HYP and the "Zulu Warrior"

[monabri]

Reading through chapter 20 of Jim Slater's "Investment Made Easy" (!) [1995 update], the Zulu Warrior discusses "High Yielders".
The methodology described for selecting/building a portfolio being:-
- "selection of 10 officers of high yield from the army of stocks in the FTSE350" ... "yield half as much again as the market average"
- "remove any with a div cover less than 1.5" (he originally stated 0.75)
- "eliminate any shares with excessive gearing ~50%" (or even 40% for extra safety)
- "with a high yielder you sell when the yield drops to a more normal level"

He ends up with a dummy portfolio of 10 shares (General Accident/ North West Water/ Severn Trent/Persimmon/Heywood Williams/Powell Duffryn/Anglian Water/Lex Service/Tarmac/Hepworth)...and possibly "BAT".

Observations
- Pretty similar to the HYP methodology we discuss here
- Continued existence of utilities like Severn Trent
- Disappearance of several shares
- He doesn't seem to discuss selection of companies in different sectors to reduce risk (maybe because I'm reading a summary of the strategy)

Conclusions (for me)
- quite a high hit rate of companies that don't appear to be around today - hence, active management of a HYP is required
- small companies are generally to be avoided (Heywood Williams/ Powell Duffryn?)
- sometimes a portfolio gets lucky (eg addition of BATS, as was the case in Pyad's HYP1)
- a portfolio for 10 companies is too few - for a fixed sum of investment (reasonable sum) - it would be safer to have 40 "half-shares" rather than 20 "full shares" (ie invest £1500 in each of 2 companies rather than £3k in just one?)

[Gengulphus]

Conclusions (for me)
- quite a high hit rate of companies that don't appear to be around today - hence, active management of a HYP is required

No, at most that should be: hence, active management of a Zulu-Warrior-style high-yielding share portfolio is required. You can't conclude anything about what a HYP requires in the way of management from what another high-yield strategy requires - not with the major difference on diversification (only 10 shares and not looking at sector-diversification) and quite possibly on level of trading (I don't actually know whether "with a high yielder you sell when the yield drops to a more normal level" would result in an average holding period meeting the HYP standard of "several years to decades", but I'm doubtful...).

And apparent disappearance of companies may mean nothing more than a name change or a takeover. The latter does of course require active management if you count selecting a replacement share or shares as active management - but if you do, that need for active management by HYPs has long been known: no need to bring Zulu-Warrior-style high-yielding share portfolios into it! So really, proper investigation of the missing companies is needed before one can draw any conclusions from them even about Zulu-Warrior-style high-yielding share portfolios... Though given that such portfolios have the "with a high yielder you sell when the yield drops to a more normal level" rule, it's much simpler to conclude from that that they require active management and not look at the missing companies at all!

If you do want to look at the missing companies, I can easily give some help about two of them that I owned in the 1990s / early 2000s:

* Anglian Water was taken over in 2006, and the price paid was certainly profitable compared with my purchase price in the 1989 flotation. Almost certainly also profitable compared with the 1995 date of your book, though I was paying no attention at all to the share price in 1995 so cannot say for certain.

* Lex Services was renamed RAC in 2002, when I owned it for 8 months (as a holding in a yield-based Value portfolio I was experimenting with, not as a HYP investment) and a little investigation shows that it was subsequently taken over by Aviva for a mixture of cash and shares in 2005. I made a roughly 20% capital loss on that holding - not surprising given general market conditions in 2002! Had I held on until the takeover, that would have been a roughly 10% loss on cash alone, and the shares part of the takeover would almost certainly have turned that into a very reasonable profit.

Hadn't even heard of the company in 1995, so cannot say how it would have performed from then - but I'd be surprised if it was a significant loss.

Gengulphus

[PinkDalek]

...

* Lex Services was renamed RAC in 2002, when I owned it for 8 months (as a holding in a yield-based Value portfolio I was experimenting with, not as a HYP investment) and a little investigation shows that it was subsequently taken over by Aviva for a mixture of cash and shares in 2005. I made a roughly 20% capital loss on that holding - not surprising given general market conditions in 2002! Had I held on until the takeover, that would have been a roughly 10% loss on cash alone, and the shares part of the takeover would almost certainly have turned that into a very reasonable profit.

Hadn't even heard of the company in 1995, so cannot say how it would have performed from then - but I'd be surprised if it was a significant loss.

Gengulphus

We had a holding in (Sir) Trevor Chinn's Lex Service from the late seventies, well before they bought RAC in 1999 or thereabouts.

My now sketchy records show them at £4.00 per share in November 1993 (the nearest date I can find at the moment). The 2005 Aviva takeover appears to have been at £9.25 (of which about half was cash). There was a rights issue in September 1995 which we didn't take up but it shouldn't impact on the comparison too much.

On that basis alone, ignoring whatever the high yield was, it doesn't look to have been a bad 1995 Zulu suggestion.

Whether or not we should have hung on to the Aviva shares is another matter. We have sold a number of them and what's left seems to be showing a gain of some 500% (I think this would be against the March 1982 value but I haven't checked the capital history).

Membership of the RAC netted each member some £30,000 on the takeover. I wasn't a member!

[monabri]

Membership of the RAC netted each member some £30,000 on the takeover. I wasn't a member!

Commiserations...

My faux-pas was Marconi (catching the falling knife)!

[Breelander]

Membership of the RAC netted each member some £30,000 on the takeover. I wasn't a member!

Don't feel so bad. I was a member of the RAC and I didn't get a penny. The RAC was owned by the Royal Automobile Club. Only members of that private club were entitled to any payments.

The Royal Automobile Club is a British private club and is not to be confused with RAC, an automotive services company, which it formerly owned.

https://en.wikipedia.org/wiki/Royal_Automobile_Club

Strictly speaking, as a customer of the RAC roadside services I was an associate member, and as such not actually an owner of the RAC.

[PinkDalek]

I do know the difference old boy and don't really appreciate the inference that I am confused! Next you'll be telling me about a golf club in Surrey.

[JohnnyCyclops]

I do know the difference old boy and don't really appreciate the inference that I am confused! Next you'll be telling me about a golf club in Surrey.

Being slightly younger than an 'old boy' I'm glad of the clarification, as being a current member of the RAC (the roadside assistance part) I thought a £30k return on my annual fees would be a pretty good return. It does make more sense knowing you were referring instead to full membership of the private members' club.

[PinkDalek]

I do know the difference old boy and don't really appreciate the inference that I am confused! Next you'll be telling me about a golf club in Surrey.

Being slightly younger than an 'old boy' I'm glad of the clarification, as being a current member of the RAC (the roadside assistance part) I thought a £30k return on my annual fees would be a pretty good return. It does make more sense knowing you were referring instead to full membership of the private members' club.

Fair enough. I should have explained what I meant by Membership of the RAC.

I was being unduly tetchy and you've given me the opportunity to apologise to Bree.

[Breelander]

I was being unduly tetchy and you've given me the opportunity to apologise to Bree.

Accepted.

[Wizard]

Reading through chapter 20 of Jim Slater's "Investment Made Easy" (!) [1995 update], the Zulu Warrior discusses "High Yielders".
The methodology described for selecting/building a portfolio being:-
- "selection of 10 officers of high yield from the army of stocks in the FTSE350" ... "yield half as much again as the market average"
- "remove any with a div cover less than 1.5" (he originally stated 0.75)
- "eliminate any shares with excessive gearing ~50%" (or even 40% for extra safety)
- "with a high yielder you sell when the yield drops to a more normal level"

He ends up with a dummy portfolio of 10 shares (General Accident/ North West Water/ Severn Trent/Persimmon/Heywood Williams/Powell Duffryn/Anglian Water/Lex Service/Tarmac/Hepworth)...and possibly "BAT".

Observations
- Pretty similar to the HYP methodology we discuss here
- Continued existence of utilities like Severn Trent
- Disappearance of several shares
- He doesn't seem to discuss selection of companies in different sectors to reduce risk (maybe because I'm reading a summary of the strategy)

Conclusions (for me)
- quite a high hit rate of companies that don't appear to be around today - hence, active management of a HYP is required
- small companies are generally to be avoided (Heywood Williams/ Powell Duffryn?)
- sometimes a portfolio gets lucky (eg addition of BATS, as was the case in Pyad's HYP1)
- a portfolio for 10 companies is too few - for a fixed sum of investment (reasonable sum) - it would be safer to have 40 "half-shares" rather than 20 "full shares" (ie invest £1500 in each of 2 companies rather than £3k in just one?)

Interesting post Monabri, but I would suggest avoiding using "HYP" which I think is pretty much a "defined term" on this board as well as the HYP Practical board. By using "HYP" you are likely to simply start a debate about whether the approach above contravenes the rules of PYAD's version of a high yield portfolio, which is IMHO not really very interesting. No surprise it is similar to "HYP" as the TMF articles on it were not revolutionary and breaking new ground, more just an evolution as clearly people were investing in high yield portfolios before "HYP" was given a particular meaning on TMF.

I have not read the book, but the approach (with your modification) seems very close to my view of how I plan to run a high yield portfolio. I agree with you that diversification is missing and I am not sure it is just that you are reading the summary looking at the dummy portfolio selection. This leads logically to your point on the number of shares to be held.

My initial thinking was that by expanding the portfolio it would drag down the yield in exchange for greater stability. However, the alternative result may be that because of the risk being spread across more shares there is more scope to accept the risk of some of those atypically high yielders, some of which end up blowing up others that don't.

Again, thanks for posting.

Terry.

[Arborbridge]

Thanks for reminding me of that chapter on HY. It's interesting to put in perspective the yield available: in the 1995 edition the average yield of ten companies selected was 6.98%!

Also note that he emphasises that with HY "the risk factor is much greater. The companies in question are usually high-yielding for very good reasons" and goes on the elaborate on that. HYPers often turn a blind eye to this factor, and that is why we use a bigger portfolio and extra safety factors. But nevertheless, HY is higher risk unless you are prepared to take a very long view.

"Investment made Easy" is a very recommendable book covering the gamut of investment styles, and expecially useful for those setting out on the investments journey.

Arb.

[monabri]

Hi Arb - hence the link to the Tweedy report in the other Hyp forum and the pages I highlighted. The general desire to "grab" the highest yielding shares might not be the best strategy long term. I think you've hinted to this in the past / not to get too focused/fixated on the big numbers.

This also might be of interest to Terry as he mentions "dragging down the overall yield" ( see Tweedy again) .