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A HYP-othetical portfolio: Year 16 review

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A HYP-othetical portfolio: Year 16 review

#472825

Postby Luniversal » January 13th, 2022, 5:19 pm

HYP06 is a 'HYP-othetical' high yield portfolio, chosen in Mar. 2011 and backtested (to tempt fate) from Fri., Jan. 13, 2006. It was conceived as a lump-sum investment to gauge how a purist application of Stephen Bland's (aka pyad's) system would have handled the crash of 2007-09 and beyond.

Twenty shares were fictitiously bought in equal amounts, rather than Pyad's minimum of 15, since by 2011 most practitioners seemed to be seeking safety in numbers. All choices were in the FTSE 100 index, the highest current yielders subject to fundamental filtering: chiefly, five years of rising dividends and not too much debt. Only one company came from each sector-- HYP's vital safety feature.

Half the Footsie's membership yielded at best no more than the index average. A few others yielded far too much for comfort. The pool was thus 45 or 50 before fundamental tests were applied; that weeded perhaps ten more.

This severe limitation of choice, following another man's guidelines, did not prevent harrumphing about how I must, if only unwittingly, have picked shares with the help of hindsight to pose as a brilliant market player. It would be a curious boast from one who has never sold a stock voluntarily in 50 years and was only out for income.

Anyhow, my telepathic chicanery created a portfolio stuffed with outrageous maverick obscurities such as Tesco, Unilever, British American Tobacco and Vodafone: the ones no honest HYP-er would go near. Sarcasm apart, the demo is tasked to give characteristic, not effulgent results: it plugged a chronological hole between Pyad's HYP1 of Nov. 2000 and my real-money Footsie job, 'LuniHYP100', acquired in Jul. 2011.

HYP06 was to undergo 'light, judicious tinkering', e.g. selling a share if it stopped paying dividends but not if it cut them. There would be no trimming to correct biases which might evolve. Four of the first 20 were duly sold when they dropped dividends during the Global Financial Crisis. From 2009, looking back from 2011, I repudiated meddling entirely. I forgave what might transpire to be temporary lapses of payouts, such as Tesco, or even indefinite ones such as Centrica. Apathy rules, as it always has done in my real-world investing since the early 1970s.

The pretend portfolio, accounted to Dec. 31, has been front-tested twice as long as it was jobbed backward. Its progress was reported annually on The Motley Fool until 2016. Update for 2017-19 here:

viewtopic.php?f=15&t=21168&p=275629#p275629

and 2020's report here:

viewtopic.php?f=15&t=27089&p=402108#p402108


MEMBERSHIP (deletions italicised)
Admiral (ADM) bought 2021 (see below)
BAe Systems (BA.)
BHP (BHP)- bought 2012
BOC International (BOC)- taken over 2006
BAT Industries (BAT)
Centrica (CNA)
Compass (CPG)
Diageo (DGE)- bought 2008
DSG International (DSGI)- sold 2008 (dividend passed)
GKN (GKN)- sold 2009 (dividend passed)
GlaxoSmithKline (GSK)
IMI (IMI)- bought 2009
International Power (IPR)- bought 2006, taken over 2012
Kelda (KEL)- taken over 2006
Land Securities (LAND)
Legal & General (LGEN)
National Grid (NG.)
Next (NXT)- bought 2010
Pearson (PSON)
Persimmon (PSN)- sold 2008 (dividend passed)
Rexam (REX)- sold 2009 (dividend passed)

Royal Dutch Shell B (RDSB)
Scottish & Newcastle (SCTN)- taken over 2008
Severn Trent (SVT)- bought 2008
South32 (S32)- BHP spinoff 2015
Standard Chartered (STAN)
Tesco (TSCO)
Unilever (ULVR)
Vodafone (VOD)

Twenty-nine in and out of a 20-company portfolio in 16 years is not a giddy turnover.


INCOME
2006 (from Jan. 13): £2,939
2007: £3,148 +7.1% change year/103 (real income deflated by RPI where Year 1 = 100)
2008: £3,239 +2.9%/105
2009: £2,990 -7.7%/95
2010: £3,235 +8.2%/98
2011: £3,646 +12.7%/105
2012: £4,127 +13.2%/116
2013: £4,239 +2.7%/116
2014: £5,608 +32.3%/152
2015: £4,903 -12.6%/131
2016: £4,708 -4.0%/122
2017: £5.866 +24.6%/147
2018: £4.960 -15.4%/121
2019: £5,075 +2.3%/121
2020: £4,241 -16.4%/99
2021: £4,952 +16.8%/109

TOTAL TO DATE: £67,876

Last year the sum as Pyad used for HYP1, £75,000 gross, would have produced £4,952. Income rebounded by one-sixth after the rash of dividend cuts in 2020, the worst blight since 2012. The latest haul includes £10 instant-withdrawal-account interest, at a beggarly 0.5%, on capital receipts from past corporate actions yet to be recycled after buying Admiral.

In all periods but 2008-09 and 2020 real income has been at least as high as in the first year; usually a fair bit higher. Even last year it was only 1% less than in Year One. Hiccups aside, HYP06 has maintained the purchasing power of an initially substantial income stream, its sole objective.

In 2020 dividends were restored by Next and Standard Chartered. Centrica and Compass remained off the list, though Compass may come back this year. Land Securities had returned on a lower rate in 2020 with accelerated restoration last year. Shell gingerly began to repair its dividend rate but as part of its retreat from Dutchness seems keener on buying back equity with its extra cash from the energy price boom.

BAe Systems resumed normal service within a few months after reconsidering the panic. IMI began a slow march back to pre=flu paying out. Pearson stuck on 2020's rate. Glaxo has been on an unchanged rate for years and its coming carve-up appears likely to reduce it overall.

BATS, Legal & General, Severn Trent and National Grid have plodded stoically along with small increases. Diageo and Unilever are other mainstays for whose small mercies one must give thanks. BHP dowered the portfolio with dividends but has become as cyclical a distributor as other large mining conglomerates.

The rally in revenue yielded a few windfalls, including £594 from Tesco when it sold out in Asia. A tinkerer might have dumped the supermarket during its troubled times and missed this. Other non-regular declarations were £207 from Next, with more in view, £54 from Admiral and £3 from South 32, for a portfolio total of £858 against just two quid from S32 in 2020.

The Retail Prices Index inflation rate was 7.1% in the year to Nov. 2021, assumed to be the same in the calendar year. It has zoomed from 0.9% in 2020-21, ambushing income funds and high yielders which try to protect purchasing power. Absent specials, HYP06's revenue inflow will toil to stay constant in real terms until, as we are assured by the Old Lady, inflation abates.

Cumulative income, 2006-21, is £67,876 including £705 interest from uncommitted cash. Soon receipts will have equalled what was invested, FWIW. Last year the return on the capital's brought-forward market value rose from 3.0% to 4.0%, compared with an average 3.9% over the portfolio's lifespan.

Revenue has compounded at 3.5% pa nominal, 0.2% real. It climbed nominally two-thirds of the times, or half the time after inflation. The ups and downs call for reserving if the income is for necessities: see 'Derisking' below.


CORPORATE ACTIONS

The last capital changes had been BHP's special distribution two years ago and National Grid's in Jun. 2017. My rule is that a new share is affordable when spare cash exceeds the original cost per share of £3,750 gross. (It might be more logical to set the limit at one-twentieth of HYP06's current market value, now c. £7,000, but one might wait for ever without getting there.) On Apr. 6, as recorded at #402018, I 'bought' 119 Admiral at £31.22 in time to catch its resumption of dividends. They included ADM's customary but not guaranteed top-up of surplus liquidity plus a 'special special' of 47p to make up for the pandemic's panic pause. This purchase was the first time a holder of HYP06 would have been required to exercise judgment since StanChart's rights issue six years ago.

Pyad thought what he called market trading-- letting irresistible events sift and reorder portfolios-- would likely give better results than gratuitous fiddling. HYP06 furnishes no strong case against leaving well enough alone. Ditching Persimmon, for instance, meant missing the handsome 'capital return plan' distributions which have made it one of HYP1's best.

Idle cash is now £1,437, far too little for a 21st recruit from a new sector. Sticking to pre-2020 criteria has left the Footsie cupboard bare anyway.


BALANCE

Divergences among holdings' value or income contributions furrow many HYP-ers' brows. Not me. My yardstick is that a stake worth more than twice average weight (5%, one-twentieth) is obese and one worth 2.5% is anorexic, but I lose no sleep if they wax or wane.

At year end the most valuable holding was Compass at 16.4% (15.8%) of HYP06's value, followed by Next with 10.6% (10.7%). The two cover 27% of realisable value, but at end-2019 it was 29%.

Apart from South32, the five least valuable holdings-- all defined above as underweight-- are Centrica (1.0%), Vodafone (0.9%, but after capital reductions), Tesco (1.8%, ditto), Standard Chartered (1.0%) and Land Securities (1.3%). Their combined capital contribution is 6%, a lot less than either of the porkers. At end-2019 the bottom 5 had amounted to 8.9%. Only Centrica seems a forlorn hope for income, and only StanChart's share price did not rise optimistically, so Doris snores on.

As for income: Tesco was 2021's most munificent, paying £683, one-seventh of the total, but most of that was its special. BATS was again the biggest regular payer, furnishing £633. 13% of the haul; but other constituents are growing their contributions faster. Back in Year One Vodafone had chipped in 16.4%, and during the last decade Next was supplying almost one-quarter, thanks to a spate of extras. The average annual top payout in 2006-21 was under 15% of the total; so Tesco is no outlier, and no sign is discernible of a creep towards over-dependence on a handful of members. The five biggest payers gave 64% of the total last year against 47% in 2019, but as the crisis reaction unwinds I would expect the leaders to run less far ahead of the pack.

Consider also the 13 survivors from the original 20 constituents (2). The table below shows how much of the £48,514 of income to date-- 72% of the portfolio total- each has supplied, their rank by this measure and their average rank by market value at each year end, 2006-21:

BAe Systems: 5.7%, 11, 8
British American Tobacco: 11.8%, 2, 2
Centrica: 6.4%, 6, 7
Compass: 19.7%, 1, 1
GlaxoSmithKline: 5.1%, 9, 11
Land Securities: 3.4%, 13, 13
Legal & General: 7.6%, 3, 4
National Grid: 7.4%, 5, 5
Pearson: 6.9%, 8, 6
Royal Dutch Shell B: 5.5%, 7, 9
Tesco: 5.3%, 12, 10
Unilever: 11.0%, 4, 3
Vodafone: 4.3%, 10, 12

Over 16 years, changes in share price have pretty faithfully followed' capacity for distributing earnings, which many academics believe is ultimately the main governor of capital values. The only gap of more than two places is BAe. possibly gaining an edge in realisable value from steady income disbursal.


DERISKING

One can defend purchasing power by fixing a withdrawal rate and increasing the sum spent only by inflation. If receipts increase faster, put the surplus into an income reserve against future setbacks. Once the reserve is full enough-- say one year of current spendable income-- consider lifting the index-linked withdrawal rate, but warily.

For HYP06 the initial withdrawal was set at 3.55%+RPI, steered by an All-Share Index yield of 2.9% at the launch in Jan. 2006 and the portfolio's actual historic yield of 3.9% at end-2006 from the first 11.5 months' receipts. The withdrawal rate was thus reasonably high for a High Yield Portfolio, but it stuck for seven years, curbed by the GFC's damage to dividend growth.

By end-2013 ten months of spendable income reposed in the kitty and specials were flowing in. It appeared feasible to raise the rate to 4.26%+RPI, a hike of one-fifth. Receipts continued so buoyant that the enhanced rate did not prevent the income reserve rising from 9 to 16 months between Years 8 and 10.

Looking back at 2019 I wrote: "Another uplift was justifiable, by 15%, giving 4.90%+RPI. That has lowered the reserve to 14 months, which feels a plump enough cushion; nonetheless the dim immediate vista for divis militates against further rises. I could live with almost 5% plus cost-of-living protection for some time (1)."

After the FluManchu struck I got nervous when reviewing 2020: "14 months of income reserve has dropped to my comfortable minimum of 12 (£5,184), compared with 17 four years ago. Last year drained it by £1,168 against £435 over the previous two years, the only previous abstractions. The kitty could empty soonish at this pace...A one-time cut in the withdrawal rate (though derisking is intended to avoid such hardship) may be unavoidable." And that was penned when we did not know that inflattion was poised to pounce for the first time since Spandau Ballet bestrode the charts.

The withdrawal rate is therefore chopped, but by one-tenth rather than the 15% mooted a year ago: from 4.9%+RPI to 4.4%. It holds the income reserve at a consolingly unchanged 12 months. Projecting inflation at 4% pa for the next four years and an increase in revenue also of 4% pa with no extras, the reserve after the lowered spendable payout would go down to 8 months on Dec. 31, 2025.

All this is verily hypothetical. Income projected to be semi-stagflationary, inflation assumed to be somewhat but not wildly worse than in the last four decades, no bonuses... but one has to guess something. If inflation were 7% pa in 2022-2025 the reserve would be four months after 20 years. OTOH if it were 5% and dividends grew by two points over that, the kitty would be ten months.

Meanwhile the time-weighted average withdrawal rate since launch is 4.12%+RPI. Not bad against the titchy yields obtainable on deposits or bonds in the GFC-and-after epoch when savers are 'financially repressed'. The cut leaves HYP06's yield above its average. Nor, as we shall see, has capital been depleted to keep it paying out more than rival asset classes.


CAPITAL

2006 (Jan. 13): £75,000 before 1% purchase costs
2006: (Dec. 31) £86,941 +15.9%/112 (real income deflated by RPI where launch = 100)
2007: £89,946 +3.5%/111
2008: £71,587 -20.4%/87
2009: £76,846 +7.3%/92
2010: £90,581 +17.9%/104
2011: £95,192 +5.1%/104
2012: £105,428 +10.8%/112
2013: £126,767 +20.2%/131
2014: £126,439 -0.3%/129
2015: £119,199 -5.7%/120
2016: £130,544 +9.5%/128
2017: £137,178 +5.1%/130
2018: £121,984 -11.1%/112
2019: £141,312 +15.8%/127
2020: £124,239 -12.1%/110
2021: £144,890 +16.6%/121


High Yield Portfolios are proverbially where capital does not matter, but market values reveal their horsepower as income generators. A selection whose dividend stream widely outpaces its realisable value may be headed for trouble, chomping its capital covertly. The sluggishness of the Footsie has often been blamed on over-large divis.

HYP06 would have been worth £144,890 on New Year's Eve: a one-sixth increase (9% real) after a one-eighth decline in 2020. It is more valuable than at any previous Dec. 31. The Covid-19 scare was shrugged off faster than the GFC; the gravest annual drawdown was 20% in 2008. Nominal value has compounded at 4.2% pa over 16 years against 3.1% pa inflation, so that in real terms HYP06 is worth one-fifth more. No light-shooter, but it has not eaten itself to sustain extravagant payouts.

For relativists, the portfolio beat or equalled the FTSE 100 index in eleven of 16 years and by 2.9 (2.3) percentage points last year. It was the fourth consecutive year of superiority, after trailing the benchmark in 2015-18 when big-divi blue chips were way out of vogue. HYP06's sole bad undershoot of the Footsie was in 2009, during the 'dash for trash' which sidelined juicy yielders; although it put on 7.3%, recovery plays fared far better.

Cumulative outperformance has been 41%. Recent relative weakness has been against momentum and growth picks outwith London's Big Board. When will the pendulum swing, or is the Foosie becoming a knacker's yard for yesterday's warhorses? Luckily, such conundrums are outwith a HYPer's remit and my competence. I am not Mystic Meg, nor was meant to be.
---------------------------------------------------------------------------------------------------------------------------------

(1) Derisking produces an admirable current withdrawal rate of 6.3%+RPI for pyad's HYP1 after 20 years; 4.3% for the 'Basket of Seven' and 3.9% for the 'Basket of Eight' after the same span as HYP06. As in other tests, derisked HYP income emerged materially greater than from collections of investment trusts, even after wider dividend variability from a HYP's narrower selection of equities. That is the method's best argument.

After 20 years, £75,000 in HYP1 became £159,773 on Nov. 12, 2021. HYP06 grew to £141,142 in just under 16 years to that anniversary; the B7 to £205,009 and the B8 to £125,818 in the same timespan.

(2) All but LAND, LGEN and NG. were among the 'Sturdy Seventeen' napped as the potential core of a High Yield Portfolio in 2010. More re-examination of sturdiness to come shortly, DV.

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Re: A HYP-othetical portfolio: Year 16 review

#472849

Postby idpickering » January 13th, 2022, 6:20 pm

Wow. An amazing update/report! Good to see your everwelcome input. Don’t be a stranger hereabouts.

Ian.

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Re: A HYP-othetical portfolio: Year 16 review

#472938

Postby MDW1954 » January 13th, 2022, 11:34 pm

Duly recc'd, as usual. Again, don't be a stranger.

MDW1954

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Re: A HYP-othetical portfolio: Year 16 review

#473060

Postby Newroad » January 14th, 2022, 12:51 pm

Hi Luniversal.

Have you ever considered the effect of comparing a rolling series of HYP's with the same initial criteria/filters applied but different starting points?

To consider a trivial case of the above, what would be the 20 * 5% starting stocks today?

It would be interesting to see if start and end dates make as much difference to a HYP portfolio as they do to other potential asset allocations - ideally they wouldn't.

Regards, Newroad

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Re: A HYP-othetical portfolio: Year 16 review

#473220

Postby Arborbridge » January 15th, 2022, 7:29 am

Newroad wrote:Hi Luniversal.

Have you ever considered the effect of comparing a rolling series of HYP's with the same initial criteria/filters applied but different starting points?

To consider a trivial case of the above, what would be the 20 * 5% starting stocks today?

It would be interesting to see if start and end dates make as much difference to a HYP portfolio as they do to other potential asset allocations - ideally they wouldn't.

Regards, Newroad


Could you/would you undertake the work? It would be enormous and probably eat your life :lol:

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Re: A HYP-othetical portfolio: Year 16 review

#473269

Postby Newroad » January 15th, 2022, 11:54 am

Maybe, Arborbridge.

I guess it depends on how

    (a) Easy the selection filter would be to apply, and
    (b) The annual updates

My guess is that (b) is relatively easy and therefore it would depend on how easy (a) would be - and I have no idea on this. It could be that tools like ShareScope or whatever can screen the needed quite easily.

That is not suggesting anyone should have done so, I was just asking. With many asset allocation strategies, is it is reasonably easy to compare by varying starting points - I was just wondering about this one too.

Regards, Newroad

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Re: A HYP-othetical portfolio: Year 16 review

#473316

Postby Arborbridge » January 15th, 2022, 4:02 pm

Newroad wrote:Maybe, Arborbridge.

I guess it depends on how

    (a) Easy the selection filter would be to apply, and
    (b) The annual updates

My guess is that (b) is relatively easy and therefore it would depend on how easy (a) would be - and I have no idea on this. It could be that tools like ShareScope or whatever can screen the needed quite easily.

That is not suggesting anyone should have done so, I was just asking. With many asset allocation strategies, is it is reasonably easy to compare by varying starting points - I was just wondering about this one too.

Regards, Newroad


Behind my question, the point was that there are an almost infinity of different HYPs starting on different weeks, days, even hours, not just the odd one or two. I was thinking of one of Star Trek episodes in which multiple copies of the Enterprise are hanging in space, all with slightly different histories..... Yikes!

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Re: A HYP-othetical portfolio: Year 16 review

#473317

Postby Newroad » January 15th, 2022, 4:12 pm

Indeed, Arborbridge.

However, most of the comparable tools online do so yearly - that would be a reasonable granularity to see whether start date had a material effect or not.

I'm not sure we're in multiverse territory yet! ;)

Regards, Newroad

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Re: A HYP-othetical portfolio: Year 16 review

#473319

Postby kempiejon » January 15th, 2022, 4:17 pm

Arborbridge wrote:
Newroad wrote:Maybe, Arborbridge.

I guess it depends on how

    (a) Easy the selection filter would be to apply, and
    (b) The annual updates

My guess is that (b) is relatively easy and therefore it would depend on how easy (a) would be - and I have no idea on this. It could be that tools like ShareScope or whatever can screen the needed quite easily.

That is not suggesting anyone should have done so, I was just asking. With many asset allocation strategies, is it is reasonably easy to compare by varying starting points - I was just wondering about this one too.

Regards, Newroad


Behind my question, the point was that there are an almost infinity of different HYPs starting on different weeks, days, even hours, not just the odd one or two. I was thinking of one of Star Trek episodes in which multiple copies of the Enterprise are hanging in space, all with slightly different histories..... Yikes!


On those old boards on TMF we regularly saw proposed portfolios and for a while on this board a poster (JohnnyCyclops? or am i misremembering) ran a regular suggestion portfolio.

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Re: A HYP-othetical portfolio: Year 16 review

#473426

Postby funduffer » January 16th, 2022, 8:42 am

kempiejon wrote:

On those old boards on TMF we regularly saw proposed portfolios and for a while on this board a poster (JohnnyCyclops? or am i misremembering) ran a regular suggestion portfolio.


Indeed, JohnnyCyclops and Luni used to regularly select HYPs.

In an ideal world, you could find a dataset, which stored all the financial data for FTSE companies, set up some HYP criteria (similar to the ones JohnnyCyclops used), and select a HYP automatically at any date in the past. Then you could project each HYP forward to the present day and look at Income generated and capital value, assuming no intervention at all for dividend cancellations and the like (pure Doris!).

Even if such an easily accessible and comprehensive dataset existed, you would still hit problems in projecting forwards in time. As you can see from Luni's HYP discussed in this thread, corporate events happen, companies go bust get taken over etc. So every HYP generated would need some intervention to decide what to do in these circumstances.

I once tried to do this for my own HYP, which I purchased with a lump sum in 2014, assuming I made no top-ups, additional purchases and just withdrew all the income. It was difficult, because some of companies were taken over by foreign ownership, and there were returns of capital and so decisions would have had to be made even if there was a strict no-tinkering policy. I gave up as it it became too subjective, whereas I was looking to see how my HYP would have done if I has strictly ignored it from day 1.

Still, it would be interesting to look at a universe of FTSE HYP's and see what the distribution of results would have been like over say 20 years if there was a simple way to do it.

All we have is a handful or so of well managed examples to go on.

FD


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