MDS1951 HYP-ISH Review 2019

[MDS1951]

Here's how my HYP progressed during 2019. I made no purchases with new money and withdrew £3,000 from dividend income. First, a table.



The value of my portfolio increased by £13.9k, an increase of 15.2% and slightly above the increase of 12.1% in the FTSE 100. So I kept pace with the market.

Dividend income increased by 14.7%; however, this includes special dividends from Rio and BHP totalling £266 in 2019. When I exclude these and compare the resulting £4,965 with 2018's dividends of £4,562 the increase in dividend income is 8.8% compared with 2018. I was pleasantly surprised by this. However, for reasons which will become clear, I don't expect my dividend income to exceed £4,800 in 2020.

I had quite a busy year with my portfolio in 2019 occasioned by trimming, the takeover of Greene King, and the disposal of some holdings because I took against them for various reasons. I'll start with the disposals which were:-

Pearson - I completely lost confidence in their Chief Executive who has issued umpteen profit warnings
Persimmon - their issues with shoddy houses, trapping buyers in leasehold properties etc made me feel like a dishonest profiteer
De La Rue - heading for the corporate equivalent of the Knackers Yard
SSE - despite offloading their customer list onto Ovo, I'm not convinced their dividend is sustainable, though I was anxious about Mr Corbyn as well
Reckitt Benckiser - I was worried about possible litigation re opioids in the USA, UK companies never seem able to bring these legal actions to a close

Greene King, as we all know, was taken over

The capital values of these companies within my portfolio seemed to be running away with themselves at somewhat above 1.5 times the value of my median holding, so I decided to trim them while their share prices were still high:-

AstraZeneca
Compass
Relx
Unilever

I had already assumed that the special dividends re Rio and BHP wouldn't be repeated in 2020 so I thought that I would be lucky to break through £5k for dividend income. After I sold my shares in Persimmon I changed that thought to being certain that £5k would be unattainable in 2020, a prediction given added weight by De La Rue's cancellation of its dividend for 2020 (we are in danger of going bust) and the cut in Tui's dividend. The trimmings enhanced future dividend income slightly because those shares were on relatively low yields and the ITs into which I reinvested the proceeds had slightly higher yields.

The components of my portfolio are set out below; I wouldn't buy some of them today because the yields are too low, either because of dividend cuts or capital appreciation. However, at the time of purchase the yield of each holding was either close to or above the FTSE100 average.

AstraZeneca
Aviva
Billiton
BP
British Land
Compass
Diageo
Glaxo
Legal & General
National Grid
Pennon
Relx
Royal Dutch Shell
RTZ
Sainsbury
Tate
TUI
Unilever
United Utilities
Vodafone
Wood Group

City of London IT
Merchants IT
Murray Income IT
Murray International IT
Schroder Income and Capital IT
Temple Bar IT

The ITs accounted for 25.6% of my portfolio (excluding cash) by value and the shares 74.4%. I decided at the end of 2018 that I was fed up with taking decisions over share purchases and that I would farm the decision-making out to IT managers.

The IRR for the portfolio increased from 6.8% to 7.9%.

Some time ago I unitised the portfolio on an accumulation basis and in 2019 the dividend income (including specials) increased by 18.1% on a unit basis. The price per unit increased as well and now is £23.85.

Overall I think my experience for 2019 shows again the value of having a diversified portfolio. I have a small IT portfolio that I might add to in future, and I have posted about its performance in 2019 - here's the link if anybody is interested.

viewtopic.php?f=56&t=21076

Finally, I wish everybody a Happy and Prosperous New Year - and good luck to us all with our investments.

MDS1951

[JoyofBricks8]

Yeah, but an undiversified portfolio is absolutely pants when the profit warnings roll in.

Nothing like looking at a 50%+ drawdown on a holding to persuade one not to put all ones eggs into the same basket.

I am sure it is nice when things go well in a concentrated portfolio but for most people, preservation of hard earned capital is a meaningful factor. Thus diversification is overall a benefit to be sought not a failure to be eschewed.

MDW has beaten inflation and made a return on his investment he is satisfied with at a risk level that he could accept. Looks like success to me?

[MDS1951]

Thank you, Pastcaring, for your comments about my portfolio review.

All I want from my portfolio is for it to provide a dividend income that usually increases each year faster than the rate of CPI inflation, and which over time at least keeps its value after adjusting for inflation. If it manages to do that, then I'm happy. Not smug or thinking how clever I am...............just happy. I'm aware that I won't get very rich with a diversified portfolio, but I like to be able to sleep at night. If I had a highly concentrated portfolio in an attempt to pick winners I'd be so worried about the possibility I had picked losers instead that I wouldn't be able to sleep. Over the last 15 years or so within my diversified portfolio I've had a few losers but the winners have more than compensated for them.

I wish you the best of fortune with your highly concentrated portfolio in 2020 and in future years.

Thank you for your comments as well, JoyofBricks8. Spot on so far as my own investment outlook is concerned. Happy New Year to you.

MDS1951

[johnhemming]

If only we could work out why the rich get richer.

I would hazard a guess that the majority of members of this forum are over 50. Many of those depend on investment income for their quality of life as well as standard of living. It is in my view reasonable to plan to give some certainty that income will be sufficient. On that basis people need a diversified formula. If you balance off on one side the possibility or perhaps a probability of making more cash against the probability of not having enough income to maintain your quality of life/standard of living - the obvious conclusion is the take the safe option of diversification.

Hence I am with MDS1951 on a strategy of not being greedy.

[Itsallaguess]

For myself I never bother looking, no point at all in it.

However companies I do own in a very concentrated portfolio, the company I highlighted MQG up a nice 34.7% for the year.

Unbelievably to most people, 34.7% of a reasonably large amount of money is a large amount of money.

Who could be silly enough to believe put a lot of eggs in a few baskets the returns can be huge.

The crowd have said put one egg in many many baskets, who would be silly enough to doubt it .

Who could possibly question the deep conviction they have that the delusions they have created are real.

It's at this point that I always like to link to this Wikipedia article -

Survivorship bias -

Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias.

Survivorship bias can lead to overly optimistic beliefs because failures are ignored, such as when companies that no longer exist are excluded from analyses of financial performance. It can also lead to the false belief that the successes in a group have some special property, rather than just coincidence (correlation proves causality).

[An] example of a distinct mode of survivorship bias would be thinking that an incident was not as dangerous as it was because everyone you communicate with afterwards survived. Even if you knew that some people are dead, they wouldn't have their voice to add to the conversation, leading to bias in the conversation.

https://en.wikipedia.org/wiki/Survivorship_bias

Highly concentrated portfolios that do well are things we hear about whilst they are doing well.

We don't tend to hear too much about them after they fail to do well.

This is a form of Survivorship bias....

Cheers,

Itsallaguess

[tjh290633]

I think that Pastcaring is looking through his Australian glasses and sees things upside down.

I just hope that his over-reliance on a few large companies doesn't bite him in his antipodes.

TJH

[richfool]

A diversified portfolio will make people better off than if they did nothing,that is all it will do.

Sounds good to me.

[Bagger46]

Like some here I think very concentrated portfolios are full of dangers, we would never attempt the 'pastcaring' approach. Over our three portfolios, two ISAs and my taxed portfolio, we hold a mixture of ITs and individual holdings. The ITs, including Berkshire which we count as an 'IT', make up 46.2% of our market wealth. We are, however very much more diversified in markets and caps reach, with substantially better returns, even in our HYish ISAs as a result. But we never will be in 'pastcaring' class in return terms, although we are passed caring.

A nicely set out OP imho. I don't fully agree with some of the maths (but maybe I don't understand the table, although it is very clearly set out I think). But the OP has definitely overperformed the FTSE in 2019.

An interesting discussion developing on diversification.

The OPs portfolio can be considered hyper diversified in FTSE terms, since much of his holdings, in particular that collection of ITs, fish in the same pond. In fact an estimated XIRR since end of 2014, since we do not have his portfolio value end 2013, assuming income taken at mid year, shows that the OPs portfolio has slightly underperformed the FTSE XIRR 7% return over that period.

It can, however, be considered very under diversified in global markets and aspects terms.

It is very easy to build a small portfolio of ITs, very much more diversified in aspects and reach, with an overall income aim, which would have imho much better long term prospects. Here is an example I knocked up quickly, not any kind of recommendation, but it would produce at least, equal weighted, around £5,772 of income, in 2020 on the OPs current capital, and overall divi CAGR would not disappoint in the future imho. I very much doubt it would underperform the FTSE over a few years forward view.

IPU
LWI
MRCH
HFEL
EAT
MYI
NCYF
RECI
BRNA
IBT

Before purists object, yes, there are three here who produce divis from capital, thus will indeed fluctuate their income, but they are three very uncorrelated investments, and the only thing which matters is the overall picture.

Not any recommendation, DYOR, many other such combinations could be produced.

Bagger

PS In terms of income I have assumed that EAT will pay, as per current policy, 6% of end 2019 NAV. We do hold all the ITs in my list across our three portfolios, among many more holdings.

[MDS1951]

Thank you for your comments, Bagger46. May I home in on just one of them, please?

It can, however, be considered very under diversified in global markets and aspects terms.

I came to a similar conclusion about global diversification when I completed my purchases of the IT portfolio (not the ITs in this portfolio), so I began investing monthly my state pension equally in 3 unit trusts - FTSE250 companies, European companies, and global. In 2018 my mother died and, as I knew some money was coming, I began investing monthly in more unit trusts covering North America, East Asia and Australasia (excluding Japan), and a second global unit trust. The separate IT portfolio and UTs are all with Interactive Investor and right now the spread of investment there is something like 50% UK, 20% Europe, 18% North America and 10% East Asia and Australasia. I know there is some way to go to increase my rest of world diversification, but I am doing something about it; I'm now able to invest up to the annual ISA limit for the next few years.

So far as the UTs are concerned 4 are trackers and 4 are actively managed.

Sorry about wandering away from the original topic, but I thought I should reply to that point.

MDS1951

[Wasron]

Thank you for your comments, Bagger46. May I home in on just one of them, please?

It can, however, be considered very under diversified in global markets and aspects terms.

I came to a similar conclusion about global diversification when I completed my purchases of the IT portfolio (not the ITs in this portfolio), so I began investing monthly my state pension equally in 3 unit trusts - FTSE250 companies, European companies, and global. In 2018 my mother died and, as I knew some money was coming, I began investing monthly in more unit trusts covering North America, East Asia and Australasia (excluding Japan), and a second global unit trust. The separate IT portfolio and UTs are all with Interactive Investor and right now the spread of investment there is something like 50% UK, 20% Europe, 18% North America and 10% East Asia and Australasia. I know there is some way to go to increase my rest of world diversification, but I am doing something about it; I'm now able to invest up to the annual ISA limit for the next few years.

So far as the UTs are concerned 4 are trackers and 4 are actively managed.

Sorry about wandering away from the original topic, but I thought I should reply to that point.

MDS1951

I thought I was globally diversified until I used the portfolio x-ray tool over Xmas which put my SIPP at 55% UK.

I’m not sure how it treats global companies like Unilever or Shell, but it’s certainly highlighted something I’ll be looking to address with top ups over the next year or two.

You’re not alone.

Wasron

[kempiejon]

I thought I was globally diversified until I used the portfolio x-ray tool over Xmas which put my SIPP at 55% UK.I’m not sure how it treats global companies like Unilever or Shell, but it’s certainly highlighted something I’ll be looking to address with top ups over the next year or two.You’re not alone

My SIPP is intentionally exUK, I use Vanguard ETFs to focus on emerging markets, Asia, USA, Europe etc. My ISAs are HYP so I thought it sensible to get globally diversified and I thought collectives the easy way.