The recent suggestion here that university is now too expensive to be the best option for many young people certainly struck a nerve.

According to new figures from the Office of National Statistics (ONS), it also seems to have hit the mark:

The ONS reports that, over the past decade, the percentage of recent graduates working in lower skilled jobs in the UK has risen from 26.7% in 2001 to around 35.9% in 2011.

Other interesting statistics:

• The number of recent graduates has increased by around 41% over the past decade

• The 2008/2009 recession took the greatest toll on the employment rate for recent graduates compared to all graduates and non-graduates.

• Graduates with an arts degree earn the least at £12.06 per hour.

• Those with a degree in medicine/dentistry earn the most at around £21.29 per hour.

• Non-graduates earn around £8.92.

• New graduates (those graduating within two years) have the highest unemployment rates.

Leaving higher education in the teeth of a recession is obviously not great for new graduates. Then again, it’s not exactly a bed of roses for those who skip university – but they at least also skip the high debt and foregone earnings that going to university now entails.

According to a recent article on graduate unemployment in The Guardian:

Graduates leaving university found it harder to get jobs in 2011 than students finishing A-level courses, as youth unemployment hit its highest level since the 1980s, official data shows.

In 2011, 20% of 18-year-olds who left school with A-levels were unemployed compared with 25% of 21-year-olds who left university with a degree, according to figures from the Office for National Statistics.

Graduate unemployment rates were almost on a par with those for people leaving school with just GCSEs, with 26% of 16-year-olds with these qualifications out of work.

Interestingly enough, after a bit of waffle from a union leader about the importance of higher education, the article notes that:

All of the UK’s “big four” accountancy firms, which between them recruit several thousand graduates each year, have established degree-equivalent school-leaver training programmes, including Ernst & Young which launches its programme in the autumn.

Stephen Isherwood, head of graduate recruitment at Ernst & Young, said […]:

“There is a sense that the mantra of the last few years that everything is about university is not necessarily right, and that A-level students should really be thinking about what they want to do and whether that means going to university, and making sure they get the best deal for themselves.”

Please read my original long discussion about the pros and cons of university – and the great comments from readers that followed – if you want to know more.

You can also download the full ONS release on graduate careers and their fortunes in the labour market.

Some good reads from around the Web.

I enjoyed Don’t be the dumb money by Allan Roth this week – not least because I’ve been slightly trimming my equity exposure in recent days, and it’s always good to be reminded why.

As Roth writes:

When stocks were surging through April of 2011, investors poured $38 billion into U.S. stock mutual funds during the first four months of the year — just in time for an ensuing five-month decline that nearly hit “bear” status. Investors subsequently pulled $179 billion out of stock funds — just in time to miss out on the recovery.

And now that stocks are hovering around that all-time high, can you guess what’s happening? Yes, for the first two weeks of February, investors have put nearly $5 billion back into stocks.

It seems one cannot repeat this message enough. Personally, I was buying heavily again when the FTSE went below 5,000 back in August. And happily, so were many Monevator readers, judging by your comments on my report at the time.

This house believes the best way for most people to invest is passively. That includes you and me most likely, though it will be years until we can know for sure.

But if you’re going to play in the murky waters of active investment, then whatever you do don’t follow the crowds in at the top and out at the bottom – unless you truly appreciate the hard work of City folk, and aspire to make them richer!

[continue reading…]

Important: What follows is for general interest, not personal investment advice. I am a private investor, not a financial advisor. Please read my disclaimer.

Chalk up another scalp to the efficient market theory. Roughly ten months after I bought it, our demo High Yield Portfolio (HYP) that I put £5,000 of my own hard-earned into on 6 May 2011 is lagging the FTSE 100.

This isn’t exactly a shocker – we don’t run all those articles extolling passive investing for nothing!

Still, I wouldn’t be human if I wasn’t mildly miffed.

I didn’t propose the HYP as a market-beating vehicle, however. Like its Motley Fool promoter, Stephen Bland, who has been banging the drum for one-shot income portfolios for over a decade, I see a HYP’s main aspiration as delivering a superior and rising investment income.

Yet the decision to buy a HYP is hardly the only option. For that reason, I plan to track how our demo HYP does versus a couple of other equity-based investments over the years ahead.

I won’t compare it to murky structured products, pseudo-bonds, offshore tax wheezes, or anything of that sort. You’re on the wrong site for that, I’m afraid!

What about a cash or annuity comparison?

I don’t propose to closely track how £5,000 kept in cash or in gilts would have done over time.

With all income assumed to be spent each year and no prospect of a capital gain from cash, any comparison would become increasingly useless.

Suffice to say that with base rates at 0.5%, my HYP’s starting yield of 4.3% was much higher than the best instant access cash rates available. Even locking away your money in a fixed-term deposit wouldn’t have got you more than about 3%.

Where the comparison with fixed returns would be more useful is with an annuity.

I think HYP’s are best thought of as an instant way to buy income for now and the future. They are much more a (far riskier) alternative to buying an annuity, say, than a method for beating the market.

To that end, I wish I’d looked at what annuity rates were available when I bought the portfolio, although I don’t think they’re much changed today.

For the record, according to the Best Buy tables from Hargreaves Lansdown on 1 March 2012, a 65-year old male can buy:

• A level annuity of £5,937 today for £100,000

• A 3% escalation annuity of around £4,103

The first equates to a yield of 5.9%. Much higher than the HYP, but with no inflation-proofing. The escalating annuity will rise over time, as I expect the HYP income to, but its starting yield is lower at 4.1%.

If anyone has access to a snapshot of rates in May 2011 so we can get a more accurate line in the sand, please do let me know in the comments below.

Remember that annuities are very different beasts to HYPs. They are guaranteed to pay out, for starters! A very pertinent consideration once you’re income-earning days are behind you. I’m many years from retiring, but I expect to convert some portion of my funds into an annuity when I do so for this reason.

On the other hand there’s no practical age constraint to when you can buy a HYP, unlike with an annuity. An annuity isn’t really a credible alternative if you’re under 55 and looking to live off investment income, even if you’re prepared to accept a very low yield.

Comparison with the FTSE 100

Given the portfolio’s constituency of mainly blue chip British mega-caps, the most straightforward benchmark is the UK’s index of 100 biggest shares.

Passively tracking the FTSE 100 offers a simple way to get a relatively high and hopefully growing dividend yield, as well as cheap exposure to capital growth in what’s a very globally-facing stock market.

I plan to track the portfolio against the iShares FTSE 100 ETF (Ticker: ISF). Like the HYP constituents, it’s stock market-listed. Comparison with this ETF should also make calculating income due a fairly straightforward task.

There are cheaper trackers available, but ISF is good enough and a popular choice among investors.

This exercise isn’t really about scientifically proving anything, anyway. Rather it’s to give interested readers a semi-regular insight into the indolent management of a largely hands-off portfolio of income producing shares, versus a couple of alternatives.

Income investment trusts

I’m growing ever fonder of income investment trusts as the years go by. I have been impressed with how the cash reserves retained by these trusts helped them ride out the dividend cuts of recent years without cutting their payments to shareholders.

If you can get income investment trusts when they are trading at a discount to NAV, I think they offer an excellent way to buy an above-market income that will hopefully rise ahead of inflation.1

With these trusts you do pay management charges (just as you do with open-ended equity income funds, which I am not as fond of but which are a reasonable alternative). This makes them more expensive to run than a tracker fund, let alone a portfolio of directly held shares.

On the other hand, once you’re into the spending phase of your investment life-cycle, costs are slightly less of a concern, given you’ve less time for their impact to mount through reinvested compound interest.

What do you get for paying these higher costs? A portion of the trust’s revenue reserves for one thing, as well as its ability to use gearing when the manager thinks shares are cheap. (Your own bank would surely baulk at giving you a loan to buy shares in a bear market!)

You’re also paying the trust’s manager to do some managing for you. It is inevitable that any portfolio of shares – even big and supposedly ‘safe’ blue chips – will have a few blowups and other challenges along the way. Buying a trust outsources all this bother.

Enthusiasts will argue your manager can deliver extra returns through superior stock picking. I wouldn’t bet on that; any out-performance is most likely to come through the tilt towards more value-orientated dividend-paying shares, I think, rather than through specific stock picks. A few have managed it though, so you never know.

Because trusts go in and out of fashion – and to reduce management risk – rather than just pick one trust, I’m going to compare the HYP against a blended trio of income trusts I like and that at times I’ve invested in:

• City of London Investment Trust (Ticker: CTY)
• The Edinburgh Investment Trust (Ticker: EDIN)
• Merchants Trust PLC (Ticker: MRCH)

Snapshot comparison to date

I bought the High Yield Portfolio on the 6th May 2011 using Halifax’s cheap ShareBuilder service.

Here’s where capital values stand to-date, with a caveat:

• Demonstration HYP: Down 5%

• iShares FTSE 100 ETF: Down 2.5%

• Basket of trusts: Down 0.8%

One thing to note is that the Demo HYP is a real-money portfolio – so it includes all dealing costs and stamp duty – whereas for now I’ve simply calculated the benchmark returns on their prevailing prices. This is probably worth about 0.75% to 1% of the differential with the trusts, though much less with the ETF, where there’s no stamp duty to pay.

Still, the portfolio is clearly lagging both the ETF and the trusts to-date. Not surprising, given I don’t see any reason why a one-shot portfolio of shares should beat the market, especially over eight months, but I am disappointed by the magnitude versus the FTSE 100, even allowing for the HYP’s higher yield.

The good news is income is holding up fine for our portfolio (as well as for the comparison investments, for that matter).2 That’s the main point. Long-term I want to see annual income rising steadily ahead of inflation, with minimal tampering from me, and with all income spent, not reinvested.

We’ll return to the HYP in May with a more detailed look at how the portfolio stands after one year, a recap of its first year of income versus the benchmarks’ payouts (and perhaps their return on a real-money basis) and even some fancy graphs.

Note: At the time of writing I own shares in all those you’ll find in the demonstration High Yield Portfolio.

1. As I write most income trusts are trading at a premium to their Net Asset Value. [↩]
2. According to Capita Registrars, dividend payouts from UK listed companies rose by roughly a fifth in 2011. They are forecast to rise another 10% in 2012 [↩]