An IT starter portfolio

[moorfield]

Ok so following on from IAAGs recent posts, I though I'd bring a pyadic flavour to proceedings and have a quick stab at selecting on paper a starter portfolio of 15 high yield ITs from different AIC sectors. I've come up with the following, which notably all paid an income through the coronavirus pandemic. I will be aiming to rotate into some of these over the next couple of years I think.

Initial overall portfolio yield, 6.7%. Thoughts?

EPIC | Sector                       | Yield
VSL  | Debt                         |  8.91
EJFI | Multi Asset                  |   8.7
HFEL | Asia Pacific Equity          |     8
RGL  | Property                     |  7.43
SMIF | Debt                         |  7.33
GCP  | Infrastructure               |  6.34
ALAI | Latin America Equity & Bonds |  6.33
BHI  | UK Equity                    |  6.26
FSFL | Infrastructure               |  6.23
THRL | Property                     |  6.01
APAX | Private Equity               |  5.94
JSGI | Asia Pacific Equity          |  5.92
MAJE | Global Equity                |  5.85
ASEI | UK Equity                    |  5.76
SHIP | Leasing                      |   5.7

[Newroad]

Hi Moorfield.

I would plug that combined portfolio into Morningstar's X-Ray and see what you would really get in the underlying holdings. My two guesses, and that's all they are

(1) That you would be more heavily exposed to some sectors that you might like to be, but if not
(2) You could probably achieve the same or similar effect from a portfolio of cheaper ETF's, perhaps with the odd investment trust (maybe one or more of the private equity ones) if you can't get what you need from a UK traded ETF (or similar)

Regards, Newroad

[Itsallaguess]

(2) You could probably achieve the same or similar effect from a portfolio of cheaper ETF's

The income-IT portfolio shown would currently deliver a dividend yield of around 6.7%, so would you please be able to list your proposed portfolio of income-ETF's that might achieve the same thing in a cheaper way?

Cheers,

Itsallaguess

[jackdaww]

.

if you must have high dividends , these pay around 5% ----

MUT - uk larger companies - managed by abrdn

MYI - global - run by bruce stout

CTY - mostly larger uk companies - run by job curtis - a plain vanilla HYP with low charges

VUKE - ETF - uk larger companies - no stamp duty - low charges

[Newroad]

Hi IAAG.

I haven't even done the first step (Morningstar X-Ray) let alone the second.

Moorfield asked for some thoughts, so I gave him some. To carry on with the thinking, the IT's may be employing some leverage to achieve that yield - to replicate it, you may need to do the same with a basket of ETF's.

I'm not one way or the other re IT's and ETF's - I hold both in roughly equal numbers. But once you start diversifying as much as suggested below with instruments that are already diverse, I start wondering whether it's simply worth tracking some or all of it as cheaply as practical - and then just worrying about the tweaking.

Another option - fewer more targeted IT's.

Regards, Newroad

[Itsallaguess]

I'm not one way or the other re IT's and ETF's - I hold both in roughly equal numbers.

But once you start diversifying as much as suggested below with instruments that are already diverse, I start wondering whether it's simply worth tracking some or all of it as cheaply as practical - and then just worrying about the tweaking.

Income-related (higher yield) ETF's that cover some of the more sectorally and globally diverse areas as some of the current income-related Investment Trusts aren't something that I'm familiar with, so I was just interested if you had any firm contenders in that area really, that's all, and I'd still be interested in an answer to that question if this is an area you've already got some experience of.

Another option - fewer more targeted IT's.

Well on that point I'd personally agree, and I think the sample portfolio as posted probably goes into some areas of the market that I'd be happy to stay out of, but as a sample 'single-hit' income-related IT portfolio, I think it's a very interesting and worthwhile experiment.

Cheers,

Itsallaguess

[Newroad]

Fair enough IAAG.

You've (understandably, given your interest) focused on my second point.

I'd be more interested in my first - what would you be exposed to in obtaining that yield (sector concentration, leverage, opacity etc)

Regards, Newroad

[moorfield]

(1) That you would be more heavily exposed to some sectors that you might like to be, but if not
(2) You could probably achieve the same or similar effect from a portfolio of cheaper ETF's, perhaps with the odd investment trust (maybe one or more of the private equity ones) if you can't get what you need from a UK traded ETF (or similar)

Noted, thank you. By pyadic I meant I have deliberately selected from as diverse a range of sectors as possible (that also paid out during the pandemic). And 15 wasn't a coincidence in this case I haven't looked much at ETFs, do you think the same overall yield is achievable selecting a broad basket of these?

[moorfield]

.

if you must have high dividends , these pay around 5% ----

MUT - uk larger companies - managed by abrdn

MYI - global - run by bruce stout

CTY - mostly larger uk companies - run by job curtis - a plain vanilla HYP with low charges

VUKE - ETF - uk larger companies - no stamp duty - low charges

Noted, thankyou. Again by pyadic I meant that I started from the highest, I didn't get as far as the 5% ers before selecting the 15.

[daveh]

I hold a number of higher yield ETFs:

EMDV for emerging markets yield = 3.33%
IDVY for Europe yield = 4.17%
IAPD for Asia Pacific yield = 5.51%

So not as good as some of the ITs on the yield front. For me total return including dividends has been

EMDV +26.1% held since October 2012 XIRR 3.56% pa
IDVY +38.8% held since January 2015 XIRR 5.59% pa
IAPD +7.4% held since June 2016 XIRR 1.65% pa

So they have not exactly performed well, with IDVY being the best, they did keep paying through covid, though they all took a hit in the quantum of payment.

I have more recently been purchasing HFEL rather than IAPD, out of interest I included in my spreadsheet matching purchases of IAPD for comparison. If I'd purchased IAPD, including dividends I'd be 1.08x better off. The higher HFEL dividend hasn't outweighed the better capital performance of IAPD over the same period. The dividend paid if I'd held IAPD instead of HFEL would have been lower at 0.59x the value.

[moorfield]

Another option - fewer more targeted IT's.

Well on that point I'd personally agree, and I think the sample portfolio as posted probably goes into some areas of the market that I'd be happy to stay out of, but as a sample 'single-hit' income-related IT portfolio, I think it's a very interesting and worthwhile experiment.

But how few? That's another interesting discussion. I have pondered here from time to time whether or not I should simply park everything into CTY (City of London) and just keep reinvesting the dividends there until I start spending them.

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

[GrahamPlatt]

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

The Goldilocks number refers to the dividend %. (Well, according to LUni’s system)

https://web.archive.org/web/20101108135 ... 50077.aspx

Most recent post here: viewtopic.php?t=27226

[moorfield]

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

The Goldilocks number refers to the dividend %. (Well, according to LUni’s system)

https://web.archive.org/web/20101108135 ... 50077.aspx

Most recent post here: viewtopic.php?t=27226

I looked at both Luni's B7 and B8 folios, which are UK equity heavy and neither seem particularly high yield if buying today. These 15 select from a more diverse pool and overall are higher yield today. For the next 5-10 years I want smooth reliable income streams that I can just keep reinvesting. I'm not too fussed about capital growth, there is enough in the tank already.

[GrahamPlatt]

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

The Goldilocks number refers to the dividend %. (Well, according to LUni’s system)

https://web.archive.org/web/20101108135 ... 50077.aspx

Most recent post here: viewtopic.php?t=27226

I looked at both Luni's B7 and B8 folios, which are UK equity heavy and neither seem particularly high yield if buying today. These 15 select from a more diverse pool and overall are higher yield today. For the next 5-10 years I want smooth reliable income streams that I can just keep reinvesting. I'm not too fussed about capital growth, there is enough in the tank already.

Oh, I’d agree with you. It was just your use of the word Goldilocks and that there’d as yet been no mention of LUni’s work (and so I wasn’t sure if you’d be aware of it) that prompted my comment.

[monabri]

Thoughts..

Need to look at the reserve levels for the IT and their dividend policy.

[Newroad]

Hi Moorfield.

My Goldilocks number is 2 (or 4 - see below) - at least, in terms of financial instruments. Were I doing my version of what you are trying to do, I would invest something like

CTY 50% (around 4.6% yield, at a quick glance), and
VHYL 50% (around 3.0% yield, at a quick glance)

I say "or 4" as I'd be happy to add a couple of bond instruments in there too (one active IT, one passive ETF) but that is a matter of taste.

However, let's assume you didn't - you would get plenty of diversification from the two, they'd be easy to manage and have a decent yield (a priori 3.8% or so) with decent growth prospects as a kicker.

Regards, Newroad

[Dod101]

Another option - fewer more targeted IT's.

Well on that point I'd personally agree, and I think the sample portfolio as posted probably goes into some areas of the market that I'd be happy to stay out of, but as a sample 'single-hit' income-related IT portfolio, I think it's a very interesting and worthwhile experiment.

But how few? That's another interesting discussion. I have pondered here from time to time whether or not I should simply park everything into CTY (City of London) and just keep reinvesting the dividends there until I start spending them.

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

I would not want to rely on only one IT/manager and certainly not City of London. I would and in fact hold 6 I think but they are not all high yield. My idea is to get a spread of managers as much as anything else. 15 ITS are too many, even if you could find them if high yield is what you want. You will stray into territory that may not prove very comfortable and inevitably there is going to be a fair amount of duplication of holdings.

Dod

[Itsallaguess]

Another option - fewer more targeted IT's.

Well on that point I'd personally agree, and I think the sample portfolio as posted probably goes into some areas of the market that I'd be happy to stay out of, but as a sample 'single-hit' income-related IT portfolio, I think it's a very interesting and worthwhile experiment.

But how few? That's another interesting discussion. I have pondered here from time to time whether or not I should simply park everything into CTY (City of London) and just keep reinvesting the dividends there until I start spending them.

But if only 1 IT is too uncomfortable for some, and 15 might be to many in terms of AIC sectors they may stray into - what is a Goldilocks number?

As with most things, I think it's likely to be a personal level of comfort, and I've never been a fan of thinking there's some magically-prescribed number of 'slots' that need to be accounted for.

Taking a quick look at the IT-based section of my portfolio, I can see the following areas accounted for -

Global Equity Income
UK Equity Income
Asia Pacific Income
North America
Europe
Global Emerging Markets

Most of the above have more than one underlying component, and I'm generally happy with the above current spread (when also taking into account my remaining single-company holdings), although I am looking to invest in some or all of the following income-IT areas over the coming years if a suitable opportunity arises -

Renewable Energy Infrastructure
Biotechnology and Healthcare
UK Smaller Companies

On your point about CTY, I've often agreed with your 'if you can't beat it, why bother with single HYP companies' approach, but whilst I think that view perhaps works when someone's already got a spread of single-company holdings, I'm not sure I'd go the whole-hog and advocate selling a full HYP and moving it all into CTY, as I'd personally think all you'd be doing there is keeping all the UK-centric risk, whilst simply losing some income to the CTY manager, and I'd have to ask myself if that was worth it if I ended up owning a single, UK-facing income-IT charging a 0.4% OCF at the end of that process..

Whilst I've got no fundamental objection to income-IT charges, I think I'd like to gain a lot more in terms of diversity than that, which again leads back to at least some sort of sector-based spread that we're each personally happy with...

Cheers,

Itsallaguess

[richfool]

It's not too difficult to exceed 15 IT's. (I have about 30).

If you think about it, taking 1, 2, or possibly 3 from each of the following sectors:

Global Growth (2)
Global Growth & Income (2)
UK (2 or 3)
North America (2)
Europe (2)
Asia Pacific (2)
EM (1)
Multi-Asset Trusts (2)
Prop Coys/REIT's (2 or 3)
Infrastructure (1)
Renewable Energy (2)
Miners/Commodities (1)
Energy (1)
Smaller Coys (1)
Special Opportunities (2)

That gets me to about 27. (Taking the higher figure for each). OK I would readily accept that that might be too ambitious/too many for a new "starter" portfolio.

[Luniversal]

This proposal and reactions embody misapprehensions against which I have vainly railed for 12 years.

(1) CHASING THE YIELD. A starting yield of 6.7% compares with 3.1% on the All-Share Index and 3.5% on the FTSE 100, i.e. well into Danger Zone territory. London is the second most information-rich and efficient equity market. Why do these funds promise so much more than shares at large? How many hostages to fortune?

(2) 'SMOOTH RELIABLE INCOME STREAMS'. Almost every IT is currently failing to raise its dividend to match inflation, which may hit double figures in 2022. Are all these picks even commtted to steady *nominal* increases, or do payouts rise and fall with revenue?

As for using ETFs instead-- an Exchange Traded Fund can never promise unruffled rises because it is obliged to shell out all the income it receives en passant, with no reserving. Reported running yields on ETFs are momentary calculations with no floor beneath them; UK Equity Income sector members arrange their business to avoid extreme fluctuations in paying out.

(3) SECURITY OF INCOME. To have gone on paying *something* during the virus squeeze is nothing to be very proud of. Portfolio receipts did not dry up totally. Revenue reserves and realised capital profits could be drawn upon. Besides, the main hit from the pandemic reductions has not percolated through to trusts' declarations. This year should be more straitened than 2021.

The acid test is whether the proposed selection can contrive to sustain the real value of income, if not increase it, over many years. Few nominees are old enough to have proved they can. Some use relatively untested models: debt funds which churn junk bonds, transport leasing, infrastructure tied to the goodwill of governments, links to novel technologies such as solar and biopharmaceuticals. They may be the future, but they can show nothing like the track records in all weathers of boring old 'basket' members; many are inventions of the atypical financial climate since the Global Financial Crisis.

'BHI', which I take to be Henderson High Income, is another potential trap: it offers an eye-catchingly fat yield by burning capital. Since its 1989 launch the real net asset value per share and price have shrunk by almost 1% pa, so that NAV is now 70% of what it was at the outset, and the share price 75%. Perhaps capital performance would not trouble an investor imitating a HYP, but those tasty-seeming dividends also shrank: by one-third after inflation.

You cannot support a running return twice the market's without eventual damage to both aspects. And that may turn out to apply to trusts that traffick in more exotic instruments than UK quoted companies...

(4) THE STOCKPICKING FALLACY. A glance at a few attribution analyses in trusts' annual reports-- when they dare publish them-- shows that spurning a bunch of mainstream UK Equity Income issues because their shareholdings have a family resemblance is off-beam.

To begin with, trusts are gradually diverging in their preferences, with even a Union Jack-flourishing operation such as City of London holding 15% non-UK stocks. Secondly, most of the bigger holdings are global and just happen to be based in Blighty. But much more importantly, the bulk of these trusts' performance, for better or worse, does not derive from stockpicking. The array of devices an IT can employ, such as discount control, gearing, writing call options, reserving, do more to determine outcomes.

An IT is not an open-ended fund... or an ETF. My annual reviews show how basket constituents can vary widely in performance despite their portfolios being 'all the same'.

(5) RISK VERSUS (EVENTUAL) REWARD. It is said of the Baskets of Seven and Eight that 'neither seem particularly high yield if buying today.' Maybe not to yield hogs, but since mid-2020 both have yielded more than their historic ratios since 2006 against the All-Share. The B7 over 16 years averaged near-par with the index yield, but on Fri. it was 20% higher; the B8 yield was 40% higher against an average of 26%. Possibly ratings are depressed by the immediate prospect of more real cuts in dividends this year. But if you are confident (as pundits are) that British dividends will pick up later, the baskets appear cheap.

The B8 yields 4.3% historic, the B7 3.7%: both above market but not hazardously so. As I have shown, with 'derisking' one could have inflation-proofed their purchasing power by reserving about one-tenth of their income.

I contend that you cannot assure yourself of a free lunch by going much above one-quarter more starting return from a portfolio of ITs than from the index-- not without courting heightened volatility and risk to income delivery, the sort of thrill Doris does not want. Markets' consensual appraisals are not wrong enough often enough to let bill payers punt insouciantly on dropsical yields.

Yes, those yields are so much bigger than the norm that a B8 whose income has grown by ~2% pa real, or a B7 by ~4%, would not catch up for quite a while even if the 6.7% yield stayed stuck. But is that hope worth the fear of pear-shaping? 'Good Enough is Better than Even Better'. I prefer to buy at a more moderate yield and expect-- reasonably, according to precedent-- that an initially competitive running return v. cash or fixed interest will expand gradually to enhance purchasing power. Such is the income investor's version of 'time in the market'.

All that said, I too was induced by Itsallaguess's useful monthly tables to dummy out an Exotically Juicy IT (EJIT) portfolio yesterday. Pronounced 'eejit', as no doubt I should be.

My longlist of 31 came down to a possible ten (enough to be going on with) of which five were the same as the OP's: GCP Infrastructure Investments, Aberdeen Latin American Income, Target Healthcare, Foresight Solar and Aberdeen Standard Equity Income. (The other five were European Assets, JPMorgan China Growth & Income, Invesco Bond Income, New City High Yield and Triple Point Social Housing. Starting yield 6.4%-- dangerous!)

However, EJIT is not a superfatted High Yield Portfolio but a shoogle up the learning curve (like the LuniHYPs) using loose change. For a time, until something goes awry, it ought to bring in income until, one hopes, 'market trading' provides enough windfall capital profits to make up for members that may well go wrong, if my unease about their untried pedigree is merited. OTOH it could be the aforesaid Future, liberating my long-dormant James Anderson. It would be a frolic to enliven my dotage, though I would probably not tinker it. Some old dogs are too stiff to learn some new tricks.

My choices need more DYOR. As a lifelong income-seeker I have always eschewed anything too thematically or geographically focused, so I would not place capital tasked to generate bill-payment income in such shares. When their divis have risen for 20 years on the trot, I might be less suspicious.