HYP1 versus the baskets: 2000-19
Posted: November 21st, 2019, 2:10 pm
Here is a 19th year update of income delivery and capital performance, including volatility, for pyad's High Yield Portfolio (HYP1). He reported results on Nov. 13 on the Practical board. They are compared with 'baskets' of seven (B7) or eight (B8) investment trusts (1).
Baskets are an alternative, professionally managed means to the same end as do-it-yourself HYPs. Both methods seek a sizeable, steadily growing and reasonably stable income from a lump sum, to supplement if not replace pensions on retiral. Voluntary 'tinkering' with the original components is discouraged.
The B7 and B8 were devised in 2010 and back-calculated to HYP1's launch date in Nov. 2000. To eliminate hindsight bias (though effects would have dissipated after nine years' onward evolution) average outcomes are shown for all larger UK Growth & Income sector trusts available when HYP1 was launched: the 'universe of 24' (U24) (2).
Three U24 dividends payable by Dec. 31 are my forecasts pending declarations: BCI, KIT and STS.
All figures assume £75,000 gross invested in equal amounts before 1% purchase expenses, without dividend reinvestment or capital additions. Compound annual growth rates (CAGR) are timed to eliminate random variations in dividend entitlements arising before Jan. 2002. Deflation is by the Retail Prices Index.
INCOME
Totals for 2019 (£)/Change from 2018 (%)/Totals since launch (£)/CAGR 2002-19 (5)/Falls year-on-year (of 17, 2002-19)
HYP1: 10,597/+19/95,525/6.9/3
B7: 6,930/+6/79,211/5.9/1
B8: 5,234/+6/72,266/3.8/1
U24: 5,289/+6/68,200/5.1/1
A few years ago on The Motley Fool, I speculated that HYP1's income might soon hit a pain barrier. Wrong. It has raced ahead: three times as fast as the trusts this year, now totalling £16,000 more than the B7. HYP1's CAGR of 6.9% is a point higher, and that stretches the dosh gap over nearly two decades.
The B8 was planned for shorter-term income-seekers, on a 'juicier' immediate yield than the Seven but with weaker dividend growth potential. The B7's cumulative total delivery passed the B8's after eight years, and in 2019 will be £1,700 more.
The U24 takes in mavericks such as Nick Train's 'conviction' trust, Finsbury, and the family-dominated Brunner. These are less committed to increasing generous dividends as mainstream, vanilla trusts which draw largely on British blue chips like HYP1. The U24 also houses two which broke down and laboured to restore their payouts: Shires and Troy. Securities Trust of Scotland also hit doldrums and resorted to paying out capital gains.
Hence income from the sector as a whole is no more than for the B8 at present, and was less in the past. But the U24's CAGR (from a depressed base in 2000) is faster.
Each option has seldom failed to raise its income in nominal (and mostly in real) terms year by year. HYP1 missed the mark three times out of 17, with an average dip of 16%. Trusts did so only once- trivially so in baskets. HYP1 may be on a fast climb, but has ridden a switchback since its birth.
DERISKING
Amount withdrawn(£)/Safety margin (%)/CAGR of withdrawn amount (%)/Average reserve (months)/Reserve at end-2019 (months)/Average withdrawn yield on capital (%)
HYP1: 83,002/13/5.0/20/6/4.3
B7: 65,616/15/14.1/21/17/2.9
B8: 65,542/9/6.0/17/13/3.9
U24: 62,738/8/4.2/15/9/3.6
HYP1's ampler revenue generation is offset by its waywardness. So if you must have at least preserve original purchasing power indefinitely- if you rely on a portfolio to finance necessities- set part of your 'raw' receipts aside.
My way of amassing a reserve is to fix a withdrawal rate once the first year's money is in the bank, somewhat below your total haul. Increase the spendable portion by inflation annually and let the surplus accumulate until it should shield you: say, 12 months' worth of whatever is the current amount being withdrawn. Thereafter you may have room to withdraw more.
This 'derisking' of income opens a margin of safety between received and spent which has averaged 13% of raw income for HYP1, trimming the CAGR for spendable income to 5.0% from 6.9%. Quite a sacrifice, but it would have let you recline on a cushion of 20 months' current spendable at present, against an historic average reserve of only 6 months. Today's level may appear too cautious; but considering HYP1's gyrations and the dim immediate prospect for British dividends, better lean that way.
For the baskets similar imposts are smaller; but apart from the wider spread of underlying shares in their constituents, which smooth income trends, the trusts do some safeguarding before you do. Typically a UK Equity Income sector member books around 5% of earnings to its revenue reserve, keeping anything between 10 and 24 months of dividend on ice. Hence many ITs have avoided dividend cuts for 20-50 years.
My three trust-based options vary between 13 and 21 months in reserve now. The B7, with its 'growthier' bias-- tortoise to the B8's hare- has had a spendable CAGR as high as 14.1%, albeit from a low base. Yet the overall totals of withdrawn income to date are nearly the same. The B8 paid more sooner, averaging a yield of 3.9% pa on the year's brought-forward capital value against the B7's 2.9%.
HYP1 trounced both baskets with a 4.3% average withdrawal rate. However, they had the comfort of much larger reserves until lately.
ANNUAL WITHDRAWAL YIELDS (%)
HYP1: Years 1-16: 4.2/17-18: 5.0/19: 6.0
B7: Years 1-6: 2.5/7-11: 3.3/12-17: 4.1/18-19: 6.5
B8: Years 1-2: 3.0/3-4: 3.8/5-19: 5.0
U24: Years Years 1-8: 3.0/9-14: 3.3/15-19: 3.5
The table above shows what set-asides could have meant for your pocket, i.e. how spendable income as a yield on the £75,000 subscription might grow-- once jacking up the abstraction rate was feasible without imperilling the reserve. All yields are index-linked, so rises boost purchasing power.
The patterns reflect smoothness and size of the raw intake, and so are very various.
HYP1 kicked off on a 4.2% yield, but after reserving and inflation-proofing it stuck for 16 years. Inflow was too erratic to venture on a higher withdrawal rate that might have come unstuck. The latter-day boom in divis has eased the dilemma: it would have permitted 5%+RPI for two years, and 6% from 2019 with the now-replete income reserve.
The Basket of Seven could only offer 2.5%+RPI for its first six years, but income's buoyancy allowed three rises afterwards. They took it to 6.5% by 2019. A lot less than the HYP for a long time, but promising more going forward.
The B8 paid a derisked 3.0% for the first two years, 3.8% for the next two and 5.0% thereafter. Its sluggish acceleration of payouts has left it becalmed on that rate. (Its history is one reason why I do not chase initial yields.)
The U24, as in many respects, has a profile between that of the baskets. Its overall distribution was so skewed by eccentric trusts rejected from baskets that its current safe yield is a paltry 3.5%.
Remembering the purpose of these portfolios: all would have furnished secure purchasing power, growing at different speeds but well above riskless but miserly cash deposits. Those latterly have offered 1-2% without indexing. Bonds have been similarly grudging. Index-linked annuities for single male retirees are quoted at 3-4%+RPI, with capital kissed goodbye. Dividends from UK companies still look best, for all their near-term uncertainties and possible decay or disruption.
CAPITAL
Value at Nov. 12, 2019 (£)/Real change in year (%)/CAGR since launch after inflation (%)/Falls year-on-year (of 19, 2000-19)
HYP1: 159,682/+0.5/1.1/4
B7: 190,161/+3.7/2.1/6
B8: 118,277/+3.8/-0.4/7
U24: 141,200/+4.4/0.5/7
---------------------------------------------
FTSE 100: 7365.44/+2.3/-2.1/7
FT All-Share: 4060.54/+2.3/-1.4/7
As a forever fellow, I will let my executors dispose of whatever capital growth eventuates from income investments. Meantime I keep one eye on values, since they can hint at the revenue flow's healthiness.
The most interesting takeaway from the table above is that HYP1, despite shelling out far more, was behind the B7 by £30,000 on their nineteenth birthdays. HYP1 became 0.5% more valuable after inflation in the latest year, whereas the trusts were 3-4% to the good. Real CAGRs for capital since launch have been 1.1% for HYP1, 0.5% for the U24, an erosion of 0.4% for the B8 (closest to HYP1 in character) and 2.1% for the B7.
The High Yield Portfolio lost value, year/year, in four of 19 periods: fewer than the baskets, albeit HYP1's ups and downs (like its income's) were more pronounced. Of concern versus the B7 is that the narrower, rotated bunch of c. 15 stocks has underperformed the basket continuously since 2013, implying that HYP1's profuse dividends may come at the expense of values. Not a worry for an eternity holder if the payouts are normally covered; but we know cover has shrunk among the Footsie's finest, so the relative frailty of HYP1's market value may discount inferior sustainability of dividends.
Certainly their quality is in question. HYP1's big payers this year were Rio Tinto, thanks to specials before the mining cycle turned; Persimmon, whose much-accelerated 'return of capital' schedule is winding down; and BAT Industries, steady and juicy but on a slow growth path. However, as before unsuspected rabbits may spring out of the hat.
Certainly one can say of capital that HYP1's benchmark, the Footsie index, has been 'crushed' or 'slaughtered', in pyadic parlance. So has the more broadly based All-Share Index, among which baskets fish more. Even the wheezy Basket of Eight is well ahead of indices. Trusts lost value as often as the broad market, but by less, while outperforming indices in bullish conditions.
RPI inflation has been 2.8% pa through this study's timespan. Apart from the B8, its options have shown modest ability to do better. Anyone who sank £75,000 into the project for income should not feel it has been bought at capital's expense. A tracker would have done worse on both counts.
CONCLUSIONS
There is no one road for all to go down. I run two HYPs and a clutch of trusts. The HYPs are more exciting, require more monitoring, stockpicking and admin-- though not a huge load-- and they pay more. The baskets would only have disturbed Doris to make sure dividends were timely and correct. In my experience of broking platforms they are.
Investors for whom the income is fun money may ignore all the derisking palaver, taking fat and lean years in their stride. But three words of wariness about HYP1 seem necessary.
First: it saw the light in a highly atypical climate. The millennial infotech craze was on; big shares' ratings were sharply polarised between glamorous futuristic issues, often yielding little or nothing and selling on hope, and 'old economy' blue chips.
Pyad's choice naturally fell on the old plodders. Their unpopularity promised much bigger immediate payback than one could obtain from them a little later after dotcom mania subsided. It was a wonderful time to be into high yield.
Thirteen of HYP1's 15 initial selections would have been acquired on running returns at least half as high again as the market, some far more. Pyad predicted a 4.8% Year One yield (actual outcome 4.6%) versus the FTSE's 2.2%.
My retrospective research into dividend growth rates, frequency of interruptions and relative yields this century warned that HYP1's blended starting return might hit squalls. So it proved. The first few years' collections were fitful, while during the global crisis HYP1 gathered less income in 2010 than in its debut year, a 37% plunge from 2009.
Secondly: the crucial principle of diversification was not fully honoured at the outset. Two of HYP1's first fifteen were banks, three were resource-extractors (miners and an oil producer). Then, and maybe now, the most alluring immediate yields clustered in a minority of sectors, if choice was confined to the Footsie and a bit below.
Thirdly: there was no codified guidance about how much to recycle funds when 'market trading' threw up cash, e.g. from a bid. HYP1 notoriously sank a lot of freed-up capital into BT which might have been spread more diversely. The much-discussed concentration of income into a minority of members, never greater than now, might have been reduced. OK, some holders would rather have bonanzas from the few... for how long, though?
Following around a dozen paper or real HYPs, back- and front-tested, reassured me. Being stricter about diversification, and reinvesting freed cash with the same per-holding commitment as in the original group, thwart polarisation. HYP1's skews are not inevitable.
Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.
Since 2006-- as far back as I have delved to date-- the average historic yield when buying a B7 would have been 96% of the All-Share's yield; for the B8, 126%, for the U24 114%. Latest (end-Oct.) ratios are narrower at 88%, 106% and 92% respectively. For all the talk about Momentum and Growth strategies eclipsing Value since 2015, somebody out there appreciates a reliable and sizeable divi.
Allowing for the trusts' reserving-- to put the comparison more on all fours with a directly-held share portfolio-- would put the B8, its nearest likeness, at about 110%. That is pretty near the middle of my 'optimal zone' (90-150% of the All-Share yield) from which I suggested the desired income trade-off of size, security and growth potential could best be obtained for an income portfolio.
Compiling weekly model 15-share 'SuperHYPs', which demanded strict tests of eligibility, I found they yielded only c. 15% more than the market yield. That rose to c. 25% more for bigger, 20-25-member HYPs chosen on easier criteria. Nowhere near the >100% extra starting yield pyad rustled up for HYP1, when such as lastminute.com were the rage.
Moreover, the zones' power to signal trouble for payouts has to be considered. Beginning a pyadic portfolio today, with the Footsie yielding around 4.5%, it would be rash indeed to shoot for a premium as large as HYP1 got. If the speed out of the starting gate is slower than then, there is reason to infer that results over the next 19 years will exalt the HYP approach less than in the decades since Y2K spooked us.
---------------------------------------------------------------------------------------------------------------------------
(1) Latest detailed annual reviews on the 'Investment Trusts and Unit Trusts' board:
B7: #225773
B8: #254212
(2) Besides the fifteen basket members, these are Aberdeen Diversified Income and Growth (formerly BlackRock Income Strategies, previously British Assets) (ADIG); Aberdeen Standard Equity Income (formerly Standard Life Equity Income) (ASEI); Brunner (BUT); Finsbury Growth & Income (FGT); Keystone (KIT); Scottish American Investment (SAIN); Securities Trust of Scotland (STS); Shires Income (SHRS); Troy Income & Growth (TIGT).
Baskets are an alternative, professionally managed means to the same end as do-it-yourself HYPs. Both methods seek a sizeable, steadily growing and reasonably stable income from a lump sum, to supplement if not replace pensions on retiral. Voluntary 'tinkering' with the original components is discouraged.
The B7 and B8 were devised in 2010 and back-calculated to HYP1's launch date in Nov. 2000. To eliminate hindsight bias (though effects would have dissipated after nine years' onward evolution) average outcomes are shown for all larger UK Growth & Income sector trusts available when HYP1 was launched: the 'universe of 24' (U24) (2).
Three U24 dividends payable by Dec. 31 are my forecasts pending declarations: BCI, KIT and STS.
All figures assume £75,000 gross invested in equal amounts before 1% purchase expenses, without dividend reinvestment or capital additions. Compound annual growth rates (CAGR) are timed to eliminate random variations in dividend entitlements arising before Jan. 2002. Deflation is by the Retail Prices Index.
INCOME
Totals for 2019 (£)/Change from 2018 (%)/Totals since launch (£)/CAGR 2002-19 (5)/Falls year-on-year (of 17, 2002-19)
HYP1: 10,597/+19/95,525/6.9/3
B7: 6,930/+6/79,211/5.9/1
B8: 5,234/+6/72,266/3.8/1
U24: 5,289/+6/68,200/5.1/1
A few years ago on The Motley Fool, I speculated that HYP1's income might soon hit a pain barrier. Wrong. It has raced ahead: three times as fast as the trusts this year, now totalling £16,000 more than the B7. HYP1's CAGR of 6.9% is a point higher, and that stretches the dosh gap over nearly two decades.
The B8 was planned for shorter-term income-seekers, on a 'juicier' immediate yield than the Seven but with weaker dividend growth potential. The B7's cumulative total delivery passed the B8's after eight years, and in 2019 will be £1,700 more.
The U24 takes in mavericks such as Nick Train's 'conviction' trust, Finsbury, and the family-dominated Brunner. These are less committed to increasing generous dividends as mainstream, vanilla trusts which draw largely on British blue chips like HYP1. The U24 also houses two which broke down and laboured to restore their payouts: Shires and Troy. Securities Trust of Scotland also hit doldrums and resorted to paying out capital gains.
Hence income from the sector as a whole is no more than for the B8 at present, and was less in the past. But the U24's CAGR (from a depressed base in 2000) is faster.
Each option has seldom failed to raise its income in nominal (and mostly in real) terms year by year. HYP1 missed the mark three times out of 17, with an average dip of 16%. Trusts did so only once- trivially so in baskets. HYP1 may be on a fast climb, but has ridden a switchback since its birth.
DERISKING
Amount withdrawn(£)/Safety margin (%)/CAGR of withdrawn amount (%)/Average reserve (months)/Reserve at end-2019 (months)/Average withdrawn yield on capital (%)
HYP1: 83,002/13/5.0/20/6/4.3
B7: 65,616/15/14.1/21/17/2.9
B8: 65,542/9/6.0/17/13/3.9
U24: 62,738/8/4.2/15/9/3.6
HYP1's ampler revenue generation is offset by its waywardness. So if you must have at least preserve original purchasing power indefinitely- if you rely on a portfolio to finance necessities- set part of your 'raw' receipts aside.
My way of amassing a reserve is to fix a withdrawal rate once the first year's money is in the bank, somewhat below your total haul. Increase the spendable portion by inflation annually and let the surplus accumulate until it should shield you: say, 12 months' worth of whatever is the current amount being withdrawn. Thereafter you may have room to withdraw more.
This 'derisking' of income opens a margin of safety between received and spent which has averaged 13% of raw income for HYP1, trimming the CAGR for spendable income to 5.0% from 6.9%. Quite a sacrifice, but it would have let you recline on a cushion of 20 months' current spendable at present, against an historic average reserve of only 6 months. Today's level may appear too cautious; but considering HYP1's gyrations and the dim immediate prospect for British dividends, better lean that way.
For the baskets similar imposts are smaller; but apart from the wider spread of underlying shares in their constituents, which smooth income trends, the trusts do some safeguarding before you do. Typically a UK Equity Income sector member books around 5% of earnings to its revenue reserve, keeping anything between 10 and 24 months of dividend on ice. Hence many ITs have avoided dividend cuts for 20-50 years.
My three trust-based options vary between 13 and 21 months in reserve now. The B7, with its 'growthier' bias-- tortoise to the B8's hare- has had a spendable CAGR as high as 14.1%, albeit from a low base. Yet the overall totals of withdrawn income to date are nearly the same. The B8 paid more sooner, averaging a yield of 3.9% pa on the year's brought-forward capital value against the B7's 2.9%.
HYP1 trounced both baskets with a 4.3% average withdrawal rate. However, they had the comfort of much larger reserves until lately.
ANNUAL WITHDRAWAL YIELDS (%)
HYP1: Years 1-16: 4.2/17-18: 5.0/19: 6.0
B7: Years 1-6: 2.5/7-11: 3.3/12-17: 4.1/18-19: 6.5
B8: Years 1-2: 3.0/3-4: 3.8/5-19: 5.0
U24: Years Years 1-8: 3.0/9-14: 3.3/15-19: 3.5
The table above shows what set-asides could have meant for your pocket, i.e. how spendable income as a yield on the £75,000 subscription might grow-- once jacking up the abstraction rate was feasible without imperilling the reserve. All yields are index-linked, so rises boost purchasing power.
The patterns reflect smoothness and size of the raw intake, and so are very various.
HYP1 kicked off on a 4.2% yield, but after reserving and inflation-proofing it stuck for 16 years. Inflow was too erratic to venture on a higher withdrawal rate that might have come unstuck. The latter-day boom in divis has eased the dilemma: it would have permitted 5%+RPI for two years, and 6% from 2019 with the now-replete income reserve.
The Basket of Seven could only offer 2.5%+RPI for its first six years, but income's buoyancy allowed three rises afterwards. They took it to 6.5% by 2019. A lot less than the HYP for a long time, but promising more going forward.
The B8 paid a derisked 3.0% for the first two years, 3.8% for the next two and 5.0% thereafter. Its sluggish acceleration of payouts has left it becalmed on that rate. (Its history is one reason why I do not chase initial yields.)
The U24, as in many respects, has a profile between that of the baskets. Its overall distribution was so skewed by eccentric trusts rejected from baskets that its current safe yield is a paltry 3.5%.
Remembering the purpose of these portfolios: all would have furnished secure purchasing power, growing at different speeds but well above riskless but miserly cash deposits. Those latterly have offered 1-2% without indexing. Bonds have been similarly grudging. Index-linked annuities for single male retirees are quoted at 3-4%+RPI, with capital kissed goodbye. Dividends from UK companies still look best, for all their near-term uncertainties and possible decay or disruption.
CAPITAL
Value at Nov. 12, 2019 (£)/Real change in year (%)/CAGR since launch after inflation (%)/Falls year-on-year (of 19, 2000-19)
HYP1: 159,682/+0.5/1.1/4
B7: 190,161/+3.7/2.1/6
B8: 118,277/+3.8/-0.4/7
U24: 141,200/+4.4/0.5/7
---------------------------------------------
FTSE 100: 7365.44/+2.3/-2.1/7
FT All-Share: 4060.54/+2.3/-1.4/7
As a forever fellow, I will let my executors dispose of whatever capital growth eventuates from income investments. Meantime I keep one eye on values, since they can hint at the revenue flow's healthiness.
The most interesting takeaway from the table above is that HYP1, despite shelling out far more, was behind the B7 by £30,000 on their nineteenth birthdays. HYP1 became 0.5% more valuable after inflation in the latest year, whereas the trusts were 3-4% to the good. Real CAGRs for capital since launch have been 1.1% for HYP1, 0.5% for the U24, an erosion of 0.4% for the B8 (closest to HYP1 in character) and 2.1% for the B7.
The High Yield Portfolio lost value, year/year, in four of 19 periods: fewer than the baskets, albeit HYP1's ups and downs (like its income's) were more pronounced. Of concern versus the B7 is that the narrower, rotated bunch of c. 15 stocks has underperformed the basket continuously since 2013, implying that HYP1's profuse dividends may come at the expense of values. Not a worry for an eternity holder if the payouts are normally covered; but we know cover has shrunk among the Footsie's finest, so the relative frailty of HYP1's market value may discount inferior sustainability of dividends.
Certainly their quality is in question. HYP1's big payers this year were Rio Tinto, thanks to specials before the mining cycle turned; Persimmon, whose much-accelerated 'return of capital' schedule is winding down; and BAT Industries, steady and juicy but on a slow growth path. However, as before unsuspected rabbits may spring out of the hat.
Certainly one can say of capital that HYP1's benchmark, the Footsie index, has been 'crushed' or 'slaughtered', in pyadic parlance. So has the more broadly based All-Share Index, among which baskets fish more. Even the wheezy Basket of Eight is well ahead of indices. Trusts lost value as often as the broad market, but by less, while outperforming indices in bullish conditions.
RPI inflation has been 2.8% pa through this study's timespan. Apart from the B8, its options have shown modest ability to do better. Anyone who sank £75,000 into the project for income should not feel it has been bought at capital's expense. A tracker would have done worse on both counts.
CONCLUSIONS
There is no one road for all to go down. I run two HYPs and a clutch of trusts. The HYPs are more exciting, require more monitoring, stockpicking and admin-- though not a huge load-- and they pay more. The baskets would only have disturbed Doris to make sure dividends were timely and correct. In my experience of broking platforms they are.
Investors for whom the income is fun money may ignore all the derisking palaver, taking fat and lean years in their stride. But three words of wariness about HYP1 seem necessary.
First: it saw the light in a highly atypical climate. The millennial infotech craze was on; big shares' ratings were sharply polarised between glamorous futuristic issues, often yielding little or nothing and selling on hope, and 'old economy' blue chips.
Pyad's choice naturally fell on the old plodders. Their unpopularity promised much bigger immediate payback than one could obtain from them a little later after dotcom mania subsided. It was a wonderful time to be into high yield.
Thirteen of HYP1's 15 initial selections would have been acquired on running returns at least half as high again as the market, some far more. Pyad predicted a 4.8% Year One yield (actual outcome 4.6%) versus the FTSE's 2.2%.
My retrospective research into dividend growth rates, frequency of interruptions and relative yields this century warned that HYP1's blended starting return might hit squalls. So it proved. The first few years' collections were fitful, while during the global crisis HYP1 gathered less income in 2010 than in its debut year, a 37% plunge from 2009.
Secondly: the crucial principle of diversification was not fully honoured at the outset. Two of HYP1's first fifteen were banks, three were resource-extractors (miners and an oil producer). Then, and maybe now, the most alluring immediate yields clustered in a minority of sectors, if choice was confined to the Footsie and a bit below.
Thirdly: there was no codified guidance about how much to recycle funds when 'market trading' threw up cash, e.g. from a bid. HYP1 notoriously sank a lot of freed-up capital into BT which might have been spread more diversely. The much-discussed concentration of income into a minority of members, never greater than now, might have been reduced. OK, some holders would rather have bonanzas from the few... for how long, though?
Following around a dozen paper or real HYPs, back- and front-tested, reassured me. Being stricter about diversification, and reinvesting freed cash with the same per-holding commitment as in the original group, thwart polarisation. HYP1's skews are not inevitable.
Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.
Since 2006-- as far back as I have delved to date-- the average historic yield when buying a B7 would have been 96% of the All-Share's yield; for the B8, 126%, for the U24 114%. Latest (end-Oct.) ratios are narrower at 88%, 106% and 92% respectively. For all the talk about Momentum and Growth strategies eclipsing Value since 2015, somebody out there appreciates a reliable and sizeable divi.
Allowing for the trusts' reserving-- to put the comparison more on all fours with a directly-held share portfolio-- would put the B8, its nearest likeness, at about 110%. That is pretty near the middle of my 'optimal zone' (90-150% of the All-Share yield) from which I suggested the desired income trade-off of size, security and growth potential could best be obtained for an income portfolio.
Compiling weekly model 15-share 'SuperHYPs', which demanded strict tests of eligibility, I found they yielded only c. 15% more than the market yield. That rose to c. 25% more for bigger, 20-25-member HYPs chosen on easier criteria. Nowhere near the >100% extra starting yield pyad rustled up for HYP1, when such as lastminute.com were the rage.
Moreover, the zones' power to signal trouble for payouts has to be considered. Beginning a pyadic portfolio today, with the Footsie yielding around 4.5%, it would be rash indeed to shoot for a premium as large as HYP1 got. If the speed out of the starting gate is slower than then, there is reason to infer that results over the next 19 years will exalt the HYP approach less than in the decades since Y2K spooked us.
---------------------------------------------------------------------------------------------------------------------------
(1) Latest detailed annual reviews on the 'Investment Trusts and Unit Trusts' board:
B7: #225773
B8: #254212
(2) Besides the fifteen basket members, these are Aberdeen Diversified Income and Growth (formerly BlackRock Income Strategies, previously British Assets) (ADIG); Aberdeen Standard Equity Income (formerly Standard Life Equity Income) (ASEI); Brunner (BUT); Finsbury Growth & Income (FGT); Keystone (KIT); Scottish American Investment (SAIN); Securities Trust of Scotland (STS); Shires Income (SHRS); Troy Income & Growth (TIGT).