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Do Income based IT's/OEIC's reduce portfolio risk?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
EssDeeAitch
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Do Income based IT's/OEIC's reduce portfolio risk?

#166125

Postby EssDeeAitch » September 13th, 2018, 5:21 pm

I am hoping the collective wisdom here can help me reconcile to a broad investment strategy but please excuse me if this question is somewhat naive.

My ISA's contain growth funds (IT's & OEIC's) and I am considering making my SIPP income based on the basis of the investment strategies being different to each other and thereby reducing risk. I shall be keeping significant cash on hand and will be able to reinvest the income as it is not needed for living expenses.

Does this approach seem reasonable and sensible? Does it provide for "diversity" in my portfolio? I really want to avoid becoming a victim of the "law of unintended consequences" so your input appreciated.

hiriskpaul
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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166131

Postby hiriskpaul » September 13th, 2018, 5:44 pm

Historically speaking it is actually been value portfolios that have performed best over long periods rather than growth and these typically pay a higher income than growth portfolios. This tendency for value to beat growth is highly variable and has not worked over all periods. The last 10 years being a good example.

I think it would be very wise to diversify to value/income. You will be pleased if we get a reversion to the mean.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166166

Postby Hariseldon58 » September 13th, 2018, 8:47 pm

I’d second Hiriskpaul with the proviso that you need to be patient.....be prepared to appear wrong, for possibly years, it takes personal confidence in why you are doing something to keep with a potentially unpopular approach.

An income based portfolio does at least pay you to be patient..

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166413

Postby argoal » September 14th, 2018, 6:17 pm

There is an interesting blog entry from the ever sensible and thoughtful Ben Carlson contemplating whether the value factor is, in fact, dead.

http://awealthofcommonsense.com/2018/09/is-software-eating-value-investing/

As ever, he is non-commital but is open to the idea that market is no longer about tangible assets any more but the value of companies is their intangibles.

Certainly, it does seem quaint to consider physical stock as a particularly valuable asset any more in this digital world.

Food for thought....

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166433

Postby richfool » September 14th, 2018, 7:21 pm

EssDeeAitch wrote:My ISA's contain growth funds (IT's & OEIC's) and I am considering making my SIPP income based on the basis of the investment strategies being different to each other and thereby reducing risk.

EssDeeAitch,

Re income based stocks, there is an argument that when the SP of income stocks falls back and thus the dividend yield increases, that tends to draw buyers back in, (because of the increased dividend), thus reducing the depth of the fall. And that that to some extent tends to underpin the price of income stocks, as opposed to growth stocks.

There is also the fact that once the dividend has been paid out, Mr Market can't take it away, whereas the growth in the share price can fall (at a stroke).

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166444

Postby EssDeeAitch » September 14th, 2018, 8:07 pm

richfool wrote:
EssDeeAitch wrote:EssDeeAitch,

Re income based stocks, there is an argument that when the SP of income stocks falls back and thus the dividend yield increases, that tends to draw buyers back in, (because of the increased dividend), thus reducing the depth of the fall. And that that to some extent tends to underpin the price of income stocks, as opposed to growth stocks.

There is also the fact that once the dividend has been paid out, Mr Market can't take it away, whereas the growth in the share price can fall (at a stroke).


That is a very good point and thanks for making it.

hiriskpaul
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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166461

Postby hiriskpaul » September 14th, 2018, 9:07 pm

argoal wrote:There is an interesting blog entry from the ever sensible and thoughtful Ben Carlson contemplating whether the value factor is, in fact, dead.

http://awealthofcommonsense.com/2018/09/is-software-eating-value-investing/

As ever, he is non-commital but is open to the idea that market is no longer about tangible assets any more but the value of companies is their intangibles.

Certainly, it does seem quaint to consider physical stock as a particularly valuable asset any more in this digital world.

Food for thought....

This chimes with the sort of things being said in the dot com bubble. Technology companies taking over the World. What they forgot was that existing companies can also be rather good at adopting technology and not paying ludicrous sums to do so.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166462

Postby mc2fool » September 14th, 2018, 9:10 pm

richfool wrote:There is also the fact that once the dividend has been paid out, Mr Market can't take it away

Unless, of course, you reinvest it, as the OP is planning to do :D

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166478

Postby richfool » September 14th, 2018, 10:43 pm

mc2fool wrote:
richfool wrote:There is also the fact that once the dividend has been paid out, Mr Market can't take it away

Unless, of course, you reinvest it, as the OP is planning to do :D

Yes, so he has had it (the dividend), to be able to reinvest it.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166483

Postby mc2fool » September 14th, 2018, 11:15 pm

richfool wrote:
mc2fool wrote:
richfool wrote:There is also the fact that once the dividend has been paid out, Mr Market can't take it away

Unless, of course, you reinvest it, as the OP is planning to do :D

Yes, so he has had it (the dividend), to be able to reinvest it.

At which point Mr Market can take it away just as he could have if there hadn't been a dividend and the value had been kept in the company instead.

The OP is comparing growth vs income and (from this point of view) there's no difference between holding a share growing at 8%pa and one growing at 4% and paying a dividend of 4% that is reinvested in the same company. Mr Market can "take it away" equally in both cases.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166518

Postby richfool » September 15th, 2018, 9:18 am

FredBloggs wrote:
mc2fool wrote:
richfool wrote:Yes, so he has had it (the dividend), to be able to reinvest it.

At which point Mr Market can take it away just as he could have if there hadn't been a dividend and the value had been kept in the company instead.

The OP is comparing growth vs income and (from this point of view) there's no difference between holding a share growing at 8%pa and one growing at 4% and paying a dividend of 4% that is reinvested in the same company. Mr Market can "take it away" equally in both cases.

A point very well made. It's all just money.

Without getting into semantics, the OP was asking about the differences of an income v growth based strategy. Receiving the (higher) dividends from an income stock, does give him the choice whether to reinvest them or not, and if he invests them, he will also have the choice of what funds to re-invest them in, and, at what point in time, - e.g. whether to defer that action/decision.
I think they are significant and useful differences to be aware of.

hiriskpaul
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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166540

Postby hiriskpaul » September 15th, 2018, 10:33 am

The real flip side of growth shares (highly regarded shares, priced at a premium) are not income shares, but value shares. Income or dividend yield can be an indicator of value (troubled or otherwise out of favour stocks, trading on lower valuations), but it is not a good one. Some value stocks do not pay any dividends. Metrics such as price/book are much better value indicators than dividend yield. If you want to diversify your growth investments look for funds with a value focus rather than an income focus. These funds will likely have higher yields than your growth funds, but I see that more as a by product of the selection process.

One possible candidate you might like to consider is the Vanguard Global Value Factor ETF. It has competitively low charges for a global value fund. This is an accumulating fund, so for simplicity best held in a tax shelter.

EssDeeAitch
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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166722

Postby EssDeeAitch » September 16th, 2018, 2:37 pm

hiriskpaul wrote:The real flip side of growth shares (highly regarded shares, priced at a premium) are not income shares, but value shares. Income or dividend yield can be an indicator of value (troubled or otherwise out of favour stocks, trading on lower valuations), but it is not a good one. Some value stocks do not pay any dividends. Metrics such as price/book are much better value indicators than dividend yield. If you want to diversify your growth investments look for funds with a value focus rather than an income focus. These funds will likely have higher yields than your growth funds, but I see that more as a by product of the selection process.

One possible candidate you might like to consider is the Vanguard Global Value Factor ETF. It has competitively low charges for a global value fund. This is an accumulating fund, so for simplicity best held in a tax shelter.


What I have settled on is looking for funds/trusts with low volatility, long term management, good yields (4%+) and what I have found is that quite a few of these funds focus on value companies. I have some Vanguard funds and will check out their Value Factor. Many thanks

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166732

Postby Itsallaguess » September 16th, 2018, 4:08 pm

EssDeeAitch wrote:
What I have settled on is looking for funds/trusts with low volatility, long term management, good yields (4%+) and what I have found is that quite a few of these funds focus on value companies.


It's at this point where someone often pops up and says 'Can we take a look at your list?'.

Can we take a look at your list?

Cheers,

Itsallaguess

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166780

Postby Charlottesquare » September 16th, 2018, 8:04 pm

hiriskpaul wrote:
argoal wrote:There is an interesting blog entry from the ever sensible and thoughtful Ben Carlson contemplating whether the value factor is, in fact, dead.

http://awealthofcommonsense.com/2018/09/is-software-eating-value-investing/

As ever, he is non-commital but is open to the idea that market is no longer about tangible assets any more but the value of companies is their intangibles.

Certainly, it does seem quaint to consider physical stock as a particularly valuable asset any more in this digital world.

Food for thought....

This chimes with the sort of things being said in the dot com bubble. Technology companies taking over the World. What they forgot was that existing companies can also be rather good at adopting technology and not paying ludicrous sums to do so.


Yes, it has the issue that where others can replicate the intangibles their shelf life may be limited, some will get to a market dominance size, some will out value by takeover, and some will sink. So, do we buy into their idea or do we have Warren's words on moats in the back of our heads as we invest. I am sure there is a place for following intangible led entities but spread of risk thoughts are required to limit exposure.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166823

Postby EssDeeAitch » September 17th, 2018, 8:01 am

Itsallaguess wrote:
EssDeeAitch wrote:It's at this point where someone often pops up and says 'Can we take a look at your list?'.

Can we take a look at your list?
Cheers,
Itsallaguess


This is my almost finalised list, there are some higher volatility funds as well as lower yielding ones and these will be reviewed this week but there are other reasons for including them such as allocation diversification, stability and growth. Not all funds will have equal allocation of investment either so weighting will depend on my settled requirement. This will represent around 50% of my investments with 35% in higher growth funds/trusts in ISA'a and 15% cash. If you see any pratfalls, please let me know.

SECTOR ------ NAME ----- Volatility ----- Yield
Bonds CQS New City High Yield Fund 7.64 7.28%
Bonds Royal London Extra Yield 2.34 6.32%
Bonds Schroder High Yield Income 3.38 6.17%
Europe European Assets Trust 9.06 7.14%
Global Foreign & Colonial Growth & Income 8.85 1.47%
Global Murray Intl 7.79 4.58%
Global Troy Income & Growth Trust 7.44 3.40%
North America JP Morgan American IT plc 11.75 1.23%
Property Direct - UK F&C Commercial Property Trust 11.92 4.17%
Property Direct - UK Standard Life Property Income Trust 6.39 4.04%
UK Equity Income City of London 9.64 4.30%
UK Equity Income Finsbury Growth & Income 9.02 1.76%
Wealth Preservation Capital Gearing Trust 4.08 0.51%
Wealth Preservation RIT Capital Partners 7.50 1.60%

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166833

Postby OZYU » September 17th, 2018, 9:08 am

EssDeeAitch wrote:
Itsallaguess wrote:
EssDeeAitch wrote:It's at this point where someone often pops up and says 'Can we take a look at your list?'.

Can we take a look at your list?
Cheers,
Itsallaguess


This is my almost finalised list, there are some higher volatility funds as well as lower yielding ones and these will be reviewed this week but there are other reasons for including them such as allocation diversification, stability and growth. Not all funds will have equal allocation of investment either so weighting will depend on my settled requirement. This will represent around 50% of my investments with 35% in higher growth funds/trusts in ISA'a and 15% cash. If you see any pratfalls, please let me know.

SECTOR ------ NAME ----- Volatility ----- Yield
Bonds CQS New City High Yield Fund 7.64 7.28%
Bonds Royal London Extra Yield 2.34 6.32%
Bonds Schroder High Yield Income 3.38 6.17%
Europe European Assets Trust 9.06 7.14%
Global Foreign & Colonial Growth & Income 8.85 1.47%
Global Murray Intl 7.79 4.58%
Global Troy Income & Growth Trust 7.44 3.40%
North America JP Morgan American IT plc 11.75 1.23%
Property Direct - UK F&C Commercial Property Trust 11.92 4.17%
Property Direct - UK Standard Life Property Income Trust 6.39 4.04%u
UK Equity Income City of London 9.64 4.30%
UK Equity Income Finsbury Growth & Income 9.02 1.76%
Wealth Preservation Capital Gearing Trust 4.08 0.51%
Wealth Preservation RIT Capital Partners 7.50 1.60%



TIGT, I see that you have classified this as Global. In fact it is a UK Equity income IT, solid and well run, similar to CTY.

Others to go alongside this pretty solid list: HFEL(Far East, good divi growth record, good yield), IBT(Income from capital growth, BIO is an important long term theme imho), IPU(UK small Cos, income from capital growth, very nice long term growth IT, we'll run. There should be room for Small Cos in any portfolio imho). My wife holds these, and a few on your list. She only invests in collectives, mostly IT.


Ozyu

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166837

Postby EssDeeAitch » September 17th, 2018, 9:19 am

OZYU wrote:
EssDeeAitch wrote:
Itsallaguess wrote:


TIGT, I see that you have classified this as Global. In fact it is a UK Equity income IT, solid and well run, similar to CTY.

Others to go alongside this pretty solid list: HFEL(Far East, good divi growth record, good yield), IBT(Income from capital growth, BIO is an important long term theme imho), IPU(UK small Cos, income from capital growth, very nice long term growth IT, we'll run. There should be room for Small Cos in any portfolio imho). My wife holds these, and a few on your list. She only invests in collectives, mostly IT.


Ozyu


Thanks for pointing out TIGT - some reallocation/balancing will be needed and I will also check the funds/trusts you mention. I am not too concerned about not having a wider spread on this list as I have other regions/sectors covered within my ISA's

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#166886

Postby colin » September 17th, 2018, 11:11 am

Do Income based IT's/OEIC's reduce portfolio risk?

Yes for as long as interest rates do not rise.

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Re: Do Income based IT's/OEIC's reduce portfolio risk?

#167216

Postby Pastcaring » September 18th, 2018, 2:17 pm

Short answer ,nope.People buy the myth,not the fact .

Dow crash 1929, depression in many places in the world,diversification was useless.

1973/74 oil shock,hit the world,diversification was useless.

We have just/ still are, going through the GFC.Diversification was useless.

History teaches us the mistakes that people are going to make in the future?

My usual habit of going against the crowd and the accepted wisdom.If you have 10 funds there ( I didn't count them ),charging fees ,say 0.3% ,then you are paying 3% for an illusion.More if the costs are higher.

Diversification produces average returns minus costs.

For the financial industry it is the biggest gravy train ever known.I can' t imagine how much is tied up in funds and pension schemes.Imagine being guaranteed a %age of it every year


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