Time flies when you’re running a high-yield share portfolio that – by design – you only look at once every few months or so.
Just one year ago my demo HYP was celebrating its first baby steps.
And those steps had been of the clumsy and stumbling kind.
The portfolio’s value was down 6.6% (ignoring income) since I’d had the bright idea to put £5,000 into it back in May 2011. The wider market was down by roughly the same amount, too, and so was the basket of three investment trusts that I picked for a second benchmark.
A year and a bit on, however, and things are looking far brighter. That’s share investing for you!
Below I’ll report how the terrible twos weren’t so terrible for my demo portfolio, which has grown nicely over the last 12 months.
Before that, I’ll share a few links to answer some of the questions you may have.
You can also read and bookmark all the articles about this HYP.
Note: I stress again this is a demo HYP. It is not a reflection of my entire investment strategy or asset allocation – it’s a small real money side portfolio created for interest and education for us on Monevator. Please don’t get hung up on the £5,000 invested figure, as that was just what I chose to commit for tracking purposes. In real-life I wouldn’t consider running a HYP like this with less than £20,000 invested, and £50-100,000 would be more like it.
The HYP valuation: Two years (and a bit) in
So where do we stand after year two? That’s the critical question, and sadly I forgot to ask it until four trading days had passed since the anniversary of the last snapshot on 10 May 2012.
What a muppet! I put real money into this demo to make it easier to track, and I keep forgetting to check-in on the anniversaries.
Last year I overcome my forgetfulness by painstakingly recreating the entire portfolio from historical prices and then crosschecking them with a second source.
This year I’m afraid I didn’t have the time. May was just a madly busy month.
So instead, I’m going to report where the portfolio (and the benchmarks) stood at close of play on 16 May 2013. That’s a few days more than a full year.
It’s not a big difference – the UK market moved less than 1% in the interim – but I suppose I can’t now be quite as outraged as The Accumulator gets about sloppy reporting from funds. It’d be a tad hypocritical.
Anyway, here’s where the portfolio stood at the close of 16 May 2013:
| Company | Price | Value | Gain/Loss |
| Aberdeen Asset Management | £4.73 | £505.62 | 102.3% |
| Admiral | £12.62 | £179.30 | -28.3% |
| AstraZeneca | £33.90 | £271.49 | 8.6% |
| Aviva | £3.47 | £195.35 | -21.9% |
| BAE Systems | £4.06 | £308.54 | 23.4% |
| Balfour Beatty | £2.26 | £171.23 | -31.5% |
| BHP Billiton | £19.12 | £199.33 | -20.3% |
| British Land | £6.39 | £267.16 | 6.9% |
| Centrica | £3.87 | £306.62 | 22.7% |
| Diageo | £20.51 | £411.57 | 64.6% |
| GlaxoSmithKline | £17.08 | £323.81 | 29.5% |
| Halma | £5.26 | £353.70 | 41.5% |
| HSBC | £7.49 | £284.89 | 14.0% |
| Pearson | £12.04 | £264.67 | 5.9% |
| Royal Dutch Shell | £22.86 | £257.06 | 2.8% |
| Scottish & Southern Energy | £15.93 | £300.48 | 20.2% |
| Tate | £8.62 | £351.85 | 40.7% |
| Tesco | £3.74 | £226.46 | -9.4% |
| Unilever | £28.40 | £357.39 | 42.95% |
| Vodafone | £1.97 | £291.50 | 16.6% |
| £5,828.00 | 16.6% |
Note: The portfolio was purchased on the morning of 6 May 2011, with £250 invested into each of 20 shares. All costs (stamp duty, spreads, and dealing fees) are included.
By the one year mark on 10 May 2012, my invested capital had fallen from £5,000 to £4,670. By 16 May 2013 it had grown back to £5,828.
That means we saw a year-on-year capital gain of roughly 25%.
Looking through the portfolio’s holdings, I still regret picking two insurers, though that’s hindsight speaking. On a brighter note, Tesco had recovered substantially – it was down 22% last year on my initial purchase price. (Since this snapshot it’s fallen back again. Every little helps? Not here!)
The big winner of the year was Aberdeen Asset Management. Its share price doubled on the back of rising markets.
If this portfolio does well over time then critics will say I was lucky to pick shares like Aberdeen. Such criticism is valid, but it’s also missing the point. This is an actively constructed portfolio, not an index fund. It will have a skewed result. That’s the risk you take, and that you’re potentially paid for.
Also I have never seen a portfolio of shares that didn’t show big gaps between the best and worst performers after a couple of years. The same would be true in an market cap weighted index fund, for that matter.
Buckle up! After 5-10 years the gap will between the leader and the laggards in this demo HYP will be several hundred per cent or so.
Benchmark 1: The iShares FTSE 100 tracker
As outlined in my benchmarking article, I will compare the progress of my demo HYP against two alternatives – a cheap ETF, and a trio of investment trusts.
Remember all these returns will be capital returns only, as with the demo HYP.
The ETF benchmark is a hypothetical £5,000 that was invested into 836 shares1 of the iShares FTSE 100 tracking ETF ISF, acquired via Sharebuilder.
As previously discussed, the ETF shares were notionally bought at £5.98 per share. The (tiny) purchase costs were taken into account, and there was no stamp duty to pay.
Here’s where the ETF stood at close of 16 May 2013.
| Company | Price | Value | Gain/Loss |
| iShares FTSE 100 ETF | £6.72 | £5,614.54 | 12.3% |
Note: Prices from Yahoo.
The ETF has not yet recovered as much as the HYP from its first year fall. Not surprising given the dash for yield we’ve seen in the markets in the past 18 months.
Benchmark 2: A trio of income trusts
I also follow three income investment trusts as an alternative to the HYP.
Again I assumed these were bought via Halifax Sharebuilder, and again I averaged the opening and closing prices on 6 May 2011 to get the initial buy prices. Stamp duty and a penny spread on each trust’s price were factored in.
Here’s where a hypothetical £5,000 pumped into these three trusts stood on 16 May 2013.
| Trust | Price2 | Value | Gain/Loss |
| City of London IT | £3.65 | £2,000.26 | 20.0% |
| Edinburgh IT | £5.92 | £2,086.25 | 25.2% |
| Merchants Trust | £4.80 | £1,878.14 | 12.7% |
| £5,964.65 | 19.3% |
Note: Prices from Yahoo.
Equity income trusts have been on a tear this year – it’s that chasing dividend income theme again. Discounts have closed, and in many cases income trusts have stood at significant premiums to their assets for long periods.
This has boosted the share price return of the trusts over this period, and thus the performance of this basket over the demo HYP. The situation will likely reverse if dividend income goes back out of favour, and the trusts fall to a discount. They will have many shareholdings in common, after all.
I think investment trusts are a good halfway house between being an enthusiast who fancies managing a portfolio of shares, and a passive investor who invests via an ETF or tracker fund.
So far that’s playing out with a superior return for the trusts, even after their management costs.
The trusts offer a more stable return than the DIY portfolio, too. They are more diversified. They also hold a cash buffer to top-up payments in the lean times.
If you want the same safety net for your own portfolio – perhaps because you plan to live off investment income – then you need to build-in your own cash buffers. This will effectively delay when you can start drawing an income by 6-12 months, since you’ll need a tranche of cash to load up your buffers.
Income comparison
So much for capital, what about the all-important income?
- For the HYP, I simply added up all the dividends I received over the period 11 May 2012 to 10 May 2013.
- For the hypothetical ETF and trust holdings, I went through the dividend records (via the Digital Look and the iShares website) and added up their payments due over the same time frame.
Here’s what each system generated in income over the year:
| 2012 | 2013 | Change | Purchase yield3 | Current yield4 | |
| HYP | £181.95 | £229.19 | 26.0% | 4.6% | 3.8% |
| ETF | £155.05 | £172.11 | 11.0% | 3.4% | 3.1% |
| Trusts | £183.56 | £245.52 | 33.8% | 4.9% | 4.1% |
Note: Yields are rounded to one decimal place.
This is the first full year where all payments made were due to the portfolios, which is why some of the year-on-year gains in income are so large. (Last year’s income figures were subject to a few ex-dividend dates that fell before the investments were made).
This means we can now see exactly what each portfolio paid out in income over the 12 month period.
So far the trusts are doing very well on an income basis, too. We’ll have to see what happens over the longer term.
Needless to say, the current yields on all three portfolios are still much higher than you’d get on bonds or cash.
Finally, while a HYP is an income strategy and I wouldn’t recommend it for total return, I know many of you are curious about how the demo HYP would grow if you reinvested the dividends each year.
That’s a whole new kettle of fish (or more accurately a can of worms) which I’ll look into in a follow-up post.
- Well, 835.87 to be precise. Halifax Sharebuilder let’s you buy fractional holdings of shares. All my demo HYP shareholdings are fractional, too. I use the fractional shareholdings in the return calculations. [↩]
- I’ve rounded these here for clarity, but have used the exact price in my spreadsheet. [↩]
- The last 12 months of income divided by the initial £5,000 invested. [↩]
- The last 12 months of income divided by the portfolio value at year end. [↩]
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Thanks for this interesting update TI.
Its early days -2 years – however the comparison of your real-life HYP and mini IT portfolio is consistent with what I am finding with my own twin-track portfolio of individual higher yield shares and investment trusts over the past 3 years.
The basket of trusts consistently out-perform the shares portfolio by 2 or 3% each year. As you point out, income trusts have been popular these past couple of years and the narrowing of discounts may be a factor. It will be interesting to see if there is a reversal of fortune when they fall out of favour.
I will be maintaining my parallel portfolios until the end of this year and will then re-evaluate whether to continue the individual shares strategy.
Interesting results, thanks for doing the legwork here. The result with the ITs is also interesting – it’s not currently useful for me at the valuation of the ITs, but it’s a direction I am tempted to move in if discounts start to happen. At the moment discounts seem more on the growth IT side, which is not a terrible thing in itself even if it isn’t HYP 😉
I also experienced an outperformance from the ITs I have, even if the mantra on here is that active investing never does anybody any good…
Perhaps you should add Vanguard FTSE UK Equity Income Index as a benchmark too.
I don’t know why people like it when shares go up
When you are still buying in large amounts it makes sense to want them to go DOWN so you can buy more for the same money
Works in the summer or winter sales…same deal with investments as far as I’m concerned
Still….I bet these gains look a bit less healthy at the moment
Personally I’m getting all excited about the prospect for a nice little market correction finally arriving, like the central banks and the financial press have been talking about for months
@ermine — That’s not my mantra. 🙂 Clearly some win in the active game. It’s that the odds of any individual manager winning after costs or an investor getting a portfolio of winners are low, and given fees are a nailed on drag on returns, the rational response for most will be to passively track.
All that said I’ve long been a fan of income investment trusts, as much written about here. Wouldn’t buy on a premium either, though! 🙂
@GrumpyOldPaul — Yes, if starting today that’d be a good choice. I don’t intend chopping and changing though.
@DIY — As you say this is a very short run so far. Income trusts will surely go to a discount again one day, but who knows if in years or decades! There was a great swap on 4-5 years ago from a HYP to discounted trusts, which I suggested on here. It should pop up in the Search box with some appropriate keywords (trust, discount, swap?)
@Neverland — As I said, this is an income portfolio. There’s no aim to add or reinvest. I’d be delighted if it quadrupled tomorrow, in theory. (In practice it’s also only a demo and I’d be grumpy in reality as it’d make investing elsewhere expensive. But the point is what matters is that it pays out a growing income stream).
I switched from admiral–when renewal came,they offered me nothing
Currently building my HYP with DRIP, have 16 shares so far, waiting for the correction before I add. Wonder how the typical TER,s of the ITs and ETFs will affect performance over a period of say 10-15 years. There is no TER for a HYP.
If dividends are slashed in a particular year, would ITs or ETFs sell units of your capital to maintain the income stream ?
@Joe — Income investment trusts keep a reserve of cash to pay dividends. You can look in the accounts to see how much they have. It’s usually between 0.7 and 1.3x the annual dividend payout, from memory. This enabled them to continue to hold their dividends during the financial crisis, when overall dividends paid by the market fell sharply for a couple of years.
An ETF does not have any such reserve — it just pays out whatever it’s paid by the underlying holdings, minus its fees. This means the payout will fall with the market if dividends are cut. On the flipside, the payout will likely rise more quickly than the ITs, which will salt some of the rise away ready for the next bout of bad news.
In specific answer to your question, some investment trusts will sell capital to hold up the yield. They may do other strange things, too, in certain circumstances. (The may borrow to pay you a dividend, for example, or use derivatives to boost the yield etc. These activities typically increase the risks.)
I hope this isn’t off topic, but do these investment trusts carry additional risk to their valuation due to supply/demand for that particular ‘brand’? I read that investment trusts can be open-ended or closed-ended and this affects whether they are valued based on purely the shares held within them. Before I switched to tracker funds I always tried to avoid funds described as an ‘investment trust’ in case I was buying at a premium due to, for example, there being a well-liked manager at the helm – because if he or she left it would presumably cause the fund to fall in value even if the underlying investments hadn’t gone down.
@BeatTheSeasons — Absolutely they do, and yes it’s a risk. As far as I’m aware trusts are always closed-ended, though they may issue or buyback shares to try to control the discount and premium.
This article explains more about discounts and premiums if you’re curious:
http://monevator.com/why-do-investment-trusts-trade-at-a-discount-or-a-premium/
This one shows an opportunity that arose to swap from blue chip HYPs into investment trusts holding very similar shares but at big discounts during the crisis:
http://monevator.com/should-you-swap-your-shares-for-an-investment-trust-on-a-discount/
I like and own investment trusts, but as usual I think most people are better with trackers. Most people will chop and change trusts poorly, be spooked at the wrong time, chase recent winners and so on, and lose money overall compared to if they’d just tracked the market.
Of course there is a TER for a HYP, unless you never buy and sell anything and have a broker that charges nothing. I suspect that most HYPs are simply the equivalent of an expensive, lumpy, value oriented, high maintenance tracker.
I feel sorry for BTS if he had been dissuaded from ITs and into active OEICs. I smell the whiff of an IFA… Trackers are very sensible though!
Trusts do range from significant discounts to significant premia, but with even a small amount of knowledge this can be used to your advantage!
I see AAS has just gone to a 4% discount. I’d be buying if I had spare money.
@Greg — You’re correct of course, but so far I’ve bought and sold nothing in two and a bit years for this HYP. So TER 0% for those years.
Definitely a risk, especially for those who decide to chop and change their holdings.
Following on from GrumpyOldPaul’s point, although always wary of putting all your eggs into one fund, it would be a very simple option to switch all equity tracker funds into Vanguard’s UK Equity Income fund come SIPP drawdown time.
In theory total return to support your drawdown level is all that matters, but specifically in a market that is heading down it would be better to just take collective dividend income rather than sell fund units.
@SemiPassive — I agree. The ability to collect dividends for income and not touch your capital is a huge plus for UK investors (where we have typically higher yields than the US, say) even if only for behavioural investing reasons. Once people start to think about harvesting capital returns, they risk getting in trouble.
Last year I invested some of my mum’s ‘spare’ money in a range of discounted investment trusts for long-term income and she’s seen an immediate (and pretty irrelevant, though I have to admit it feels better than the opposite!) capital gain. But the closing of discounts (or move to premiums) in most cases means it’ll probably be Vanguard Equity Income and World High Income for her second and final tranche we’re due to invest this year, plus perhaps a smattering more from the property ITs.
I’m 60 and lucky enough to have been retired for two years now. When I first retired, in my head I was still young and going to live forever, so I thought put my savings into a Vanguard Life Strategy 60% Equity Fund and accumulate any income from it. Being ‘young’ I thought I should be heavy on equities and being essentially cautious I thought I should have the 40% bond type backup.
However, I am thinking now that really I should be taking some of the income and living off it. I can’t afford to just have it locked away, accumulating. I need some of it now.
So now I am torn between switching the Life Strategy 60/40 fund to an Income paying one or getting a high yield dividend paying fund.
I did wonder about getting both, but there will probably be some duplication of the holdings of these funds and it feels like a fudge to just get half of each. Is there a discussion to be had about this? Are there pros and cons for people in different circumstances?
I read you can’t manage money unless you’ve got the right amount of money to manage. What’s a rough amount to begin a HYP with?
Kind regards
Grand
@Grand85 — Not sure I fully understand the question, as it depends on your aims. If your primary aim is to get a rising dividend income, I think good equity income investment trusts or even the UK Dividend Aristocrats ETF is as good a bet. If you want to grow your capital, I’d probably just buy a normal index tracker.
If your aim is to learn/enjoy the process of managing a portfolio of shares, with the risks and potential rewards, that’s different. 🙂 I wouldn’t go for less than 20 shares and £500 a share, personally, if I were setting up a HYP. That’s assuming you’re using a cheap Sharebuilder service like I have here. And I’d do a *lot* of research and reading first. 🙂
I was referring to learning/enjoying the process… I suppose that’s all I will be going to be doing for now 🙂 I suppose it’s something I’ll look into once I’ve got a deposit for a home in London, so in a few years maybe ha.
Thanks you as always,
Grand
Dear Mr Monevator
Is there going to be a follow up for this year, 2014, with regards to the HYP? Or have you already done one and I’ve missed it?
@Dawn — There was going to be, but I forgot to do it in a period of busy-ness in May and I was put off by having to decide how to deal with the Vodafone special dividend / demerger (which I ultimately addressed by reinvesting enough money to bring me back to the same initial money invested). I’ll try to get back to it next year with a full update.
For the very keen — as of right now, the portfolio is worth £5,754.88.
That means it’s *down* about 1.2%. In contrast the FTSE 100 is up about 3.5% and the City of London investment trust is up about 7%.
A bit disappointing. Tesco and Balfour Beatty haven’t helped. I really regret buying the latter in a portfolio like this. There’s always one! 🙂
thanks for mini up date mr monevator
do you regret buying Tesco ?