HYP1 is 23 - Total Return

[Itsallaguess]

There are a number of posters perfectly happy to point out that the portfolio becomes too unbalanced, some shares wither away, it's too UK-centric and, because of factors such as these, it's an overly risky approach.

But there is never any rigorous analysis or quantification of this risk. It's rarely based on the industry standard of volatility and seems to be more in the gut-feel camp or simply 'looks too risky to me'.

I agree that it's difficult to talk about 'risk' sometimes, as we all have views and definitions that may not align with everyone else.

To help get around that, here's one of Pyad's own HYP-focussed risk-definitions, in his own words, from a 2005 article titled 'How To Pick A High Yield Portfolio' -


The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm


Out of the 18 current HYP1 holdings, 58% of income now comes from just 3 sectoral holdings, and 76% of income comes from 6 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629797

Looking at capital, out of the 18 current HYP1 holdings, 58% of capital is now held within just 4 sectoral holdings, with nearly 78% of capital held within 7 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629855


Given the above two risk-based comments in that 'How To Pick A High Yield Portfolio' article, it seems to me that we need look no further for what people mean by 'risk' in this particular context, as not only has HYP1 proved beyond all doubt that a completely hands-off HYP portfolio is never likely to maintain it's own 'critical feature' of sectoral-diversity, he even then goes on, with that second line quoted above, to provide as clear an explanation as we're likely to see as to why HYP1 has been able to deliver such high income and capital returns...

Because it's been doing so at risk for such a long time by 'concentrating on certain sectors', as clearly acknowledged in that 2005 article...

Cheers,

Itsallaguess

[Bubblesofearth]

I agree that it's difficult to talk about 'risk' sometimes, as we all have views and definitions that may not align with everyone else.

To help get around that, here's one of Pyad's own HYP-focussed risk-definitions, in his own words, from a 2005 article titled 'How To Pick A High Yield Portfolio' -


The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm


Out of the 18 current HYP1 holdings, 58% of income now comes from just 3 sectoral holdings, and 76% of income comes from 6 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629797

Looking at capital, out of the 18 current HYP1 holdings, 58% of capital is now held within just 4 sectoral holdings, with nearly 78% of capital held within 7 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629855


Given the above two risk-based comments in that 'How To Pick A High Yield Portfolio' article, it seems to me that we need look no further for what people mean by 'risk' in this particular context, as not only has HYP1 proved beyond all doubt that a completely hands-off HYP portfolio is never likely to maintain it's own 'critical feature' of sectoral-diversity, he even then goes on, with that second line quoted above, to provide as clear an explanation as we're likely to see as to why HYP1 has been able to deliver such high income and capital returns...

Because it's been doing so at risk for such a long time by 'concentrating on certain sectors', as clearly acknowledged in that 2005 article...

Cheers,

Itsallaguess

The whole point of sectoral and share diversification on purchase is an acknowledgement that you don't know where the big winners are going to come from that will drive portfolio growth. All portfolios, as well as whole markets , evolve this way. As I've pointed out repeatedly on these boards, markets are asymmetric. Growth of both capital and dividends comes from a relatively small number of components. Leave them alone to do their thing. If the changes in weighting worry you then don't look. Emulate Doris.

BoE

[Itsallaguess]

I agree that it's difficult to talk about 'risk' sometimes, as we all have views and definitions that may not align with everyone else.

To help get around that, here's one of Pyad's own HYP-focussed risk-definitions, in his own words, from a 2005 article titled 'How To Pick A High Yield Portfolio' -


The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm


Out of the 18 current HYP1 holdings, 58% of income now comes from just 3 sectoral holdings, and 76% of income comes from 6 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629797

Looking at capital, out of the 18 current HYP1 holdings, 58% of capital is now held within just 4 sectoral holdings, with nearly 78% of capital held within 7 of the 18 - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=41460#p629855


Given the above two risk-based comments in that 'How To Pick A High Yield Portfolio' article, it seems to me that we need look no further for what people mean by 'risk' in this particular context, as not only has HYP1 proved beyond all doubt that a completely hands-off HYP portfolio is never likely to maintain it's own 'critical feature' of sectoral-diversity, he even then goes on, with that second line quoted above, to provide as clear an explanation as we're likely to see as to why HYP1 has been able to deliver such high income and capital returns...

Because it's been doing so at risk for such a long time by 'concentrating on certain sectors', as clearly acknowledged in that 2005 article...

The whole point of sectoral and share diversification on purchase is an acknowledgement that you don't know where the big winners are going to come from that will drive portfolio growth.

All portfolios, as well as whole markets , evolve this way. As I've pointed out repeatedly on these boards, markets are asymmetric.

Growth of both capital and dividends comes from a relatively small number of components. Leave them alone to do their thing. If the changes in weighting worry you then don't look. Emulate Doris.

You complained earlier that others were talking about 'risk' with regards to HYP1, without actually defining what they meant by the word.

I've given you two clear risk-based statements from Pyad himself, where he clearly and specifically talks about the 'critical feature' of wide sectoral diversity, and then also goes on to clearly state that 'higher yield[s] could be obtained by concentrating on certain sectors like utilities for example, [but] the risks to the capital and income would be too high' if an income-investor were to do so.

Your statement that 'The whole point of sectoral and share diversification on purchase is an acknowledgement that you don't know where the big winners are going to come from that will drive portfolio growth', is one that bears no relation at all to the absolutely clear sectoral-diversity safety-aspects of the two risk-based statements by Pyad that I've provided from one of his HYP articles -

The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm

If what you're now saying in response is that it was *inevitable* that those two important safety-related aspects of the original HYP idea were going to very quickly and irretrievably disappear in a very short space of time, which as we know is exactly what happened, then I'm happy to leave it there and allow readers to consider those clear and unambiguous risk-based statements in the HYP sales-pitch above, when set against what you consider to be the inevitable reality that anyone following such a 'safe and diversified' process would quickly see occurring with a similar hands-off HYP...

Cheers,

Itsallaguess

[Bubblesofearth]

You complained earlier that others were talking about 'risk' with regards to HYP1, without actually defining what they meant by the word.

I've given you two clear risk-based statements from Pyad himself, where he clearly and specifically talks about the 'critical feature' of wide sectoral diversity, and then also goes on to clearly state that 'higher yield[s] could be obtained by concentrating on certain sectors like utilities for example, [but] the risks to the capital and income would be too high' if an income-investor were to do so.

Your statement that 'The whole point of sectoral and share diversification on purchase is an acknowledgement that you don't know where the big winners are going to come from that will drive portfolio growth', is one that bears no relation at all to the absolutely clear sectoral-diversity safety-aspects of the two risk-based statements by Pyad that I've provided from one of his HYP articles -

The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm

If what you're now saying in response is that it was *inevitable* that those two important safety-related aspects of the original HYP idea were going to very quickly and irretrievably disappear in a very short space of time, which as we know is exactly what happened, then I'm happy to leave it there and allow readers to consider those clear and unambiguous risk-based statements in the HYP sales-pitch above, when set against what you consider to be the inevitable reality that anyone following such a 'safe and diversified' process would quickly see occurring with a similar hands-off HYP...

Cheers,

Itsallaguess

The statements from PYAD apply to the selection criteria on purchase. They were not AFAIA applied to the post-purchase portfolio. Neither should they be because if you apply them in that way you defeat the very objective of allowing the portfolio to evolve in the manner I described.

This may be where our opinions differ?

BoE

[Itsallaguess]

The statements from PYAD apply to the selection criteria on purchase. They were not AFAIA applied to the post-purchase portfolio.

Neither should they be because if you apply them in that way you defeat the very objective of allowing the portfolio to evolve in the manner I described.

This may be where our opinions differ?

Just to be clear then...

You think that HYP1 is not risky because all that's happened is the natural and expected 'evolution' of an income portfolio. It was simply inevitable, and HYP1 should be lauded for simply 'findings it's winners'...

Does that mean that you'd consider something like Terry's HYP, where he continues to self-manage a very good and broad level of sectoral-diversity into his HYP, to be going 'against' that 'natural evolution', and presumably *introducing* risk by doing so?

Cheers,

Itsallaguess

[Bubblesofearth]

Just to be clear then...

You think that HYP1 is not risky because all that's happened is the natural and expected 'evolution' of an income portfolio. It was simply inevitable, and HYP1 should be lauded for simply 'findings it's winners'...

Does that mean that you'd consider something like Terry's HYP, where he continues to self-manage a very good and broad level of sectoral-diversity into his HYP, to be going 'against' that 'natural evolution', and presumably *introducing* risk by doing so?

Cheers,

Itsallaguess

I don't think the risk inherent in HYP1 to my initial investment (i.e. the money I was prepared to risk) has increased.

Terry has introduced the risk of missing out on the full benefit of the emergence of big winners in his portfolio. He has also introduced new (transaction) costs. These are in the order of 1% of the trade value each time.

BoE

[tjh290633]

Just to be clear then...

You think that HYP1 is not risky because all that's happened is the natural and expected 'evolution' of an income portfolio. It was simply inevitable, and HYP1 should be lauded for simply 'findings it's winners'...

Does that mean that you'd consider something like Terry's HYP, where he continues to self-manage a very good and broad level of sectoral-diversity into his HYP, to be going 'against' that 'natural evolution', and presumably *introducing* risk by doing so?

Cheers,

Itsallaguess

I don't think the risk inherent in HYP1 to my initial investment (i.e. the money I was prepared to risk) has increased.

Terry has introduced the risk of missing out on the full benefit of the emergence of big winners in his portfolio. He has also introduced new (transaction) costs. These are in the order of 1% of the trade value each time.

BoE

I may miss the full benefit of a big winner, but I do have the opportunity to trim growing holdings repeatedly and, in fact, have done so a number of times with some holdings, to the extent that their average cost has become negative.

There is also the fact that, with each trimming and reinvestment the yield on that chunk of capital is increased, possibly as much as threefold or more.

It is not unknown for an erstwhile high flier to suddenly stop rising like a rocket and begin falling like the stick. Marconi was a typical example.

You raise the cost of transactions. They may be 0.5% for purchases in stamp duty, plus a fixed transaction fee. However in terms of both capital value and income they are de minimis. Somewhere I have published the costs, including management fees, for my portfolio. They are a very small percentage.

TJH

[Arborbridge]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years. I realise that Pyad has an idealogy - that in time the risks will balance out because company percentages rise and fall. They do, and HYP1 has seen that happen over the long term.

HYP1, of course, has a free pass in this respect as it was set up to prove a point about not tinkering, but in my case I do not like the idea of re-balancing occurring at such a slow and uncontrolled pace so I prefer to intervene.

I acknowledge that I might also pass up the benefit which has been spoken about - the advancement of companies doing particularly well compared with their fellows.

All a bit confusing: which is better? Take advantage of the increasing influence of winners, or keep the risk spread more evenly by keeping the variation in company holding within some bounds? What Terry and I do certainly keeps the balance within bounds, but one might also criticise it for backing losers and not winners as regards capital growth.

Arb.

[GoSeigen]

I haven't been following the thread(s); if this has already been covered please just post a link, but has anyone tried to estimate what HYP1's value would have been today had dividends been reinvested?

This is for purposes of comparing with the returns from my ISAs over the same period which have only had withdrawals in later years.


Thanks,

GS

[Itsallaguess]

Just to be clear then...

You think that HYP1 is not risky because all that's happened is the natural and expected 'evolution' of an income portfolio. It was simply inevitable, and HYP1 should be lauded for simply 'findings it's winners'...

I don't think the risk inherent in HYP1 to my initial investment (i.e. the money I was prepared to risk) has increased.

That's looking at 'risk' with a specific eye only on the input capital though, and I'm not sure that any of the people that you're looking to engage with on this thread that might consider HYP1 to be 'too risky' would be coming to their arguments with initial-capital in mind at all, because as far as I can see, any detractors are keeping in mind the strategic-intent of a safe and diversified income-stream as their primary focus when discussing that 'risk'...

And surely the two risk-based lines that I've quoted repeatedly from Pyad in earlier posts are looking at risk in terms of the output as well -

The most critical feature of HYP share selection is sector diversification in order to spread the risks around different industries.

Although a higher yield could be obtained by concentrating on certain sectors like utilities for example, the risks to the capital and income would be too high.

https://web.archive.org/web/20160609102814/http://news.fool.co.uk//valueinvesting/2005/vi050304.htm

I fail to see how the rapid evolution of HYP1 to a highly-focussed ongoing state of very low sectoral-diversification is compatible with either of those original risk-based statements...

Does that mean that you'd consider something like Terry's HYP, where he continues to self-manage a very good and broad level of sectoral-diversity into his HYP, to be going 'against' that 'natural evolution', and presumably *introducing* risk by doing so?

Terry has introduced the risk of missing out on the full benefit of the emergence of big winners in his portfolio. He has also introduced new (transaction) costs. These are in the order of 1% of the trade value each time.

Well, I think it's instructive that a risk-based discussion like this can expose us to such a topsy-turvy Alice-in-Wonder world, where an income-investor looking to produce a lower-risk, steady and growing dividend-stream to supplement their retirement income can do that by following the HYP1 'hands-off' process, which is considered by some to be lower risk than looking to self-manage their income-portfolios in a manner which might replicate Terry's long-term and enviable results of maintaining a much more balanced company and sectoral spread...

Cheers,

Itsallaguess

[Bubblesofearth]

I may miss the full benefit of a big winner, but I do have the opportunity to trim growing holdings repeatedly and, in fact, have done so a number of times with some holdings, to the extent that their average cost has become negative.

There is also the fact that, with each trimming and reinvestment the yield on that chunk of capital is increased, possibly as much as threefold or more.

It is not unknown for an erstwhile high flier to suddenly stop rising like a rocket and begin falling like the stick. Marconi was a typical example.

You raise the cost of transactions. They may be 0.5% for purchases in stamp duty, plus a fixed transaction fee. However in terms of both capital value and income they are de minimis. Somewhere I have published the costs, including management fees, for my portfolio. They are a very small percentage.

TJH

Not sure what you mean by costs becoming negative?

Stamp duty, transaction fees and buy/sell spread will typically sum to around 1% for big-caps, more for small-caps. The benefit to your portfolio from these transactions will only apply to the actual shares being traded. It's therefore misleading to calculate the percentage as a fraction of your whole portfolio.

BoE

[Alaric]

I but has anyone tried to estimate what HYP1's value would have been today had dividends been reinvested?

I believe they have, but that in itself opens up another avenue for debate, namely where the dividends should be considered to have been reinvested.

[kempiejon]

I haven't been following the thread(s); if this has already been covered please just post a link, but has anyone tried to estimate what HYP1's value would have been today had dividends been reinvested?

This is for purposes of comparing with the returns from my ISAs over the same period which have only had withdrawals in later years.


Thanks,

GS

Yes, in fact it was fairly recently updated, it's retrospective experiment mind.
https://lemonfool.co.uk/viewtopic.php?f=15&t=28104

[GoSeigen]

Yes, in fact it was fairly recently updated, it's retrospective experiment mind.
https://lemonfool.co.uk/viewtopic.php?f=15&t=28104

Thank you, exactly what I was looking for, and RIP Gengulphus, it's two years this month IIANM.

GS

[daveh]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years. I realise that Pyad has an idealogy - that in time the risks will balance out because company percentages rise and fall. They do, and HYP1 has seen that happen over the long term.

HYP1, of course, has a free pass in this respect as it was set up to prove a point about not tinkering, but in my case I do not like the idea of re-balancing occurring at such a slow and uncontrolled pace so I prefer to intervene.

I acknowledge that I might also pass up the benefit which has been spoken about - the advancement of companies doing particularly well compared with their fellows.

All a bit confusing: which is better? Take advantage of the increasing influence of winners, or keep the risk spread more evenly by keeping the variation in company holding within some bounds? What Terry and I do certainly keeps the balance within bounds, but one might also criticise it for backing losers and not winners as regards capital growth.

Arb.

Well Terry seems to have done better than me with my HYPish portfolio. I do rebalance as I'm adding new money and reinvesting dividends and I have occasionally chopped back shares that have done particularly well. But I'm less organised than Terry in chopping back above a fixed % of the portfolio, I tend to let my winners run longer (which means some like PSN have fallen back from highs that could have been locked in if I was more strictly rules based). I also don't always top up the share at the top of HYPTUSS (eg I've been avoiding topping up VOD for a while).

MY XIRR is only 6.99%pa since inception and I recall Terry's is in the high 9%

[kempiejon]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years. I realise that Pyad has an idealogy - that in time the risks will balance out because company percentages rise and fall. They do, and HYP1 has seen that happen over the long term.

HYP1, of course, has a free pass in this respect as it was set up to prove a point about not tinkering, but in my case I do not like the idea of re-balancing occurring at such a slow and uncontrolled pace so I prefer to intervene.

As we acknowledge and appreciate HYP1 is that non-tinkered experiment but there have been possible branches in that history. I'm fairly sure that at times of corporate activity in HYP1's past pyad applied rules that were not laid out at inception, wasn't it proceeds from returns of capital invested back into the donor shares and take overs applied all in to a single replacement pick? Imbalances like we see today might still come about but more even redirections of corporate trading would have changed the outcome.

[tjh290633]

I may miss the full benefit of a big winner, but I do have the opportunity to trim growing holdings repeatedly and, in fact, have done so a number of times with some holdings, to the extent that their average cost has become negative.

There is also the fact that, with each trimming and reinvestment the yield on that chunk of capital is increased, possibly as much as threefold or more.

It is not unknown for an erstwhile high flier to suddenly stop rising like a rocket and begin falling like the stick. Marconi was a typical example.

You raise the cost of transactions. They may be 0.5% for purchases in stamp duty, plus a fixed transaction fee. However in terms of both capital value and income they are de minimis. Somewhere I have published the costs, including management fees, for my portfolio. They are a very small percentage.

TJH

Not sure what you mean by costs becoming negative?

Stamp duty, transaction fees and buy/sell spread will typically sum to around 1% for big-caps, more for small-caps. The benefit to your portfolio from these transactions will only apply to the actual shares being traded. It's therefore misleading to calculate the percentage as a fraction of your whole portfolio.

BoE

Quite simple. When you trim a holding, the cash realized is deducted from the cost of the holding, just as when you add to a holding the cost of the extra shares is added to the cost of the holding. The HMRC has a different view, which is that the cost per share remains the same after a part disposal.

The first method will lead to a negative cost once you have realized more than the holding cost. The second can lead to a negative cost if the company returns cash to the holder by a special dividend and consolidation, or by a return of capital.

The cost of buying and selling shares includes stamp duty if buying and transaction fee in any case. The latter is fixed, or may be zero in some circumstances. It is part of the consideration paid, or the cash received, in a transaction. You cannot avoid these costs, so why worry about them?

TJH

[tjh290633]

I've never seen eye to eye with Pyad on the "balance" question. It seems to me that if equal weight is a Good Thing at the start, then it must be the same after a number of years. I realise that Pyad has an idealogy - that in time the risks will balance out because company percentages rise and fall. They do, and HYP1 has seen that happen over the long term.

HYP1, of course, has a free pass in this respect as it was set up to prove a point about not tinkering, but in my case I do not like the idea of re-balancing occurring at such a slow and uncontrolled pace so I prefer to intervene.

I acknowledge that I might also pass up the benefit which has been spoken about - the advancement of companies doing particularly well compared with their fellows.

All a bit confusing: which is better? Take advantage of the increasing influence of winners, or keep the risk spread more evenly by keeping the variation in company holding within some bounds? What Terry and I do certainly keeps the balance within bounds, but one might also criticise it for backing losers and not winners as regards capital growth.

Arb.

Well Terry seems to have done better than me with my HYPish portfolio. I do rebalance as I'm adding new money and reinvesting dividends and I have occasionally chopped back shares that have done particularly well. But I'm less organised than Terry in chopping back above a fixed % of the portfolio, I tend to let my winners run longer (which means some like PSN have fallen back from highs that could have been locked in if I was more strictly rules based). I also don't always top up the share at the top of HYPTUSS (eg I've been avoiding topping up VOD for a while).

MY XIRR is only 6.99%pa since inception and I recall Terry's is in the high 9%

Mine is currently over 9%, but at the turn of the century it was about 13%. It obviously varies with starting points. Those figures are from 1987.

TJH

[daveh]

Well Terry seems to have done better than me with my HYPish portfolio. I do rebalance as I'm adding new money and reinvesting dividends and I have occasionally chopped back shares that have done particularly well. But I'm less organised than Terry in chopping back above a fixed % of the portfolio, I tend to let my winners run longer (which means some like PSN have fallen back from highs that could have been locked in if I was more strictly rules based). I also don't always top up the share at the top of HYPTUSS (eg I've been avoiding topping up VOD for a while).

MY XIRR is only 6.99%pa since inception and I recall Terry's is in the high 9%

Mine is currently over 9%, but at the turn of the century it was about 13%. It obviously varies with starting points. Those figures are from 1987.

TJH

I sort of started in 97 with a demutualisation purchase of Norwich Union, but only really started the HYP in 2000 with purchases of SCTN, IVYS and LLOY. My XIRR was also much better in ~2000 at about 9% (I haven't kept a record of how the XIRR has varied with time). Looks like my performance is mirroring yours, but 3-4 percentage points to the poorer.

[Arborbridge]

Mine is currently over 9%, but at the turn of the century it was about 13%. It obviously varies with starting points. Those figures are from 1987.

TJH

I sort of started in 97 with a demutualisation purchase of Norwich Union, but only really started the HYP in 2000 with purchases of SCTN, IVYS and LLOY. My XIRR was also much better in ~2000 at about 9% (I haven't kept a record of how the XIRR has varied with time). Looks like my performance is mirroring yours, but 3-4 percentage points to the poorer.

Compared with mine, yours is a Rolls Royce! My XIRR is 5.34 to the end of November from August 2006.