Quality HYP

[dundas666]

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!)

[Dod101]

That seems to me to be a perfectly well balanced portfolio and probably mirrors my own to some extent. I am not sure whether the percentages refer to value (I assume it does) or to the number of shareholdings, but if the former, I will have a smaller proportion in UK ITs because do not forget that they will be fishing in the same pool as your own HYP and there is a strong likelihood of duplication.

Dod

[IanTHughes]

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

[Itsallaguess]

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 that going forward?

That's likely to be show a significant difference in comparable concentration-levels though, isn't it?

Speaking as someone who is likely to hold an income-portfolio that looks broadly similar to the above break-down, although slightly different on the exact ratios, I personally do accept that there's always likely to be at least some diluted element of 'non-desirables' being held to some degree when seeking out income-collectives in this manner, and especially in relation to UK-centric income-Investment Trusts..

It's that specific 'diluted element' aspect, however, that makes such a concern much more palatable, to me at least, than holding such 'undesirables' in a much more concentrated way as potential 'single-share holdings'...

In discussions around this particular topic in the past, it's been mentioned that there might be an element of 'smoke and mirrors' going on with such an approach, and I've got to say that I'd actually fully agree with anyone that might wish to take that view, as a large part of that 'smoke and mirrors' aspect of income-collectives, in terms of perhaps not being completely and forensically aware of some of the lower-denomination holdings in some of these income-IT's is actually one of the primary reasons that I like using them as part of my income-investment strategy...

Great OP by the way dundas666, and I'd be interested to see if you go on to flesh out your idea into a broader selection set, even if it's done only as a purely academic exercise. Personally, I intend to aim for a lower proportion of UK 'single-share' holdings, with a larger spread of the other two sections, and with a side-order of Vanguard LifeStrategy 80/20 being built up over time as well, but we're not a million miles away if we squint a bit...

Cheers,

Itsallaguess

[baldchap]

It is a good idea, and lets call it a QYP from now on so that you are not burned as a heretic.

I started making the move from high to quality a while back, and exited my last individual equities earlier in the year. I am much happier.
If you do set one up, personally I wouldn't even bother with the 30% individual equities and limit UK & Europe exposure to 40% max.

You can't avoid all the 'stinkers', but that risk is now a much smaller part of the whole thing thanks to being invested in IT's, and we are paying them to make those decisions regarding quality anyway.

If you do follow your plan, you will of course be a very naughty boy, and must never ever visit the practical part of the forum.

[Lootman]

It is a good idea, and lets call it a QYP from now on so that you are not burned as a heretic.

I started making the move from high to quality a while back, and exited my last individual equities earlier in the year. I am much happier.
If you do set one up, personally I wouldn't even bother with the 30% individual equities and limit UK & Europe exposure to 40% max.

You can't avoid all the 'stinkers', but that risk is now a much smaller part of the whole thing thanks to being invested in IT's, and we are paying them to make those decisions regarding quality anyway.

If you do follow your plan, you will of course be a very naughty boy, and must never ever visit the practical part of the forum.

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.

[IanTHughes]

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.

The more I think of it, the less sense I can make of your reasoning. Perhaps you might explain why it it that you believe that it is necessary to select shares that you believe to be "stinkers"? An HYPer would simply reject such a share and move on to the next highest yield. I would suggest that anyone insisting on selecting a "stinker" is not an HYPer.

Which of course is not to say that HYPers do not on occasion buy absolute "stinkers"! They just do not set out to do so


Ian

[Darka]

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!)

That's pretty much what I'm doing, and I think it's an excellent idea (and not just because I'm doing it).

All new money goes into IT's , both income and growth, UK, USA, and international and I feel much better for it, less volatile than my previously pure HYP and with less dividend cuts....

[IanTHughes]

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 that going forward?

That's likely to be show a significant difference in comparable concentration-levels though, isn't it?

You are absolutely correct! An HYP would have 0.00% invested in any "stinkers" whereas an IT selected without such a restriction might well have a holding.

If one wants to avoid what one believes to be "stinkers", as an HYPer obviously does, it surely makes sense to avoid ITs!


Ian

[Alaric]

An HYP would have 0.00% invested in any "stinkers"

How many avoided Carillion then?

Once selected, depending on which version of the HYP Strategy is being followed, you can't dump them either. If following a doctrine of Strategic Ignorance, you only notice when the dividends dry up and the stock becomes worthless.

[Itsallaguess]

If one wants to avoid what one believes to be "stinkers", as an HYPer obviously does, it surely makes sense to avoid ITs!

I just came to a different conclusion on the subject, that's all, and it's one which works quite well for me - and that's to just fully accept that it's impossible to avoid 'stinkers', either as initial purchases from the outset, or 'evolutionary-stinkers' that develop their 'stinker-like' qualities over a period of time following purchase, and I now try to just make sure that those really quite inevitable 'stinkers' play as small a role as possible in an income-strategy that now continues to suit my needs...

Income-related Investment Trusts deliver on that requirement in a way that I struggled to maintain as a 100% single-share-portfolio holder, and whilst it's fully acknowledged that there will always be some level of stinkiness in all investment portfolios to some degree or other, I personally gain a great deal from that low-level stinkiness being watered down somewhat by a much wider and more diversified set of underlying holdings within the broad range of income-IT's that I hold, and also from that low-level stinkiness being 'hidden and contained' behind the 'Wizard of Oz' curtain of the overarching IT itself..

Which is no doubt all quite odd-sounding to some, but I tell you what - it works very well for me!

Cheers,

Itsallaguess

[IanTHughes]

If one wants to avoid what one believes to be "stinkers", as an HYPer obviously does, it surely makes sense to avoid ITs!

I just came to a different conclusion on the subject, that's all, and it's one which works quite well for me - and that's to just fully accept that it's impossible to avoid 'stinkers', either as initial purchases from the outset, or 'evolutionary-stinkers' that develop their 'stinker-like' qualities over a period of time following purchase, and I now try to just make sure that those really quite inevitable 'stinkers' play as small a role as possible in an income-strategy that now continues to suit my needs...

Income-related Investment Trusts deliver on that requirement in a way that I struggled to maintain as a 100% single-share-portfolio holder, and whilst it's fully acknowledged that there will always be some level of stinkiness in all investment portfolios to some degree or other, I personally gain a great deal from that low-level stinkiness being watered down somewhat by a much wider and more diversified set of underlying holdings within the broad range of income-IT's that I hold, and also from that low-level stinkiness being 'hidden and contained' behind the 'Wizard of Oz' curtain of the overarching IT itself..

Which is no doubt all quite odd-sounding to some, but I tell you what - it works very well for me!

Well, in my case, if I think it a "stinker", I never touch it.

That way my HYP never holds any share that I thought a "stinker at purchase. I thought that buying known "stinkers" was the problem being experienced by the OP and my advice was therefore a very simple: "don't buy them"!


Ian

[tjh290633]

I think that this is a case of "Let him without sin cast the first stone".

I have certainly picked the odd share that I have regretted in my time, as perusal of viewtopic.php?p=307357#p307357 will show.

There is nothing wrong with following three different strategies at the same time. You can compare the different methods and concentrate on the one that floats your boat if you wish. I started out using unit trusts, and still hold a few, which are a useful check on how I am doing with my main individual equities portfolio. I also have a few ITs for another purpose, but I view them all as separate portfolios and don't conflate them.

TJH

[88V8]

One thing that has always bugged me about HYP was needing to include in 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.

Luni always felt that 15 shares was sufficient, and more could result in diworsification. He also decried sectoral philately.

Of course you may mean what might be regarded as moral stinkers - oilies, armaments, housebuilders, fags, but that's another matter.

When it comes to stinkers, ITs are a form of potential tactical ignorance. One doesn't have to look at their largest holdings. So long as the divis roll in, it's not your problem.
Luni's B7 & B8 offered an escape from the travails of pure HYP. I looked askance at their lower yield, but I must say that of late with the encouragement of IAG and Dod I have become more interested and invested in income ITs. They do seem to offer a degree of sleepeasy that is presently absent from the HYP universe.

V8

[Wizard]

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!)

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.

[kempiejon]

Well, in my case, if I think it a "stinker", I never touch it.

That way my HYP never holds any share that I thought a "stinker at purchase. I thought that buying known "stinkers" was the problem being experienced by the OP and my advice was therefore a very simple: "don't buy them"!


Ian

Quite right Ian but unfortunately if making a one hit HYP looking for at least 15 companies with a yield above FTSE100, large cap, long history of increasing dividends, low debt and any other safety factors we employ, I feel one might have to relax some of those criteria to buy a sub optimal share. Not pick a stinker for sure, who'd knowingly add a lemon, but after share 10 or so picking become a bit more pungent I feel so a pure quality approach would struggle to buy a 15 share HYP. I think Pyad did mention having to relax criteria further down the list of yield. For regular accumulators they ignore diversification for the first few picks so can over time probably be a bit more quality driven but I think it is inevitable they'll hold a few stinkers even if they didn't buy them and only diversification protects from those problems. You are right that ITs like trackers inevitable pick the clangers.

[AJC5001]

... 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 think it would be helpful if we had a definition of "stinker" we can all agree on, otherwise I forsee posters talking at cross purposes.

As the OP (Original Poster ) perhaps you could start.

Adrian

[IanTHughes]

... 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 think it would be helpful if we had a definition of "stinker" we can all agree on, otherwise I forsee posters talking at cross purposes.

As the OP (Original Poster ) perhaps you could start.

No definition is required in my view. If an individual HYPer thinks a share is a "stinker", then that individual HYPer should not touch it. What anyone else thinks, even if that same share is happily selected by another HYPer, is irrelevant. If you think it a "stinker", don't touch it.


Ian

[jackdaww]

Well, in my case, if I think it a "stinker", I never touch it.

That way my HYP never holds any share that I thought a "stinker at purchase. I thought that buying known "stinkers" was the problem being experienced by the OP and my advice was therefore a very simple: "don't buy them"!


Ian

Quite right Ian but unfortunately if making a one hit HYP looking for at least 15 companies with a yield above FTSE100, large cap, long history of increasing dividends, low debt and any other safety factors we employ, I feel one might have to relax some of those criteria to buy a sub optimal share. Not pick a stinker for sure, who'd knowingly add a lemon, but after share 10 or so picking become a bit more pungent I feel so a pure quality approach would struggle to buy a 15 share HYP. I think Pyad did mention having to relax criteria further down the list of yield. For regular accumulators they ignore diversification for the first few picks so can over time probably be a bit more quality driven but I think it is inevitable they'll hold a few stinkers even if they didn't buy them and only diversification protects from those problems. You are right that ITs like trackers inevitable pick the clangers.

=========================

very few IT's hold BT , certainly not in there top ten holdings - just an example..

[TUK020]

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!)

Interesting. Your 3 categories are broadly my direction of travel, but based on a slightly different reasoning.

I think that one of the key tenets that underpins the concept of Bland's Annuity Replacement is diversification - equal weighting of sectors, to avoid the skew (and risk) inherent in the FTSE index (very valuable in avoiding over concentration of financials in the GFC, or Oil more recently). A weakness is that just focusing on big cap listed individual shares misses big chunks of the world economy. I see ITs as an opportunity to easily get exposure to more diverse bits such as Infrastructure (e.g HICL), Property (I hold Land Securities, SEGRO), International Markets (Henderson Far East, Murray International). On the same basis I also have invested in some index trackers (most notably L&G Global 100). This International/Other Sectors part of my portfolio is growing steadily as a proportion of the total.

A second key tenet is to look for security of income generated. I have been moving gradually towards UK Income ITs at a slower pace on the basis that they will provide that with lower attention/portfolio management (a.k.a. the long term gaga plan). More recently this has accelerated on the hypothesis (unproven) that income ITs, such as City of London, will be better able to ride through the dividend drought to come than individual shares.

I also have a 4th strand, which is other asset classes, notably bond ETFs and Gold. This is more from an insurance/keeping some powder dry perspective.