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Wondering aloud - IT top up process

General discussions about equity high-yield income strategies
TUK020
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Wondering aloud - IT top up process

#423182

Postby TUK020 » June 28th, 2021, 4:25 pm

I have noticed a lot of commentary on how many investors on these boards are edging more towards a basket of ITs to augment their portfolios of individual stocks to gain diversification, reduce risk, and above all simplify their portfolio management. I am among these, and ITs now represent between a quarter and a third of my portfolio.

A lot of my own selection of ITs is informed as a backdrop by the sterling work done by Luniversal on the B7 & B8, which were selected over a decade ago, and the performance data analysed/backdated to the beginning of the century.

Two separate strands to this thought exercise:
- Is anyone up to the challenge of thinking through and proposing a new basket(s) for the new decade?
- Does anyone have any thoughts on what a 'portfolio top up algorithm' should look like?

I think an awful lot of the solidity of the "HYP" process comes from the painstaking work undertaken and recorded over a long time by TJH, taking into account portfolio capital weight, share of income and cost.

For a collection of ITs, there are other factors that would influence such a decision - discount/premium to NAV, maybe years of reserve etc. Any thoughts?
Last edited by tjh290633 on June 28th, 2021, 4:28 pm, edited 1 time in total.
Reason: Typo Corrected - TJH

monabri
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Re: Wondering aloud - IT top up process

#423195

Postby monabri » June 28th, 2021, 5:05 pm

"Top up algorithm"

Why not use HYPTUSS if one is topping up income ITs?

Screening of top up candidates might involve a consideration of yield, reserves, diversification, management company , divi history,
divi growth rate and/or........(others T.B.C).

TUK020
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Re: Wondering aloud - IT top up process

#423205

Postby TUK020 » June 28th, 2021, 5:43 pm

HYPTUSS has a rather clever mechanism to use the market noise, and the tendency of mean reversion to take advantage of the fact that from time to time, the market prices low shares (and then yield rises) that will recover.
It also has a protection mechanism in terms of the % on cost to stop this running away in the event of terminal decline of a share.
This results is 'stacking the odds' in your favour if used in a systematic basis.

With ITs, there is another aspect to take advantage of, which is the discount/premium to NAV will tend to self correct (particularly with ITs that have a discount control mechanism). I wonder if anyone has spent time working out how to take advantage of this in a systematic way?

Itsallaguess
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Re: Wondering aloud - IT top up process

#423207

Postby Itsallaguess » June 28th, 2021, 6:00 pm

TUK020 wrote:
HYPTUSS has a rather clever mechanism to use the market noise, and the tendency of mean reversion to take advantage of the fact that from time to time, the market prices low shares (and then yield rises) that will recover.
It also has a protection mechanism in terms of the % on cost to stop this running away in the event of terminal decline of a share.
This results is 'stacking the odds' in your favour if used in a systematic basis.

With ITs, there is another aspect to take advantage of, which is the discount/premium to NAV will tend to self correct (particularly with ITs that have a discount control mechanism). I wonder if anyone has spent time working out how to take advantage of this in a systematic way?


Even when I was a 100% 'single share' HYP investor, I only ever used the HYPTUSS method as the initial filter that then went on 'inform' some more granular investigation based on that initial 'best bang for your buck' (whilst keeping one eye on diversification etc...) process, and I can say with some confidence that in almost all cases when I was looking to top anything up, the share at the top of the HYPTUSS ranking almost always got ignored for one good reason or another...

I'm happy to do the same now I've largely moved over to income-IT's, and I'll use the HYPTUSS top-up ranking order as an initial guide, and then move on to look at some of the more granular influences that you're right to highlight, such as discounts, cover, dividend growth-rates etc..

I personally don't think it needs to be much more complicated than that, other than to point out that whilst with single-shares we might have been happy to have had a 'flat' level of capital weighting diversification, I'm concious that with income-IT's being available that invest in wider geographical markets and sectors, there may well be a concious reason that an investor wants to 'weight' their IT portfolio in a way that might not then really suit the HYPTUSS ranking process, given that capital-weighting is an important feature of the HYPTUSS ranking calculations, so there is a potential added complication where we might not want a 'flatly diversified' portfolio across each individual IT holding....

Cheers,

Itsallaguess

TUK020
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Re: Wondering aloud - IT top up process

#423219

Postby TUK020 » June 28th, 2021, 7:21 pm

I'm not suggesting blindly following the spreadsheet suggestions, but getting to an algorithm for a spreadsheet involves thinking clearly about the process and codifying it - how much weight to assign to NAV discount versus yield versus relative capital weight.
I'm asking if anyone has had a go at defining a process for this.....

scrumpyjack
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Re: Wondering aloud - IT top up process

#423220

Postby scrumpyjack » June 28th, 2021, 7:25 pm

Maybe train your pet to select by throwing darts?

https://www.forbes.com/sites/rickferri/ ... bd1f9e630a

Itsallaguess
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Re: Wondering aloud - IT top up process

#423224

Postby Itsallaguess » June 28th, 2021, 7:52 pm

TUK020 wrote:
I'm not suggesting blindly following the spreadsheet suggestions, but getting to an algorithm for a spreadsheet involves thinking clearly about the process and codifying it - how much weight to assign to NAV discount versus yield versus relative capital weight.


Apologies - I know you weren't, and I wasn't trying to imply you were - I was just putting down some thoughts, that's all...

Cheers,

Itsallaguess

monabri
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Re: Wondering aloud - IT top up process

#423238

Postby monabri » June 28th, 2021, 8:37 pm

Why not ignore NAV premium/discount if the IT is trading in it's "usual range " ( historical average)?

tjh290633
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Re: Wondering aloud - IT top up process

#423278

Postby tjh290633 » June 28th, 2021, 11:15 pm

TUK020 wrote:I'm not suggesting blindly following the spreadsheet suggestions, but getting to an algorithm for a spreadsheet involves thinking clearly about the process and codifying it - how much weight to assign to NAV discount versus yield versus relative capital weight.
I'm asking if anyone has had a go at defining a process for this.....

Since the HYPTUSS algorithm uses just two factors, it is simple to add a third if you wish, assuming that discount is a positive factor. Sum rankings by discount, yield and inverse weight and the ranking of that sum gives you your answer.

TJH

torata
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Re: Wondering aloud - IT top up process

#423286

Postby torata » June 29th, 2021, 12:27 am

tjh290633 wrote:
TUK020 wrote:I'm not suggesting blindly following the spreadsheet suggestions, but getting to an algorithm for a spreadsheet involves thinking clearly about the process and codifying it - how much weight to assign to NAV discount versus yield versus relative capital weight.
I'm asking if anyone has had a go at defining a process for this.....

Since the HYPTUSS algorithm uses just two factors, it is simple to add a third if you wish, assuming that discount is a positive factor. Sum rankings by discount, yield and inverse weight and the ranking of that sum gives you your answer.

TJH


Building on what Terry has said, I think rather than a simple discount element, a more sophisticated one might be to rank the extent to which the current discount differs from the usual discount on that IT (or premium, of course). Otherwise the algorithm would tend to favour those with greatest discount in the portfolio, rather than those whose discount offered the best temporary 'value'.

torata

Itsallaguess
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Re: Wondering aloud - IT top up process

#423309

Postby Itsallaguess » June 29th, 2021, 7:48 am

torata wrote:
rather than a simple discount element, a more sophisticated one might be to rank the extent to which the current discount differs from the usual discount on that IT (or premium, of course).

Otherwise the algorithm would tend to favour those with greatest discount in the portfolio, rather than those whose discount offered the best temporary 'value'.


Trustnet has some figures that could help with that, as they highlight the discount, the average discount over a given time-period, and also the high/low discount over the same period as well.

An example shown here for Merchants -

Image

Source - https://www.trustnet.com/factsheets/t/bj25/merchants-trust-plc

The figures given are specifically related to the time-period shown on the chart, which by default is five years, but can be manually changed if required, with 1m / 3m / 6m / 1yr / 3yr / 5yr options being available.

I'd always personally take a look at this sort of more granular information when looking for a purchase or top-up candidate, and URL hyperlinks to the relevant Trustnet pages can be inserted to the right of the main HYPTUSS Portfolio data to help with these types of investigative steps, which then helps to embed a more formal process into these income-portfolio management tasks...

Cheers,

Itsallaguess

JuanDB
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Re: Wondering aloud - IT top up process

#423323

Postby JuanDB » June 29th, 2021, 8:07 am

TUK020 wrote:I'm not suggesting blindly following the spreadsheet suggestions, but getting to an algorithm for a spreadsheet involves thinking clearly about the process and codifying it - how much weight to assign to NAV discount versus yield versus relative capital weight.
I'm asking if anyone has had a go at defining a process for this.....


I have a spreadsheet that I maintain which aggregates data from a few sources, some automated, some manual. I rank on a number of data points including:

Current Yield ASC
5 Year Yield growth ASC
Total 1 year costs (trading fee + OCF + SDRT) DESC
Gearing DESC
Current Held Value DESC
Current Income DESC

Ranked data points are the summed giving a total score per candidate. The highest score should “win”.

I’ve found this generally gets me to the right area. I then apply a smell test before making a final decision. If there are a number of candidates with a close final score I choose the lowest cost highest yield growth of the available choices.

As this is the HY board, I am answering from the perspective of choosing ITs based on their above average yield for income. For growth focus I Use ETFs rather than ITs. This implies, all the candidates who have been pre-filtered are higher yield, typically >4% as a start point.

Cheers,

Juan.


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