HYP1 is 22 - thread discussing income and capital diversification

General discussions about equity high-yield income strategies
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Charlottesquare
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Charlottesquare »

BullDog wrote:
Itsallaguess wrote: I personally think that gets to the heart of the issue though Arb, because once we start looking up the yield-curve, it's often difficult to know where to stop...

The idea that additional income could easily be found, with little consideration for real underlying risk, simply by focussing on higher and higher yields is so appealing, that I suspect the normal checks and balances that really should accompany such searches can often become less and less important...

4-5% will meet the bills...
5-6% will meet the bills and leave some margin...
6-7% will meet the bills and allow me to have some holidays...

Enticing, isn't it...

Cheers,

Itsallaguess
I think Arb almost hit the nail squarely on the head. In the final analysis anyone who finds themselves in the position of having to over reach for yield simply doesn't yet have enough capital. Despite one or two protestations, I think overwhelmingly the population here sensibly acknowledges that selecting the highest possible stock yields is not without cranking up the risk to wealth.
#

Or, to put it in plain terms, there is no such thing as a free lunch.

BullDog
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by BullDog »

Charlottesquare wrote:Or, to put it in plain terms, there is no such thing as a free lunch.
Absolutely. Never is in investment.

Bubblesofearth
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Bubblesofearth »

dealtn wrote:
Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).

For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.
I don't think anyone is claiming proof of concept from something we can all acknowledge is n=1. But, by similar logic, you cannot claim failure of concept. The fact that concentration has occurred is obvious and should be expected. It was never in doubt and was not something that was ever claimed to be something to try to avoid.

Diversification on purchase can actually be viewed as a way of expecting and allowing for exactly the kind of divergence we've seen. Some companies will fail, some will do OK and a small number will excel. Diversification should allow you to at least have some money in the latter. It is this minority of high performers that drive much of the gains of the whole market. You could be unlucky and not select any of these shares in your portfolio (hence the argument for more than 15 shares) but by regularly selling down any strong performance you are guaranteeing not benefitting fully from them.

There was a study some time ago, that has been linked on here or TMF in the past, looking at the performance of the original Dow components over time. Equal weight long term buy and hold outperformed the other strategies looked at which IIRC included price-weighting as well as equal weight with rebalancing. Of course this is another n=1 study but it was interesting nonetheless.

What we don't have is any material evidence that the 'concentration risk' of HYP1 or any other evolved HYP has led to significant underperformance vs rebalancing. Maybe that will emerge over time, maybe it won't. But until it does it's presumptive IMO to call such concentration an obvious flaw.

BoE

dealtn
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by dealtn »

Bubblesofearth wrote:
dealtn wrote:
Agreed. But this thread is specifically about HYP1, and its resulting (over) concentration. Many appear to, instead of acknowledging this, and acting as you describe, prefer to defend this specific portfolio as a proof of HYP concept success, and see no issue with the concentration risk seemingly on the basis it has worked out ok (so far).

For an investment strategy purposely designed for those unable (or unwilling) to monitor portfolios and market risk - with specific intention at inception to diversify away elements of risk - I find it bizarre that ongoing lack of diversification risk is ignored, or considered ok.
I don't think anyone is claiming proof of concept from something we can all acknowledge is n=1. But, by similar logic, you cannot claim failure of concept. The fact that concentration has occurred is obvious and should be expected. It was never in doubt and was not something that was ever claimed to be something to try to avoid.
Really? Comments such as
Well, yes, there is potentially a danger of disaster, but this has not yet produced a tragic result over 22 years and looks less likely to as time goes on and proves the concept works. Far from it, as we see from the very rewarding results which Pyad has published recently, both in income and capital. Most people looking at that overall result would be very happy indeed, and people are being extremely harsh for no good reason, in my view.

As for "wholesale construction" - the point of HYP1 was to see what would happen. Having proved that the result fulfills Pyad's aims, there is no point "reconstructing" or altering the experiment from here onwards.
suggest some struggle with the idea a single example portfolio's success are enough proof of concept that HYP as a strategy overall works. Instead, at best, it merely shows it can work. Draw a probability distribution and select a single point on it to the right hand side and you can "prove" an above average result. Don't worry about any of the other single observations on the left hand side.
Bubblesofearth wrote:
Diversification on purchase can actually be viewed as a way of expecting and allowing for exactly the kind of divergence we've seen. Some companies will fail, some will do OK and a small number will excel. Diversification should allow you to at least have some money in the latter. It is this minority of high performers that drive much of the gains of the whole market. You could be unlucky and not select any of these shares in your portfolio (hence the argument for more than 15 shares) but by regularly selling down any strong performance you are guaranteeing not benefitting fully from them.

There was a study some time ago, that has been linked on here or TMF in the past, looking at the performance of the original Dow components over time. Equal weight long term buy and hold outperformed the other strategies looked at which IIRC included price-weighting as well as equal weight with rebalancing. Of course this is another n=1 study but it was interesting nonetheless.

What we don't have is any material evidence that the 'concentration risk' of HYP1 or any other evolved HYP has led to significant underperformance vs rebalancing. Maybe that will emerge over time, maybe it won't. But until it does it's presumptive IMO to call such concentration an obvious flaw.

BoE
HYP was proposed as an alternative to other strategies, and postulated as an alternative to purchasing an annuity at retirement. It wasn't proposed to be the best investment strategy in the form of income return (or any other form of return) so looking for underperformance versus the market, or alternatives, shouldn't be anyone's task - or a demonstration if its flaws or failures. What would be a failure would be an obvious risk, systemic to the strategy, such that the probability of being to the left of its benchmark on that probaility distribution was higher than alternative approaches that it set out to be better than. The right hand side of the distribution can look out for itself and any excess outperformance (were it to systemically exist) be utilised to better protect the left.

In other words there is no need (or claim to be) best on the right, but there IS an importance to protect the downside - else why not adhere to that safe annuity route?

So I would argue the "obvious flaw" embedded into the strategy is the acknowledged rising concentration over time has a rising probability associated with drift towards either extreme of that probability distribution. Concentration leads to above average variability in outcomes - away from the norm to out or under performance. Given the asymmetry of purpose here, where outperformance isn't necessary, but protection from underperfomance is, why would you have that rising volatility and embedded attraction to the extremes of the distribution as a sytemic feature of your strategy?

A simple rebalancing rule would address this. You would give up some (potential) upside to put a floor on the downside. Doris wouldn't understand (or care) about options as a financial instrument - which could achieve the same thing. But, for example, a rule to ensure the top 5 shares in a portfolio didn't provide 50% of the income (or capital?) such that the exposure to a failure in one or two of the specific investments was limited would be value accretive to a simple rule based strategy designed to provide a steady rising income, and not designed to outperform the average (and certainly not designed to be top decile).

Alaric
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Alaric »

dealtn wrote: a simple rule based strategy designed to provide a steady rising income.

I don't think the word "steady" can be applied to the practical results or even "rising", given the volatility of the annual income and the dependence on a handful of shares for much of the income. Not particularly a problem for anyone using it as a wealth accumumulator with dividend reinvestment but not good news for anyone using it as an annuity replacement or even annuity supplement.

dealtn
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by dealtn »

Alaric wrote:
dealtn wrote: a simple rule based strategy designed to provide a steady rising income.

I don't think the word "steady" can be applied to the practical results or even "rising", given the volatility of the annual income and the dependence on a handful of shares for much of the income. Not particularly a problem for anyone using it as a wealth accumumulator with dividend reinvestment but not good news for anyone using it as an annuity replacement or even annuity supplement.
I, for one, don't disagree, and those 2 words (alongside "high"), core to its claimed (sole) measure of success, can have many meanings in practice. See earlier contributions.

On those measures some can see failure where others only see success.

Itsallaguess
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Itsallaguess »

dealtn wrote:
HYP was proposed as an alternative to other strategies...
I'll assume the irony isn't being lost on any of us that HYP1 is currently being defended on a 'Total Return' basis...

Cheers,

Itsallaguess

88V8
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by 88V8 »

Itsallaguess wrote:
dealtn wrote:HYP was proposed as an alternative to other strategies...
I'll assume the irony isn't being lost on any of us that HYP1 is currently being defended on a 'Total Return' basis...
That is rather hilarious, now you point it out.

I would say HYP1 is still succeeding, by the skin of its teeth. But will it outlive Doris? Or indeed, has it already done so?
If she retired aged 60, she's more than had her 4,000 weeks on this earth.
After all, HYP1 wasn't supposed to be an exercise in infinity.

V8

Arborbridge
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Arborbridge »

Itsallaguess wrote:
dealtn wrote:
HYP was proposed as an alternative to other strategies...
I'll assume the irony isn't being lost on any of us that HYP1 is currently being defended on a 'Total Return' basis...

Cheers,

Itsallaguess
Well, this is interesting. I think it comes about when those who prefer to look at the Total Return criticise HYP for not being TR oriented - then HYPers get sensitive about this and come back quoting TR as a result.

Cause and effect. Pyad was never interested particularly in TR, and neither was I - it's all about income - but then I did get pulled into checking TR out of interest, as well as keeping checks on individual shares.

But ultimately, I'm more interested in the fact that HYP has given me a high and rising income.
BTW, I don't believe anyone ever promise a "steady" rising income - not that I remember, or expected. I always assumed that "steady" was a desire rather than a high probability except on the medium term view - which I why I have a "header tank" with a suitable income reserve.


Arb.

dealtn
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by dealtn »

Itsallaguess wrote:
dealtn wrote:
HYP was proposed as an alternative to other strategies...
I'll assume the irony isn't being lost on any of us that HYP1 is currently being defended on a 'Total Return' basis...

Cheers,

Itsallaguess
It's lost on me unfortunately. Am I the one supposedly defending it on a TR basis? If so I will have to do better at explaining what I am posting.

Itsallaguess
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Itsallaguess »

dealtn wrote:
Itsallaguess wrote: I'll assume the irony isn't being lost on any of us that HYP1 is currently being defended on a 'Total Return' basis...
It's lost on me unfortunately. Am I the one supposedly defending it on a TR basis? If so I will have to do better at explaining what I am posting.
No, sorry - not at all.

It's been the others who have been highlighting the 'Total Return' aspect of HYP1 as part of their views that I was posting about.

You've quite correctly said that the HYP strategy was specifically meant to deliver on other, more income-related fronts, but this point seems to have been conveniently forgotten in the search for other justifications that have never been part of the HYP pitch...

Apologies if that wasn't clear in my earlier post.

Cheers,

Itsallaguess

dealtn
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by dealtn »

Itsallaguess wrote:
dealtn wrote: It's lost on me unfortunately. Am I the one supposedly defending it on a TR basis? If so I will have to do better at explaining what I am posting.
No, sorry - not at all.

It's been the others who have been highlighting the 'Total Return' aspect of HYP1 as part of their views that I was posting about.

You've quite correctly said that the HYP strategy was specifically meant to deliver on other, more income-related fronts, but this point seems to have been conveniently forgotten in the search for other justifications that have never been part of the HYP pitch...

Apologies if that wasn't clear in my earlier post.

Cheers,

Itsallaguess
No, my apology. I was simply led astray by me being quoted, and by association I was the advocate.

My observations are (I hope) simply that

1) Advocates defending the strategy are wrong to do so using an extremely small sample size of one, when the strategy's success should be viewed on the probability distribution of the many potential outcomes. The evidence simply isn't there to assess it. The lack of alternatives strongly suggest confirmation and hindsight biases in my opinion.

2) The strategy itself, I think, is designed for those unable, or unwilling, to consider risk. Endemic within it is (or should be) a risk reducing element to avoid the worst of those risky potential outcomes. This is evident in the wish for the initial selections to be equally weighted, and diversified across a number of sectors. (Some may argue a slight counter with the selection being solely in high (dividend) yielding shares - considered academically to be slightly riskier than alternatives - and to be UK and large cap too - creating a niche selction pool and not as diverse as alternatives).

That risk reducing, however, is only evident at the time of selection, and not considered over the (often long) life of the resulting portfolio. This is by my labelling an "obvious flaw". This could be removed, or at least significantly reduced, by additional minimal and simple rules (and in practice this is what many do - and presumably show on the "Practical" board).

I would say a strategy of this type, designed for the benefit of the type of people described above as being unable, or unwilling, to consider risk, should better ensure the outcome isn't in the left 20% of a probability distribution, rather than unnecessarily care about potentially being in the right 20%. Or in other words, try and ensure it is in the right 80% (or middle 60%), and definitely not be in the left 20%. Avoiding very poor outcomes is more important than striving for the best. Using HYP1s (very) good outcome, and being in the (perhaps) right 20% of the probaility distribution in practice, misses that point. Defending how good it turned out doesn't reflect how it might otherwise have been.

daveh
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by daveh »

But there are other versions of HY or Income portfolios posted fairly regularly, just that they aren't HYP1, weren't built in a single purchase and some are a bit broader in their constituents. Examples are TJH's HYP which sticks fairly close to the original Uk based large cap high yield companies, but is rebalanced to maintain diversity. Arborbridges HYP which they regular compare to their IT and OEIC portfolios. ITH's versions of PYADs portfolio that he regularly reports on. There was the late Gengulphus's HYP portfolio which was reported regularly (and the last report could possibly be found on here). My Income portfolio that started as a classic HYP but had prefs for extra diversity and ITs and ETFs added for high yield from outwith the UK that I report on every January https://www.lemonfool.co.uk/viewtopic.php?f=56&t=32775 and more HYP and Income portfolios can be found on here: https://www.lemonfool.co.uk/viewforum.php?f=56

Bubblesofearth
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Bubblesofearth »

dealtn wrote:
HYP was proposed as an alternative to other strategies, and postulated as an alternative to purchasing an annuity at retirement. It wasn't proposed to be the best investment strategy in the form of income return (or any other form of return) so looking for underperformance versus the market, or alternatives, shouldn't be anyone's task - or a demonstration if its flaws or failures. What would be a failure would be an obvious risk, systemic to the strategy, such that the probability of being to the left of its benchmark on that probaility distribution was higher than alternative approaches that it set out to be better than. The right hand side of the distribution can look out for itself and any excess outperformance (were it to systemically exist) be utilised to better protect the left.

In other words there is no need (or claim to be) best on the right, but there IS an importance to protect the downside - else why not adhere to that safe annuity route?
How safe is an annuity during a period of financial repression? An index-linked annuity with rises capped at 3% whilst rpi is >14%?

Without the data it's hard to know what the probability distribution for HYP's created 22 years ago would be. However, I don't think HYP1 is as far to the right as you think. Remember that sectoral diversification would have avoided too much exposure to the main culprits of the big falls that started in 2000 and 2007. The same sector diversification would also likely have captured a big winner or two- the rise in tobacco stocks for example was across that whole sector.

I'm not sure how easy it is to get the data but it would be interesting to see how much income index-linked annuity would have generated over the past 22 years. If this is less than HYP1 then the difference could have been used to create a margin of safety or even to purchase shares to reduce the perceived concentration risk.

BoE

dealtn
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by dealtn »

Bubblesofearth wrote:
I'm not sure how easy it is to get the data but it would be interesting to see how much income index-linked annuity would have generated over the past 22 years. If this is less than HYP1 then the difference could have been used to create a margin of safety or even to purchase shares to reduce the perceived concentration risk.

BoE
It could, yes. Another simple alternative additional rule that would have, and would continue to, reduce risk.

Alaric
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Alaric »

Bubblesofearth wrote: How safe is an annuity during a period of financial repression? An index-linked annuity with rises capped at 3% whilst rpi is >14%?
.


In money terms, it will continue to increase reliably every year. That's different to a collection of shares with high dividend yields where the dividends are liable to be reduced, suspended or cancelled entirely. That's been demonstrated by HYP1. For reliable income, the goto approach aside from annuities or possibly a bond portfolio is income focused ITs. Admittedly they use accounting tricks to maintain and increase income, but similar ideas are available to private investors, essentially by setting aside part of the dividend return to subsidise years where the stock portfolio fails to deliver.

88V8
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by 88V8 »

Alaric wrote:
Bubblesofearth wrote: How safe is an annuity during a period of financial repression? An index-linked annuity with rises capped at 3% whilst rpi is >14%?
.
...similar ideas are available to private investors, essentially by setting aside part of the dividend return to subsidise years
where the stock portfolio fails to deliver.
Luni has always advocated a reserve.

But HYP1 was a purist exercise without suchlike bells or whistles.

When comparing to an annuity the other key point is that one loses all one's capital, whereas with HYP one keeps it... or most of it... or more than most.
I hope I can say that without straying into the realms of TR - the point is that there is still a pot if one suddenly needs it.

V8

tjh290633
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by tjh290633 »

Bubblesofearth wrote:I'm not sure how easy it is to get the data but it would be interesting to see how much income index-linked annuity would have generated over the past 22 years. If this is less than HYP1 then the difference could have been used to create a margin of safety or even to purchase shares to reduce the perceived concentration risk.

BoE
I can give you the data for 1998, when I took out an annuity:
.                    Single Life   Joint Lives
Level                909.00        797.86
5% escalating        646.00        448.00
Index-linked         740.00        570.76
Rates fell a bit over the next few years, but the index-linked was LPI with a 5% maximum. £100 in 2000 is now £186. My income unit dividend/share is 195.5p on the same basis.

TJH

Alaric
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by Alaric »

Did I imagine it, or was there not a thread proposing to discuss the creation of a "HTP 2023"? There were a few contributors, then the thread vanished without even leaving a moderator message to explain the disappearance.

BullDog
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Re: HYP1 is 22 - thread discussing income and capital diversification

Post by BullDog »

Alaric wrote:Did I imagine it, or was there not a thread proposing to discuss the creation of a "HTP 2023"? There were a few contributors, then the thread vanished without even leaving a moderator message to explain the disappearance.
You didn't dream that, it happened.

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