LuniHYP250: Year 7 review
Posted: July 13th, 2019, 1:27 pm
Yesterday closed the seventh year of what began as a 20-share 'Midcaps HYP' on The Motley Fool. It is now called LuniHYP250, since it limits choice to larger FTSE 250 companies; none was valued at less than half a billion on purchase. Selection was by normal 'pyadic' tests, e.g. dividend history, gearing, sectoral separation. No tinkering, no capital injected or abstracted since I bought it on Jul. 12, 2012.
It is a sealed, lump-sum affair like the fixed trusts of old. No wind-up deadline except my mortality.
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
+Inmarsat's board fended off a good bid. Now it has folded to a cheap one from some private-equity mob, to be completed by Christmas. That will call for a substitute. At the current price ISAT will have produced £680 in divis plus capital gain from an investment of £1,200.
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
Original cost after expenses was £23,949. Later buys were at the same unit cost: <=£1,200 per share. On the corporate-events front all was quiet. The portfolio's 23 shares paid 51 regular and three special dividends last year.
INCOME
The midcaps variant stemmed from hopes that periodic income would grow faster, if more bumpily, than in my Footsie HYP. But this did not begin to happen until the year just past.
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: £1,308, -4.1%
2018-19: £1,464, +11.9%
LuniHYP250 has collected £9,255 of routine payouts, averaging 3.9% on each financial year's opening capital.
Provident Financial, Chemring and Balfour Beatty had ceased paying entirely, before they resumed at far lower rates. No more suspenders last year, but Inmarsat and N Brown cut payouts. Freezes are in force at Ashmore, Go-Ahead, Greene King and TP ICAP. Worthy gains in income were furnished by Greggs, IG, moneysupermarket and Cineworld, although CINE's has shrunk after its stonker of a rights issue. IG is moving on to a standstill rate.
Maiden contributions from Bellway, Essentra, William Hill (if worse than hoped) and John Wood helped the 12% surge in income. Unusually among smaller companies, Cineworld and Paypoint have begun quarterly dividends.
LuniHYP250's running yield from Year 7's regular income was 3.9% (3.2%), matching the aforementioned average since 2012. That ~4% yardstick constantly crops up for UK equity higher-paying assemblages.
On average shares were purchased when yielding one-third more than the All-Share Index (FTAS). This is in line with my 'optimal zone' happy medium between juicy and injudicious; though not deliberately so, since this is not a mechanically selected portfolio. Indeed, eight of 27 buys came from the 'warning' or 'danger' zones.
The fruits of TMFpyad's 'market trading' are another tale entirely. They greatly safeguarded income:
2012-13: £115
2013-14: £188
2014-15: £315
2015-16: £200
2016-17: £0
2017-18: £2,046
2018-19: £177
Total to date £3,041, a quarter of total receipts. In peaceful 2018-19 only £87, £66 and £23 respectively from Cineworld, moneysupermarket and Paypoint popped up. All were special dividends.
CAPITAL
This is academic, because I am a lifetime holder for income and would only liquidate if potless.
LuniHYP 250 holds 23 well-differentiated midcaps. None lack all hope of producing dividends in the near term. Together they yield well above what a bond or cash deposit offers, with inflation protection from an income reserve. That suffices.
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%
At Jul. 12, 2019, market value included £85 of unallocated capital.
The seventh year follows three of underperformance by the HYP. I use the All-Share Index as a universal comparator for an unconstrained, British small investor. The portfolio has so far increased by 61.6% against the FTAS's 40.8%, beating it in four of seven years. Compound rate of growth in capital has been 7.1% pa for the shares, 5.0% for the FTAS, 2.6% for retail prices.
Best overall payback, taking in all receipts plus paper profits, is Gregg's £4,903. The thinnest is William Hill's minus £545, though it is early days for this wayward bookie. The average payback among 16 survivors from 2012 is £1,291, doubling the £1,200 purchase cost per share after seven years. Chemring is the dunce with a negative return of £292.
BALANCE
Has the income stream become perilously unweighted over time? My test is whether any share has paid out more than twice or less than half what an even split would dictate.
As to regular payments, the pecking order a year ago is unchanged. Of 16 survivors Balfour Beatty and Chemring-- both cutters, both now convalescing-- provided less than half as much as the one-sixteenth portion of a perfect balance.
No share has paid out more than twice as much as the ideal proportion. The largest regular cumulative incomes among survivors have come from Close Brothers and Go-Ahead, each supplying about 8%. Neither is near the 12.5% I would consider to be pushing against an upper limit.
DERISKING
My habit is to set aside part of the raw inflow to preserve the purchasing power of a 'derisked' spendable sum. The surplus goes to an income reserve which will bolster purchasing power when the portfolio collects too little.
Thus 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 reserved 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 inflation-- by 2.6%, then 1.0%-- while further transfers swelled the reserve. At the end of Year 3 it already contained 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 in Feb. 2018 made me waive 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.
Yet far harder times may lie in wait for dividend fans. So I leaned to temerity and boosted the withdrawal by one-tenth, giving an ongoing 5.69%+RPI on the original investment. At Jul. 2019 the reserve is 23 months. Over the first seven years, one-quarter of raw income will have been held back: £3,092 out of £12,296. (As it happens, this is very close to the one-off receipts tally.)
A stress test, accentuating the negative, posits inflation at 4% pa in 2019-2022. Against that, what if portfolio income comprised regular items only, without extras?(1)
Say such regular income dropped by one-fifth in 2019-20 due to a sudden new crisis, then stayed flat in 2020-22. The reserve would be heavily depleted; however by Jul. 2022 it would contain nine months' payout after ten years' operation.
CONCLUSION
One can easily doubt the short-term potency of dividends from the midcap 'space'. Brexit fallout could hit this type of high yielder harder, if more exposed to the domestic economy. Years of easy capital financing and the clamour for income from investors may have induced maturing or becalmed midsized enterprises to shell out too much. A global recession might bring swift, widespread and serious chopping of dividends. Boards already seem to be reining in, with 0-5% the new normal for annual dividend rises.
'Unsteady as she goes' as far as this company and that are concerned... but the HYP's range of activities and derisking fortify a goodly purchasing power from the contraption as a whole. By now it has thick shock-proofing in the income reserve. So I remain warily cheerful as far as the eye can legitimately see.
----------------------------------------------------------------------------------------------------------------
(1) Though Greggs has promised a special, amount tba, for the autumn. The vegan sausage roll bonus?
It is a sealed, lump-sum affair like the fixed trusts of old. No wind-up deadline except my mortality.
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
+Inmarsat's board fended off a good bid. Now it has folded to a cheap one from some private-equity mob, to be completed by Christmas. That will call for a substitute. At the current price ISAT will have produced £680 in divis plus capital gain from an investment of £1,200.
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
Original cost after expenses was £23,949. Later buys were at the same unit cost: <=£1,200 per share. On the corporate-events front all was quiet. The portfolio's 23 shares paid 51 regular and three special dividends last year.
INCOME
The midcaps variant stemmed from hopes that periodic income would grow faster, if more bumpily, than in my Footsie HYP. But this did not begin to happen until the year just past.
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: £1,308, -4.1%
2018-19: £1,464, +11.9%
LuniHYP250 has collected £9,255 of routine payouts, averaging 3.9% on each financial year's opening capital.
Provident Financial, Chemring and Balfour Beatty had ceased paying entirely, before they resumed at far lower rates. No more suspenders last year, but Inmarsat and N Brown cut payouts. Freezes are in force at Ashmore, Go-Ahead, Greene King and TP ICAP. Worthy gains in income were furnished by Greggs, IG, moneysupermarket and Cineworld, although CINE's has shrunk after its stonker of a rights issue. IG is moving on to a standstill rate.
Maiden contributions from Bellway, Essentra, William Hill (if worse than hoped) and John Wood helped the 12% surge in income. Unusually among smaller companies, Cineworld and Paypoint have begun quarterly dividends.
LuniHYP250's running yield from Year 7's regular income was 3.9% (3.2%), matching the aforementioned average since 2012. That ~4% yardstick constantly crops up for UK equity higher-paying assemblages.
On average shares were purchased when yielding one-third more than the All-Share Index (FTAS). This is in line with my 'optimal zone' happy medium between juicy and injudicious; though not deliberately so, since this is not a mechanically selected portfolio. Indeed, eight of 27 buys came from the 'warning' or 'danger' zones.
The fruits of TMFpyad's 'market trading' are another tale entirely. They greatly safeguarded income:
2012-13: £115
2013-14: £188
2014-15: £315
2015-16: £200
2016-17: £0
2017-18: £2,046
2018-19: £177
Total to date £3,041, a quarter of total receipts. In peaceful 2018-19 only £87, £66 and £23 respectively from Cineworld, moneysupermarket and Paypoint popped up. All were special dividends.
CAPITAL
This is academic, because I am a lifetime holder for income and would only liquidate if potless.
LuniHYP 250 holds 23 well-differentiated midcaps. None lack all hope of producing dividends in the near term. Together they yield well above what a bond or cash deposit offers, with inflation protection from an income reserve. That suffices.
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%
At Jul. 12, 2019, market value included £85 of unallocated capital.
The seventh year follows three of underperformance by the HYP. I use the All-Share Index as a universal comparator for an unconstrained, British small investor. The portfolio has so far increased by 61.6% against the FTAS's 40.8%, beating it in four of seven years. Compound rate of growth in capital has been 7.1% pa for the shares, 5.0% for the FTAS, 2.6% for retail prices.
Best overall payback, taking in all receipts plus paper profits, is Gregg's £4,903. The thinnest is William Hill's minus £545, though it is early days for this wayward bookie. The average payback among 16 survivors from 2012 is £1,291, doubling the £1,200 purchase cost per share after seven years. Chemring is the dunce with a negative return of £292.
BALANCE
Has the income stream become perilously unweighted over time? My test is whether any share has paid out more than twice or less than half what an even split would dictate.
As to regular payments, the pecking order a year ago is unchanged. Of 16 survivors Balfour Beatty and Chemring-- both cutters, both now convalescing-- provided less than half as much as the one-sixteenth portion of a perfect balance.
No share has paid out more than twice as much as the ideal proportion. The largest regular cumulative incomes among survivors have come from Close Brothers and Go-Ahead, each supplying about 8%. Neither is near the 12.5% I would consider to be pushing against an upper limit.
DERISKING
My habit is to set aside part of the raw inflow to preserve the purchasing power of a 'derisked' spendable sum. The surplus goes to an income reserve which will bolster purchasing power when the portfolio collects too little.
Thus 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 reserved 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 inflation-- by 2.6%, then 1.0%-- while further transfers swelled the reserve. At the end of Year 3 it already contained 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 in Feb. 2018 made me waive 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.
Yet far harder times may lie in wait for dividend fans. So I leaned to temerity and boosted the withdrawal by one-tenth, giving an ongoing 5.69%+RPI on the original investment. At Jul. 2019 the reserve is 23 months. Over the first seven years, one-quarter of raw income will have been held back: £3,092 out of £12,296. (As it happens, this is very close to the one-off receipts tally.)
A stress test, accentuating the negative, posits inflation at 4% pa in 2019-2022. Against that, what if portfolio income comprised regular items only, without extras?(1)
Say such regular income dropped by one-fifth in 2019-20 due to a sudden new crisis, then stayed flat in 2020-22. The reserve would be heavily depleted; however by Jul. 2022 it would contain nine months' payout after ten years' operation.
CONCLUSION
One can easily doubt the short-term potency of dividends from the midcap 'space'. Brexit fallout could hit this type of high yielder harder, if more exposed to the domestic economy. Years of easy capital financing and the clamour for income from investors may have induced maturing or becalmed midsized enterprises to shell out too much. A global recession might bring swift, widespread and serious chopping of dividends. Boards already seem to be reining in, with 0-5% the new normal for annual dividend rises.
'Unsteady as she goes' as far as this company and that are concerned... but the HYP's range of activities and derisking fortify a goodly purchasing power from the contraption as a whole. By now it has thick shock-proofing in the income reserve. So I remain warily cheerful as far as the eye can legitimately see.
----------------------------------------------------------------------------------------------------------------
(1) Though Greggs has promised a special, amount tba, for the autumn. The vegan sausage roll bonus?