Swap Merchants to HFEL ?

[monabri]

viewtopic.php?p=562893#p562893


"If I were to sell up my holding in MRCH in full and redeploy into HFEL then I could increase my annual income on the invested sum by 75%.

Whereas UK equities have bounced up in recent months, pessimism still abounds with HFEL's target markets.

I hold MRCH at 6.8% and HFEL at 4.5% of total portfolio value.

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https://www.theaic.co.uk/companydata/0P ... /dividends

MRCH 5 year dividend growth = 2.44%

https://www.theaic.co.uk/companydata/0P ... /dividends

HFEL 5 yr dividend growth = 2.73%

(Similar - Neither are stunning)

Yield on offer for new buy

HFEL 8.32%

MRCH 4.71%

[BullDog]

Hedge your bets and swap half?

[monabri]

Hedge your bets and swap half?

I was just running through the numbers and considering a 22% reduction in MRCH (held in one ISA account).

This would swing the balance to 5.8% MRCH v 6.6% HFEL

[DrFfybes]

With a yield of 8.32%, HFEL fails my "too good to be true" test.

That's almost as good a Yield as Direct Line, until last week.
Only 2 months ago it was showing a 35% drop in capital over 5 years - fine if you're winding down your assets to generate income, but this is the HYP board, not TR

Paul

[monabri]

With a yield of 8.32%, HFEL fails my "too good to be true" test.

That's almost as good a Yield as Direct Line, until last week.
Only 2 months ago it was showing a 35% drop in capital over 5 years - fine if you're winding down your assets to generate income, but this is the HYP board, not TR

Paul

High Yield Shares & Strategies board...hence I'm generally mulling it over & soliciting views. True, it might be "a too good to be true"...hence I'm stating my % holding of each.

[Dod101]

As monabri would expect from me, I think that HFEL represents dearly bought income. I do not know much about either share currently but I am always very wary of high income at the expense of growth.

I am not suggesting that HFEL is about to cut its dividend although it may do so, but that its very high yield is at the expense of its capital. I would not want that especially if I were still building my portfolio. If you are in your dotage then there might be an argument for that but not at an earlier age. Why would you do that?

Dod

[monabri]

My line of thought is along the lines of ..

MRCH and HFEL were very similar in terms of total return until a few years ago..



Then, there is a clear deviation between the two in Q1 2021.

As a benchmark, let's introduce both CTY (City of London IT) and Vanguards's FTSE 100 tracker (VUKE).



Merchant's seems to have raced ahead of both CTY and VUKE. Is Gergel a much better stock picker than Job, is the lead maintainable ?

So, what I'm mulling over, is it time to take some money off the MRCH table and redeploy into a higher yielding 'out of favour' trust? However, the move will be in moderation, changing the relative holding in MRCH & HFEL as noted above. As both MRCH and HFEL are reasonable percentages of the portfolio, the ensuing extra dividend is "reasonable".

(I know there is no right nor wrong answer..until 2021, both MRCH and HFEL were mooching along at a TR of "not a lot!" )

[Itsallaguess]

Merchant's seems to have raced ahead of both CTY and VUKE.

Is Gergel a much better stock picker than Job, is the lead maintainable

It's a reasonable question, and ranking the whole of the AIC UK Equity Income sector in descending order of 5-year returns highlights the question you're asking, but it doesn't just show that Merchants has outperformed nearly all of the other UK Equity Income sector IT's, with only Law Deb being in a better position over a 5-year period, but it's clearly outperformed the UK Equity Income sector itself, with City of London actually showing 5-year returns that are broadly in line with the sector it's investing in -

https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=UGI&sortid=SPTR5Y&desc=true

It's interesting as well, that when we do the same for the AIC Asia Pacific Equity Income sector, and rank by descending 5-year returns, that we see Henderson Far East Income appears at the bottom of the list, under-performing all other AIC listed investments in that particular Asia Pacific Income sector on a 5-year basis -

https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=ASI&sortid=SPTR5Y&desc=true

Please note that the above two URL links still need manual-intervention to rank the 'Share Price Total Return / 5yr' column in descending order, by clicking on the column header twice. The URL's looks like they should configure the tables automatically for that particular view, but there seems to be something wrong with the AIC site that's preventing those URL configurations from automatically rendering in that view for some reason...


If we consider what might be in play to influence not only the return-disparities between MRCH and HFEL, but the relative returns of different investments within the same AIC investment sectors, we might broadly come up with a list of major influences that looks like this -

• Macro-level influences in different geographical markets (UK markets broadly performing well compared to Asian markets over a given period, perhaps)

• Individual investment influences within different collective options (Manager-level calls being difference between alternative collective investments, perhaps)

• Influence of gearing levels on historical returns that might also strongly influence returns going forward (Accelerated positive returns in broadly rising markets, and accelerated negative returns in broadly dropping markets, perhaps)

On the first topic, it's interesting to see from the above two URL links that the 5-year returns of both the UK Equity Income sector and the Asia Pacific Equity Income sector are actually broadly similar -




In the type of 'reversion to mean' investment-swap that you're thinking of making here, I'd personally be looking for a larger disparity than that, at both the 5-year and the 1-year level, because sector-level influences might be seen as one of the largest drivers of future returns when we're talking about the types of geographical-market calls similar to the one that you're looking to make...

When we look at the performance within each of the two sectors by Merchants and Henderson Far East, it's clear that MRCH has outperformed it's sector, and HFEL has underperformed within it's own, and I agree that it might look tempting to take some of that MRCH out-performance off the table and rotate into something like HFEL that might hopefully turn a corner within it's own sector, but where the HFEL manager has not even achieved his own Asia Pacific Equity Income sector-level returns, or anywhere near them over the past 5-years, then a question needs to be asked as to why that might have been the case, I think, and I'd personally want to answer it in a more focussed way that just crossing my fingers and hoping that 'things come good' in that particular 'relatively under-performing' collective investment...

On the gearing front, it might be said that MRCH has a relatively high level of gearing in relation to other UK Equity Income IT's, at around 9%, and this is something that might help to explain some of the relative out-performance within the same sector, but it's clear as well from looking at the first UK Equity Income link above that there's a chunk of poorly-performing IT's at the bottom of that 5-year-return ranking that have managed to starkly under-perform with high gearing levels as well, although it's worth highlighting that this is a difficult area to properly investigate without knowing granular details around historical levels of gearing over the periods being looked at.

One thing is certain - it's possible to gear up and still invest poorly, in the same way as it's possible to gear up and invest well, but we shouldn't ignore what can turn out to be a highly influential metric on these types of collective-investment options, and especially so when we might be looking to make sector-level calls as part of any investment rotation...

I just wanted to highlight with the above that if the whole Asia Pacific Equity Income sector returns had been relatively poor lately, and the UK Equity Income sector returns had been relatively good, then looking for an investment-rotation option to perhaps capture some level of 'sector-level reversion to mean' might help to influence such a decision, but it was interesting enough to see that broadly, on a current discount basis, as well as when we look at the above 1-year, 5-year, and 10-year sector return figures, there's really not much sector-level disparity there to actually take advantage of, which means that you're really then making a call on specific investment-managers, and it's *that* secondary call that I thought was also worth highlighting with the above information as well, because you're looking to move away from a MRCH manager who's outperformed his sector, and into a HFEL manager who's underperformed his own by quite a margin...

I suppose it's worth asking if you could split this call into two separate ones...

• Sell down some MRCH to take advantage of some recent out-performance

• Invest in some HFEL to take advantage of some recent under-performance

Personally, I think the first call might have some legs, but it's the second one I'd look to justify a little more myself, given the above sector-level figures and HFEL's relatively poor performance within it's own sector...

Cheers,

Itsallaguess

[Arborbridge]

I suppose it's worth asking if you could split this call into two separate ones...

• Sell down some MRCH to take advantage of some recent out-performance

• Invest in some HFEL to take advantage of some recent under-performance

Personally, I think the first call might have some legs, but it's the second one I'd look to justify a little more myself, given the above sector-level figures and HFEL's relatively poor performance within it's own sector...

Cheers,

Itsallaguess

Thanks for this - very deep thoughts! It reminds me of my own questioning at times, based on XIRR. Should I be taking capital from those who always appear near the bottom of my TR table and back the "winners" in the table: or is it better to back a reversion to mean by doing the opposite? I know your answer would be to do further analysis, but I'm much shallower than that, unfortunately

The subject reminds me of some general advice in a book by William O'Neill "How to make money in Stocks" - (very broadly..) it distinguished between pooled investments and individual shares. Buying a pooled invesment when it had been knocked for six was probably a good thing since the management will take that underperformance and make radical changes. With an individual share, it's more likely to go under or get taken over. His approach was, note, from the TA point of view - quite compelling, but not what we are normally concerned with.

[Dod101]

I am not very analytical but I think anyone considering selling some Merchants and buying some HFEL needs to consider whether he is looking at income alone or total return. Since this is a High Yield Board I guess income gets the nod. If so, then how could anyone argue with the proposal? If it is income that is needed first and foremost then there can be no argument.

Investing in HFEL is not a long term solution though, because capital is being steadily eroded, the more so in real terms with inflation where it is. On that basis alone, I would not be buying into HFEL. Without capital there will be no income. Thus for anyone with a long term outlook, HFEL is a poisoned chalice. With a short term outlook and in dire need of income (say for someone in a care home) there might be something to be said for it but I would not want to hold HFEL. I am not that desperate for income.

Dod

[absolutezero]

I am not very analytical but I think anyone considering selling some Merchants and buying some HFEL needs to consider whether he is looking at income alone or total return. Since this is a High Yield Board I guess income gets the nod. If so, then how could anyone argue with the proposal? If it is income that is needed first and foremost then there can be no argument.

Investing in HFEL is not a long term solution though, because capital is being steadily eroded, the more so in real terms with inflation where it is. On that basis alone, I would not be buying into HFEL. Without capital there will be no income. Thus for anyone with a long term outlook, HFEL is a poisoned chalice. With a short term outlook and in dire need of income (say for someone in a care home) there might be something to be said for it but I would not want to hold HFEL. I am not that desperate for income.

Dod

And also don't forget that this income is purely a return of your own money in the form of a dividend, since all else being equal the share price falls by the dividend amount on XD day.
Better to buy things that stand a chance of an increase in price and create your own income by selling shares now and again.
These days, I tend to stick to global/S&P 500 trackers with the odd bit of FTSE 100 thrown in.

[Adamski]

I would have thought Hfel underperformance in total return in 2020-22 would be in part due to the strict Covid lockdown in the FE. Now that China has pivoted away from zero covid, they've had a bull market last 3 months - HFEL up +12.9%.

[Dod101]

I am not very analytical but I think anyone considering selling some Merchants and buying some HFEL needs to consider whether he is looking at income alone or total return. Since this is a High Yield Board I guess income gets the nod. If so, then how could anyone argue with the proposal? If it is income that is needed first and foremost then there can be no argument.

Investing in HFEL is not a long term solution though, because capital is being steadily eroded, the more so in real terms with inflation where it is. On that basis alone, I would not be buying into HFEL. Without capital there will be no income. Thus for anyone with a long term outlook, HFEL is a poisoned chalice. With a short term outlook and in dire need of income (say for someone in a care home) there might be something to be said for it but I would not want to hold HFEL. I am not that desperate for income.

Dod

And also don't forget that this income is purely a return of your own money in the form of a dividend, since all else being equal the share price falls by the dividend amount on XD day.
Better to buy things that stand a chance of an increase in price and create your own income by selling shares now and again.
These days, I tend to stick to global/S&P 500 trackers with the odd bit of FTSE 100 thrown in.

With respect, that argument has been well aired in the not so distant past, and of course is only marginally, if at all, relevant to the current discussion.

Dod

[Itsallaguess]

I would have thought HFEL underperformance in total return in 2020-22 would be in part due to the strict Covid lockdown in the FE.

Now that China has pivoted away from zero covid, they've had a bull market last 3 months - HFEL up +12.9%.

Absolutely, but beyond that near-term influence which is likely to also benefit most IT's that focus on the Asian areas, what might be the explanation for the comparatively poor 5-year and 10-year performance compared to almost all the other Asia Pacific Equity Income listings?

https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=ASI&sortid=SPTR1Y&desc=true

Bottom of the 5-year ranking, and a close 2nd from bottom on the 10-year rankings, and it's those sorts of stand-out peer-related anomalies that always gives me pause for thought with HFEL when I've looked at it in the past, and so even with the COVID trade-related issues hopefully abating in the region, my question would be to ask if there's better income-related collective investments that might also be able to take advantage of that benefit...

Cheers,

Itsallaguess