Itsallaguess wrote:I think HYP1 is a great experiment in how a completely 'hands-off' income-portfolio might develop, ...
Sorry, but I disagree, because HYP1 has not been run in a completely 'hands-off' way. If it had been, it would be missing its current holdings in BA Tobacco, BT Group, Dixons Carphone, GlaxoSmithKline, Persimmon and Pearson, because nothing would have been done following the cash takeovers of Gallaher, Associated British Ports, Alliance Boots (derived from original holding Boots), Blue Circle, Resolution (derived from original holding Britannic) and Scottish & Newcastle. Together, those six holdings produced £5,628.70 income out of the portfolio total of £10,557.29, and had a capital value of £76,339 out of the portfolio total of £159,682, so their absence would remove a bit over half of the portfolio's share income and a bit under half of the portfolio's share capital. It would have a large pile of cash instead of those holdings, which would go about 71% of the way towards replacing the capital (*) but only a tiny bit of the way towards replacing the income, cash interest rates being as derisory as they are.
Those are major differences from how HYP1 has actually performed, and in fact it's almost certainly an underestimate of those differences because a completely 'hands-off' version of HYP1 would also not have had the benefit of the topped-up holdings produced by reinvesting the proceeds of the numerous partial capital returns made by HYP1's holdings over the years. So the actual sizes of many of the 9 holdings it would have kept would be smaller than the real HYP1's, and the unproductive cash total larger - it would take a lot of work to establish just how big those differences are, but my gut feel is not as major as those due to cash takeovers but still quite noticeable (**). For completeness, there would also be some differences due to the fact that HYP1 has entirely voluntarily sold (***) on four occasions in order to simplify the admin: United Utilities rights in 2003 to simplify a complex rights issue, Anglo American's demerger on tiny holdings in Mondi in 2007, Banco Santander's takeover of Alliance & Leicester for shares in 2008 and GVC's takeover of Ladbrokes Coral for a mix of shares, cash and 'Contingent Value Rights' in 2018. For various reasons, those differences look quite minor - the United Utilities differences are essentially only a matter of share price fluctuations affecting the outcomes of different routes through the rights issue, the Mondi holdings would have been really small, the Alliance & Leicester holding was only about a third of its original size when it was taken over and Banco Santander's performance since October 2008 is not impressive, and the completely 'hands off' version of HYP1 wouldn't have faced the Ladbrokes Coral takeover at all because it wouldn't have had Ladbrokes Coral (it having been produced by reinvestment of the Blue Circle takeover proceeds in Hilton Group, which was later renamed Ladbrokes and later still merged to form Ladbrokes Coral).
The practical points I'm making with all that are:
A) In the long run, it isn't realistic to expect to run a HYP in a completely 'hands-off' way, because cash takeovers and returns of capital are basically one-way routes back to cash whose effect is cumulative. It's highly uncertain when they'll accumulate to enough to drastically affect the HYP's performance, but in the long run they're practically certain to do so, and HYP1's experience of five cash takeovers (plus a share takeover that was rather awkward for a demo 'paper' portfolio) in the three years 2006-2008 shows that it can happen quite quickly.
B) So in practice, a HYP needs a way to decide how to reinvest returned capital, and no way of doing that can be completely 'hands-off'. It can be quite close to completely 'hands-off' if it's a single company returning part of its capital, with its shares remaining on the market and without various complications, by using the mechanical rule of reinvesting the capital in the share that produced it - that's not completely 'hands-off' since the HYPer does have to do something, namely make the buy, but once the decision has been made to use that rule, the HYPer only needs to act on it, not make further decisions. Though complications can change that fairly easily - for instance, when Six Continents demerged Mitchells & Butlers in 2003 and renamed what was left of itself as International Hotels Group, it did a return of capital at the same time - and that did present a HYPer who wanted to follow the mechanical rule with an extra decision, namely how to split reinvesting it between the two resulting companies.
C) But that mechanical rule doesn't work for reinvesting capital returned by cash takeovers, since it's impossible to reinvest that capital in the share that produced it. Furthermore, experience of HYP1 says that cash takeovers are probably the biggest source of returned capital, and that without reinvesting it, a HYP's number of shares will probably decline over time. That's not absolutely certain, because demergers will produce increases to offset decreases caused by cash takeovers, but HYP1's record of six cash takeovers and two demergers (one of them only producing a small 'splinter' holding, which HYP1 sold) suggests probably not enough increases. So it seems likely that one will need to select new holdings from time to time, and that necessarily involves making decisions that are at least very hard to make well using a purely mechanical rule.
So I'm not criticising HYP1 for failing to be a completely 'hands off' HYP, since I don't think running such a HYP is a realistic aim - I'm just saying that HYP1 isn't one. It would be more accurate to describe it as a non-tinkering HYP, though the small number of voluntary sales it as done mean that that isn't a fully accurate description either. Perhaps calling it an admin-tinkering-only HYP would be best, since the common theme of the few voluntary sales it has done is avoiding admin to do with multi-stage corporate actions, tiny holdings, foreign holdings, etc. Note incidentally that such admin avoidance tends to be a rather more important factor in the HYPer's mind for a 'paper' demo HYP than it would be for a real-money HYP that was actually a significant part of the HYPer's financial prospects, both because the HYPer is probably going to be less willing to spend significant time and effort on it and because there won't be a broker collecting dividends, handling obligatory corporate actions and alerting voluntary corporate actions for the HYPer.
(*) Those takeovers delivered cash of roughly £13,556+£14,032+£9,328+£5,330+£3,881+£8,080 = £54,207 according to
https://web.archive.org/web/20170213161 ... sort=whole. That's not necessarily totally accurate, as those figures were calculated by kool4kats in 2009 rather than by pyad at the time of the takeover - his figures tended to be a bit vague, e.g. he described the proceeds of the
Associated British Ports takeover as "about £14,000" - but it should be pretty close.
(**) In particular, those due to IHG's numerous capital returns by a special dividend plus share consolidation must be mounting up!
(***) I say "entirely voluntarily" because there are also a few occasions on which it sold earlier than a near-certain takeover actually went through, just to get the admin done and dealt with. I don't have a record of exactly which occasions they were.
Gengulphus