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HYP Concept waning?

General discussions about equity high-yield income strategies
Dod101
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HYP Concept waning?

#437963

Postby Dod101 » August 28th, 2021, 12:00 am

I am inclined to think that common sense is prevailing and that the whole hearted dedication to the original HYP concept is waning. It was after all, at least as I understand it intended to be nothing more than a concept, a general guide. Over the years bits of it became enshrined as gospel. That is no way to set out an investment philosophy. Better stop now.

Dod
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Re: HYP Concept waning?

#437981

Postby jackdaww » August 28th, 2021, 7:30 am

.

it was well on the wane even before the carillions and the like .

8-)

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Re: HYP Concept waning?

#437985

Postby Itsallaguess » August 28th, 2021, 8:01 am

Dod101 wrote:
I am inclined to think that common sense is prevailing and that the whole hearted dedication to the original HYP concept is waning.


As someone who's got a lot of interest in income-investing, and having myself moved away from a HYP (FTSE-focussed, single-company) approach, I don't think that using the phrase 'common sense' would be an appropriate way of describing my own decision to move away from it, because I think using language like that tends to denigrate those HYPers who remain happy with their own HYP approaches, and it's clear that there are investors who are still happy to take that approach, and perhaps implying that they lack 'common sense' whilst doing so isn't really going to help any useful debate around the subject...

We're all different, and if we might accept that *any* investment strategy is likely to have some aspects of it that may or may not suit any particular individual investor, then I'd simply describe my own journey away from the HYP approach as one of a stark realisation that it's own shortfalls as an income-strategy just didn't suit me personally, and if I were to list the primary ones that I personally struggled with then they would generally be -

  • Too narrowly focussed in geographical scope, in terms of being UK/FTSE-focussed, and missing out on more global emerging markets, for instance
  • Too narrowly focussed in sectoral scope, in terms of the UK/FTSE market generally being dominated by 'old-school' industries, and often missing out on emerging sectors
  • High volatility of income due to regularly fishing in areas of the market that often have yields that are simply 'too-high' to be regularly sustainable over the very long term
  • Generally needing more attention and 'hands-on action' than the type of income-strategy that I was actually looking for, personally

I've managed to largely solve every one of the above personal issues, whilst still maintaining a primarily 'income-investment' approach, by moving towards collective Income-Investment-Trusts, which provide access to global markets as well as emerging sectors, and which definitely deliver on one of my primary goals of a much more 'hands-off' approach by contracting out almost all of the day-to-day company-level issues to those IT-managers who run the trusts, understand their markets, and manage those remits for me over the long term.

The primary change that I've clearly seen over the years since I've moved away from a HYP, single-company, 'high-yield' approach has been that I've now fully accepted that the level of income I was initially seeking from my investment capital when first using a HYP approach, where yields of around 6% or higher wouldn't have been out of the ordinary in terms of where I might have been investing towards with a HYP hat on, was one of the primary problems, for me at least, of that particular strategy.

Having just taken a look at my 13 globally and sectorally diverse income-IT holdings, I can see that almost all of them are yielding 4.5% or lower, with my overall income-portfolio currently standing at a forecast yield of around 4.2%, and whilst it's clear that HYP investors who are happy with their own approach might consider that type of income-return to perhaps be 'inadequate', I would honestly consider such a view to be at the heart of the main issues that I personally had with the HYP strategy itself, where seeking much higher yields generally brings with it problems that I simply wasn't happy to live with over the long-term investment time-scales that I was looking for...

And that's probably as good a point as any to come back to your main point about 'common sense prevailing', because I think it's much more nuanced than that, and it's more to do with just accepting that different investors will have different levels of tolerance to different issues, and what I think has happened over recent years is that the issues with the HYP approach have become better understood and more visible in terms of the discussions around them, but that's not to say that even then, there might not be investors who are still quite happy to live with those issues, if by doing so they personally still get some worthwhile benefits from doing so - it's just that for me personally, it wasn't 'worth it'....

Cheers,

Itsallaguess

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Re: HYP Concept waning?

#438017

Postby absolutezero » August 28th, 2021, 11:23 am

Rather like Itsallaguess, above, I have moved away from the HYP concept.
My HYP is still there and it provides dividends that cover (or more supplement) my living expenses - but I do tinker with it to remove shares that are dive-bombing/cutting dividends.

My dividends are now put into ITs and trackers that give me exposure to where the growth is (US, Asia, Tech etc) rather than just London listed insurers and miners.

It's fine to have a bit of both. But the Cult of HYP won't allow that.

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Re: HYP Concept waning?

#438038

Postby TahiPanasDua » August 28th, 2021, 2:02 pm

I started an effective HYP, based on a US book, before I discovered LMF. I set my target yield at a low-ish level to avoid pups. I soon started to invest separately in income producing ETFs and ITs. I was a bit embarrassed to admit this in the old Lemon Fool days but things have changed a lot since then. I get the impression that many HYPers have diversified away from the high yield individual UK shares of old. Or is that wishful thinking?

I still have most of my HYP shares but haven't added more for getting on 10 years. All buys these days are ETFs or ITs.

As IAAG says, we are all different and the HYP meets the needs of many investors. There is no absolute right or wrong despite the emotional stance taken by some people on each side of what is an imaginary fence. Still, chucking bricks can be fun.

TP2.

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Re: HYP Concept waning?

#438039

Postby Midsmartin » August 28th, 2021, 2:10 pm

Posting nervously as a non-hyper, I would imagine that a diversified portfolio should use a diverse range of styles: some hyp-style stocks, plus other equities as well. I often read hyp posts and find them useful, but Ive always feared a slap if I posted!

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Re: HYP Concept waning?

#438040

Postby 1nvest » August 28th, 2021, 2:24 pm

Midsmartin wrote:Posting nervously as a non-hyper, I would imagine that a diversified portfolio should use a diverse range of styles: some hyp-style stocks, plus other equities as well. I often read hyp posts and find them useful, but Ive always feared a slap if I posted!

I believe you're OK here, its the 'other place' (HYP Practical) that is more a private board area where you get stomped on for any utterances that don't comply.

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Re: HYP Concept waning?

#438041

Postby 1nvest » August 28th, 2021, 2:26 pm

Itsallaguess wrote:We're all different, and if we might accept that *any* investment strategy is likely to have some aspects of it that may or may not suit any particular individual investor, then I'd simply describe my own journey away from the HYP approach as one of a stark realisation that it's own shortfalls as an income-strategy just didn't suit me personally, and if I were to list the primary ones that I personally struggled with then they would generally be -

  • Too narrowly focussed in geographical scope, in terms of being UK/FTSE-focussed, and missing out on more global emerging markets, for instance
70%+ of FTSE 100 earnings are sourced from foreign. In many ways the FT100 is a global excluding US type holding, so potentially a lower cost more tax efficient way to hold global exc. US, but where there is some UK concentration risk involved such as induced by Brexit. That could however wash i.e. the UK might relatively outperform/rebound from 2022 onward

  • Too narrowly focussed in sectoral scope, in terms of the UK/FTSE market generally being dominated by 'old-school' industries, and often missing out on emerging sectors
HYP selected stocks from across sectors

  • High volatility of income due to regularly fishing in areas of the market that often have yields that are simply 'too-high' to be regularly sustainable over the very long term
On a total returns based measure with a SWR method of withdrawals a HYP was reasonable, providing consistent regular inflation adjusted income

  • Generally needing more attention and 'hands-on action' than the type of income-strategy that I was actually looking for, personally
HYP (non tinker) was low effort


Since 2011 (my own data limit of HYP total return data), investing in either the HYP (Pyad's non tweaked), TJH HYP accumulation (tweaked) of the FTSE 250, measured on total returns would have achieved similar rewards. TJH HYP had the highest volatility, followed by FTSE 250, with Pyad HYP the considerably lower volatility. That may be a function of years, Pyad's is November based, TJH HYP April years, FTSE 250 calendar years, as even a single month shift can see substantially different outcomes.

Each of those have trashed the FTSE 100 primarily because it was more tilted/concentrated, such as too heavily into financials during the 2008/9 financial crisis. That can however swing the other way, US S&P500 recently for instance with its high Tech exposure.

The 'risk' of HYP is that in targeting stocks selected by above average yield as a potential 'better value' measure, the suggestion is that you can spend that higher yield. That's no different to perhaps opting to apply a 5% SWR instead of a 4% SWR against total return, it induces risk of drawing/spending too much.

Pyad's HYP is being non-tweaked other than enforced changes, drifts towards high concentration into single stocks. A initial 15 stocks for instance might drift to being more like 4 large holdings plus another bunch of 11 stocks that collectively value around the same as one of the of the 4 large holdings. That can still be diversified enough however, 20% risk per one of 5 type holdings, four of which were great performers. It also runs winners rather than taking money out to potentially add to laggards. There are US funds that have bought and held since the 1930's, non tinkered, that have performed similar overall to the broader market.

My take-away is that each/any of those three are fine on a total return and SWR style approach. Of the three Pyad's HYP is likely the least cost, FTSE 250 the least effort. If the standard deviations in yearly total returns since 2011 are anything to go by, then Pyad's HYP was the least volatile and hence better risk adjusted reward (Sharpe Ratio).

Can't recall the exact wording of the original HYP in November 2000, but it was suggested as being a annuity alternative. That's still true, IF you utilise something like a SWR approach for income withdrawal/spending (that provides a consistent/regular inflation adjusted income). Something like a 2.5% to 3% SWR would likely be a perpetual withdrawal rate (PWR) and be more inclined to leave substantial amounts for heirs, or perhaps have accumulated to a value where the capital in still being available rather than having been spent (buying a annuity) was available to perhaps cover late life care costs, or be passed onto heirs. Or perhaps where on reaching a certain age, say 85 where you'd consider yourself unlikely to see another 10 years, you might draw down/spend that capital at a 1/10th, 1/9th, 1/8th ...etc. rate.

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Re: HYP Concept waning?

#438046

Postby TUK020 » August 28th, 2021, 2:45 pm

As IAAG has eloquently laid out the shortfalls of relying only on "HYP", I am also augmenting my hyp with IT investments to get diversification into sectors and geographies not represented adequately in the FTSE.
I am also moving towards ITs as a direction of travel for their income smoothing properties, and the reduced need for management and attention.

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Re: HYP Concept waning?

#438047

Postby 1nvest » August 28th, 2021, 2:45 pm

HYP total return hasn't been easy/friendly to measure as postings tend to focus upon income, and opted to compare to lousy choices such as just the FTSE 100 price only value.

Transposed from viewtopic.php?p=356568#p356568 (thanks to Itsallaguess).


Income is much easier to obtain, such as from viewtopic.php?f=15&t=26213

So with both capital and income values for each year its then just a case of calculating the years total return using

( current capital value + years dividend income value - last years capital value ) / last years capital value

From that above table of originally sector diverse holdings, it strikes me that its concentrated into a set of Tobacco (BAT), House builder (Persimmon), Hotels (IHC) and Mining (RIO and Anglo American), plus a bunch of other smaller holdings. That's still relatively diversified whilst having provided reasonable total return/SWR income results.

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Re: HYP Concept waning?

#438049

Postby 1nvest » August 28th, 2021, 2:59 pm

TUK020 wrote:As IAAG has eloquently laid out the shortfalls of relying only on "HYP", I am also augmenting my hyp with IT investments to get diversification into sectors and geographies not represented adequately in the FTSE.
I am also moving towards ITs as a direction of travel for their income smoothing properties, and the reduced need for management and attention.

Not a fan of IT's myself. From what I've seen they get to keep what alpha add they make using your money, without having to bear the risks. Income smoothing is simple if you use a SWR approach, x% of the start date portfolio value, and uplift that £££ amount by inflation each year as the amount drawn out of total return as income in subsequent years.

I prefer the FTSE 250 structure over that of the FTSE 100, and the FT250 includes 50 odd IT's within that, so in part includes a HYP type set, and a IT set ...etc. Feeds both in and out of the top and bottom, so massive stocks that falter but still remain large don't drag down the whole as per FT100/Japan. Dead wood is ejected and replaced with 'upstarts' that are likely better financially replaced. Strong performers are ejected out of the top into the FT100, so catches the rise whilst potentially avoiding any subsequent collapse back down again (may fall back into the FT250 and be a potential recovery play, or may just drop straight out of the FT100 (fail). Single stocks rarely get to being 2% of the index in contrast to the FT100 potentially having 10% in single stocks and sometimes multiple big stocks in the same sector dominating the index.

Buffett style, forget bonds and shift bond risk over to the stock side, 90/10 FT250/cash instead of 80/20 stock/bonds. Enough cash to cover unexpected expenses (10% of portfolio value).

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Re: HYP Concept waning?

#438066

Postby Arborbridge » August 28th, 2021, 4:10 pm

1nvest wrote:HYP total return hasn't been easy/friendly to measure as postings tend to focus upon income, and opted to compare to lousy choices such as just the FTSE 100 price only value.



Not being easy to measure is hardly surprising since as regards the maker of HYP 1 was concerned, it was all about income. Other people might have obsessed about total return, and that's fair enough, if you are one of those, why try to draw comparison with an idea solely concerned with providing income? Or to put it the other way round, if you are trying to compare HYP's income generation weith other ways of supplying a pension, don't compare it with TR stocks etc.

No one has ever opined that HYP provides TR, so don't test it against that criterion.

Arb.

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Re: HYP Concept waning?

#438073

Postby 1nvest » August 28th, 2021, 4:44 pm

Arborbridge wrote:No one has ever opined that HYP provides TR, so don't test it against that criterion.

I do, and its not for you to say what or what not I should test or not. Comparing total return is the only way to compare dissimilar asset allocations/styles as a relative comparison as to what rewards those investments provided. Fundamentally given total return you can draw the same £££ income equally to level the income production if just part of total return (income) was your sole focus. Disregard of capital value has always been one of those uncommon quirks that HYP'ers have gospelled.

If at the start of 2011 you took HYP and added equal capital amounts to BRK and a FT250 accumulation index fund, a three way initial equal split, left to accumulate and ...

Image

Some may find such total return measures and potential diversification benefits (dissimilar yearly gains) to be of interest. Turning focus away from portfolio total reward to just part of total return just obfuscates and more often leads to pointless negativity/confrontation.

To me that chart shouts that taking the same income at the same times out of total return from a blend of those asset would generally have been better than just holding one alone. Yes holding the best alone (US stock/BRK) would have been the optimal, but that could not have been predicted in advance. With that three way annualising 2.8% more than HYP1 total return, then that had the capacity to provide a higher income production (or the same income production with greater capital growth), whilst also being more broadly diversified and with a lower Sharpe (better risk adjusted reward). You cannot gleam such measures from just looking at income alone.

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Re: HYP Concept waning?

#438080

Postby Itsallaguess » August 28th, 2021, 5:06 pm

1nvest wrote:
Arborbridge wrote:
No one has ever opined that HYP provides TR, so don't test it against that criterion.


I do, and its not for you to say what or what not I should test or not.

Comparing total return is the only way to compare dissimilar asset allocations/styles as a relative comparison as to what rewards those investments provided.


Yet another interesting dividend-based income-investment thread TR-spammed, I see....

Bravo..

Itsallaguess

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Re: HYP Concept waning?

#438082

Postby TUK020 » August 28th, 2021, 5:18 pm

1nvest wrote:
Arborbridge wrote:No one has ever opined that HYP provides TR, so don't test it against that criterion.

I do, and its not for you to say what or what not I should test or not. Comparing total return is the only way to compare dissimilar asset allocations/styles as a relative comparison as to what rewards those investments provided. Fundamentally given total return you can draw the same £££ income equally to level the income production if just part of total return (income) was your sole focus. Disregard of capital value has always been one of those uncommon quirks that HYP'ers have gospelled.

If at the start of 2011 you took HYP and added equal capital amounts to BRK and a FT250 accumulation index fund, a three way initial equal split, left to accumulate and ...

Image

Some may find such total return measures and potential diversification benefits (dissimilar yearly gains) to be of interest. Turning focus away from portfolio total reward to just part of total return just obfuscates and more often leads to pointless negativity/confrontation.

To me that chart shouts that taking the same income at the same times out of total return from a blend of those asset would generally have been better than just holding one alone. Yes holding the best alone (US stock/BRK) would have been the optimal, but that could not have been predicted in advance. With that three way annualising 2.8% more than HYP1 total return, then that had the capacity to provide a higher income production (or the same income production with greater capital growth), whilst also being more broadly diversified and with a lower Sharpe (better risk adjusted reward). You cannot gleam such measures from just looking at income alone.


One of the attractions of the pyad "HYP" strategy was that it would create sufficient cash (albeit with some volatility) that a pensioner could draw income from it without having to make decisions about what to sell, or when. One also did not need to incur transaction costs in harvesting income.
A basket of investment trusts will do something similar, without needing to worry about/provision for a cash buffer to smooth dividend volatility.

1nvest makes the point that there are ways of achieving better total return, which is not an issue that we choose to turn a blind eye to.

A different question: If one followed the the 3 way split of HYP/BRK/FT250, what simple/mechanical/low cost way of determining how to pull income from this portfolio would you propose that would involve the minimum of attention or stress from the portfolio manager?

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Re: HYP Concept waning?

#438099

Postby Arborbridge » August 28th, 2021, 6:41 pm

1nvest wrote:
Arborbridge wrote:No one has ever opined that HYP provides TR, so don't test it against that criterion.

I do, and its not for you to say what or what not I should test or not.


Well, your are right. Apply a false test if you like, it's your prerogative, but it won't be a very convincing one.

HYP is specifically an income strategy, but as IAAG says you insist on comparing it with something it was never designed to compete with. Fine, if that's what you want to do, but you are hardly coming up with a clever revelation.
HYPers have been accused, wrongly in my view, of being akin to religious idealogues. Well, the same could be said of people who come from other wings of investing.

There's no argument between us as far as TR goes. HYP isn't going to compete in that way, never was it meant to - read the tin! If I was pot building I wouldn't invest in UK companies using HYP. End of. But I am not. If you don't like it that's fine, but if you insist on comparing HYP against things with go-faster stripes (and believe me, if you find one, someone else with find a better one!) people will be justified in shutting down and saying "I'm bored now". Go and play on a TR board rather than in a thread about HYP on a board about HY investing.
I'm sure some reader somewhere would be grateful for your input.

Arb.

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Re: HYP Concept waning?

#438108

Postby AJC5001 » August 28th, 2021, 7:26 pm

1nvest wrote:
Arborbridge wrote:No one has ever opined that HYP provides TR, so don't test it against that criterion.

I do, and its not for you to say what or what not I should test or not. Comparing total return is the only way to compare dissimilar asset allocations/styles as a relative comparison as to what rewards those investments provided. Fundamentally given total return you can draw the same £££ income equally to level the income production if just part of total return (income) was your sole focus. Disregard of capital value has always been one of those uncommon quirks that HYP'ers have gospelled.


I thought Total Return included reinvestment of dividends. Given that the HYP you are using was the original HYP1 that Pyad started, and the dividends were assumed to be extracted from the portfolio as they arose, I would be grateful if you could explain what basis for reinvestment you are assuming in any of your comparisons.

Adrian

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Re: HYP Concept waning?

#438114

Postby tjh290633 » August 28th, 2021, 8:02 pm

Oh ye of little faith.

The fundamental premises of HYP investing were:

1. Equal weighting at the outset

2. Yields higher than the FTSE100

3. Diversification across sectors.

Where HYP1 got into problems were the divergence from equal weighting and the perpetuation of that after take-overs, by reinvesting all the proceeds into a single share. I had been following these principles in essence since I began a PEP in 1987, and before that to some extent. When one share got to 16% of a 16 share portfolio in 1997, I realised that this was not a sensible situation, and with another close on its heels, I made the decision in March that 10% was a prudent maximum weight for any one holding. Consequently Lloyds TSB and Zeneca were both trimmed back to below that level. Then things remained on a fairly steady keel until December 1999, at the height of the dot-com boom, when Marconi, British Telecom and Prudential all broke through my self-imposed weight limit. Marconi did it again in September 2000 and Whitbread saved itself in 2001 by demerging Fairbar, its pub estate. In general the limit has served me well to the present day, changing first to twice the median and then to 1.5 times the median holding weight.

In my view, if you ignore the second principle, this is a sensible formula for investing any which way. For private investors, equal weighting within limits is the only practical approach. tracker funds have to follow market weightings to be trackers. We are not seeking to be trackers, but to derive benefits from our investing, and hopefully to do at least as well as that index which is closest to our style of investing. If we are interested in deriving income, then the second principle has merit. If you have some other objective, then it may not. You may find that your objective is better served by investing in one or more ITs, or other collective investments. You may be a gambler with a yen for farm bets and put it all in a mining share from some obscure country. The words Total Return crept in higher up, and for many people this is a desirable objective, which may be obtained at times from a high income approach, but not in the last few years.

People's interests vary with time, and the OP has indicated that he feels less enchanted with the HYP approach. As we get older, the attraction of actively managing a portfolio can be lessened, and this is natural. I have contemplated a move into ITs myself, but see no reason to do so at the moment. That could change overnight and whether I would be capable of making the move is open to question. It would not be a disaster if I did not, but it would be earier for my heirs and successors.

The HYP Concept has not waned, but people's perceptions and experiences lead them to drift away. It is only natural.

TJH

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Re: HYP Concept waning?

#438115

Postby MrFoolish » August 28th, 2021, 8:11 pm

TUK020 wrote:One of the attractions of the pyad "HYP" strategy was that it would create sufficient cash (albeit with some volatility) that a pensioner could draw income from it without having to make decisions about what to sell, or when. One also did not need to incur transaction costs in harvesting income.


True. But some of the ISA account providers offset their fees with trading credits - so there's an argument for making use of these credits.

Also, there seems to be much debate about whether or not to sell HYP shares that have cut their dividends. So not exactly buy and forget.

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Re: HYP Concept waning?

#438130

Postby Alaric » August 28th, 2021, 10:14 pm

Arborbridge wrote:If I was pot building I wouldn't invest in UK companies using HYP.


But that's what many of the more avid HYP followers are actually doing. Why else are there endless posts about which limited selection of stocks to reinvest in next? Once fully invested and with no immediate intent to start a drawdown, income or lack of it can go out the window. If there is no new money other than dividends, but the portfolio is up 6%, how much does it matter if that was 6% dividends and no capital growth, no dividends and 6% capital growth or even 10% dividends and a loss of 4% on share values? The reported asset value is the same.


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