The Lemon Fool

TUK020 wrote:I am afraid that I have a bit of a problem with this chart. It is misleading. Less so visually, now that the 'y' axis starts at zero. However, the 'y' isn't defined.
I believe it is normalised income, and thus the graph shows trends in income, but not absolute income from a fixed investment level.

On an absolute income from a fixed investment level, the HYP portfolio would start with a higher income than the IT basket. Admittedly, to 'de-risk' this, you would need to hold some HYP income in reserve, and then you would get something that looks more like the IT basket, but all of that is glossed over in a chart with no 'y' axis defined.

On an absolute income from a fixed investment level, the HYP portfolio would start with a higher income than the IT basket.


Indeed it does, and you may have missed the relevant chart I published in a neighbouring thread:

viewtopic.php?f=31&t=28808

This shows income generated by an investment of £100 at the beginning of the chart.

Arb.

Arborbridge wrote:

TUK020 wrote:
On an absolute income from a fixed investment level, the HYP portfolio would start with a higher income than the IT basket.

Indeed it does, and you may have missed the relevant chart I published in a neighbouring thread:

viewtopic.php?f=31&t=28808

This shows income generated by an investment of £100 at the beginning of the chart.

For completeness Arb, I think this is the chart that you're wanting to show as highlighting this process that TUK020 quite rightly raised?



Source post - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=28808#p405762

I maintain my view that your valuable 'pink-IT-line' analysis here, compared with a number of other income-related investment strategies, is one of the most important and worthwhile long-term records that we've got access to, so thanks again for your ongoing commitment in maintaining this data....

Robust, predictable, and - importantly - with a rising-trend over time........that's a lot of key boxes ticked for anyone wishing to investigate income-investment strategies over the long-term.....

Cheers,

Itsallaguess

Itsallaguess wrote:
For completeness Arb, I think this is the chart that you're wanting to show as highlighting this process that TUK020 quite rightly raised?


Cheers,

Itsallaguess

Yes, thank you for "cleaning up" for me. In truth, I should have come back and done it more clearly when I had more time. The quickj and dirty link was because I was being called for breakfast: more haste, less speed, as they say

Arb.

Itsallaguess wrote:

Arborbridge wrote:

TUK020 wrote:
On an absolute income from a fixed investment level, the HYP portfolio would start with a higher income than the IT basket.

Indeed it does, and you may have missed the relevant chart I published in a neighbouring thread:

viewtopic.php?f=31&t=28808

This shows income generated by an investment of £100 at the beginning of the chart.

For completeness Arb, I think this is the chart that you're wanting to show as highlighting this process that TUK020 quite rightly raised?



Source post - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=28808#p405762

I maintain my view that your valuable 'pink-IT-line' analysis here, compared with a number of other income-related investment strategies, is one of the most important and worthwhile long-term records that we've got access to, so thanks again for your ongoing commitment in maintaining this data....

Robust, predictable, and - importantly - with a rising-trend over time........that's a lot of key boxes ticked for anyone wishing to investigate income-investment strategies over the long-term.....

Cheers,

Itsallaguess

Yup, this is the way

Urbandreamer wrote:
I confess that I am interested in the income IT basket mentioned, but it almost certainly wouldn't suit me. A link to the basket would I'm sure be of interest to many.

Well here's the basket in capital weight order:-



It started off as a bechmark for my HYP, so the bulk of the original investment was in UK ITs. Then I added one or two of Luni's basket recommendations since his work seemed very academic and plausible. I very quickly decided to have some foreign interest too, so the basket became less HYP and more generalised. It became even more wayward with additions like HINT and 3IN (which some include in their HYP shares, but not I).

I offer only for detail, and make no claims that this is the best choice one could make - it's only the group I've set up for my own purposes, and it is an important contributor to my pension.

On the idea of investing in ITs for growth and harvesting that growth: it's good if your mind works that way, but I am content to see the income coming in and not having to think about which assets to "cull" to gain income. In retirement, I prefer to keep it simple where possible.

As regards managers fees: these are indeed irksome, but I live with them simply because I have concluded that managers' on the whole produce a better result than I can. Others clearly can do it better than I do, so it's a question of testing what one can do, and drawing conclusions over time to suit yourself. This, incidentally, is why I started unitising my investments - to aid comparison. If you wish to compare, I'd recommend doing that from the beginning, or soon afterwards. I would keep XIRR records in addition, to keep a handle on total return too.
Then you will have all the equipment you need to make life choices in the fullness of time. However, a word of warning: by the time you have found the secret, the market could have morphed into something else!


Arb.

Apologies if this has been mentioned - but if the money has to be invested in the UK outside of a Tax shelter, then the tax difference between Dividends and Capital Gains needs to be considered. E.G. you are investing considerably more than the ISA yearly limit of £20,000.

Dividends - annual tax free = £2000. Thereafter 7.5%, 32.5% , 38.1% tax - depending on income tax band
Capital gains - annual tax free £12300. Thereafter 10% or 20% tax - depending on income tax band.

So if you are looking at two ITs, with identical total returns, and you are perfectly happy to simply sell units to produce your desired income level, then its probable (depending on your income) that the IT with the lower dividend will produce a superior tax paid return.

But , of course, tax regulations can, and do, change.

scotia wrote:So if you are looking at two ITs, with identical total returns, and you are perfectly happy to simply sell units to produce your desired income level, then its probable (depending on your income) that the IT with the lower dividend will produce a superior tax paid return.

Not just ITs, share and OEIC investments as well when outside tax shelters.

scotia wrote:Apologies if this has been mentioned - but if the money has to be invested in the UK outside of a Tax shelter, then the tax difference between Dividends and Capital Gains needs to be considered. E.G. you are investing considerably more than the ISA yearly limit of £20,000.

Dividends - annual tax free = £2000. Thereafter 7.5%, 32.5% , 38.1% tax - depending on income tax band
Capital gains - annual tax free £12300. Thereafter 10% or 20% tax - depending on income tax band.

Indeed.

If the share price/value had doubled since purchase you can sell £24,600 of stock value and remain within your yearly Capital Gains Tax allowance. In contrast assuming a pension of the same as the personal allowance such that you paid 7.5% tax on dividends above £2000, if £24,600 of dividends were generated by the portfolio you'd pay nearly £1700 in dividend tax. Or nearly £7400 if taxed at the 32.5% rate.

Dividends are a potential tax trap. Some years back I recall a budget speech declaration along the lines of "dividends within ISA continue to remain tax exempt". For me that was a red flag - a potential suggestion that consideration had been given to potentially changing the ISA rules to not exempt dividends from taxation. Taxing regular income streams is a easier target than taxing wealth, wealth tax simply results in large scale capital flight and a overall poorer tax take for HMRC. At times income tax even at the basic/low rates can be significant, for instance rising to 38% type levels during the 1960's/1970's - i.e. times of economic stress. Combined with higher interest rates/dividend yields (such as in reflection of higher inflation/lower asset prices) and a series of such years can involve a substantial hit. 10% inflation, 10% cash interest, basic rate 40% taxation on that interest = -4% net real, repeated for a handful of years and 20% of the total investment value lost to taxation (and in addition to stocks/bonds likely also having seen modest/large declines in valuations. If capital values are down a third, and a further 20% is lost to dividend taxation, and you're also drawing a income (retired), then at the end of a handful of years you might be looking back at a lifetime of saving/investing having been massively eroded across a relatively short period of time.

For such reasons its a common practice for income to be drawn out of total returns of which dividends are more often are just a part. When you use the likes of a SWR based approach you benefit from a regular/consistent inflation adjusted income. That also doesn't constrain your universe of potential holdings/assets and broadly wider diversification is lower risk than concentrated risk. Higher income production/provision isn't a higher total reward, rather it just broadly means a lower capital appreciation rate (tendency to achieve similar overall total returns).

Arborbridge wrote: I would keep XIRR records in addition, to keep a handle on total return too.

Thanks for your table - I have attached 5 year total return. I have dropped out IVI (no longer with us), and have added a World tracker and Fundsmith OEIC.
Values taken today from HL, and rounded to 1%. Any errors in my transposition would be gratefully corrected.

scotia wrote:

Arborbridge wrote: I would keep XIRR records in addition, to keep a handle on total return too.

Thanks for your table - I have attached 5 year total return. I have dropped out IVI (no longer with us), and have added a World tracker and Fundsmith OEIC.
Values taken today from HL, and rounded to 1%. Any errors in my transposition would be gratefully corrected.

Thanks, most interesting. I'm surprised some of them compare quite well with VWRL. No surprise with Fundsmith, but then with either of those we are not comparing apples with apples. Income funds are almost always poorer performers for TR than low income funds so it would be a shock if they weren't performing better. Finding funds which perform better is not difficult - holding funds which permanently perform better is more difficult

Fundsmith, BTW seems a breed apart - when I look at my holding and it's XIRR month by month, I find its performance extraordinary and wonder how long that can go on.

Arb.

scotia wrote:So if you are looking at two ITs, with identical total returns, and you are perfectly happy to simply sell units to produce your desired income level, then its probable (depending on your income) that the IT with the lower dividend will produce a superior tax paid return.

That may be true at the moment, but a few years ago and for a good number of years, the converse was true. That's how the FT350HY Index got so far ahear of the FTSE350LY index.

Both indices started on the same day, yet the Total Return version of the FTSE350HY (HIX) a few days ago was 6449 and that of the FTSE350LY (LIX) was 5048.

TJH

ReallyVeryFoolish wrote:Quite, it isn't apples v apples. However, it is all money. The comparison isn't entirely outrageous.

But Smith has been consistently delivering for 11 years or more now with an impressive lack of major volatility. I do still keep an eye on FS and I have diversified out of FS to Smithson IT and Blue Whale growth fund. But FS keeps on doing its stuff. By a margin the best thing I ever bought more than a decade ago now.

BTW, look at City of London. That's awful.

RVF

I too bought into FS and can't help thinking what would have happened had I put all my chips into it. But, of course, I wouldn't have done, and neither you nor I were gifted with knowledge of what was to come.

Thinking that way does not get us very much further, unfortunately. I'm not convinced we can come to any useful general lessons to help - as soon as we "know" something, the market tends to morph and confound us.

Yes, Smith is a consistent performer, but so was Woodford for a similar period, so was Bolton for much longer. Buffett was a greater investor than all three, yet people are now questioning whether he is past it. The trick is to know when to jump ship and who to back next. If you ever find out, let me know what the trick is.

BTW, I am also cutting back on FS and buying into Smithson.

Arb.

Arborbridge wrote:

ReallyVeryFoolish wrote:Quite, it isn't apples v apples. However, it is all money. The comparison isn't entirely outrageous.

But Smith has been consistently delivering for 11 years or more now with an impressive lack of major volatility. I do still keep an eye on FS and I have diversified out of FS to Smithson IT and Blue Whale growth fund. But FS keeps on doing its stuff. By a margin the best thing I ever bought more than a decade ago now.

BTW, look at City of London. That's awful.

RVF

I too bought into FS and can't help thinking what would have happened had I put all my chips into it. But, of course, I wouldn't have done, and neither you nor I were gifted with knowledge of what was to come.

Thinking that way does not get us very much further, unfortunately. I'm not convinced we can come to any useful general lessons to help - as soon as we "know" something, the market tends to morph and confound us.

Yes, Smith is a consistent performer, but so was Woodford for a similar period, so was Bolton for much longer. Buffett was a greater investor than all three, yet people are now questioning whether he is past it. The trick is to know when to jump ship and who to back next. If you ever find out, let me know what the trick is.

BTW, I am also cutting back on FS and buying into Smithson.

Arb.

Yes, could not agree more. Therein lies a big problem with actively managed funds. Just to add, 10 years ago CTY's 10 year total return was comfortably ahead of both the FTSE All-Share and FTSE All World. No doubt plenty of investors piled in based on that track record.

scotia wrote:

Arborbridge wrote: I would keep XIRR records in addition, to keep a handle on total return too.

Thanks for your table - I have attached 5 year total return. I have dropped out IVI (no longer with us), and have added a World tracker and Fundsmith OEIC.
Values taken today from HL, and rounded to 1%. Any errors in my transposition would be gratefully corrected.

Some of the better returns have been helped by narrowing of discounts. Still a valid return of course, but reduced scope for future reductions in discount (and provides scope for future widening!). eg from the AIC site, 3in price return over 5 years 86%, NAV return 78%. MRC price return 92%, NAV return 78%. LWDB price return 89%, NAV return 74%.

hiriskpaul wrote:

scotia wrote:

Arborbridge wrote: I would keep XIRR records in addition, to keep a handle on total return too.

Thanks for your table - I have attached 5 year total return. I have dropped out IVI (no longer with us), and have added a World tracker and Fundsmith OEIC.
Values taken today from HL, and rounded to 1%. Any errors in my transposition would be gratefully corrected.

Some of the better returns have been helped by narrowing of discounts. Still a valid return of course, but reduced scope for future reductions in discount (and provides scope for future widening!). eg from the AIC site, 3in price return over 5 years 86%, NAV return 78%. MRC price return 92%, NAV return 78%. LWDB price return 89%, NAV return 74%.

One does have to be aware of that point. I'm tempted by a small discount and I think one could probably make up quite an interesting portfolio of high discounts and wait for the value to "out". The problem I've found lies in the time taken and uncertainty of outcome.

Arb.

Isn´t this like the classic retirement income dilemma - invest for total return and drawdown for income or alternatively go for dividend income. Whole books have been written on this and there are some great websites dedicated to the subject - have a read of Wade Pau on RetirementResearcher, Big Ern at Early Retirement Now or Max at RetirementAce. If at the end of the day it is just dividend income you´re after then it's difficult to beat a diversified portfolio of income trusts and you´ll find lots of guidance on this subject within the LemonFool forum.

Arborbridge wrote:One does have to be aware of that point. I'm tempted by a small discount and I think one could probably make up quite an interesting portfolio of high discounts and wait for the value to "out". The problem I've found lies in the time taken and uncertainty of outcome.

Arb.

Not sure I would be tempted by a small discount, but buying on a big discount can work out really well. Last time I did this was with UK small cap ITs. I got better returns over the period I held them than I would have done with a FTSE 250 tracker and the strategy also beat FTSE World. But success is far from guaranteed. As illustrated in this thread, 3in, MRC and LWDB all did well with the return boosted by the narrowing discount, but they still trailed VWRL.

hiriskpaul wrote:

Arborbridge wrote:One does have to be aware of that point. I'm tempted by a small discount and I think one could probably make up quite an interesting portfolio of high discounts and wait for the value to "out". The problem I've found lies in the time taken and uncertainty of outcome.

Arb.

Not sure I would be tempted by a small discount, but buying on a big discount can work out really well. Last time I did this was with UK small cap ITs. I got better returns over the period I held them than I would have done with a FTSE 250 tracker and the strategy also beat FTSE World. But success is far from guaranteed. As illustrated in this thread, 3in, MRC and LWDB all did well with the return boosted by the narrowing discount, but they still trailed VWRL.

They trailed VWRL because they were apples not oranges VWRL is 55% onvested in the US, and particularly tech, which the others aren't. So it not so much the discount as the underlying investments which make the difference here.

Arborbridge wrote:

hiriskpaul wrote:

Arborbridge wrote:One does have to be aware of that point. I'm tempted by a small discount and I think one could probably make up quite an interesting portfolio of high discounts and wait for the value to "out". The problem I've found lies in the time taken and uncertainty of outcome.

Arb.

Not sure I would be tempted by a small discount, but buying on a big discount can work out really well. Last time I did this was with UK small cap ITs. I got better returns over the period I held them than I would have done with a FTSE 250 tracker and the strategy also beat FTSE World. But success is far from guaranteed. As illustrated in this thread, 3in, MRC and LWDB all did well with the return boosted by the narrowing discount, but they still trailed VWRL.

They trailed VWRL because they were apples not oranges VWRL is 55% onvested in the US, and particularly tech, which the others aren't. So it not so much the discount as the underlying investments which make the difference here.

I know, and this is a fair point, but if I am choosing to stray away from world market weighting, by backing an IT or a strategy (value, quality, whatever), I want to see a better return from doing that than I would get from a bog standard world tracker. Or at least, a better risk adjusted return.