Quality HYP

[baldchap]

I recall from somewhere that pyad decried "quality" claiming it was some vague fluffy idea. In a sense he was right because it cannot be measured or quantified and, as an accountant, that meant he couldn't understand it (*).

Fund managers like Smith and Train are essentially quality investors. The thing with it is if you really follow it then it's not an income strategy at all, since the best names tend to have low yields because the market rates them higher. So the average person who thinks that HYPs are good will lament the lack of yield in a QYP even while its shares are going up in this years' bear market.

(*) I am not an accountant myself but I believe that quality metrics like goodwill all get stuffed into a footnote. It's the part of the value of a company that accountants cannot measure or understand.

Maybe 'quality' is not the word. How about sensible, or reliable yield?
It is an income strategy though, it is just that I am happy with a reliable/sensible yield that lets me sleep at night.
I aim for a specific income from each holding, so for example, a 3% yielder is going to need twice the investment of another yielding 6%.
I am happy with that as it means that I have a larger cash investment in quality IT's (my ballast in the good ship Baldy) as opposed to REITs/Debt IT's (the skyscrapers) at the extreme other end.
Most however are in the steadier 4 - 5% area. Not exciting, but do we want that as we approach a time when we want to put the income portfolio into operation?

[dealtn]

I recall from somewhere that pyad decried "quality" claiming it was some vague fluffy idea. In a sense he was right because it cannot be measured or quantified and, as an accountant, that meant he couldn't understand it (*).

Fund managers like Smith and Train are essentially quality investors. The thing with it is if you really follow it then it's not an income strategy at all, since the best names tend to have low yields because the market rates them higher. So the average person who thinks that HYPs are good will lament the lack of yield in a QYP even while its shares are going up in this years' bear market.

Thanks for this. I clumsily tried to express something similar, but got deleted for being off-topic

[Bubblesofearth]

I think that one of the key tenets that underpins the concept of Bland's Annuity Replacement is diversification - equal weighting of sectors,

Covid-19 has provided a dramatic confirmation of the need for this. It has been a genuine Black Swan event that has had an extraordinary bipolar affect on market constituents. It doesn't matter how carefully you could have applied 'quality' filters to companies, or what those filters are, if you had picked companies in the wrong sectors you would have done badly with those companies. The only defence (except luck) would have beed to have been sectionally diversified.

BoE

[richfool]

One thing that has always bugged me about HYP was needing to include into my portfolio shares that I didn't particularly like, in the name of strategic ignorance, sector diversity and wanting at least 25 shares in it. I'd always thought that selecting well-managed companies with growing and supported dividends was the heart of a successful HYP, but the standard HYP selection process always seemed to recommend quite a few stinkers for my portfolio, and more often than I'd like I'd have to hold my nose with one hand while I pressed the Buy button with the other.

Instead of just complaining, I had a think about an alternative and what I came up with was a hybrid "Quality HYP" which partners individual shares with Investment Trusts. Broadly speaking I was thinking of splitting investments into 3 categories:
1) 30% UK shares - around 10 to 15 'quality' HYP shares, including some 'steady eddies'
2) 30% UK Income ITs
3) 40% International Income ITs

I think that the ITs would provide me with a broad baseline yield, and I could still invest in individual, quality HYP shares for a long-term boost in income units.

I'd be grateful for your thoughts!

(P.S. I've thought of another name for the HYP principle of building a diverse portfolio of shares .... herd immunity!)

Noting that you would have 30% + 30% = 60% in the UK, do you need as much in both the HYP and the UK Income IT's? I would reduce one or the other. In my case I considerably reduced the HYP holdings.

[daveh]

One thing that has always bugged me about HYP was needing to include into my portfolio shares that I didn't particularly like, in the name of strategic ignorance, sector diversity and wanting at least 25 shares in it. I'd always thought that selecting well-managed companies with growing and supported dividends was the heart of a successful HYP, but the standard HYP selection process always seemed to recommend quite a few stinkers for my portfolio, and more often than I'd like I'd have to hold my nose with one hand while I pressed the Buy button with the other.

Instead of just complaining, I had a think about an alternative and what I came up with was a hybrid "Quality HYP" which partners individual shares with Investment Trusts. Broadly speaking I was thinking of splitting investments into 3 categories:
1) 30% UK shares - around 10 to 15 'quality' HYP shares, including some 'steady eddies'
2) 30% UK Income ITs
3) 40% International Income ITs

I think that the ITs would provide me with a broad baseline yield, and I could still invest in individual, quality HYP shares for a long-term boost in income units.

I'd be grateful for your thoughts!

(P.S. I've thought of another name for the HYP principle of building a diverse portfolio of shares .... herd immunity!)

What i've done with my HYPish portfolio is hold standard HYP shares for the UK element, plus some preference shares ( I've topped these up recently, though I should have bought a few weeks sooner as the price is going back up) and one of the green Infrastructure funds (TRIG). I may look at buying another or perhaps HICL with next months contribution. I've not bought Uk focused ITs as I think I can cover that area myself.

Then for foreign shares I've not deemed myself competent to buy in that area so I initially picked up some region specific high yield ETFs to cover Europe (IDVY), Asia Pacific (IAPD) and EMDV (emerging markets). Recently I've added HFEL (Asia Pacific IT) and I had been undecided on how to cover North America. The high yield ETFs coving the region weren't particularly high yield and in the end went for VWRL (world tracker ETF) which is >50% in North America ( I looked at VHYL the high yield version but its performance has been poor compared to VWRL).

I'm not sure if the ETFs were the best choice over Income ITs covering the same areas - I've noted the price of IAPD when I bought IAPD so I can make a direct comparison. I'll be interested to see how the three ETFs perform over the next year or so.

The ETFs and IT make up ~19% of the portfolio at the moment, Infrastructure ~4% and Prefs ~3%

[dundas666]

One question does immediately spring to mind:

If you believe that the "standard HYP selection process always seemed to recommend quite a few stinkers", do you insist that the Income ITs selected must not invest in any of those "stinkers". If you do not, can you please explain why "stinkers" are acceptable when selected by an IT, but not acceptable when within an HYP? Assuming you do ban such ITs, how do you enforce such a ban going forward?

Ian

Thanks Ian, you're right, I do accept that the ITs would inevitably contain some of the "stinkers", but as part of a larger and more varied portfolio I believe they may be be better placed to manage the risk accordingly. I find the alternative of directly owning BT and M&S shares in a vanilla HYP in order to achieve sector diversification a lot more uncomfortable. Also if you look at the top 10 holdings in CTY you'll see Diageo and Unilever, good quality companies but not strictly HYP candidates, which again gives me more peace of mind knowing of their broader approach to income generation.

In the long term I would probably just occasionally review their top holdings to make sure they weren't overly invested in the "stinkers". If they were then I'd switch to an IT that wasn't.

Cheers, Pete

[Charlottesquare]

One thing that has always bugged me about HYP was needing to include into my portfolio shares that I didn't particularly like, in the name of strategic ignorance, sector diversity and wanting at least 25 shares in it. I'd always thought that selecting well-managed companies with growing and supported dividends was the heart of a successful HYP, but the standard HYP selection process always seemed to recommend quite a few stinkers for my portfolio, and more often than I'd like I'd have to hold my nose with one hand while I pressed the Buy button with the other.

Instead of just complaining, I had a think about an alternative and what I came up with was a hybrid "Quality HYP" which partners individual shares with Investment Trusts. Broadly speaking I was thinking of splitting investments into 3 categories:
1) 30% UK shares - around 10 to 15 'quality' HYP shares, including some 'steady eddies'
2) 30% UK Income ITs
3) 40% International Income ITs

I think that the ITs would provide me with a broad baseline yield, and I could still invest in individual, quality HYP shares for a long-term boost in income units.

I'd be grateful for your thoughts!

One question does immediately spring to mind:

If you believe that the "standard HYP selection process always seemed to recommend quite a few stinkers", do you insist that the Income ITs selected must not invest in any of those "stinkers". If you do not, can you please explain why "stinkers" are acceptable when selected by an IT, but not acceptable when within an HYP? Assuming you do ban such ITs, how do you enforce such a ban going forward?


Ian

Dilution hopefully addresses (unless the IT only buys stinkers)

[dundas666]

Why limit your first category to UK shares? There are quality shares outside the UK which currently are rarely yielding more than the FTSE100 forward yield.

Only because I don't have much knowledge of shares outside of the UK.

Is there any forum or topic on Lemonfool for International high income shares? I couldn't find one, although I have seen occasional sub-posts recently mentioning, for example, Canadian banking shares.

[IanTHughes]

One question does immediately spring to mind:

If you believe that the "standard HYP selection process always seemed to recommend quite a few stinkers", do you insist that the Income ITs selected must not invest in any of those "stinkers". If you do not, can you please explain why "stinkers" are acceptable when selected by an IT, but not acceptable when within an HYP? Assuming you do ban such ITs, how do you enforce such a ban going forward?

Thanks Ian, you're right, I do accept that the ITs would inevitably contain some of the "stinkers", but as part of a larger and more varied portfolio I believe they may be be better placed to manage the risk accordingly.

But surely, if your aim is to have no stinkers, your HYP will contain no stinkers, because you are making the selection! You make the selections for your HYP not the HYP itself!

Otherwise all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that, but do not pretend it is because you cannot stop yourself buying stinkers, when you could just not buy them!


Ian

[Charlottesquare]

I do have a semblance of the mixed approach with my selection, here are those of mine which had/have a Div Yield over 3% (I have removed some I hold like Berkshire/Roche/Fidelity China/JP Morgan Emerge/J P Morgan Indian/Scottish Mortgage that could not be considered High Yield)

They are not all equal weight holdings, have tried to roughly indicate percentage of a notional full holding value

Braemar Shipping 50% hold
Royal Dutch Shell 100% hold (was 150%)
Smith (DS) 70% hold
Unilever 100% hold
Warehouse REIT 75% hold

Aberdeen Asian Fund 90% hold
Aberdeen Standard European Logistics 50% hold
Aberforth Smaller Cos 50% hold
Athelney Trust 85% hold
Blackrock North American Income 50% hold
City of London IT 50% hold
Edinburgh investment Trust 90% hold
European Assets Trust 50% hold
Henderson Far East Income 120% hold
JP Morgan Global Growth & Inc 95% hold
Invesco Perpetual Smaller Cos 50% hold
Merchants Trust 90% hold
Murray International 115% hold
North American IT 80% hold
Schroder Oriental 80% hold

[Alaric]

when you could just not buy them!

What do you do if you buy a share which "isn't a sinker", but then becomes one? If you follow a doctrine of not tampering and strategic ignorance, you are stuck with it.

[Dod101]

I recall from somewhere that pyad decried "quality" claiming it was some vague fluffy idea. In a sense he was right because it cannot be measured or quantified and, as an accountant, that meant he couldn't understand it (*).

Fund managers like Smith and Train are essentially quality investors. The thing with it is if you really follow it then it's not an income strategy at all, since the best names tend to have low yields because the market rates them higher. So the average person who thinks that HYPs are good will lament the lack of yield in a QYP even while its shares are going up in this years' bear market.

Thanks for this. I clumsily tried to express something similar, but got deleted for being off-topic

Thanks for that. It would explain why my response mysteriously disappeared. No mod told me.

Dod

[dundas666]

But surely, if your aim is to have no stinkers, your HYP will contain no stinkers, because you are making the selection! You make the selections for your HYP not the HYP itself!

I'm not sure I have the experience and knowledge to actively manage a HYP in that way. For example in another post you mentioned you'd dumped Land Sec and British Land, presumably because they went from "whiffy" to "stinkers"! I think I would have ended up holding on to them for too long, perhaps because of sector diversification, or simply because core HYP principles encourage a buy-and-hold approach.

Otherwise all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that, but do not pretend it is because you cannot stop yourself buying stinkers, when you could just not buy them!

Well I'd be looking at someone to manage half my UK portfolio, as I'm aiming for 50% broad income ITs plus 50% quality high yielding shares. You might think it contradictory that I feel comfortable identifying high quality shares but not identifying low quality shares, but I think that's definitely the case. Also it's a lot fewer companies to focus on.

Another way I like to look at this is that I have a broad HYP(-ish), but have doubled-up on the quality shares.

[IanTHughes]

But surely, if your aim is to have no stinkers, your HYP will contain no stinkers, because you are making the selection! You make the selections for your HYP not the HYP itself!

I'm not sure I have the experience and knowledge to actively manage a HYP in that way. For example in another post you mentioned you'd dumped Land Sec and British Land, presumably because they went from "whiffy" to "stinkers"! I think I would have ended up holding on to them for too long, perhaps because of sector diversification, or simply because core HYP principles encourage a buy-and-hold approach.

You must be thinking of someone else! My own portfolio has never contained either one of Land Securities (LAND) or British Land (BLND). The two virtual portfolios that I currently report on from time to time, both contain holdings of both from the outset and they have most definitely not been sold!

If they had been sold, it would not be HYP but some other strategy

Otherwise all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that, but do not pretend it is because you cannot stop yourself buying stinkers, when you could just not buy them!

Well I'd be looking at someone to manage half my UK portfolio, as I'm aiming for 50% broad income ITs plus 50% quality high yielding shares. You might think it contradictory that I feel comfortable identifying high quality shares but not identifying low quality shares, but I think that's definitely the case. Also it's a lot fewer companies to focus on.

So you are content to own stinkers, just so long as you do not have to manage them?

Look each to their own. You do not fancy the HYP strategy, fair enough. Go another way


Ian

[daveh]

But surely, if your aim is to have no stinkers, your HYP will contain no stinkers, because you are making the selection! You make the selections for your HYP not the HYP itself!

I'm not sure I have the experience and knowledge to actively manage a HYP in that way. For example in another post you mentioned you'd dumped Land Sec and British Land, presumably because they went from "whiffy" to "stinkers"! I think I would have ended up holding on to them for too long, perhaps because of sector diversification, or simply because core HYP principles encourage a buy-and-hold approach.

You must be thinking of someone else! My own portfolio has never contained either one of Land Securities (LAND) or British Land (BLND). The two virtual portfolios that I currently report on from time to time, both contain holdings of both from the outset and they have most definitely not been sold!

If they had been sold, it would not be HYP but some other strategy

It was Ian Pickering who has sold his Land and BLND

Otherwise all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that, but do not pretend it is because you cannot stop yourself buying stinkers, when you could just not buy them!

Well I'd be looking at someone to manage half my UK portfolio, as I'm aiming for 50% broad income ITs plus 50% quality high yielding shares. You might think it contradictory that I feel comfortable identifying high quality shares but not identifying low quality shares, but I think that's definitely the case. Also it's a lot fewer companies to focus on.

So you are content to own stinkers, just so long as you do not have to manage them?

Look each to their own. You do not fancy the HYP strategy, fair enough. Go another way


Ian

So you are suggesting the IT managers set out to buy stinckers for their portfolios then? Just like us they buy what they think are good income shares and, just like us, they occasionaly get it wrong. So the question we have to ask is can we pick fewer stinckers than the professionals? If we are certain we can do better than the professional manager(s) then the sensible option is to do all our own stock picking. If we are certain we can't then purchasing ITs (or other collectives) entirely is the way to go.
I'm somewhere in between - I think, for UK shares, I'm going to do a similar job to the professional and I think there is some advantage to approximately equal capital weighting. However I also want an international component to my portfolio and here I'm less sanguine about my stock picking abilities so am invested via collectives. And I can see that it might be sensible for some to buy a mixture of ITs and individual shares to spread their risk.

[Charlottesquare]

But surely, if your aim is to have no stinkers, your HYP will contain no stinkers, because you are making the selection! You make the selections for your HYP not the HYP itself!

I'm not sure I have the experience and knowledge to actively manage a HYP in that way. For example in another post you mentioned you'd dumped Land Sec and British Land, presumably because they went from "whiffy" to "stinkers"! I think I would have ended up holding on to them for too long, perhaps because of sector diversification, or simply because core HYP principles encourage a buy-and-hold approach.

You must be thinking of someone else! My own portfolio has never contained either one of Land Securities (LAND) or British Land (BLND). The two virtual portfolios that I currently report on from time to time, both contain holdings of both from the outset and they have most definitely not been sold!

If they had been sold, it would not be HYP but some other strategy

Otherwise all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that, but do not pretend it is because you cannot stop yourself buying stinkers, when you could just not buy them!

Well I'd be looking at someone to manage half my UK portfolio, as I'm aiming for 50% broad income ITs plus 50% quality high yielding shares. You might think it contradictory that I feel comfortable identifying high quality shares but not identifying low quality shares, but I think that's definitely the case. Also it's a lot fewer companies to focus on.

So you are content to own stinkers, just so long as you do not have to manage them?

Look each to their own. You do not fancy the HYP strategy, fair enough. Go another way


Ian

It is more being content to hold them but with little aroma, or at least an aroma that an air freshener can make tolerable. Having say 8% of a portfolio as a dead fish placed under the floorboards is not pleasant, especially when you are not sure in advance which fish will die or when it will die or if it will die.

The significant risks with ITs tend to move more towards the sectoral/geographic and less to the particular company which of course also carry sectoral/geographic risks, it also allows one to sample options that may otherwise not be available whilst maintaining (hopefully) an income yield that is tolerable. There is no free lunch here, my guess is overall yields drop from say 5.5% to 4.5%, but for that one gets indirect investment in a much wider range of stocks.

I on purpose hold far more China/Asia/Pacific/smaller cos etc because I believe that is where longer term growth will come from, and growth hopefully means increased dividends, I want to position now so over the next up to say 30 years or so I can just ignore most of it and just go fishing.

[IanTHughes]

Well I'd be looking at someone to manage half my UK portfolio, as I'm aiming for 50% broad income ITs plus 50% quality high yielding shares. You might think it contradictory that I feel comfortable identifying high quality shares but not identifying low quality shares, but I think that's definitely the case. Also it's a lot fewer companies to focus on.

So you are content to own stinkers, just so long as you do not have to manage them?

Look each to their own. You do not fancy the HYP strategy, fair enough. Go another way

So you are suggesting the IT managers set out to buy stinckers[sic] for their portfolios then?

No, I am not suggesting anything of the sort. What I am suggesting is that an IT might include holdings that the HYPer thought were stinkers and wished to avoid

Just like us they buy what they think are good income shares and, just like us, they occasionaly get it wrong. So the question we have to ask is can we pick fewer stinckers[sic] than the professionals? If we are certain we can do better than the professional manager(s) then the sensible option is to do all our own stock picking. If we are certain we can't then purchasing ITs (or other collectives) entirely is the way to go.

Which is what I said:

... all you are really looking for is someone else to manage your portfolio, and there is nothing wrong with that

Ian

[IanTHughes]

It is more being content to hold them but with little aroma, or at least an aroma that an air freshener can make tolerable. Having say 8% of a portfolio as a dead fish placed under the floorboards is not pleasant, especially when you are not sure in advance which fish will die or when it will die or if it will die.

A smelly object in the garden shed, smells just as much as the same smelly object in the living room! And, a garden shed which contains a smelly object, smells much more than a living room where one has been careful to avoid smelly objects!


Ian

[Arborbridge]

One thing that has always bugged me about HYP was needing to include into my portfolio shares that I didn't particularly like, in the name of strategic ignorance, sector diversity and wanting at least 25 shares in it. I'd always thought that selecting well-managed companies with growing and supported dividends was the heart of a successful HYP, but the standard HYP selection process always seemed to recommend quite a few stinkers for my portfolio, and more often than I'd like I'd have to hold my nose with one hand while I pressed the Buy button with the other.


I'd be grateful for your thoughts!

(P.S. I've thought of another name for the HYP principle of building a diverse portfolio of shares .... herd immunity!)

This is all based on a fallacious view of HYP. No one ever said you "needed" to include shares you don't particularly like - i.e. because they are "stinkers" or on moral grounds. It's your portfolio, for heaven's sake. No one is making you choose rotten shares and it's up to you to pass over any which you consider are not well managed or where the dividend is not well supported. Blame yourself for not looking into the safety aspect, not the HYP process itself which is only a starting point.

Having got that off my chest: I too have chosen some rotten shares, but I believe that is my fault, or lack of attention to warning signs. Even given all the mistakes, my HYP has (until this last crash) fulfilled its aims: a high and rising income with some chance of capital gain for ten years. I have every expectation that it will sort itself out as the market does in due course. I can hardly expect anything better.


Arb.

[dealtn]

So you are suggesting the IT managers set out to buy stinckers for their portfolios then? Just like us they buy what they think are good income shares and, just like us, they occasionaly get it wrong. So the question we have to ask is can we pick fewer stinckers than the professionals? If we are certain we can do better than the professional manager(s) then the sensible option is to do all our own stock picking. If we are certain we can't then purchasing ITs (or other collectives) entirely is the way to go.

I think the point is that the universe available from which to choose a (strict) HYP portfolio of shares from is a smaller pool than that available to an IT portfolio manager. Therefore the existence, and quantum, of "stinkers" is possibly lower. Or at least the diversification effect is such that their "smell" on your investment is less.

When the universe of available shares to include in a HYP was greater, with fewer cutters etc., this was less of an issue. Starting from where we are it makes sense for some to consider how they want to mitigate this, and considering ITs be they UK or ex-UK (and dare I say non-qualifying "quality" non-H UK shares too), is part of that.

Even the staunchest of HYPers agree it is ok for others to do this, so I don't see the problem. It seems it makes no difference, other than language, as to whether this entire portfolio is a "HYP", or whether it is a "HYPish" portfolio with multi-components, one of which is a "HYP", the other bits being non-HYP, or HYPish.