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LuniHYP250: Year 8 review

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Luniversal
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LuniHYP250: Year 8 review

#325264

Postby Luniversal » July 10th, 2020, 7:05 pm

Today closed the eighth year of what began as a 20-share 'Midcaps High Yield Portfolio', posted on The Motley Fool. It is now called LuniHYP250, since it limits choice to larger FTSE 250 companies; none was capitalised at less than half a billion on purchase. Selection was by 'pyadic' tests, e.g. dividend history, gearing, sectoral separation. No tinkering, no capital injected or abstracted since the bunch was bought on Jul. 12, 2012.

It is a sealed, lump-sum affair like the fixed trusts of old. It will run until I conk out.

Constituents at launch:

Amlin (AML)*
Balfour Beatty (BBY)
Berendsen (BRSN)*
Chemring (CHG)
Cineworld (CINE)
Close Brothers (CBG)
Cranswick (CWK)
Go-Ahead (GOG)
Greene King (GNK)*
Greggs (GRG)
HICL Infrastructure (HICL)
IG (IGG)
Inmarsat (ISAT)*
moneysupermarket (MONY)
N Brown (BWNG)
Premier Farnell (PFL)*
Provident Financial (PFG)
Tullett Prebon (TLPR), renamed TP ICAP (TCAP)
UBM (UBM)*
UK Commercial Property (UKCM)

*Taken over

Substitutions and additions:

Weir (WEIR), Feb. 2016
Ashmore (ASHM), Mar. 2017
Paypoint (PAY), Oct. 2017
Essentra (ESNT), Nov. 2017
Bellway (BWY), Mar. 2018
William Hill (WMH), Jun. 2018
John Wood (WG.), Jun. 2018

and since 2019's review:

Marston's (MARS), Dec. 2019
G4S (GFS), Jan. 2020

These two purchases were reported as updates to last year's review:

viewtopic.php?p=236429

(Each promptly stopped dividends, naturally.)

Original cost after expenses was £23,949. Later buys were at the same unit cost: <=£1,200 per share after expenses. The portfolio's 23 members paid 39 (2019: 51) regular and two (three) special dividends last year, though four months ago I expected 54.


INCOME

The midcaps plan stemmed from hopes, misplaced until c. 2017, that periodic income would grow faster, if more bumpily, than in my Footsie LuniHYP100. Everything was tickety-boo until late Feb., coasting towards a 10% rise year on year. Then came WuFlu.

2011-12 (equivalent for year before acquisition): £1,216
----------------------------------------------------------------------------------------
2012-13: £1,241, +2.1% equivalent
2013-14: £1,273, +2.6%
2014-15: £1,299, +2.0%
2015-16: £1,305, +0.5%
2016-17: £1,365, +4.6%
2017-18: £1,310, -4.0%
2018-19: £1,435, +9.5%
2019-20: £1,080, -24.7%

On average these 23 shares were purchased yielding one-third more than the All-Share Index (FTAS). This is in line with my 'optimal zone' happy medium between juicy and injudicious; not deliberately so, since this is not a mechanically selected portfolio. Indeed, eight of 29 buys came from 'warning' or 'danger' zones, before I designated them.

LuniHYP250 has collected £10,308 of routine payouts, averaging a 3.8% return on each financial year's opening capital. Last year was easily the worst, though only in 2018-19 did the portfolio amass a hefty increase in regular payouts.

The ideal for divis in a HYP is a steady rise in real terms. By now only Cranswick and Moneysupermarket can boast of that. Other concerns which once behaved well played the KungFlu card: Greggs, Close Brothers, Provident Financial, Cineworld and PayPoint. One is no longer annoyed but grateful for the few which had stuck on a rate but did not slash it: TP ICAP, Ashmore, IG.

However, every troubled constituent's directors speak of bringing back dividends; not this year but next year or some time, and none say 'never'. Colour me skeptical. We are on a darkling plain until the shape and speed of recovery dawns on us. LuniHYP250's running yield from Year 8's regular income was 2.8% (2019: 3.8%), against the aforesaid 3.8% average since 2012. It could go lower.

TMFpyad's 'market trading'-- the unwilled reordering of a portfolio by corporate incidents such as bids-- previously made up for regular dividends' slow growth, did little to swell collections this time:

2012-13: £115
2013-14: £188
2014-15: £315
2015-16: £200
2016-17: £0
2017-18: £2,046
2018-19: £166
2019-20: £93

Total to date £3,123, 23% of total receipts. In 2019-20 only £82 and £12 respectively from Greggs and Paypoint popped up; both were special dividends.


CAPITAL

Cash-in proceeds are for amusement only. I am a lifetime holder for income and would bale out only if skint. FWIW, year-end values and change compared with the FT All-Share Index (FTAS):

Jul. 2012 (bought): £23,949
Jul. 2013: £30,405, +27.0%, FTAS +19.3%
Jul. 2014: £31,688, +4.2%, FTAS +2.8%
Jul. 2015: £38,353, +21.0%, FTAS +1.9%
Jul. 2016: £36,949, -3.7%, FTAS -0.8%
Jul. 2017: £40,509, +9.6%, FTAS +12.2%
Jul. 2018: £37,362, -7.8%, FTAS +4.0%
Jul. 2019: £38,798, +3.6%, FTAS -2.7%
Jul. 2020: £30,455 -21.3%, FTAS -17.5%

At Jul. 12, 2020, market value included £208 of unallocated capital.

The eighth year relapsed to underperformance by the LuniHYP. I use the All-Share Index as a universal comparator for an unconstrained, British small investor. The portfolio has so far increased by 27.2% against the FTAS's 16.2%, beating it in four of eight years. Compound rate of growth in capital has been 3.5% pa for the shares, 2.2% for the FTAS, 2.6% for retail prices.

Best overall payback, taking in all receipts plus paper profits, is Cranswick's £4,523. The lousiest is Wood's minus £779-- one of nine constituents out of 23 in negative territory--followed by Willliam Hill (minus £715). The average payback among the 14 survivors from 2012 is £1,152, about fifty quid under their original per-unit cost. Brown is the dunce on minus £628.


BALANCE

Has the income stream become perilously concentrated over time? My test is whether a share has paid out more than twice or less than half what a mathematically equal split would dictate.

As to regular payments: among 14 survivors Balfour Beatty and Chemring-- both cutters, now convalescing-- provided less than half as much as the one-sixteenth portion of a perfect balance.

No share has paid out twice as much as the ideal proportion. The fattest cumulative regular incomes among survivors came from Close Brothers, Moneysupermarket and Go-Ahead: each supplied about 9% of the survivors' total delivery, i.e just over a quarter of the portfolio total arose from three of 23 constituents. None approached the 14.3% which would challenge my upper limit.

Anyway, who fancies rejigging for income weight, given today's baffling outlook for dividends? With so many defaulters, the portfolio would be turned inside out. Then it might transpire that more secure-seeming income streams into which monies were redirected were mirages.


DERISKING

My habit is to earmark part of the raw inflow to preserve the purchasing power of a 'derisked' spendable sum. The set-aside forms an income buffer or reserve which can bolster purchasing power when the portfolio collects too little-- like now, and how.

LuniHYP250 harvested £1,356, 5.7% of starting capital, in its first year. At the end of it I took 4.5% or £1,078 for spending and parked the rest, £278. The FTAS yielded 3.3% in Jul. 2012. To begin more than a point higher seemed enough to honour the High in HYP.

In Years 2 and 3 the withdrawn quantum was increased only by subdued inflation-- by 2.6%, then 1.0%-- while further transfers swelled the reserve assuringly. At the end of Year 3 it covered 12 months of the spendable allowance. So it felt safe to lift the withdrawal rate, index-linked, from 4.5% to 5.2%, i.e. by 15%. The reserve remained at 12 months in Jul. 2017.

The Cineworld lapsed-rights windfall seven months later made me relax my custom of waiting at least five years betweeri upward reviews of the withdrawal rate. I do not need a reserve of three or four years' current spendable income.

But far harder times might await dividend fans. It was Brexit, not bugs, that fretted income-drawers late in the last decade, plus the fear that UK companes were overdistributing profits: running debt up and cover down. Already in 2018 I leaned to temerity and boosted the withdrawal by one-tenth, giving an ongoing 5.7%+RPI on the original investment. That cut the reserve from 23 to 19 months last year. Over eight years, one-fifth of raw income will have been held back: £2,602 out of £13,432.

Nineteen months may sound good upholstery, but beware. My crisis projection posits inflation at 3% pa until 2022. What if portfolio income collapsed to half last year's regular total, without extras, then rose only by one-tenth in 2021-22? The reserve would be dangerously depleted; by Jul. 2022 it would contain three months' payout after a decade's operation.

Such a forecast compels a cut in the spendable portion, if less drastic than individual companies are inflicting.

If the withdrawal rate is lowered by a quarter to 4.3%+RPI, and if receipts dive then revive slowly as projected above, the reserve at Jul. 2022, after 10 years, will be 12 months, not three. Such is the typical level which long-established investment trusts maintain; it is inspiring them (for the time being) to sound cheerful about preserving lengthy records of rising payouts.

Beyond 2022? You tell me.


OUTLOOK

LuniHYP 250 holds more than twenty well-differentiated midcaps. It does not seem too rose-coloured, evaluating each company's mood music in bulletins since Feb., to envisage that only Brown, Cineworld and Marston's should struggle to resume dividends within the strategic ignorance horizon of 24 months forward. Not that all payouts will return fast or in full former glory; experience teaches that boards adore 'macro' excuses for cuts, and that restoration is apt to be slow and grudging.

But on the derisking forecast that receipts halve in 2020-21, the portfolio will still prospectively yield above the joke returns of a bond or cash deposit, and with inflation protection from the income reserve. Windfalls may arise: for instance in lapsed rights if a company tries to repair its finances. So it was in the last blitz, 2009-11. There may be rescue bids which enable recycling into dividend providers. However, that is counting chickens. I would not start a High Yield Portfolio today.

Moderator Message:
Edited to replace a mistaken reference to HICL Infrastructure with the correct company, Provident Financial. (See exchange with OP below.) -- MDW1954

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Re: LuniHYP250: Year 8 review

#325295

Postby SuperCally » July 10th, 2020, 8:57 pm

An interesting study. Thanks for taking the trouble.

I’m regretting reading it alone though :shock:

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Re: LuniHYP250: Year 8 review

#325311

Postby MDW1954 » July 10th, 2020, 10:39 pm

Luniversal wrote:Other concerns which once behaved well played the KungFlu card: Greggs, Close Brothers, HICL Infrastructure, Cineworld and PayPoint.


Hello Luni,

As ever, many thanks. Others may regard some of your projects as rebarbative; I invariably find them coruscating and perspicacious. Granted, your characteristic idiolect is somewhat removed from the quotidian, but no matter.

A query, though. What is meant by the reference to HICL Infrastucture above? I wasn't aware of a cut, and given HICL's business model I would find one surprising. I'm willing to allow that I make mistakes, but a quick search of their investor website yields no obvious dividend mea culpas.

What have I missed?

MDW1954

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Re: LuniHYP250: Year 8 review

#325319

Postby 88V8 » July 10th, 2020, 11:27 pm

Thankyou for the update.

How time flies.
Today I hold none of the initial constituents, although but a few years ago many were household names at least in a few houses, and of the additions I hold only Marstons as a punt.

Luniversal wrote: I would not start a High Yield Portfolio today.

And thankyou for the honesty. Not many proponents of HYP would say that.
Let us hope it need not be repeated a year from now.

V8

Moderator Message:
The OP's doubtless casual observation about the advisability of starting a HYP today is strictly speaking outside this board's scope. So let's not overly fixate on it, please. -- MDW1954

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Re: LuniHYP250: Year 8 review

#325322

Postby Luniversal » July 10th, 2020, 11:49 pm

MDW1954 wrote:
Luniversal wrote:Other concerns which once behaved well played the KungFlu card: Greggs, Close Brothers, HICL Infrastructure, Cineworld and PayPoint.


Hello Luni,

As ever, many thanks. Others may regard some of your projects as rebarbative; I invariably find them coruscating and perspicacious. Granted, your characteristic idiolect is somewhat removed from the quotidian, but no matter.

A query, though. What is meant by the reference to HICL Infrastucture above? I wasn't aware of a cut, and given HICL's business model I would find one surprising. I'm willing to allow that I make mistakes, but a quick search of their investor website yields no obvious dividend mea culpas.

What have I missed?

MDW1954


My mistake: I meant Provident Financial, not HICL Infrastructure.

PFG had begun to repair its dividend, if at the speed of a herniated snail, but has gratefully joined the chorus of 'we recognise the importance of dividends to you suckers... but desperate times demand desperate remedies'.

HICL continues placidly to produce payouts which claim to be up with inflation but are always slightly below the prevailing RPI figure.

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Re: LuniHYP250: Year 8 review

#325347

Postby MDW1954 » July 11th, 2020, 9:17 am

Luniversal wrote:
My mistake: I meant Provident Financial, not HICL Infrastructure.



Luni,

I have amended your original post to correct the error.

MDW1954

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Re: LuniHYP250: Year 8 review

#325354

Postby monabri » July 11th, 2020, 10:00 am

I wonder how many of these will actually survive?

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Re: LuniHYP250: Year 8 review

#325750

Postby Arborbridge » July 13th, 2020, 9:00 am

monabri wrote:I wonder how many of these will actually survive?


I was going to write "most", but then I realised the answer depends entirely on the time horizon one specifies. Basically unknowable, so let's not worry about it 8-)
All HYP's will morph over time, but will hopefully carry on doing the job - unless society alters radically, then anything is on the cards. e.g. the Roman Empire.

Arb.

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Re: LuniHYP250: Year 8 review

#325860

Postby tjh290633 » July 13th, 2020, 5:00 pm

monabri wrote:I wonder how many of these will actually survive?

My experience going back 32 years, is that I currently hold 36 shares and have disposed of a similar number over the years. Without looking at my file, about half of those disposals are down to take over operations. Household names like ICI, BOC, Blue Circle and BG Group among them.

TJH

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Re: LuniHYP250: Year 8 review

#325927

Postby 1nvest » July 14th, 2020, 6:11 am

LEXCX a US fund that bought 30 stocks in 1935 and just left them as-is, somewhat HYP style, and has morphed into 21 stocks. Largest holding is a railroad - Union Pacific (38%). Berkshire Hathaway is its second largest (14%)... that didn't even exist back then i.e. takeovers etc.

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Re: LuniHYP250: Year 8 review

#325969

Postby dealtn » July 14th, 2020, 9:33 am

1nvest wrote:LEXCX a US fund that bought 30 stocks in 1935 and just left them as-is, somewhat HYP style, and has morphed into 21 stocks. Largest holding is a railroad - Union Pacific (38%). Berkshire Hathaway is its second largest (14%)... that didn't even exist back then i.e. takeovers etc.


1935 is a long time. What does it do with "cash" takeovers, as opposed to "paper" ones. I would have thought after 85 years it would have a large holding of cash if it "just left them as-is"?

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Re: LuniHYP250: Year 8 review

#326006

Postby tjh290633 » July 14th, 2020, 11:11 am

tjh290633 wrote:
monabri wrote:I wonder how many of these will actually survive?

My experience going back 32 years, is that I currently hold 36 shares and have disposed of a similar number over the years. Without looking at my file, about half of those disposals are down to take over operations. Household names like ICI, BOC, Blue Circle and BG Group among them.

TJH

Now looking at my files, and I have 41 which have departed, 20 of which were taken over or delisted while I held them. One or two others which were demerged were sold immediately, like USI and Millennium Chemicals out of Hanson, and several more have since vanished, like Marconi. The other 21 were sold because of low yield or to avoid unwanted foreign shares, like Dr Pepper out of Cadbury, itself since taken over by Nestle. BG Group was sold for low yield and subsequently taken over by Shell.

TJH

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Re: LuniHYP250: Year 8 review

#326050

Postby 1nvest » July 14th, 2020, 1:15 pm

dealtn wrote:
1nvest wrote:LEXCX a US fund that bought 30 stocks in 1935 and just left them as-is, somewhat HYP style, and has morphed into 21 stocks. Largest holding is a railroad - Union Pacific (38%). Berkshire Hathaway is its second largest (14%)... that didn't even exist back then i.e. takeovers etc.

1935 is a long time. What does it do with "cash" takeovers, as opposed to "paper" ones. I would have thought after 85 years it would have a large holding of cash if it "just left them as-is"?

Looking at the prospectus, it looks like its based on a initial equal shares weighting method. And where inflows/outflows (including cash from takeovers) get removed/added as the same number of shares being added/removed from each holding. This morningstar link for instance is indicating -6416 shares being drawn from each/every stock (Shares Change column). Other historic snapshots has that showing the same positive number of shares across the board.

So not static, as it has to deal with inflows and flights as investors buy/sell the fund. For a individual doing similar they'd have to make their own decision of how to deal with the likes of cash takeovers. Splitting that cash across all holdings equally would be relatively expensive, mostly likely impractical.

Moderator Message:
Off-topic parts deleted - TJH

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Re: LuniHYP250: Year 8 review

#326051

Postby dealtn » July 14th, 2020, 1:18 pm

1nvest wrote:Looking at the prospectus...


Thank you


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