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Total Return vs other performance measures?

A helpful place to also put any annual reports etc, of your own portfolios
dealtn
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Re: Total Return vs other performance measures?

#433466

Postby dealtn » August 9th, 2021, 1:26 pm

mc2fool wrote:
dealtn wrote:
mc2fool wrote:Funny, I always thought that in the end what mattered was if your investments were meeting your goals ... giving you enough to live off of, or leaving a big chunk to your beneficiaries, etc, you know, that sort of thing ... :D

Giving you enough to (currently) live off isn't that great a measure of how you will do so in the future though is it? In the end is that important, or not? I would think most would think it was important.

Yes, I of course agree, but my comment wasn't restricted to just the present. ;)


I think it highlights the importance of what (and how) you measure though. (And more broadly how you think about investing).

I think it much more important to look at total return than dividend income. Or if income was the preferred measure then it is income at the (portfolio of) company level, not the distribution to shareholders. Company Income, or cash flow, is more important (and less subject to Director influence in the short term) than dividend declarations.

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Re: Total Return vs other performance measures?

#433468

Postby Urbandreamer » August 9th, 2021, 1:40 pm

Newroad wrote:Hi Mc2Fool.

No, my original post was trying to figure out why people weren't simply focused on {net} total return as a measurement.

Yes, some of the reasons posited why not may relate to methodologic preference, but that didn't (and still doesn't) change the underlying question being asked.

Regards, Newroad


Given recent entertainment, it's not much good measuring how fast you sprint if diving is what you do. Indeed if sprint speed is what you measure, surely even sprinters underperform those who ride horses. Horses however are not much good at climbing walls.

If you have chosen a wealth preservation methadology, it may be easier to measure total return, but does it actually tell you how well you are achieving your desires/goals? I personally would argue that a wealth preservation IT that has high total return, but significant periods of negative returns was doing far from well. One that has few or no periods of negative return but low total return might be considered to be doing well. The likes of Ruffer expressly state that to be what they are trying to achieve.

My methadology could be described as growth & income, but currently run as an accumulation fund. If I compare my return against a global total return index I underperform. If I compare against the FTSE 100 or all-share then I outperform (neither index takes account of dividends so only growth/decline is measured).
Picking a benchmark to compare against isn't easy.
Especially because of the reason that I chose that methadology. In a couple of years it will be run as a income fund, as it will provide the money that I need to live on. The yield per year will become very important and the growth/decline in the capital less so.

I actually attempt to produce three figures, XIRR based upon the total return, XIRR based upon the return less all income and anual income. It could be argued that I should also attempt to produce a figure showing the rate of increase of income, but the fact that I'm adding to the pot and changing the investments makes that too difficult to do.

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Re: Total Return vs other performance measures?

#433470

Postby dealtn » August 9th, 2021, 1:51 pm

Urbandreamer wrote:
If I compare against the FTSE 100 or all-share then I outperform (neither index takes account of dividends so only growth/decline is measured).
Picking a benchmark to compare against isn't easy.


You can get total return indices for the FTSE100 and FTSE All Share though.

Urbandreamer wrote:The yield per year will become very important and the growth/decline in the capital less so.



Well there is plenty of scope below "very important" for something to still be important enough for it to be measured. That "growth/decline in the capital" is about as good a predictive measure of your future "very important" current income as you are likely to have.

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Re: Total Return vs other performance measures?

#433475

Postby Newroad » August 9th, 2021, 2:46 pm

Hi UrbanDreamer.

I think which benchmark is a red herring. Pick one that more or less suits, e.g. FTSE 100 and report relative to it (in Total Return terms) - others can do the same. If others who have a different methodology perform better, then we ask the question "Why?".

On wealth preservation, that relates to risk - and I gave a nod to that in the original post. I've also tried to discuss it here, with varying degrees of success: https://www.lemonfool.co.uk/viewtopic.php?f=56&t=30599. Whilst I do regard risk as very relevant, it would likely send this thread down a further set of rabbit holes IMO - but if you want to try and add it in, go ahead :)

One of your statements below is at the crux of the discussion. You write

"In a couple of years it will be run as a income fund, as it will provide the money that I need to live on. The yield per year will become very important and the growth/decline in the capital less so."

This is the bit I (and some others) don't understand - and I'm trying to figure out if I'm missing something, other than, as we've discussed today, methodologic preference etc. To take the example of some, do those with wholly or predominantly (say) UK High Yield portfolios have them predominantly because

1. Of methodologic preference, or
2. They believe they'll outperform (in total return terms) the main alternative options, e.g. Lifestyle 60/40 or 100% global equity or 100% UK equity or whatever?

Regards, Newroad

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Re: Total Return vs other performance measures?

#433485

Postby mc2fool » August 9th, 2021, 3:41 pm

Urbandreamer wrote:In a couple of years it will be run as a income fund, as it will provide the money that I need to live on. The yield per year will become very important and the growth/decline in the capital less so.

Actually I suggest to you that it's the dividends per year that will then become very important to you, not the yield. The yield is in part a derivative of the capital values and will go up and down with them, and so become similarly less important.

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Re: Total Return vs other performance measures?

#433489

Postby Urbandreamer » August 9th, 2021, 3:51 pm

mc2fool wrote:Actually I suggest to you that it's the dividends per year that will then become very important to you, not the yield. The yield is in part a derivative of the capital values and will go up and down with them, and so become similarly less important.


Yield per year need not be expressed as a percentage, while dividends per year MUST come from equities.

Newroad wrote:One of your statements below is at the crux of the discussion. You write

"In a couple of years it will be run as a income fund, as it will provide the money that I need to live on. The yield per year will become very important and the growth/decline in the capital less so."

This is the bit I (and some others) don't understand - and I'm trying to figure out if I'm missing something, other than, as we've discussed today, methodologic preference etc. To take the example of some, do those with wholly or predominantly (say) UK High Yield portfolios have them predominantly because

1. Of methodologic preference, or
2. They believe they'll outperform (in total return terms) the main alternative options, e.g. Lifestyle 60/40 or 100% global equity or 100% UK equity or whatever?

Regards, Newroad


I think that the problem is differing mindsets, ages and experiences.

HYP in particular is from another time. Many who follow the method were introduced to it in 2000. The "Pension Freedom" legislation wasn't introduced until 2015. Before then if you had a "personal pension" (a DC Scheme) you were normally REQUIRED to buy an annuety. Negative total returns!
Piad (S Bland), argued that a collection of high yielding, blue chip firms (usually UK listed) would outperform an annuety with no more effort.
UK listing had the advantage that it was easier to buy such firms than the likes of Nestle.

I'm not going to debate the merits of the methology save to say that I once followed it and now desire a significant growth component to my own portfolio. The difference in life expectance of a man retireing at state retirment age in 2000 to 2030 is marked. I feel that the increase in retirement years means that a growth rate that at least keeps pace with inflation is required. I refuse to speculate why others have not changed their minds.

The 60/40 portfolio also dates from a different time. Modern porfolio theory dates to the 50's and was developed in the USA. Historically it has worked quite well for decades, but there are serious questions about if it is working well now or will do so in the future.

Should we all be 100% in equities? Well it depends upon what you mean by "equities" doesn't it. I have shares in companies that produce almost everything under the sun and others that offer services hard to do without. I'm almost 100% equities, but both my income and capital value was seriously impacted by Covid. I can understand those who argue the benefits of the 60/40 portfolio, or others who argue that it should be levened with gold or cryptocurrency.

As for adopting a method that has reduced total returns. People need to eat. If the income falls below a certain point cash must be realised by sacrificing capital. It's quite likely that this may happen when the price of the underlying asset is heavily discounted. Many companies have restored the dividends that they cut in the early stages of the pandemic, but if you needed that income back then, well their share prices were cheap. I was luck to be on the buying side at that point. The "reduced returns" method could be cash in the bank, 40/60 split, equity + gold, or more dividends than you can spend it really doesn't matter does it. The point is to reduce the risk of being a forced seller.

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Re: Total Return vs other performance measures?

#433497

Postby mc2fool » August 9th, 2021, 4:26 pm

Urbandreamer wrote:
mc2fool wrote:
Urbandreamer wrote:In a couple of years it will be run as a income fund, as it will provide the money that I need to live on. The yield per year will become very important and the growth/decline in the capital less so.

Actually I suggest to you that it's the dividends per year that will then become very important to you, not the yield. The yield is in part a derivative of the capital values and will go up and down with them, and so become similarly less important.

Yield per year need not be expressed as a percentage, while dividends per year MUST come from equities.

Indeed yield need not, but if you're talking about yield in terms of bushels of corn, gallons of moonshine, £ of income or some other absolute measure may I suggest that either be explicit about that or you don't use the word yield, as on these boards it leads folks to instantly think of it as % dividends over share price. :D

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Re: Total Return vs other performance measures?

#433504

Postby tjh290633 » August 9th, 2021, 4:54 pm

I follow all these arguments, but none of them explain why the FTSE350HY TR index has a higher value than the FTSE350LY TR index.

Certainly the IRR of a portfolio or share is a measure of its total return. If you are looking at the amount of dividends being produced, then one is usually interested in the comparison with inflation, using RPI or CPI as the comparator. If your interest is in the natural yield of dividends, then the monetary amount of dividends produced is the factor of interest.

Looking back at the sudden shocks to share prices over the years, some showed a very rapid recovery in prices and virtually no change in dividend values, while others (e.g. 2008 and 2020) showed considerable drops in dividends which were slower to recover than prices.

I calculate the total return of my portfolio on both "income units" and "accumulation units". The portfolio cash flow is identical in both cases, and so the IRRs are identical (9.60% since April 1987). The values of the units and the dividend per unit varies in the two cases. (as of Friday 6th August 2021, Income unit value= £6.40, dividend/unit=34.90p; Accumulation Unit value=£31.17, dividend/unit= £1.62) The monetary value of the dividends remains the same, as does the yield.

I am at liberty to use whichever measure of performance I choose. My interest is income generation primarily, although capital value is also of interest. Over the years I found that investing for income gave me a better result than aiming for total return. The two indices mentioned above show that for most of the time that approach has been justified. At times the position is reversed for a while, but the divergence is obvious.

TJH

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Re: Total Return vs other performance measures?

#433506

Postby Alaric » August 9th, 2021, 5:03 pm

Urbandreamer wrote:The "Pension Freedom" legislation wasn't introduced until 2015. Before then if you had a "personal pension" (a DC Scheme) you were normally REQUIRED to buy an annuety. Negative total returns!


That isn't totally correct. Drawdown, if in a restricted and expensive form, was available in 2000.

If you are prepared to accept the inherent longevity risk sharing inherent in the concept, a problem with annuities was that no providers managed to work out a satisfactory way at the retail level of backing them with equity investment. As a consequence it was necessary to buy a combined package of longevity and investment guarantees which became increasingly expensive as mortality improved and interest rates fell.

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Re: Total Return vs other performance measures?

#433508

Postby Newroad » August 9th, 2021, 5:08 pm

Hi UrbanDreamer.

As I said before, volatility is not directional. Similarly, the argument for dividends being safer than capital appreciation is also not a one-way bet, e.g. banks may be legislatively prohibited from paying them for a period until reserves are built up to some level the regulators are happy with. So it's not clear to me that the "need to eat" is best served from dividends as opposed to capital appreciation (or some appropriate combination of the two).

Further, I'm not advocating one methodology over another (I have an opinion, but it needn't be right). I'm trying to understand if there's any instrinsic reason one shouldn't compare the results of a chosen methodology to others on anything other than a (net) total return basis - except by possibly attempting to measure risk and factoring that in - the subject of the other thread and something that people are in general not keen on (or regard as personal and/or somewhat immeasurable).

Regards, Newroad

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Re: Total Return vs other performance measures?

#433551

Postby Itsallaguess » August 9th, 2021, 5:40 pm

Newroad wrote:
(combining two sections for simplicity and to aid discussion...)

To take the example of some, do those with wholly or predominantly (say) UK High Yield portfolios have them predominantly because

1. Of methodologic preference, or

2. They believe they'll outperform (in total return terms) the main alternative options, e.g. Lifestyle 60/40 or 100% global equity or 100% UK equity or whatever?

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Further, I'm not advocating one methodology over another (I have an opinion, but it needn't be right).

I'm trying to understand if there's any intrinsic reason one shouldn't compare the results of a chosen methodology to others on anything other than a (net) total return basis - except by possibly attempting to measure risk and factoring that in - the subject of the other thread and something that people are in general not keen on (or regard as personal and/or somewhat immeasurable).


I personally think it would be absolutely right to compare the results of any chosen methodology to others on a (net) total return basis so long as the proponents of such a methodology come from your second group of people - specifically those that absolutely believe that their own methodology will outperform (in total return terms) those other options...

I'm struggling to see how it cannot be fair to do so.

What is also clear though, in terms of what wouldn't be fair, is for anyone to wilfully misrepresent investors in that first group, who might simply have a methodological preference and are happy to continue using it, with less regard for total return, and to treat those investors as though they belong to your second group of investors.

This key issue is at the heart of many of these long-running and oft-repeated discussions....

Cheers,

Itsallaguess

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Re: Total Return vs other performance measures?

#433557

Postby Newroad » August 9th, 2021, 6:31 pm

Hi ItsAllAGuess.

If I've understood you correctly, I have no particular issue with what you say, though I'm not sure about the purity of the groupings (including myself, for what it's worth)

    Group A: People who believe their chosen methodology is good/best - compare performance on a net total return basis
    Group B: People who have a methodologic preference for reason other than, or at least reduced emphasis on, performance reasons - do something else (including perhaps not comparing at all)

If you look back at my original post, my posited reason 2 was trying to capture a subset of the above - using the one I suspected as being the largest subset as an example.

As I alluded to above, I am split between Groups A & B, but for different reasons than most - allocation simplicity - perhaps being closer in thinking to someone who would simply pick a Vanguard Lifestyle Fund. However, I am happy to have my "methodology", including its almost certain imperfections, compared on a {net} total return basis - conversely, let's see if some of the people you might suspect to be Group B'ers are prepared to acknowledge it?

Regards, Newroad

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Re: Total Return vs other performance measures?

#433561

Postby Itsallaguess » August 9th, 2021, 6:56 pm

Newroad wrote:
If I've understood you correctly, I have no particular issue with what you say, though I'm not sure about the purity of the groupings (including myself, for what it's worth)

    Group A: People who believe their chosen methodology is good/best - compare performance on a net total return basis

    Group B: People who have a methodologic preference for reason other than, or at least reduced emphasis on, performance reasons - do something else (including perhaps not comparing at all)

If you look back at my original post, my posited reason 2 was trying to capture a subset of the above - using the one I suspected as being the largest subset as an example.

As I alluded to above, I am split between Groups A & B, but for different reasons than most - allocation simplicity - perhaps being closer in thinking to someone who would simply pick a Vanguard Lifestyle Fund. However, I am happy to have my "methodology", including its almost certain imperfections, compared on a {net} total return basis - conversely, let's see if some of the people you might suspect to be Group B'ers are prepared to acknowledge it?


I don't think investors in Group B need to wear a badge...

I think they should be left alone to get on with the investment strategy that suits them best, personally, and not wilfully mis-represented as Group A members so that their investment approaches can then be forcefully compared on a misguided total-return basis, ignoring many of the other factors that Group B investors often think of as being important to them....

The simple challenge I've put forward during these types of discussions in the past is to ask for any example of a Lemon Fool income-investor who clearly proclaims that their strategy also delivers the best total-returns...

If none can be found, then I think the clear assumption should be that income-investors generally belong to Group B, unless specifically otherwise stated....

That feels like a reasonable approach to this issue, in the absence of badge-wearing Group A people who also happen to be income-investors, and I've yet to see any evidence that they actually exist on those terms...

Cheers,

Itsallaguess

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Re: Total Return vs other performance measures?

#433565

Postby Newroad » August 9th, 2021, 7:23 pm

Hi ItsAllAGuess.

If you're right, that there is an "... absence of badge-wearing Group A people who also happen to be income-investors ..." (or similar) then no point me flogging a dead horse. I personally think the discussion had and still has merit - and am grateful for most of the responses which have helped aid my understanding - whether or not I agree with their perspectives.

To others, I remain interested in pursuing the discussion were one of the examples ItsAllAGuess implies is mythic to appear.

Regards, Newroad

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Re: Total Return vs other performance measures?

#433567

Postby mc2fool » August 9th, 2021, 7:40 pm

Itsallaguess wrote:The simple challenge I've put forward during these types of discussions in the past is to ask for any example of a Lemon Fool income-investor who clearly proclaims that their strategy also delivers the best total-returns...

I haven't read the HYP1 anniversary reports, or indeed the HYP board, for quite a few years now ... but does Pyad, in the anniversary reports, still trumpet that, despite capital being secondary, HYP1 has thoroughly trounced the FTSE 100? (Assuming that's still so).

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Re: Total Return vs other performance measures?

#433571

Postby Itsallaguess » August 9th, 2021, 7:50 pm

mc2fool wrote:
Itsallaguess wrote:
The simple challenge I've put forward during these types of discussions in the past is to ask for any example of a Lemon Fool income-investor who clearly proclaims that their strategy also delivers the best total-returns...


I haven't read the HYP1 anniversary reports, or indeed the HYP board, for quite a few years now ... but does Pyad, in the anniversary reports, still trumpet that, despite capital being secondary, HYP1 has thoroughly trounced the FTSE 100? (Assuming that's still so).


He reports on the HYP1 capital performance, which he does state has outperformed the FTSE100 in his latest 20th birthday-report (linked below), but I don't think that's the same as claiming that his strategy is the best for that particular purpose, and I think he makes that absolutely crystal clear when the very first sentence in the capital section of his report says -

Capital -This is irrelevant or very much secondary depending on your viewpoint.

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=26213

For Pyad to clearly state that, and then perhaps to be forced to wear a 'Group A' badge, as a 'my strategy delivers the best total-return' proponent would be completely unfair in my view, and he's absolutely clear on the primary goal of his income-strategy, when he says this in his initial income-section of the above report -

Income - This is the purpose of HYP..

Cheers,

Itsallaguess

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Re: Total Return vs other performance measures?

#433578

Postby Alaric » August 9th, 2021, 8:11 pm

Itsallaguess wrote:Income - This is the purpose of HYP..


How should that statement be interpreted? Does it mean that an outcome which delivers income of 10 and capital value of 90 is to be preferred to one that delivers income of 5 and capital value of 100?

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Re: Total Return vs other performance measures?

#433584

Postby mc2fool » August 9th, 2021, 8:50 pm

Itsallaguess wrote:
mc2fool wrote:
Itsallaguess wrote:The simple challenge I've put forward during these types of discussions in the past is to ask for any example of a Lemon Fool income-investor who clearly proclaims that their strategy also delivers the best total-returns...

I haven't read the HYP1 anniversary reports, or indeed the HYP board, for quite a few years now ... but does Pyad, in the anniversary reports, still trumpet that, despite capital being secondary, HYP1 has thoroughly trounced the FTSE 100? (Assuming that's still so).

He reports on the HYP1 capital performance, which he does state has outperformed the FTSE100 in his latest 20th birthday-report (linked below), but I don't think that's the same as claiming that his strategy is the best for that particular purpose, and I think he makes that absolutely crystal clear when the very first sentence in the capital section of his report says -

Capital -This is irrelevant or very much secondary depending on your viewpoint.

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=26213

For Pyad to clearly state that, and then perhaps to be forced to wear a 'Group A' badge, as a 'my strategy delivers the best total-return' proponent would be completely unfair in my view, and he's absolutely clear on the primary goal of his income-strategy, when he says this in his initial income-section of the above report -

Income - This is the purpose of HYP..

Cheers,

Itsallaguess

Ok, so he does still trumpet that, despite capital being secondary, HYP1 has thoroughly trounced the FTSE 100 then! :D

(Saying, "continues to murder the market", as he does, is definitely trumpeting rather that just merely reporting IMO!)

Ok, so maybe I'm being a little cheeky here, but it does highlight a couple of problems with your demarcation. Firstly, evidence of performance can only be retrospective. So, while anyone can try proclaiming that their strategy will deliver the "best" total-returns it's only the folks that can evidence that their strategy has delivered the "best" total-returns that can have any credibility and be measured in your comparison.

Secondly, what on earth is the "best" total-returns?!? Is there even such a thing? How about the folks who put £1 on the lottery and won millions, they surely win the "best" total-returns strategy league table hands down? Market beating would be a reasonable metric but "best" is just a superlative.

Getting back to any Lemon Fool income-investor who clearly proclaims that their strategy also delivers better total-returns, I believe TJH falls into that category. He has stated in the past that the reason for his high(er) yield strategy is that he noticed in his early investing days that his higher yield investments (UTs at the time IIRC) actually had better capital gains than the lower yield ones. He has the evidence too.

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Re: Total Return vs other performance measures?

#433587

Postby Newroad » August 9th, 2021, 9:03 pm

Hi Mc2Fool.

I would certainly be interested in someone trying to demonstrate that - especially (though not necessarily) if choices implied by methodology were noted contemporaneously (this would be very easy to do for pure Buy'n'Hold income investors). For what it's worth, I've done that with my two recent switches (MYI -> MNP and WTAN -> MWY).

As a quick proxy, I compared three Vanguard US based ETF's (easier to use US ETF's as they have longer histories).

    VYM: (US) High Dividend Yield ETF
    VTI: Total (US) Stock Market ETF
    VT: Total World Stock Market ETF

Over 10 years VTI > VYM > VT

Maybe the UK is different, or maybe some people rely on their stock picking skills for HY stocks (and if successful anecdotally, it could indicate they are skilled or could indicate they are lucky). Like I said, I'd like to see the case made in a somewhat scientific way.

Regards, Newroad

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Re: Total Return vs other performance measures?

#433589

Postby mickeypops » August 9th, 2021, 9:10 pm

This, I think, is a thread about measuring portfolio performance, and the contention that “total return” is the most logical way of achieving this. It is certainly ONE way, but I prefer to look at the, to me, fundamental question. Has the portfolio achieved my objectives?

In my case this is the delivery of a stream of dividends that attain the yield the portfolio was constructed to achieve; which can match inflation over the long term. For this to happen it is reasonable to expect the capital value to also maintain its real value - this though is an outcome of achieving the primary income objective. To me, the portfolio is simply a pot, a container within which a stream of dividends are delivered. Its exact value is only of theoretical interest. From that I can state the the TR is not of major importance to me.


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