A year ago, I thought it would be a good idea to sink £5,000 of my own money into a high-yield portfolio [1] (HYP).
I know, what was I thinking?
Almost as soon as I set-up this demo portfolio – by buying into [2] 20 shares via a low-fee Halifax ShareBuilder account – the markets turned south. And despite a brief flirtation with north in early 2012, south is pretty much where they’ve stayed.
Buying an income portfolio is a long-term game, however, so I have no regrets about setting up this demo when I did.
Firstly, I don’t believe it was obvious a year ago that equities would do poorly. We could just as easily be up as down.
Sure, Europe already looked about as attractive as a busload of Greek pensioners dressed up as 1930s German showgirls, but things also looked grim in 2009. Valuation counts most [3], and they didn’t (and don’t) look too stretched to me.
Secondly, as I discussed in my follow-up article on benchmarking the demo HYP [4], the alternatives for income seekers [5] didn’t look exactly attractive. Real yields on cash were negative in May 2011, even if you locked away your money.
True, with hindsight an investor would have done better sticking with cash [6] for the past year, as we’ll see. But you can’t invest with hindsight!
A more sensible conclusion from the mediocre past year for shares is that you shouldn’t put all your eggs in one basket. A mix of cash, bonds, equities, and other asset classes [7] will provide a smoother ride. This demo portfolio is meant to show how a pure HYP performs over time. I don’t mean to suggest you should put your worldly worth into 20 shares!
Still, a 7% fall isn’t a big deal compared to the spanking you’ll get in properly bad years. Also, none of the 20 shares I bought have cut their dividend payouts, as far as I’m aware. On the contrary, they’ve raised them. And that’s what counts most when buying an income.
Income streams can be expected to be far smoother than capital fluctuations, which is why I think targeting income [8] is a better goal for many private investors.
The HYP valuation, one year on
So where do we stand after a year? Good question, and I wish I’d asked the same thing when the portfolio turned one a fortnight ago.
Regular readers may recall I bought the HYP with real money, partly to make it easier to track. However I didn’t have time to write this post on the HYP’s birthday – and I forgot to note down the valuation. I’ve therefore had to reconstruct it in a spreadsheet.
Here’s where the HYP stood at the end of trading on the 10th May 2012, using prices from Yahoo:
| Company | Price | Value | Gain/Loss |
| Aberdeen Asset Management | £2.57 | £274.62 | 9.9% |
| Admiral | £11.48 | £163.10 | -34.8% |
| AstraZeneca | £26.78 | £214.46 | -14.2% |
| Aviva | £3.03 | £170.71 | -31.7% |
| BAE Systems | £2.78 | £211.75 | -15.3% |
| Balfour Beatty | £2.70 | £204.13 | -18.4% |
| BHP Billiton | £18.72 | £195.16 | -21.9% |
| British Land | £4.92 | £205.82 | -17.7% |
| Centrica | £3.10 | £246.09 | -1.6% |
| Diageo | £15.35 | £308.10 | 23.2% |
| GlaxoSmithKline | £14.06 | £266.63 | 6.7% |
| Halma | £3.91 | £263.17 | 5.3% |
| HSBC | £5.57 | £211.67 | -15.3% |
| Pearson | £11.63 | £255.66 | 2.3% |
| Royal Dutch Shell | £21.31 | £239.57 | -4.2% |
| Scottish & Southern Energy | £13.21 | £249.17 | -0.3% |
| Tate | £6.94 | £283.24 | 13.3% |
| Tesco | £3.20 | £193.90 | -22.4% |
| Unilever | £20.64 | £259.73 | 3.9% |
| Vodafone | £1.71 | £253.33 | 1.3% |
| £4,670.03 | -6.6% |
Note: The portfolio was purchased on the morning of 6th May 2011, with £250 invested into each of 20 shares. All costs (stamp duty, spreads, and dealing fees) are included.
It’s never nice to see your shares down when you’re not going to be buying any more – my £5,000 investment is the lot for this experiment – but there we are.
Turning to the performance of individual companies, “what was I smoking?” comes to mind most when I look at the two insurers, Admiral and Aviva. They are in slightly different sectors (and Admiral was also hit by company-specific worries) but both do suffer a lot when capital markets are unnerved. I probably went a bit overboard here.
The big surprise for me was Tesco, which I thought of as a stalwart addition. I would never have guessed it’d be the third-worst performer in capital terms.
Alternative 1: The iShares FTSE 100 tracker
As outlined in my benchmarking article [4], I’m going to compare this HYP against two alternatives – a cheap ETF [9], and a trio of investment trusts.
For the ETF, I’ve selected the iShares FTSE 100 ETF (Ticker: ISF), which is safe1 [10], popular, and liquid. I’ve assumed I bought it for the same low dealing fees as the HYP, and that there’s no stamp duty to pay.
However due to the uncertainty over when exactly a Halifax Sharebuilder deal would have gone through on the day of purchase, I can’t be sure exactly what price I’d have paid.
I’ve therefore averaged the opening and closing price of the ETF, which seems the fairest solution. (I’ve ignored the tiny spread, too).
A hypothetical £5,000 was invested on 6th May 2011. Here’s where it would have stood at close of 10th May 2012.
| Company | Price | Value | Gain/Loss |
| iShares FTSE 100 ETF | £5.60 | £4,678.36 | -6.4% |
Note: Prices from Yahoo.
I’m pretty surprised by how similarly the HYP and this tracker have performed in year one, given all the turbulence and the higher fees of buying the HYP (20 lots of dealing fees plus stamp duty and higher spreads). It shows the power of horizontal diversification [11].
Still, it’s very early days.
Alternative 2: A trio of income trusts
As further discussed in the benchmarking article, I’ve chosen three income investment trusts [12] to track as an alternative to the HYP.
Once again, I assumed they were bought via Halifax Sharebuilder, and again I averaged the opening and closing prices on 6th May 2011. Stamp duty and a penny spread on each trust’s share price were also factored in.
Here’s where a hypothetical £5,000 split between the three trusts stood on 10th May 2012.
| Trust | Price | Value | Gain/Loss |
| City of London IT | £2.86 | £1,567.02 | -6.0% |
| Edinburgh IT | £4.79 | £1,688.03 | 1.3% |
| Merchants Trust | £3.65 | £1,430.84 | -14.2% |
| £4,685.89 | -6.3% |
Note: Historical prices were not available from Yahoo for Merchants, so were taken from Google.
A similar capital performance here to the HYP and the iShares ETF. Clearly my choice of trusts has been a big factor in the short-term though, so it’s even more important to wait a few years before we overstate any findings.
I personally think investment trusts are a good halfway house between being an enthusiast who fancies managing a portfolio of shares (and perhaps daydreaming of outperformance) and a passive investor who invests via an ETF or fund.
So far, so good.
Income comparison
So much for capital, what about the all-important income?
One snag is that the timing of payments (and of ex-dividend dates) means none of the three alternatives received all the income you’d expect them to get in a normal calendar year. This is a first-year problem, and it won’t happen again.
For the hypothetical ETF and trust holdings, I went through the dividend records (via the Digital Look and iShares websites) and manually totaled the payments due, taking into account ex-dividend and payment dates.
For the HYP, I simply added up all the dividends I received over the period.
Here’s what each system earned between 6th May 2011 and 10th May 2012.
| Income | Yield on £5,000 | |
| HYP | £181.95 | 3.6% |
| ETF | £155.05 | 3.1% |
| Trusts | £183.56 | 3.7% |
Note: Yields are rounded to one decimal place.
As you might expect, the FTSE 100 ETF is lagging the two more specialist income vehicles. But these are very early days.
The next 12 months will provide our first full-year run of capturing all payments due to each strategy. And in the long-term, we’ll see whether biasing for income at the start is still generating a higher income versus the market in 5-10 years time.
First year total returns
Adding the capital valuations to the dividends received gives us the total return earned (or the lack of it) over the year.
Here’s where total returns stood as of close of play on 10th May 2012.
| Total return | Gain/Loss | |
| HYP | £4,851.58 | -3.0% |
| ETF | £4,833.42 | -3.3% |
| Trusts | £4,869.44 | -2.6% |
Note: Gain/loss is rounded to one decimal place.
Did I hear someone at the back shout “Efficient Market Hypothesis?” The results from our first year of following the strategy do suggest a lot of faff to generate much of a muchness.
But you know what I’m going to say, don’t you?
Early days!
Given all the short-term factors I’ve mentioned above, I wouldn’t draw any conclusions from these total return figures yet.
In theory, the fact we’re targeting income from the HYP and income trusts will eventually be reflected in slightly lower capital gains versus the market (the ETF). The total returns should be roughly equivalent.
In practice, I’ve seen high-yield strategies beat the large-cap market even on a capital-only basis, perhaps because they avoid a lot of temporarily overpriced companies that don’t care much about their shareholders. (*cough* Facebook. *cough*).
That’s heresy of course, but we’ve plenty of passive articles [13] to offset the balance! Also, I don’t think the market was at all frothy when the HYP was set-up, so I think there’s less chance of a value-based strategy outperforming, anyway.
We’ll see what the next year holds.
Note: Apologies in advance for any typos. Copying from spreadsheets and then working manually with WordPress’ clumsy table formatting means it’s all too easy to slip up. Please let me know if you spot anything.
- In terms of how it is constructed. As an equity investment it can go up and down as wildly as any other. [↩ [18]]