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HYP1 versus the baskets: 2000-19

General discussions about equity high-yield income strategies
Luniversal
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HYP1 versus the baskets: 2000-19

#266013

Postby Luniversal » 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).

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Re: HYP1 versus the baskets: 2000-19

#266326

Postby Gengulphus » November 22nd, 2019, 4:08 pm

For the benefit of those who would like it to be easier to see what each number means in Luniversal's data (including myself), here is his post reformatted with that data in table format, with some work to reduce column widths. With the obvious health warning that I might have made typos or other mistakes in the process, so if you see anything that doesn't make sense, do check against his original data! And if you do find mistakes I've made, do post them and I'll get them corrected - provided they are mistakes in my reformatting, any mistakes in Luniversal's content being for him to decide whether he wants them corrected.

Luniversal wrote: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


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



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


[Note by Gengulphus: Sorry about the slightly odd formatting of the headings for this table, but I have been unable to induce the posting software to avoid that oddity.]

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


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).

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Re: HYP1 versus the baskets: 2000-19

#266346

Postby Dod101 » November 22nd, 2019, 4:59 pm

''Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.''

That quote from Luniversal will be music to some ears, including mine. I think it is timeless advice for most HYPers, indeed, most investors.

Dod

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Re: HYP1 versus the baskets: 2000-19

#266392

Postby Gengulphus » November 22nd, 2019, 7:48 pm

Dod101 wrote:''Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.''

That quote from Luniversal will be music to some ears, including mine. I think it is timeless advice for most HYPers, indeed, most investors.

That's a classic case of confirmation bias in action, I'm afraid. You agree strongly with what Luniversal is saying - it is music to your ears - and so you accept it uncritically.

Unfortunately, it is probably no longer possible to examine Luniversal's TMF research in 2010-2016 critically - someone might have archived it and be able to provide links to it, but that someone isn't me and AFAIAA nobody has ever done so or said that they could do so if people wanted. But even when it was around on TMF, there was too much of an "I've spent a lot of time studying the data I've collected intensively and I've drawn these conclusions that support my 'zones' idea, so trust me - those ideas are correct" tone to what Luniversal wrote about it - which to an outsider who hasn't seen his data, his methodology in collecting it, how he drew his conclusions from it, whether he'd looked just as hard for arguments against the ideas as for arguments against them, whether he'd examined the arguments for it as critically as the arguments against it, etc, aroused similar suspicions of confirmation bias.

Not saying that there definitely is confirmation bias in what either you or Luniversal have said - but there definitely are reasons for suspecting it's there, and you're only going to heighten them by the sort of uncritical acceptance and admiration expressed in the above quote.

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Re: HYP1 versus the baskets: 2000-19

#266401

Postby Dod101 » November 22nd, 2019, 8:28 pm

Gengulphus wrote:
Dod101 wrote:''Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.''

That quote from Luniversal will be music to some ears, including mine. I think it is timeless advice for most HYPers, indeed, most investors.

That's a classic case of confirmation bias in action, I'm afraid. You agree strongly with what Luniversal is saying - it is music to your ears - and so you accept it uncritically.


Confirmation bias is a term used quite a bit on these Boards. I am not trying to find confirmation in anything; all I am saying is that from my own experience I think that Luniversal is correct. We have each come independently to the same conclusion. I do not fully understand what is meant by 'confirmation bias' but I do not think that that is it.

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Re: HYP1 versus the baskets: 2000-19

#266404

Postby Gengulphus » November 22nd, 2019, 8:40 pm

Dod101 wrote:I do not fully understand what is meant by 'confirmation bias' but I do not think that that is it.

If you want to understand what is meant by 'confirmation bias', https://en.wikipedia.org/wiki/Confirmation_bias is a good starting point.

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Re: HYP1 versus the baskets: 2000-19

#266440

Postby Dod101 » November 22nd, 2019, 11:58 pm

I did actually have a look at a definition of the phrase. Your reference does not get me much further but I deny that there was any bias whatever in my happening to agree with Luniversal. I happen to agree with what he says but that does not indicate that I am using confirmation bias. I am not using his conclusion in any sort of 'See! Told you so!' way so as to prove my point.

As far as I am concerned, my view stands on its own merits. I was simply quoting him as it is a nice succinct way of putting forward my view that chasing yields is a dangerous practice.

On a slightly different note, but apposite in the HYP v ITs discussion, are the views of Chris Dillow in today's IC. As he says Labour's plans would remove many of the market's higher yielders, and would mean that many high yielders which were left would be those which suffer from cyclical risk such as miners and housebuilders. And of course compensation would be paid in very low yielding gilts (at least until the price falls through the floor!)

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Re: HYP1 versus the baskets: 2000-19

#266466

Postby Lootman » November 23rd, 2019, 9:36 am

ReallyVeryFoolish wrote:Fascinating. Having considered and rejected the whole high yield portfolio pyadic/Dorisian philosophy a longtime ago in the ancient TMF days, I have no particular affinity towards it. I find the proposition that chasing excessive yield opens one up to a higher risk of disappointing outcomes to be highly likely. In fact, it's so blindingly obvious it seems to me that to deny such a proposition is rather odd. Away from here, I think you'd find it quite hard to come across anyone who'd disagree. I am foolishly being lulled into a false sense of warm fuzziness by confirmation bias too?

Yes, in most investment circles the proposition that a higher yield entails a higher level of risk is so axiomatic that it would be risible to declare that there was any kind of "bias" in holding that view. An analogy is the world of high yielding bonds, which are widely known as "junk bonds", for good reasons. They can give great returns when the market favours them, but they carry a greater risk of default.

Someone who claims that the pursuit of high yields in equities is any different should, I believe, be held to a much higher standard of proof. I've usually taken the view that HY investing is really a method of taking your return in immediate income rather than long-term growth. Jam today rather than more jam tomorrow, as it were. Which is why those who follow variations of HY investing usually stress their relative indifference to capital growth and total return. Well, they would, wouldn't they?

As with Dod, I have had the same personal experience with dabbling at the HY end of the market. As for HYP1, it was started around the beginning of the dot.com collapse, which might just be the most favourable starting point for any HY portfolio, since it was the low and no yelding shares that got creamed, whilst the more boring parts of the market held up. Measure things from, say, the beginning of the dot.com boom or the start of the 2007-2010 financial crisis and you'd get a very different picture.

That's the problem with "data". It can paint very different pictures depending on the dates you pick. Principles, on the other hand, are timeless.

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Re: HYP1 versus the baskets: 2000-19

#266614

Postby Gengulphus » November 23rd, 2019, 8:16 pm

ReallyVeryFoolish wrote:Fascinating. Having considered and rejected the whole high yield portfolio pyadic/Dorisian philosophy a longtime ago in the ancient TMF days, I have no particular affinity towards it. I find the proposition that chasing excessive yield opens one up to a higher risk of disappointing outcomes to be highly likely. In fact, it's so blindingly obvious it seems to me that to deny such a proposition is rather odd. Away from here, I think you'd find it quite hard to come across anyone who'd disagree. I am foolishly being lulled into a false sense of warm fuzziness by confirmation bias too?

If you are finding yourself believing that proposition any more strongly as a result of reading Luniversal's statements "Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.", then yes, you are. Uncritical acceptance of statements that support one's view is characteristic of confirmation bias, and unless anyone can supply links to archived copies of Luniversal's "TMF research in 2010-16", it is no longer possible to subject it to critical scrutiny. (Not that it ever did stand up well to such scrutiny as I recollect it, but I'm also not expecting people to uncritically accept that recollection!)

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Re: HYP1 versus the baskets: 2000-19

#266617

Postby Lootman » November 23rd, 2019, 8:32 pm

Gengulphus wrote:
ReallyVeryFoolish wrote:Fascinating. Having considered and rejected the whole high yield portfolio pyadic/Dorisian philosophy a longtime ago in the ancient TMF days, I have no particular affinity towards it. I find the proposition that chasing excessive yield opens one up to a higher risk of disappointing outcomes to be highly likely. In fact, it's so blindingly obvious it seems to me that to deny such a proposition is rather odd. Away from here, I think you'd find it quite hard to come across anyone who'd disagree. I am foolishly being lulled into a false sense of warm fuzziness by confirmation bias too?

If you are finding yourself believing that proposition any more strongly as a result of reading Luniversal's statements "Another lesson of my TMF research in 2010-16 is that chasing yields is tempting fate. 'Good Enough is Better than Even Better'.", then yes, you are. Uncritical acceptance of statements that support one's view is characteristic of confirmation bias, and unless anyone can supply links to archived copies of Luniversal's "TMF research in 2010-16", it is no longer possible to subject it to critical scrutiny. (Not that it ever did stand up well to such scrutiny as I recollect it, but I'm also not expecting people to uncritically accept that recollection!)

It's an interesting subject. In my view it comes down to the issue of what it is to know something, for which epistemology is the fancy name.

One way we can know things is via data and evidence, which seems to be the method you prefer, given this and previous comments by you. And there is nothing wrong with that.

However that does not preclude someone from knowing things by other means. For instance, I believe that you are some kind of mathematician (not professionally, but as a hobby?). Unless I missed the point of "Principia Mathematica" by Russell and Whitehead, mathematical "knowledge" derives from the rules of symbolic logic, for which no empirical data is needed. It is a priori knowledge.

Likewise knowledge can also be gleaned by experience, inference, intuition and instinct.

So I would be hesitant to reject as bias any knowledge that somebody else claims merely because they cannot conjure up a citation. And I say that as someone who agrees with your observation that Luniversal's claims often did not stand up to scrutiny.

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Re: HYP1 versus the baskets: 2000-19

#266651

Postby JoyofBricks8 » November 24th, 2019, 3:54 am

My experience has been that there is both good bets and bad bets among the high yielders, but a slight tilt towards the latter. The ideal situation of finding value by identifying a good company beaten down to a junk equity valuation is rather elusive, though I have made some very good gains from situations where I thought that situation was the case. Most notably in 2015-16 where the mining sector was bizarrely priced for Armageddon despite the value within their primary assets, being singularly high grade ore deposits that are necessary to sustain industrial society.

However those gains were rather negated by losses on turnaround situations which failed, principally where the company was not making sufficient return on capital, or was too indebted to survive without painful restructuring.

I am content that HYP can work for some purposes: It is just that my objectives don’t really align with those of Doris. Capital growth is very important to me, but I had no way of discovering that without the experience of the vagaries of the market.

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Re: HYP1 versus the baskets: 2000-19

#266675

Postby Lootman » November 24th, 2019, 8:48 am

ReallyVeryFoolish wrote:Thanks JoB8, I think you pretty well described by investments too. I am by no means averse to buying a high yielding share but it has to have quality behind it. When fishing in that pond it's sometimes hard to be sure you caught a dogfish or not, but sometimes you can stack the odds in your favour by buying a quality business at an abnormally low valuation and with a well covered yield.

The other issue with HYP is that it is UK only. If the UK is the worst-performing major global market then you are almost doomed to under-perform the global market even if your share picks were decent.

As an example look at the 2009 market bottom. The FTSE-100 hit an intra-day low of about 3,500. It's now around 7,300 and so it has gone up by a little more than double. Not bad huh? In fact it's about a 7% annual compound increase.

Now let's look at the S&P 500. It hit an intra-day low of 666 in 2009. It is now about 3,100. It's gone up somewhere between four-fold and five-fold. There are a good number of US funds showing a compound growth rate of about 15% a year over that decade.

Now, the average dividend yield on the UK market is about twice that of the US market. But even allowing for that extra income, a HYP'er is still well behind the chap who simply bought a US tracker. The extra income comes with an opportunity cost.

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Re: HYP1 versus the baskets: 2000-19

#266682

Postby IanTHughes » November 24th, 2019, 9:03 am

Lootman wrote:
ReallyVeryFoolish wrote:Thanks JoB8, I think you pretty well described by investments too. I am by no means averse to buying a high yielding share but it has to have quality behind it. When fishing in that pond it's sometimes hard to be sure you caught a dogfish or not, but sometimes you can stack the odds in your favour by buying a quality business at an abnormally low valuation and with a well covered yield.

The other issue with HYP is that it is UK only. If the UK is the worst-performing major global market then you are almost doomed to under-perform the global market even if your share picks were decent.

As an example look at the 2009 market bottom. The FTSE-100 hit an intra-day low of about 3,500. It's now around 7,300 and so it has gone up by a little more than double. Not bad huh? In fact it's about a 7% annual compound increase.

Now let's look at the S&P 500. It hit an intra-day low of 666 in 2009. It is now about 3,100. It's gone up somewhere between four-fold and five-fold. There are a good number of US funds showing a compound growth rate of about 15% a year over that decade.

Now, the average dividend yield on the UK market is about twice that of the US market. But even allowing for that extra income, a HYP'er is still well behind the chap who simply bought a US tracker. The extra income comes with an opportunity cost.

Don't you mean: "The extra income CAME with an opportunity cost". I mean you are dependent on the benefit of hindsight to make your point, are you not?


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Re: HYP1 versus the baskets: 2000-19

#266686

Postby Lootman » November 24th, 2019, 9:15 am

IanTHughes wrote:
Lootman wrote:
ReallyVeryFoolish wrote:Thanks JoB8, I think you pretty well described by investments too. I am by no means averse to buying a high yielding share but it has to have quality behind it. When fishing in that pond it's sometimes hard to be sure you caught a dogfish or not, but sometimes you can stack the odds in your favour by buying a quality business at an abnormally low valuation and with a well covered yield.

The other issue with HYP is that it is UK only. If the UK is the worst-performing major global market then you are almost doomed to under-perform the global market even if your share picks were decent.

As an example look at the 2009 market bottom. The FTSE-100 hit an intra-day low of about 3,500. It's now around 7,300 and so it has gone up by a little more than double. Not bad huh? In fact it's about a 7% annual compound increase.

Now let's look at the S&P 500. It hit an intra-day low of 666 in 2009. It is now about 3,100. It's gone up somewhere between four-fold and five-fold. There are a good number of US funds showing a compound growth rate of about 15% a year over that decade.

Now, the average dividend yield on the UK market is about twice that of the US market. But even allowing for that extra income, a HYP'er is still well behind the chap who simply bought a US tracker. The extra income comes with an opportunity cost.

Don't you mean: "The extra income CAME with an opportunity cost". I mean you are dependent on the benefit of hindsight to make your point, are you not?

Absent that crystal ball you've been working on, history and experience is all any of us have to go on.

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Re: HYP1 versus the baskets: 2000-19

#266693

Postby IanTHughes » November 24th, 2019, 9:37 am

Lootman wrote:
IanTHughes wrote:
Lootman wrote:The other issue with HYP is that it is UK only. If the UK is the worst-performing major global market then you are almost doomed to under-perform the global market even if your share picks were decent.

As an example look at the 2009 market bottom. The FTSE-100 hit an intra-day low of about 3,500. It's now around 7,300 and so it has gone up by a little more than double. Not bad huh? In fact it's about a 7% annual compound increase.

Now let's look at the S&P 500. It hit an intra-day low of 666 in 2009. It is now about 3,100. It's gone up somewhere between four-fold and five-fold. There are a good number of US funds showing a compound growth rate of about 15% a year over that decade.

Now, the average dividend yield on the UK market is about twice that of the US market. But even allowing for that extra income, a HYP'er is still well behind the chap who simply bought a US tracker. The extra income comes with an opportunity cost.

Don't you mean: "The extra income CAME with an opportunity cost". I mean you are dependent on the benefit of hindsight to make your point, are you not?

Absent that crystal ball you've been working on, history and experience is all any of us have to go on.

Personally, I have never once worked on the production of a crystal ball. I happily leave that pointless task to those too blinkered in their investment approach to see the futility of such efforts.


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Re: HYP1 versus the baskets: 2000-19

#266698

Postby Lootman » November 24th, 2019, 9:44 am

IanTHughes wrote:
Lootman wrote:
IanTHughes wrote:Don't you mean: "The extra income CAME with an opportunity cost". I mean you are dependent on the benefit of hindsight to make your point, are you not?

Absent that crystal ball you've been working on, history and experience is all any of us have to go on.

Personally, I have never once worked on the production of a crystal ball. I happily leave that pointless task to those too blinkered in their investment approach to see the futility of such efforts.

I am glad you agree with me about the importance of looking at how different investing styles have worked in the past.

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Re: HYP1 versus the baskets: 2000-19

#266704

Postby Lootman » November 24th, 2019, 10:01 am

Lootman wrote:
IanTHughes wrote:
Lootman wrote:Absent that crystal ball you've been working on, history and experience is all any of us have to go on.

Personally, I have never once worked on the production of a crystal ball. I happily leave that pointless task to those too blinkered in their investment approach to see the futility of such efforts.

I am glad you agree with me about the importance of looking at how different investing styles have worked in the past.

Of course, that is why I compared two different styles.

I welcome your comparison data.

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Re: HYP1 versus the baskets: 2000-19

#266707

Postby IanTHughes » November 24th, 2019, 10:05 am

Lootman wrote:
IanTHughes wrote:
Lootman wrote:Absent that crystal ball you've been working on, history and experience is all any of us have to go on.

Personally, I have never once worked on the production of a crystal ball. I happily leave that pointless task to those too blinkered in their investment approach to see the futility of such efforts.

I am glad you agree with me about the importance of looking at how different investing styles have worked in the past.

IanTHughes wrote:
Lootman wrote:Now, the average dividend yield on the UK market is about twice that of the US market. But even allowing for that extra income, a HYP'er is still well behind the chap who simply bought a US tracker. The extra income comes with an opportunity cost.

Don't you mean: "The extra income CAME with an opportunity cost". I mean you are dependent on the benefit of hindsight to make your point, are you not?

I most certainly do not agree with [your] practice of using hindsight based evidence to back up your latest investment wheeze!


Ian

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Re: HYP1 versus the baskets: 2000-19

#266763

Postby JoyofBricks8 » November 24th, 2019, 1:38 pm

Come on now chaps, none of us have a clue what the next decade holds so there is no point bickering.

What we could be focussing efforts on is finding the companies with good attributes getting undervalued, where there is scope for a nice bit of wonga to be made alongside a dividend to collect.

I gave my example of miners in 2015: What are tomorrow’s examples of value in the HY pool?

I see some pretty bombed out tobacco companies out there:

IMB on 12% yield is certainly not for the faint hearted but could be of interest.

I can’t get excited about New River REIT.

Aviva on 8% yield- I think it’s a company that seems to be out of growth ideas right now, but others may have a counter opinion.

Petrofac on 7%: I have made good money trading PFC but wouldn’t say it was one I would want to hold forever.

I am not seeing the opportunity I am looking for among the large caps right now.

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Re: HYP1 versus the baskets: 2000-19

#266768

Postby SDN123 » November 24th, 2019, 2:00 pm

Back to the OP and
Moderator Message:
please desist, dspp


The post from Luniversal is incredibly useful to me to help balance choices for retirement drawdown. Of course it is only one data-point, like HYP1, but it is transparent and has been consistent for a number of years. I can definitely draw some lessons for my personal circumstances along the lines of “if I need x income then it’s reasonable to use the HYP or an IT basket approach to provide my income depending on my appetite for risk. But if I need (x+1) income then “only” HYP will work or, if that’s too risky for me, then I need to save more and retire later.“. The work also lets me plan for reasonable cash reserves, safety margins, etc

The data provided by the hard work of Luniversal and PYAD (and elsewhere THJ and others) lets me get a <b>feel</b> for what that all really means and is helping me make real life decisions about my, and my families, future.

I, for one, am very grateful for that!

SDN


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