HYP Diversification - by sector, industry or both?

[funduffer]

Interesting article form John Kingham on diversification:

https://www.ukdividendstocks.com/blog/s ... and-sector

TLDR - The answer seems to be both:

With this new rule in place, I thought it might make sense to remove the old 10% sector limit, but I didn't think that for very long.

If I only diversified by industry then the portfolio could have all of its 20% per-industry allowance allocated to one sector. That could mean 20% invested in banks or car insurers or clothing retailers. For me, that would be too much exposure to a single sector-specific risk, so I think it's better to diversify across both industries and sectors.

Enjoy!

FD

[micrographia]

Never used such broad Industry definitions when considering diversification in my HYP, except possibly in the case of financial companies - a hangover from 2008.

If I have a quick look at my holdings using the strict Industry definitions in the article, none contain more than 20%. Highest is Consumer Staples at a touch over 18%, then Financials at 16%. Lowest is Healthcare at under 4%, with Consumer Discretionary and Industrials both just under 6%.

In terms of Industry type, it's 43% Defensive, with the rest split equally between Cyclical and Highly Cyclical. It's all a bit broad brush though and basing rules on it seems impractical. Are AGR and PHP Highly Cyclical Real Estate companies, or are they actually a better fit in the Defensive Healthcare sector? Are TRIG and UKW Highly Cyclical Renewable Energy companies or in the UK are they closer to the Defensive Electricity Utilities? Or as ITs, are they neither?

There is always room for judgement - I'd be inclined to have all the above as Defensives, which would substantially reduce my exposure to Highly Cyclical Industries compared to the definitions in the link. Conversely, how's everyone's Defensive Telecomms investments in the UK doing ?

EEM.

[idpickering]

Interesting article form John Kingham on diversification:

https://www.ukdividendstocks.com/blog/s ... and-sector

TLDR - The answer seems to be both:

With this new rule in place, I thought it might make sense to remove the old 10% sector limit, but I didn't think that for very long.

If I only diversified by industry then the portfolio could have all of its 20% per-industry allowance allocated to one sector. That could mean 20% invested in banks or car insurers or clothing retailers. For me, that would be too much exposure to a single sector-specific risk, so I think it's better to diversify across both industries and sectors.

Enjoy!

FD

A good and important question IMHO. The bottom line to me is, each to their own, but I do like to be diversified myself. My HYP currently has 25 shares spread over 17 different sectors. 19 are from the FTSE100, and the others from the FTSE250. I'm open to buying more holdings in order to further diversify my HYP. but I'm fairly happy with my HYP as is currently. I'm always wary of diworsification.

Ian.

[kempiejon]

HYPTUSS has a sector/super sector toggle and spits out a handy graph. Banks, insurance and financial services are separate, at industry level they are grouped. I don't much check these days but just now I see I have most in financials, I have least in chemicals 0.7% Johnson Matthey.
I don't check that much these days as I have plenty of shares and I think I was diversified long ago. Every now and again individual picks can go overweight and reinvested dividends can balance that. Perhaps JMAT can have the next top up?
The Kingham strategy is trading my HYP is not.

[Newroad]

Hi FundRuffer.

It would be helpful to know if Kingham is using GICS or ICB when referencing sectors. Their groupings are more or less the same, but they unhelpfully use different names for each. I use GICS (as I think you are, by referencing Sectors and Industries) but KempieJon and I think HYPTUSS use ICB.

My approach, based largely on Carver's "Smart Portfolios" work, could be described as "even risk-weighted by sector". Volatility is used as the proxy for risk weighting. There are 11 sectors in the "GICS" nomenclature. I have 22 holdings (2 per sector) plus 2 extra to cover mid-cap & small-caps. Mine is a pseudo-HYP rather than HYP - roughly speaking, I go for the highest yielding share(s) within a sector.

One's experience is very anecdotal, but if I hadn't forced myself into the Technology sector as per the methodology, I wouldn't hold my two bigget gainers, SGE (Sage) and BA. (BAE) - and the latter itself is a fudge (the best I could do - it is technically Industril Sector, but is part of the FTSE Techmark 100 index).

So, each to their own for their own reasons.

Regards, Newroad

[tjh290633]

I think the more important factor is to set a maximum holding weight. In my case with 35 holdings, it is set at 1.5 times the median holding weight.

Diversification should involve sectors and subsectors. If you have more than one holding in a sector, ideally they should be from different sub-sectors. Not always possible, particularly with oil shares, but easy with property REITs, where I have BLND (Offices and retail), SGRO (Warehousing) and PHP (GP surgeries).

If you have a minimum of 10 sectors, and limit yourself to 3 holdings per sector, then the weight in each sector virtually takes care of itself, provided that you have more than 30 holdings.

TJH

[pyad]

I found the article rather over complicated for what should be a fairly simple job for HYPers and I question the reliance on official sector taxonomy as it was not designed for our purposes. From the start I wrote that whilst diversification is fundamental, investors should decide this for themselves. Most companies' activities are obvious but if you are unsure, this can be easily checked these days from their websites and it should be up to you to decide on the similarity or otherwise of various shares and whether they are in the same or different sectors.

This will lead to some HYPers having a slightly varying views on the classification of certain shares by sector but no matter, it's your portfolio and for you to decide I feel.

[idpickering]

I found the article rather over complicated for what should be a fairly simple job for HYPers and I question the reliance on official sector taxonomy as it was not designed for our purposes. From the start I wrote that whilst diversification is fundamental, investors should decide this for themselves. Most companies' activities are obvious but if you are unsure, this can be easily checked these days from their websites and it should be up to you to decide on the similarity or otherwise of various shares and whether they are in the same or different sectors.

This will lead to some HYPers having a slightly varying views on the classification of certain shares by sector but no matter, it's your portfolio and for you to decide I feel.

Spot on Stephen. Thanks for your input. Always good to see you hereabouts.

Ian.

[monabri]

Hi FundRuffer.

It would be helpful to know if Kingham is using GICS or ICB when referencing sectors. Their groupings are more or less the same, but they unhelpfully use different names for each. I use GICS (as I think you are, by referencing Sectors and Industries) but KempieJon and I think HYPTUSS use ICB.

My approach, based largely on Carver's "Smart Portfolios" work, could be described as "even risk-weighted by sector". Volatility is used as the proxy for risk weighting. There are 11 sectors in the "GICS" nomenclature. I have 22 holdings (2 per sector) plus 2 extra to cover mid-cap & small-caps. Mine is a pseudo-HYP rather than HYP - roughly speaking, I go for the highest yielding share(s) within a sector.

One's experience is very anecdotal, but if I hadn't forced myself into the Technology sector as per the methodology, I wouldn't hold my two bigget gainers, SGE (Sage) and BA. (BAE) - and the latter itself is a fudge (the best I could do - it is technically Industril Sector, but is part of the FTSE Techmark 100 index).

So, each to their own for their own reasons.

Regards, Newroad

The article states:

"The above list is based on the Industry Classification Benchmark, but there are other systems, such as the Global Industry Classification Standard (popular in the US) which, annoyingly, has Sector as the top-level grouping with multiple Industries per Sector (ie the complete opposite to the ICB system). Exactly which system you use will depend on where you get your data, but the most important thing is to be consistent."