for your help.

[mc2fool]

The idea is an IT would give the account a greater degree of diversification.

Do you really mean "the account"? If so I'd suggest you look at diversification across all of your holdings as a whole, rather than just by accounts, as those are rather artificial boundaries. After all, adding share XYZ (or sector Thingymebobs) in one account doesn't help your overall diversification if you already hold XYZ (or sector Thingymebobs) in other accounts, even if it's "new" to the account you are adding it to.

I am not expert in ITs, but looking at my own list of HYP prospects, the top IT on my list is Murray International Trust (MYI). ... The fly in the ointment is that it is so international, and does not give me the kind of diversification I was expecting from an IT that invests in UK equities, such as City Of London Investment Trust (CTY) which came out second on my list.

Well I think then you're going to have to explain what you mean by (or what limits you want to put on) "diversification".

Putting aside for the moment the obvious diversification of MYI being only 12% UK vs your current 100% UK holdings (whereas CTY is 87% UK), of your holdings, BP, BAT, Centrica, GSK, SSE and UU, MYI has just one: BATS.

CTY, on the other hand, has all of them. Of course, it has other stuff too, but it's worth thinking about what kind of "diversification" you mean and want.

(Above refers to in top 40 holdings shown in last annual report for CTY and half-year report for MYI.)

[UncleEbenezer]

Let's see. I'm getting:
1. You have your own selection of HYP shares.
2. You want diversification.

So an IT focussed on something other than UK HYP-ish shares would seem obvious. Something focussed internationally. Or on non-dividend-payings stocks: those investing in growth or recovery. Or small companies. Or Private Equity. Or some some sector/theme that doesn't feature in your own picks.

Some such funds may themselves and focus on capital growth. Others maintain a good dividend stream by paying out a proportion of their capital gains on underlying investments. Take your pick.

[mc2fool]

I'm a little smitten that a HYP candidate can contain so many new exotic companies that are not on my radar for regular HYP investing.

MYI isn't "a HYP candidate". HYP is individual company shares only and specifically excludes, as a matter of principle, all collectives (ITs, OIECs, ETFs, etc). If you think "HYP" as used on these boards simply refers to any portfolio of high yielding shares then you are mistaken and should look up Pyad's original scriptures articles ... just so you don't get yourself into trouble with the zealots purists

Having said that, I know that quite a few HYPers hold some ITs, etc, additionally to (outside of) their HYP, following a philosophy of that that you can buy directly yourself (e.g. UK shares) you should do so, but use collectives for that that you cannot (e.g. non-UK shares).

[ZipserSir]

Thank you for your replies and comments; they really are appreciated.

Do you really mean "the account"? Yes, I do. There are reasons, that I don't want to go into here, why this account is operated separately from my other investments, but which I do try to operate on a broadly HYP basis, even though there aren't enough funds to do so economically. Hence the interest in an IT.

Putting aside for the moment the obvious diversification of MYI being only 12% UK vs your current 100% UK holdings (whereas CTY is 87% UK), of your holdings, BP, BAT, Centrica, GSK, SSE and UU, MYI has just one: BATS. This is very valid. Buying MYI allows me to play along with the idea that my standalone investment is a HYP on the basis that I am diversifying my existing limited holdings. On the other hand I could sell all my existing holdings and buy one or more ITs, including CTY, and effectively have an IT-HYP. I will have to think about that as it does begin to sound like a very good idea for my purposes...

MYI isn't "a HYP candidate". HYP is individual company shares only and specifically excludes, as a matter of principle, all collectives (ITs, OIECs, ETFs, etc). If you think "HYP" as used on these boards simply refers to any portfolio of high yielding shares then you are mistaken and should look up Pyad's original scriptures articles ... just so you don't get yourself into trouble with the zealots purists Another interesting point. I thought I was loyal to Pyad, but actually I need to reread the original article... But not yet. I'm not sure that I agree with HYP in its purest form (does it make sense to continue holding Tesco, for example), certainly I don't understand (apart from the purest rules) why I can't invest in an IT if they meet the other criteria and provide some appropriate diversification as MYI does (but CTY would not).

[Lootman]

I'm not sure that I agree with HYP in its purest form (does it make sense to continue holding Tesco, for example), certainly I don't understand (apart from the purest rules) why I can't invest in an IT if they meet the other criteria and provide some appropriate diversification as MYI does (but CTY would not).

I'm agnostic on the rather academic, and sometimes endless, debate on what is or is not a valid candidate for inclusion in a HYP. But what I do think is relevant to discuss, and on the HY boards as well as here, is what are the risks and shortcomings of a HY strategy and, specifically, what additional types of holdings in your portfolio can add balance and diversification and/or reduce risk and volatility. UK HY shares are about 3% of global equity market cap so some consideration of the other 97% does seem appropriate.

Or put another way, nothing in the HYP rules prescribe what is the maximum percentage of your net worth you should allocate to a HYP as opposed to other strategies. That you have to do for yourself, and you are right to do so.

[mc2fool]

I don't understand (apart from the purest rules) why I can't invest in an IT if they meet the other criteria and provide some appropriate diversification as MYI does.

Well, of course you can. You can do as you like, it's your portfolio. My comments were just meant to try to keep you out of trouble with the HYP crowd -- although now taking a look at your same thread on HYP Practical I see I'm too late!

[Gengulphus]

However, rather than add a regular HYP share, I am interested in investing in an investment trust. For information, this ISA already contains BP, BAT, Centrica, GSK, SSE and UU.

The idea is an IT would give the account a greater degree of diversification. I am not expert in ITs, but looking at my own list of HYP prospects, the top IT on my list is Murray International Trust (MYI). On the face of it, it looks OK: FTSE350, high yielding, rising dividend yield since 2012, and prospective yield of 4.09% (dividenddata.co.uk). The fly in the ointment is that it is so international, and does not give me the kind of diversification I was expecting from an IT that invests in UK equities, ...

True - but it's highly likely to give you more diversification than them, not less! In particular, that particular ISA is already overweight in the six shares you mention, presumably having about 1/7th of its value in each (based on there being six holdings plus another holding's worth of cash). The UK-based ITs you mention will almost certainly have holdings in some or all of those shares - so some percentage of them would go towards reducing diversification. The rest would increase diversification - but the international IT's holdings will probably all or nearly all increase it.

Having said that, personally I wouldn't look at the diversification of a single ISA on its own: I would add up the holdings of all the ISAs I owned and judge the diversification of the resulting portfolio. And indeed, some would go further than that and add up the holdings of all of the accounts they owned... I don't go quite that far, having been burnt by making my ISA-based HYP investments overweight in REITs when they were came into existence in 2007. But I do also add up the holdings of all my accounts and regard keeping that total well-diversified as my primary diversification aim - I simply also keep an eye on the diversification of the separate totals of ISAs, SIPPs and unsheltered dealing accounts to make certain that company-specific and sector-specific problems cannot make too much of a mess of the tax-sheltering / retirement provision.

Gengulphus

Moderator Message:
Moved from original thread
TJH

[richfool]

ZipserSir, Yes I do hold a portfolio of IT's. My objective is income, but not exclusively, I also seek some growth and lots of diversification. So yes, I hold IT's in most sectors.

Be careful if you are following the "High Yield Portfolios (HYP) - Practical" board, as it is intended for those who are following a particular prescribed High Yield portfolio, involving the purchase of company shares generally meeting certain criteria, and not for those seeking income from IT's or in other ways. Thus the abbreviation HYP on those boards would normally be understood to mean a specific type of portfolio, as opposed to just meaning high yielding in general terms. There is another board: "High Yield Strategies - General", - which is intended for discussing High Yield investment strategies in more general terms.

Whilst I do keep one eye on the HYP- Practical board, I generally stay away as my interest is mainly IT's. That said, I do "dabble" with a few direct holdings of shares, usually where I see a good case to hold them for either income or growth or both.

Re your interest in MYI, I see no reason whatsoever why you shouldn't hold that particular trust. I have a large holding in it and have had for many years. It did rather lose its way a year or two back, because the Manager Bruce Stout, tends to hold a very pessimistic view of the market (and the effects of QE) and thus mainatains a fairly defensive stance. So he tended to perform less well during a period of good market performance. MYI have however done very well over the last year. So it's 3 & 5 year performance (growth-wise) has been not so good, but it's performance over the last year has been very good. MYI also has the advantage of paying a good yield, currently around 4% (4.09%). The Manager has something of a cult-following amongst investors. He has tended to favour Asian markets and some Emerging markets and thus some of his holdings may not be well known to us UK investors.

GG&I sector tables:
http://citywire.co.uk/money/investment- ... ePeriod=12

MYI:
http://citywire.co.uk/money/investment- ... undID=3103

[richfool]

ZipserSir, To answer another of your questions, I tend to prefer IT's because the risk is less as compared with holding individual company's shares directly. The actual choice of companies/investments are managed for me by the manager. Thus I don't have to monitor them so closely. I am thinking about as I get older and perhaps more "gaga", I won't have to worry about losing the plot.

The dividend stream tends to be more evenly spread, as IT's tend to hold a proportion of dividend income back for leaner times.

I get much greater diversification than would be the case holding shares directly, and can also obtain exposure to markets where I have little or no knowledge, such as overseas markets, private equity, property etc.

I hold IT's in UK, Global, European, North American, Asian Pacific, Natural Resources and the "Flexible" sectors. At least a minimum of two in each sector.

If as I think you said, you had direct holdings in some UK shares, then a Global (G&I) trust like MYI would give you global exposure/diversification. CTY would give you exposure to the UK markets (though here it could be argued that many of CTY's holdings being international companies, would still give you some indirect global exposure). MYI has a healthy dividend yield.

[greygymsock]

NYP (No Yield Portfolio) - reduces potential regular income (dividend) taxation risk and adds diversity. Just pay yourself a dividend out of total returns by selling some holdings, at a time and amount of your own choosing (tuned to your own particular circumstances - yearly allowances etc.).

17% 2MCL (Boost ETP 2x FT250, FT250 cap size compares to US small cap. 2MCL is a total return swap, pays no dividends. Expense Ratio 0.6%)
41.5% BRK-B (Berkshire Hathaway pays no dividends)
41.5% Gold (legal tender coins pay no interest, no purchase tax, no CGT)[/img]

if you're thinking about tail-end risks, such as taxation rising to confiscatory levels, how can you consider holding a synthetic ETF (2MCL)? i certainly don't understand synthetic ETFs in detail, but there has to be a tail risk that they will blow up in some way.

a large holding in BRK-B carries a risk - that it will start paying a large dividend! at the underlying investment level, it is diversified - effectively, it's a conglomerate. but at the dividend policy level, it carries single-company risk. a better approach would be a diversified portfolio of no- and low-dividend stocks; some of them might start paying high dividends, but probably not all at the same time. BRK-B could be 1 stock in such a portfolio.

(i make no comment on that size of gold holding )

Moderator Message:
Folks, this is starting to stray off-topic, with talk of synthetic ETFs and gold etc. Let's stay with ITs, as this is the IT board. -- MDW1954

[richfool]

ZipserSir, There is some discussion of another Global G&I trust (JPGI) on this thread (link below), if it is of interest to you:

viewtopic.php?f=8&t=3099&p=29728#p29728

[eyeball08]

Zipser:
I think it is true that quite a few Hypers also hold some IT's. I have a 26 equity HYP starting in 2008 which includes more or less equal holdings in the shares and City of London (CTY), Henderson Far East Income (HFEL), Murray International (MYI) and Perpetual Income and Growth (PLI). I can't really be bothered to keep them in a "separate portfolio" but wouldn't dare to say so on the HYP practical board. Probably won't bother to buy any more apart from maybe a more US focussed one.

They serve various purposes: diversification has already been much discussed. They also provide a comparison with your own HYP share efforts. Beginning to lose the plot with brain ageing might be a reason to concentrate on them alone if you think you could make the change in a timely manner and if your spouse or other family member can take over the running of even a small IT portfolio. Another bonus for me is that it has been a low dividend cover period for a good many of my HYP shares and topping up an IT might be an easier decision to make at times.

Downside: you must be losing some of the IT income to management fees, compared to your directly held equities.
But if the income you get is enough for your living expenses, why sweat the small stuff?

[JMN2]

I have around the median sized holding of MYI alongside my HYP-as-I-see-it.