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Investment Trust Income Portfolio for our Retirement

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
mickeypops
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Investment Trust Income Portfolio for our Retirement

#159437

Postby mickeypops » August 14th, 2018, 9:50 am

Mrs MP and me retired in the spring, and we’ve now completed the transfer of our employer DC funds into our SIPPs held with Hargreaves Lansdown. The funds have been used to top up and finalise our Investment Trust portfolio in the SIPPs which are now in drawdown.
The portfolio has been developing for the last three or four years, taking in our monthly savings and the cash we used to pay into our mortgage before it was paid off in 2014. It has many HYP characteristics: it is income focused; long term buy/hold; capital value of secondary importance; diversification. The forecast yield is quite high - 5.67% - maybe too high. Time will tell I guess.

Lemonfools familiar with John Baron’s work may identify some similarities with his work, and it’s fair to note him as being of influence, alongside publications such as Money Observer and the AIC web site. The income is being withdrawn to provide some “jam” to our “bread and butter” retirement income of our DB pensions and the state pension when it arrives. Any unused income is being saved outside the SIPP into our ISAs which hold our cash float and emergency/capital purchase moneys.

The asset allocation is approximately as follows:

Fixed Interest – 10%
UK Equities – 23%
International / Private Equity – 37%
Property - 14%
Infrastructure / Alts – 16%

Here are the details of the portfolio. For ease of future comparison (and for confidentiality) I have adjusted all values pro rata to show a starting position as at 31.07.18 of exactly £100,000. If this is of interest to the board I will post updates every six months.



Best wishes,

MP

MaraMan
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Re: Investment Trust Income Portfolio for our Retirement

#159441

Postby MaraMan » August 14th, 2018, 10:12 am

Thanks for posting, very interesting. I am in a very similar position.

I chose, for better for worse, to use our ISA's for a Baronesque high yield IT and share portfolio, very much along the lines of yours with a yield of around 5%. For my SIPP also with HL I decided to have a small number of growth IT's (6) and 2 growth shares, while I took about 4% pa out as pension.

Its only been a year and so far far too early to draw any conclusions but it has been interesting to observe that my growth portfolio, nearly 20% up in 12 months, has substantially eclipsed my income ISA portfolio. It was interesting to hear Terry Smith of Fundsmith fame make the same point at one of the shareholder meetings.

As I said the jury is still out as its far too early to draw any conclusions whatsoever, but the ebb and flow of fashion in equity portfolios is interesting to observe. I guess for me a mix is proving to be fruitful.

All the best with it.

MM

mickeypops
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Re: Investment Trust Income Portfolio for our Retirement

#159446

Postby mickeypops » August 14th, 2018, 10:22 am

Thanks MaraMan

It will be very interesting to learn how your TR portfolio, with 4% withdrawals, compares with our respective income focused strategies. I went for Income and a "natural yield" approach because I have an aversion to selling and depleting the holding, slightly irrational I know. This way, whenever there's a correction or full blown slump, I think I will be able to sleep a bit more soundly..... We shall see.

Thanks again for your insight.

MP

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Re: Investment Trust Income Portfolio for our Retirement

#159465

Postby BrummieDave » August 14th, 2018, 11:14 am

Thanks for posting this, it's always interesting to see someone else's portfolio, particularly when the overall objective and context is so similar to one's own. I will also be taking the natural yield from an income focused IT portfolio to supplement a DB pension, and plan to post my portfolio for review and comment in a couple of months time.

We overlap in several ITs, inc. MYI, EAT, HFEL, JLEN, MRC, MCT, RGL, and SLI. I took Luni's B7a as my starting point, and then diversified out globally and away from straight equity based ITs, and now have a yield lower than yours, at around 4.4%

Thanks again, and please look out for my review post in a couple of months.

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Re: Investment Trust Income Portfolio for our Retirement

#159503

Postby mickeypops » August 14th, 2018, 12:58 pm

Thanks BrummieDave - I look forward to your posts about your IT portfolio.

MP

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Re: Investment Trust Income Portfolio for our Retirement

#159778

Postby forrado » August 15th, 2018, 10:29 am

mickeypops wrote:The forecast yield is quite high - 5.67% - maybe too high. Time will tell I guess.

That’s the very reservation I have. The set-up suggests to me that down the road the struggle is going to be with inflation in terms of both income and capital. Also, 20 holdings is too many for my liking with an over emphasis on high yielders. All well and good if such high yields can be sustained but the risk is the elevated yield curve. It would take only a few of those 20 holdings to disappoint for the cracks to begin to show.

Just as the OP intends to do, my ISA income is drawn off to provide me with the “jam” for my “bread and butter” retirement income of a DB and state pension which, in my case, I’ve been drawing since 2007 (the DB) and 2011 (the state).

In the spirit of sharing, one can see what my ISA portfolio of ITs – that was established back in 1991-92 – currently looks like at …
https://drive.google.com/drive/folders/15bHbQAZutzHXBJvxNqViJNdapPtf2K0v

The trio of City of London, Murray Income and Schroder Income Growth account for 50% Capital and 50% Income
(Consider these three to be core holdings. For the past 20 years - and more - the three have beaten inflation in terms of both capital and income)

Merchants Trust accounts for 16% Capital and 19% Income
(In my view a genuine high-yielder that has never cut the annual dividend to shareholders in 35 years. Has done well in terms of both capital and income of late since interest on weighty borrowings was considerably reduced)

Securities Trust of Scotland (STS) and Murray International (MYI) represents 19% Capital and 17% Income
(A tale of two opposites; STS has doubled in SP terms since I took chance on them back in 2009 at 85p, however the income generation has been lacklustre, while for MYI the story has been reversed, strong income but weak capital performance)

F&C Comm Property Trust represents 14% Capital and 14% Income
(Has been a holding since the SP was 100p, while the dividend has remained stubbornly static has done well in capital terms - very reliable)

Cash currently accounts for £1,568 with a further £2,250 due in pay-outs by the end of this month of August from four of the holdings.

Based on pay-outs per share the portfolio received during the past 12 months, £19,800 should be forthcoming over the next 12 months plus of course any changes (positive or negative) there may be in the amounts of dividend payments received, minus £120 deducted from income in fixed flat-fee admin charges for the coming year. As things presently stand the portfolio has an annual running yield of 4.1%.

I’ve always been comfortable with not too many holdings. My thinking is there’s always that danger one will spread the money too thin thereby diluting the potential of future returns. Obviously, with fewer holdings comes greater risk, but I’m of the view that it’s all a balancing act anyway. I’ve come to very much concur with experiences of legendary Fidelity fund manager Peter Lynch, at any one time a third are winners, a third are losers and the rest are somewhere in-between. In terms of churning out income, 7 holdings is all I need, that is on condition I’ve done my due diligence and am satisfied with a holding’s ability to do what I want it to do over time and not disappoint me too much in the process.

Over the past 10 years growth of my ISA income overall has keep pace with the RPI, however it’s the capital side of the portfolio that’s been building up the gains - which should come as no surprise given the favourable market conditions that have existed. Though to be honest, I’ve trained myself over time to try and largely ignore the market. At this point in the game I’m more concerned to stay one-step ahead of inflation as my process of decumulation gets underway.

mickeypops
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Re: Investment Trust Income Portfolio for our Retirement

#159794

Postby mickeypops » August 15th, 2018, 11:18 am

Thanks for you input Forrado, I'm aware that the income may be at the cost of lesser capital gain or even preservation. I will be keeping a close eye on the portfolio. One mitigation is that I'm not spending all of the income and so some of it can be reinvested into the market. Capital is of less importance to me - I have no plans to dip into it for as long as I can envisage. If I can achieve income (and capital) preservation in real terms I'll be content.

The number of holdings does seem large, but I'm reassured by John Baron's approach which is not dissimilar. His portfolios hold 3 or 4 or more of each asset type, for diversification. I'm aware though that, for example, the UK equity income trusts are all fishing in the same pond, similar to LUNI's B7/8 baskets. Some though seem to do much better that others, and I'd rather invest in a few rather than try to pick a winner. The portfolio size is such that each investment is a decent size (to me.) One advantage is that there's a steady stream of dividends, which is a pleasant feeling!

Your portfolio seems perfectly sensible - congratulations and good luck for the future.

MP

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Re: Investment Trust Income Portfolio for our Retirement

#159887

Postby Hariseldon58 » August 15th, 2018, 4:36 pm

Interesting posts, Forrado makes good points about too many holdings and the yield being targeted is high.

Having invested along similar lines as Forrado around 10 years ago I found the desire for diversification result in multiple holdings in different areas of investment that I wished to have in portfolio and the number of holdings became truly excessive such that I had about 10 holdings in UK Equity Income, when you looked through at the underlying portfolio of holdings it was a mess !

I have diverged away from chasing income such that whilst the portfolio income has risen steadily, the capital value has soared such that the yield on the portfolio is now around 2% from over 4%.

The portfolio is now largely in overseas passive ETF's but have added to Law Debenture on its present large discount and bought back into Finsbury Growth and Income and perhaps we may see market weakness in Sterling, UK orientated trusts and more large discounts that could well provide some interesting opportunities.

There comes a point that if you grow capital sufficiently then the income becomes secondary, not enough years left to spend the money !( A large equity holding still makes sense to provide protection against inflation)

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Re: Investment Trust Income Portfolio for our Retirement

#159922

Postby mickeypops » August 15th, 2018, 6:41 pm

Thanks for your comments Harriseldon.

I guess some of the comments here reflect the classic "Total Return" v. "Natural Yield" debate and I have to confess to belonging to the latter camp.

In terms of number of holdings, well, they're all purchased now - there's little or no additional admin as I'm not trading and all I need to do is to make sure the dividends are received, and I've never had an issue. There's no additional cost either as both my and Mrs MP's SIPPs benefit from HL's cap on charges for ITs.

Thanks again everyone, you're comments are greatly appreciated.

MP

Itsallaguess
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Re: Investment Trust Income Portfolio for our Retirement

#159933

Postby Itsallaguess » August 15th, 2018, 7:11 pm

Hariseldon58 wrote:
I have diverged away from chasing income such that whilst the portfolio income has risen steadily, the capital value has soared such that the yield on the portfolio is now around 2% from over 4%.

There comes a point that if you grow capital sufficiently then the income becomes secondary, not enough years left to spend the money !( A large equity holding still makes sense to provide protection against inflation)


On a quick skim-read, we could read the above as a simple change of mind regarding your earlier income-investment approach, but having read you discussing the same topic a couple of times in the past on these boards, can I just confirm that your income-investments did *so well*, on a total-return basis at least, that you were then able to generate the originally-required income by re-investing the now-grown capital into much lower yield investments, thus walking down the risk-ladder somewhat whilst maintaining the generation of your original income-requirements?

It sounds like a great result overall, and congratulations on achieving such an outcome, but it sounds like the catalyst for the outcome was such a good initial TR result from the income-approach initially, and this isn't always clear when you then describe your movement away from that approach into lower yielding assets.

An interesting thread - thanks to MP for starting it.

Cheers,

Itsallaguess

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Re: Investment Trust Income Portfolio for our Retirement

#159973

Postby BrummieDave » August 15th, 2018, 8:46 pm

mickeypops wrote: I'd rather invest in a few rather than try to pick a winner. The portfolio size is such that each investment is a decent size (to me.) One advantage is that there's a steady stream of dividends, which is a pleasant feeling!



Great thread and very much of interest to me, so thanks to MP and all respondents.

The question of how many ITs to have in a LTBH income orientated portfolio was one that I thought long about. Having started with Luni's B7a plus CTY (8 being preferable to 7 purely for aesthetic reasons to me!) I then initially chose to diversify out in global terms, and a little later in underlying asset classes too. So I had to have more than 8, unless I tinkered of course, but how many should I grow that total to?

I know hold 20 ITs with my four largest holdings comprising 48% of the total and providing a global base platform (MYI, STS, MUT and HFEL), an overall 50:50 split between UK and International, and 90% in equities with the remainder in Infrastructure and Property. I'm currently seeing an overall yield of 4.4%.

So I think I've partly embraced the same approach as Forado with a relatively small number of ITs forming a core, but then built up smaller holdings in 16 other ITs to diversify.

It's fascinating stuff this...! :)

mickeypops
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Re: Investment Trust Income Portfolio for our Retirement

#160069

Postby mickeypops » August 16th, 2018, 9:52 am

Thanks for the interest all. It’s reassuring that others are using ITs to help fund their retirement. There really isn’t that much material out there compared with OEICs and UTs, and apart from John Baron and some Money Observer material, there’s not a lot in the way of sample portfolios etc.

A word about my portfolio. It might look at first glance to be a random collection of high yield trusts, but that isnt the case. I started off my investment journey in 2012 by transferring some legacy DC pension funds to a SIPP, and did the same for Mrs MP. At first, I followed a HYP share buying approach, but became uncomfortable with the large swings experienced by individual shares, in both directions. LUNI’s work with his Baskets got me interested in ITs as collectives, I was -and remain- attracted by the idea of buying at a discount to NAV and by the ability to smooth dividends. There are other pros and cons, but I’m confident that on balance ITs are suitable for Long term buy and hold income instruments. Around 2014 I switched the HYP into My first 10 ITs, which I still hold, and over the next four years continued to invest monthly into developing the portfolio I describe above.

After retiring in April, I transferred into our SIPPs our current employers DC funds, effectively doubling the value of the portfolio, which by then had grown to 18 ITs. I put in place the purchases needed to get to the asset allocation I mention in the OP, which is a pretty conventional 60/40, with the 60% equities split between domestic and international trusts, and the 40 being a mix of Fixed Interest, property and alternatives.

I’ve been happy with the portfolio as it has been developing over the last few years, and quite excited to see how it pans out over the years.

A quick word on the yield, which we all agree is on the high side. I’d targeted 5% as I’d been going along, but deflated values and inflated yields on some of the property and infrastructure trusts have seen it rise higher than I had forecast. We shall have to see if some of the trusts are in LUNI’s “danger zone!”

Thanks again for everyone’s interest in this.

MP

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Re: Investment Trust Income Portfolio for our Retirement

#160106

Postby Hariseldon58 » August 16th, 2018, 12:36 pm

@Itsallaguess

For clarification, I had followed the Investment Trust route since 1990, largely UK Equity Income trusts and Global Investment Trusts, these worked very well. ( A brief foray into HYP 2006-2008 was a mistake...probably my fault but getting out in 2008 was a good move in hindsight)

The move into passive funds and a more global approach, particularly the USA, in 2012 onwards, reflected the thought that people would pay too much for income, some low quality stocks morph into income stocks to meet demand, low passive costs and being agnostic to stock selection capturing momentum, led to excellent capital performance and the decision in early 2016 to reduce sterling exposure worked out well. Thus the income in pounds has slowly grown whilst moving from higher yielding to lower yielding investments, although not a reduction in risk.

I have looked carefully at previous performance of seven Investment Trusts over a 20 year period, comparing them to various indices.
The trusts are Law Debenture,Finsbury Growth and Income, Lowland, Edinburgh, City of London, Temple Bar and Foreign and Colonial. I particularly compared the first 4 and the first 6 against an blend of the FTSE100 and FT250 and then against a World blend of indices. By and large they have done very well, except the last few years, this reflected my real investing experience.

I previously invested along similar lines to Forrado, whilst he has stuck with his style and done well, I took a different approach over recent years and have done very well but I am inclined to think that we may have good investment opportunities in investment trusts going ahead and actively compiling a list of trusts for future consideration, I presently only hold Law Debenture and Finsbury Growth and Income.

Many thanks to Forrado for sharing his portfolio and the very well thought out reasoning in which he has described his investing choices and which he has posted over many years here and on Motley Fool.

I do not take a fixed position on the active vs passive, most people would probably do better with a passive approach but these boards are not most people.

With respect to drawing income from capital and dividends against the natural yield approach then Dividend Income from a portfolio's natural yield is reassuring but I feel there is a danger in reaching for income. Investing for total return makes financial sense and its very much easier in a long rising bull market then when shares are going down, perhaps quickly. In 2007-2009 crisis, income from investment trusts stood up very well and it is very reassuring, its much easier to be calm and think long term when the income is still piling in, having seen major market falls twice since 2000 I know this full well.

Portfolio income is my only income source and has been since 2007 and the state pension is still a little over 6 years away, having done well in capital terms does provide a backstop that allows me to be relaxed about these matters but for a smaller portfolio then natural yield is a great choice.

Having seen my portfolio go from 70% to 15% uk over recent years then clearly currency movements have provided a significant tailwind, that could well head into reverse in the next few months/years and thus my personal feeling that UK Equity Income Trusts may provide opportunities.

Heading back to the original topic Mickeypops has an interesting list of investments and will probably do well but in steering towards high income he is not exactly going against the crowd and perhaps a few low yielders might be worth considering.

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Re: Investment Trust Income Portfolio for our Retirement

#160135

Postby forrado » August 16th, 2018, 2:51 pm

@Hariseldon1958
As a side issue concerning Law Debenture.
I have a younger brother who is still working with near 7 years to go before state pension age. Some 13 years ago his company DB pension scheme was closed down and replaced by an inferior DC alternative. After some discussion at the time, I persuaded my brother to tell his employer where to stick the new pension arrangements and go the DIY SIPP route. For the past three tax-years his SIPP has been building a position in Law Debenture. Now on a 2.8% yield and a previous double-digit discount that's starting to tighten, I’ve told him to keep buying LWDB until the market gets round to rerating the stock - which by the looks of a now slightly positive Z-Score could be happening.

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Re: Investment Trust Income Portfolio for our Retirement

#160499

Postby ikethespike » August 18th, 2018, 9:09 pm

Thanks Mickeypops for starting this interesting discussion. Like you and the others I have a similar plan in place to provide top-up income from investment trust dividends. It is reassuring to see that some other lemon fools consider this a viable strategy.

I am slightly envious of your 5.7% yield. Mine is approximately 3%. Similar to Forrado, my top 5 account for 50 % of the portfolio. ( Foreign and Colonial, Scottish American, Personal Assets, Rothschild and Standard Life Equity) . They currently provide 30 % of the income and in the last 5 years or so have produced approximately 70 % of the capital gains.

At the moment, I have no re-balancing strategy or withdrawal of capital gains plan, and this has been taxing my brain - although I do not necessarily need more income at present.

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Re: Investment Trust Income Portfolio for our Retirement

#160581

Postby TahiPanasDua » August 19th, 2018, 1:54 pm

This is a very interesting topic.

In line with others commenting above, I started with a HYP-type income portfolio (before discovering Motley Fool) and proceeded after several years to add international ETFs and ITs to provide greater diversity in terms of the number of company holdings, markets and currencies. The latter feature has been rewarding following the recent GBP drop.

Low-ish yielding ETFs such as EUE (3.12%) and VHYL (3.19%) have increased in value steadily over the years and I now tend to think of them as solid portfolio bankers similar to low yielding but safe ULVR (2.54%), DGE (2.34%) and RB (2.42%) HYP shares. They complement higher yielding holdings and provide some peace of mind. Hold them for long enough through the market cycles and they are unlikely to let you down even if the initial income is unexciting. All of this assumes, of course, that you can afford to have such low yielders. As Hariseldon implies, it may take years to achieve the nirvana of "enough" income so allowing the luxury of at least some safer investments. Nothing will ever be "enough" for some, of course.

More pertinently, like most people on this forum, I was always aware that the FTSE 100 and 250 index companies source income from 75% and 50% overseas holdings respectively, even if suboptimally distributed. Figures for individual UK income ITs, such as Luni's baskets, would, of course, vary from the indices. They should nevertheless provide at least modest overseas cover. I mention this only to give balance to those (few if any) readers here who may be unaware.

TP2.

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Re: Investment Trust Income Portfolio for our Retirement

#160628

Postby Longtermyieldman » August 19th, 2018, 6:05 pm

As others have said, the OP is trading a great income today for a substantial risk that income may not grow as fast as inflation (or cost of living, which can be higher). Fine if you're nearing end of life, risky otherwise. I'd swap out the infrastructure assets particularly and some other very high yielders for ITs that pay less but grow dividends faster.

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Re: Investment Trust Income Portfolio for our Retirement

#160693

Postby chevin » August 20th, 2018, 8:36 am

ikethespike wrote:I am slightly envious of your 5.7% yield. Mine is approximately 3%. Similar to Forrado, my top 5 account for 50 % of the portfolio. ( Foreign and Colonial, Scottish American, Personal Assets, Rothschild and Standard Life Equity) . They currently provide 30 % of the income and in the last 5 years or so have produced approximately 70 % of the capital gains.


Looking at that combination though, you've taken a slightly different approach, haven't you? Personal Assets and Rothschild at least aren't about generating an income per se (or at least a high yield), but more aimed at capital preservation. I hold PNL as part of my core holding primarily for the diversification it provides and the defensiveness of its holdings - a bit of insurance if you like. It's not exactly been setting the world alight in terms of performance, but then that's not the intention! (But there again I hold 26 ITs as my portfolio, so might be regarded by some here as too diworsified).

Can I also add my voice to the appreciation of this thread? I have spent the past 18 months or so gradually changing from a portfolio of predominantly ndividual equities to one now focused almost entirely on ITs. At present it's more growth orientated than generally being discussed here (or, more TR orientated perhaps?) but I'm gradually moving it towards providing retirement income. Like the OP, I've relied mainly on info in Money Observer and John Baron column, plus what I've gleaned here, so all this discussion has been really interesting.

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Re: Investment Trust Income Portfolio for our Retirement

#160701

Postby tjh290633 » August 20th, 2018, 8:59 am

Longtermyieldman wrote:As others have said, the OP is trading a great income today for a substantial risk that income may not grow as fast as inflation (or cost of living, which can be higher). Fine if you're nearing end of life, risky otherwise. I'd swap out the infrastructure assets particularly and some other very high yielders for ITs that pay less but grow dividends faster.

Have you worked out how long it takes to compensate for such tactics? It could be 20 years before there is any advantage.

TJH

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Re: Investment Trust Income Portfolio for our Retirement

#160763

Postby mickeypops » August 20th, 2018, 2:28 pm

Thanks everyone for the interest in the thread, I'm surprised - in a good way - that it has generated so much response.

One other factor for me, when assembling the portfolio, is that it should be fairly "Doris" like and require little or no hands on work, except if there some corporate activity, e,g, a potential take over or merger which impacts upon the income-producing objective of a trust. I intend to write up a brief set of notes so that Mrs MP could easily take care of the investments should something happen to me. She isn't particularly interested in finance, but is by no means stupid and could readily pick up the reins. It's now set on auto-pilot with Hargreaves Lansdown - they pay out a regular amount each month from our SIPPs to our bank accounts on or around the 29th of each month. The SIPPs have a cash buffer or around two months payments so that the cash should always be available.

I think I mentioned before, it's very reasuring to see a steady flow of dividends come in.

Thanks again, and I'll post an update after six months, as at the end of January.


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