What to top up and HYP strategy going forward

[dealtn]

...I merely discussed what he'd said ...

I'm not sure that's what you did. To be fair you did use the phrase "as far as I am concerned", so it is clear you weren't referring to the general case, but it seems clear to me that you are making a claim that judging over a period of as short as one year (or of a small sample size of either ITs or HYPs - which I agree with) is insufficient to make a clear claim.

I am not disputing that isn't true as far as "you are concerned", after all only you can know, but for some based on the evidence of many posts over many years, it might be enough that a single year of falling income or a length of time to recover the income level (regardless of inflation and other specific caveats) is sufficient not to meet their understanding of "reasonably secure" or "rising". Hence my thinking it comes down to definition of what those terms actually mean (to individuals).

[tjh290633]

Just looking at the Annual Report of F&C IT, the Balance Sheet tells me:

Investments: £4,512,321,000
Current Assets: £48,759,000 (Debtors and Cash & Cash Equivalents)
Revenue Reserve: £111,224,000

https://www.bmogam.com/fandc-investment ... t-2020.pdf

Which rather dispels the idea of an IT having large reserves of cash.

It's not much good quoting the physical size of an IT's revenue-reserve without also comparing it to the dividend distributions that it's being reserved against though Terry...

When we look in the above 2019 linked report for F&C, we can see that they paid out almost £62m in dividends last year -



Source - https://www.bmogam.com/fandc-investment-trust/wp-content/uploads/2020/03/fcit-annual-report-2020.pdf

So at £111m, the F&C revenue-reserve is actually nearly 2-years worth of distributed dividends, and given that we would hopefully agree that no Investment Trust is likely to ever see a 100% dry-up of incoming funds anyway, then it's probable that this level of revenue-reserve would be able to cover a period of time even longer than that, if required to do so...

Cheers,

Itsallaguess

Hold on a bit. Those dividends are those paid out during the financial year, so at the end of the financial year, the cash that they hold of £28 million has to pay the 3rd and 4th Interim dividends for that year. Looking at page 72 of the annual report, we see that the cost of these is £31.4 million or thereabouts, so they are going to have to use monies not yet received to pay those two dividends.

There is a bit of creative accounting going on there. The Revenue Reserve is not cash.

TJH

[Gengulphus]

You're not comparing apples with apples. Every demonstration HYP I've seen consists of the shareholdings alone, and is judged purely by the dividends delivered by those shareholdings. The underlying shareholdings of ITs will have experienced similar dividend income falls.

What I think we are both saying is that if the primary objective is a reasonably secure and rising income, then an unmanaged HYP on its own is unsuitable. If it's alongside a defined benefit pension or an annuity, income volatility doesn't matter so much. If it's a replacement for those, then it probably does.

Basically, there's no such thing in practice as an "unmanaged HYP" - a HYP is managed by its owner, who will have management work to do on it, due to cash takeovers and other corporate actions that return capital to shareholders if nothing else. For instance, HYP1 had about 30 such events in its first nine years, and has had quite a few more since, though I don't think they've been happening quite as often since late 2009. Had it not had that management work done, more than half of its value would have been stuck in not-very-productive cash by the end of those 9 years, and even more by now.

But ignoring the word "unmanaged" because of that, sort-of-agreed. It doesn't take something as big as a defined benefit pension or an annuity to do the job, though: a cash reserve of maybe 6-12 months of living expenses (more than the standard 3-6 months recommendation because shares and their dividends) and some safety margin of the HYP's income over the normally-required income (so that the cash reserve gets recharged after a period of depressed dividends is over) will do the job - much as a cash reserve can do the job for an IT. It won't last forever if the period of depressed dividends is severe and prolonged, of course - but it would have taken something more serious and prolonged than the 2008-2010 financial crisis to do that. So very much like an IT's methods of dividend-smoothing in those respects, which is hardly surprising because the main difference between them is that the HYPer is managing the dividend-smoothing themselves and the IT investor is getting IT managers to do it for them.

Gengulphus

[dealtn]

Hold on a bit. Those dividends are those paid out during the financial year, so at the end of the financial year, the cash that they hold of £28 million has to pay the 3rd and 4th Interim dividends for that year. Looking at page 72 of the annual report, we see that the cost of these is £31.4 million or thereabouts, so they are going to have to use monies not yet received to pay those two dividends.

There is a bit of creative accounting going on there. The Revenue Reserve is not cash.

TJH

There is no creative accounting going on there. It is all perfectly straight forward and explained.

Agreed that the revenue reserve isn't cash, but is anyone claiming it is?

[Gengulphus]

...I merely discussed what he'd said ...

I'm not sure that's what you did. To be fair you did use the phrase "as far as I am concerned", so it is clear you weren't referring to the general case, but it seems clear to me that you are making a claim that judging over a period of as short as one year (or of a small sample size of either ITs or HYPs - which I agree with) is insufficient to make a clear claim.

Alaric said "On the other hand, if an investor's primary investment objective is a reasonably secure and rising income from dividends, a collection of ITs is likely to be better at delivering that than a strategy of selecting higher yielding shares." That's a general statement, and I was saying that it's a matter of opinion, not the statement of fact that it's worded as. I said "win the argument as far as I am concerned" - that's the argument about whether Alaric's statement is a matter of fact or of opinion, and the sort of study I described is what would be needed to establish it as a matter of fact as far as I'm concerned.

You seem to have somehow taken "win the argument as far as I am concerned" as a statement about which is better for me personally. For anyone interested, my view on that question is that I don't see anything that allows me to come to even a halfway clear conclusion about whether my HYP or a suitable collection of ITs is likely to be better for me financially. So I'm going on which better fits my circumstances and preferences - which is currently the HYP, but might become a collection of ITs if I become less keen on managing my own finances in the future. But there quite simply isn't any argument here about that to be won at all - because nobody here other than me knows my finances, circumstances and preferences well enough to have an informed opinion about them!

Gengulphus

[IanTHughes]

On the other hand, if an investor's primary investment objective is a reasonably secure and rising income from dividends, a collection of ITs is likely to be better at delivering that than a strategy of selecting higher yielding shares with an added self imposition of not being willing to sell to supplement or maintain income.

Not according to my research and records.


Ian

[Gengulphus]

Hold on a bit. Those dividends are those paid out during the financial year, so at the end of the financial year, the cash that they hold of £28 million has to pay the 3rd and 4th Interim dividends for that year. Looking at page 72 of the annual report, we see that the cost of these is £31.4 million or thereabouts, so they are going to have to use monies not yet received to pay those two dividends.

There is a bit of creative accounting going on there. The Revenue Reserve is not cash.

There is no creative accounting going on there. It is all perfectly straight forward and explained.

Agreed that the revenue reserve isn't cash, but is anyone claiming it is?

Itsallaguess's statement "So at £111m, the F&C revenue-reserve is actually nearly 2-years worth of distributed dividends, and given that we would hopefully agree that no Investment Trust is likely to ever see a 100% dry-up of incoming funds anyway, then it's probable that this level of revenue-reserve would be able to cover a period of time even longer than that, if required to do so..." does talk about the revenue reserve covering distributed dividends. That covering can very easily be read as the revenue reserve supplying the cash that can be used to pay the dividends, especially given the connection made with incoming funds that definitely do supply such cash - whereas what is actually going on is that the revenue reserve allows such cash to be raised without actually supplying it.

In short, not an actual claim that the revenue reserve is cash, I think, but very easily mistaken for one.

Gengulphus

[dealtn]

On the other hand, if an investor's primary investment objective is a reasonably secure and rising income from dividends, a collection of ITs is likely to be better at delivering that than a strategy of selecting higher yielding shares with an added self imposition of not being willing to sell to supplement or maintain income.

Not according to my research and records.


Ian

Might I ask what that research is, or are you specifically referring to your HYP and its track record? (Which is absolutely fine, as I am not trying to be controversial or suggest it hasn't performed as you expect it to, or want it to.)

My belief is that a collective IT is likely to be less volatile than even a well diversified 20-30 self-select portfolio. Additionally if such a collective also had the attribute that it (intentionally) reserved a portion of its income, undistributed, to "smooth" the path of income to its holders, then there will be many that see that (before and after the event) as a positive attribute.

Now again it may well come down to some as to what their meaning of "reasonably secure and rising income" means in determining what is better, and whether one path is disallowed on their definition of it, but I suspect some, if not many, will see the smoother path (even if because of fees or some other reason, it were sub-optimal from a total return perspective) as a positive attribute, enough to claim it was "better at delivering ... a strategy".

If you have research that suggests the collective route isn't better at delivering a smoother income, or one that has less annual negative income rises. I would be pleased to read it.

[TopOfDaMornin]

... Rather than discuss the OP's problem and try to help, ...

I'm afraid it's a bit hard to do that, because while TopOfDaMornin has said "I do consider [ITs] part of my HYP approach.", they are an awkward case because they're really investments across a spread of industry sectors, and so aren't all that easy to fit into the traditional HYP approach of concentrating on high yields, dividend safety and sector diversification, with each company assigned to a specific sector (*). There are various ways to approach fitting it in - two standard ways are keeping inaccuracies in the sector diversification picture you get small by only having a low weighting of the ITs collectively, or recognising that this is a fundamental difference between managing non-IT and IT shares in a portfolio and so adopting different ways of running the two parts of the portfolio. TopOfDaMornin might have either of those two in mind, or indeed some other method - but I at least need to know how he or she considers ITs to be part of the approach being used to be able to produce relevant help without also producing a whole lot of irrelevant stuff.
Gengulphus

The portfolio has 2 goals. Firstly to create a rising income above the annual rate of RPI, and secondly, for the capital value to increase above the annual rate of a ‘good savings account’ e.g. 2% per annum.

Withdrawals will start in approximately 10 years time, and would represent my main retirement income. I do have other savings.

Most investments are HYP shares. In the last year I have bought a number of ITs identified from the Basket of 7 (2020 review) https://lemonfool.co.uk/viewtopic.php?f=54&t=23743&p=323358&hilit=basket+of+seven#p323358 and the Basket of eight (2019 review here, I could not find the 2020 review)
https://lemonfool.co.uk/viewtopic.php?f=54&t=19695&p=257043&hilit=Basket+of+Eight%3A+2020+review#p257043

Cash Reserves or Buffers – at the moment all dividends are re-invested. When it comes to living of the income in 10 years’ time, I plan to keep approximately 3 years of dividend income in cash deposits accounts and take monthly income from this cash account.

What is your goal with ITs - the commonly quoted reasons for moving into ITs are to smooth out the dividend received through the year (not too applicable to me as I will have a cash buffer), de-risking (not sure how applicable this is to a 30+ share HYP), keeping ‘dividend hero’ status and accessing shares typically out of reach from usual UK HYP sectors. Another advantage is that if my desire or mental capacity to manage a HYP deceases, ITs are a good way of remaining exposed to HY shares.

I am a bit concerned about the drop in capital value of some of these e.g. TMPL down 40%. In the last 9 months the HYP has dropped in capital by 15%. Coincidently, the ITs have also dropped in capital by 15%. It would have been more but the ITs have been ‘saved’ by the good performance of SMT. The dividend impact remains to be seen. Does ‘dividend hero’ status come at a cost to capital?

The intention is to have about 30% or 40% of capital value in ITs. Hence, as well as this year’s £10k new cash, I would have to sell some HYP shares to get to 30% or 40% in the ITs. I am undecided on the best way forward or indeed, if the ITs represent value for me.

What currently represents better value, HYP shares or ITs?

What HYP shares to sell to buy ITs, if any? Past experience shows me I tend to benefit from strategic ignorance e.g. do nothing as the ex-HYP shares will become HYP shares.

Would another type of investment achieve my goals better e.g. I suspect a VWRL bought 10 years ago may have achieved the dividend and capital goals as the share price has risen so much.

TDM

[Alaric]

So very much like an IT's methods of dividend-smoothing in those respects, which is hardly surprising because the main difference between them is that the HYPer is managing the dividend-smoothing themselves and the IT investor is getting IT managers to do it for them.

My term "unmanaged HYP" was intended to describe the HYP run without IT style safety margins, which has been the case for the demonstration HYPs. Clearly that's more volatile in terms of income and thus less suitable as an annuity replacement than a set of ITs investing in at least some of the same stocks. That's presuming the ITs follow the usual practice of not distributing all the dividends received in normal circumstances but over distributing when there's a dividend shortfall. Without rules inhibiting selling, ITs would also be better able to maintain sector diversification if that formed part of their investment objectives.

"More volatile in terms of income" for the HYP without safety management, I would regard as a statement of fact, "less suitable""is opinion.

[Charlottesquare]

What currently represents better value, HYP shares or ITs?

What HYP shares to sell to buy ITs, if any? Past experience shows me I tend to benefit from strategic ignorance e.g. do nothing as the ex-HYP shares will become HYP shares.

Would another type of investment achieve my goals better e.g. I suspect a VWRL bought 10 years ago may have achieved the dividend and capital goals as the share price has risen so much.

TDM

To me they are different products with different characteristics so not sure better value can be determined, a bit like apples and pears, both are fruit, both taste great, so it boils down to which I want right now and whether or not it is a good time or not to get juice all down my chin.In my case I like the greater diversity of risk I believe ITs give me, I like their ability to have more focused and directed exposure overseas, I certainly do not really buy into the reserves bit re ITs (There is no magic pot of cash) and right now have circa 18% in individual shares and 77% in ITs.

These days I tend not to ever want particular shares or ITs I more tend at certain times to not want particular share or IT sectors , so dislike of a particular investment is more the driver for my sales and that dislike tends to be formed not by the particular investment but by my more macro economic feeling for the sector. For instance right now I am cool on smaller companies , more traditional REITS, retail,leisure/hospitality/travel industries, I am happy to have a very small holding in these via an IT but would not currently hold them as individual investments. Purchases are to me merely a chase around for where the product of these sales and the dividends are to go rather than where I set out towards or what triggered the reason to sell:- in effect I do not sell to buy I sell because I dislike an exposure/risk then have to buy (or sit on cash)

As an example right now I am sitting with a 5% chunk in cash, mainly from a couple of sales, unsure where I want it to go, the dividend element of my cash holding is likely to go towards a further top up of SMT or Fidelity China at end of quarter (neither high yield as I just target an overall 4% yield within what I hold and if some yield near hee haw others are higher) the rest I am not sure, I was driven by disquiet to want to sell most of my smaller companies ITs but so far have no cunning plans for the money.

[tjh290633]

Hold on a bit. Those dividends are those paid out during the financial year, so at the end of the financial year, the cash that they hold of £28 million has to pay the 3rd and 4th Interim dividends for that year. Looking at page 72 of the annual report, we see that the cost of these is £31.4 million or thereabouts, so they are going to have to use monies not yet received to pay those two dividends.

There is a bit of creative accounting going on there. The Revenue Reserve is not cash.

TJH

There is no creative accounting going on there. It is all perfectly straight forward and explained.

Agreed that the revenue reserve isn't cash, but is anyone claiming it is?

Going back some way, to viewtopic.php?p=336881#p336881

What I'm buying is their reserves to see me past the divi drought.

If that is not assuming that their reserves are cash, I don't know what is.

TJH

[funduffer]

Looking at my (roughly equally sized) HYP and IT portfolios over the last 6 months (March through August 2020):

HYP:
Income per unit down 20% (no shares added or sold, 11 dividend cuts).
Actual income received down 35%, compared to same 6 month period in 2019

IT's:
Income per unit down 4 % (All due to dividend drag, as there have been 3 top-ups and no dividend cuts).
Actual income received up 21%, compared to the same 6 month period in 2019

For the first time my IT income over the last 12 months exceeds that from my HYP.

IT's are doing it for me at the moment, but of course it may not last, depending on how quickly we see a dividend bounce back.

One point on the discussion above - IT's are active funds, so besides delivering income/dividends, they also trade for capital gain, unlike my HYP, which is essentially passive, bar the odd top-up or corporate action. In these unpredictable times, I am sure the IT managers have more idea of winners and losers than myself. I hope so, because that is why I stump up the IT fees!

FD

[IanTHughes]

So very much like an IT's methods of dividend-smoothing in those respects, which is hardly surprising because the main difference between them is that the HYPer is managing the dividend-smoothing themselves and the IT investor is getting IT managers to do it for them.

My term "unmanaged HYP" was intended to describe the HYP run without IT style safety margins, which has been the case for the demonstration HYPs. Clearly that's more volatile in terms of income and thus less suitable as an annuity replacement than a set of ITs investing in at least some of the same stocks. That's presuming the ITs follow the usual practice of not distributing all the dividends received in normal circumstances but over distributing when there's a dividend shortfall. Without rules inhibiting selling, ITs would also be better able to maintain sector diversification if that formed part of their investment objectives.

"More volatile in terms of income" for the HYP without safety management, I would regard as a statement of fact, "less suitable""is opinion.

That also does not accord with the research that I have done. If one imposes a safety margin on an HYP, it still comes out ahead of a basket of ITs, whether one measures that result by overall income, capital appreciation or - I know it is your favourite - Total Return.

Sorry but your assertions otherwise are not supported by the evidence that I have determined and must be considered unsafe if not incorrect.


Ian

[dealtn]

Going back some way, to viewtopic.php?p=336881#p336881

What I'm buying is their reserves to see me past the divi drought.

If that is not assuming that their reserves are cash, I don't know what is.

TJH

Well it wasn't my claim so it will be up to that poster to clarify, but my reading of that quote doesn't make the claim that reserves are cash, nor that he thinks they are. All that is being said (I think) is that an IT has a reserve in a liquid enough form, to enable the continued paying of dividends as cash when other portfolios or strategies don't (or can't or won't).

For me I don't see the IT being particularly different in that respect to other strategies, that could achieve the same thing by either having a reserve (be that in cash, or an easily realisable asset), or by selling Capital. But that me a whole different discussion.

[Arborbridge]

If, as Arb says, an HYP as described by PYAD or the TLF rules cannot include multiple ITs, why would HYPTUSS include ITs as an option to be tracked? Maybe to allow for the Breelander Convetion, but surely that does not need the now provided AIC sectoral granularity. I therefore formally object to the use of the name HYPTUSS, from now on that tool can only be called hypTUSS or HYTUSS. Alternatively, as we now have PYADic or pure HYP and TLF HYP I insist we also add HYPTUSSHYP to the lexicon, as it seems the parties behind the so called HYPTUSS believe ITs should be included in an HYP. Why else would they provide the functionality to allow it?

Please take this in the light hearted way it is intended

Well, it happens to be called HYPTUSS because it developed as a tool for that use. However, I use a HYPTUSS for all of my ITs and find it very useful. The IT basket is easily accounted for separately from the HYP by using this spreadsheet.

To conclude that the existence of a possibility of using the spreadsheet for ITs means that developers suggest ITs £should be included" as part of a HYP is wide of the mark. It developed because it was possible using the same software, so why not do it?
I may be wrong, but I think one might also train a HYPTUSS to pick up OIECs, though I;m not sure about that.

Arb.

[Arborbridge]

So very much like an IT's methods of dividend-smoothing in those respects, which is hardly surprising because the main difference between them is that the HYPer is managing the dividend-smoothing themselves and the IT investor is getting IT managers to do it for them.

My term "unmanaged HYP" was intended to describe the HYP run without IT style safety margins, which has been the case for the demonstration HYPs. Clearly that's more volatile in terms of income and thus less suitable as an annuity replacement than a set of ITs investing in at least some of the same stocks. That's presuming the ITs follow the usual practice of not distributing all the dividends received in normal circumstances but over distributing when there's a dividend shortfall. Without rules inhibiting selling, ITs would also be better able to maintain sector diversification if that formed part of their investment objectives.

"More volatile in terms of income" for the HYP without safety management, I would regard as a statement of fact, "less suitable""is opinion.

That also does not accord with the research that I have done. If one imposes a safety margin on an HYP, it still comes out ahead of a basket of ITs, whether one measures that result by overall income, capital appreciation or - I know it is your favourite - Total Return.

Sorry but your assertions otherwise are not supported by the evidence that I have determined and must be considered unsafe if not incorrect.


Ian

Sadly, that hasn't been my experience.
You are better at the HYP game than I am, but the TR of my IT basket is certainly ahead of my HYP and the income is growing faster too. I cannot comment on the total income, and although the HYP yield is usually higher, this has reversed during the drought.

Arb.

[Alaric]

If one imposes a safety margin on an HYP, it still comes out ahead of a basket of ITs, whether one measures that result by overall income, capital appreciation or - I know it is your favourite - Total Return.

Are you claiming that is always true, regardless of who is doing the stock selection and when the initial lump sum investment is made?

[IanTHughes]

If one imposes a safety margin on an HYP, it still comes out ahead of a basket of ITs, whether one measures that result by overall income, capital appreciation or - I know it is your favourite - Total Return.

Are you claiming that is always true, regardless of who is doing the stock selection and when the initial lump sum investment is made?

Of course not! I leave that sort of idiotic nonsense to those that would claim, without any evidence being sited:

On the other hand, if an investor's primary investment objective is a reasonably secure and rising income from dividends, a collection of ITs is likely to be better at delivering that than a strategy of selecting higher yielding shares with an added self imposition of not being willing to sell to supplement or maintain income.

What I do is investigate the returns achieved on publicly available HYP's and what might have been achieved if the same funds had been invested in a series of Investment Trusts.

It really is not that difficult


Ian

[Alaric]

What I do is investigate the returns achieved on publicly available HYP's and what might have been achieved if the same funds had been invested in a series of Investment Trusts.

How many "publicly available" HYPs are operated with safety margins? Particularly as maintaining payouts during 2008 would have involved either selling or holding cash reserves. But that's not totally the point. The comparison is ITs against HYPs operated without safety margins. A series of articles last year about how to select shares for a HYP made no mention of a need to hold back part of the dividend income if using the HYP as an annuity replacement.