HYPertrading

Stephen Bland sell Foreign & Colonial Asset Mangement from two of his high yield portfolios and picks replacements.

Following on from last week's article there are probably quite a few words I could invent with the prefix HYPer to describe some activity related to my High Yield Portfolio (HYP) strategy, desirable or otherwise. Hyper comes originally from the Greek, meaning over or beyond, but today it means excessive or above normal, though that is not the sense in which I use it for HYPs. It's just a bit of wordplay because the acronym HYP lends itself to this. Thus by HYPertrading I do not mean excessive trading of an HYP, merely any voluntary trading.

I have many times advocated that the best way for most HYP investors to follow the strategy is never to trade voluntarily but rather to hold for eternity. There will very likely be a fair amount of compulsory trading from corporate action over the years anyway as has been demonstrated by the model HYPs I feature on The Fool, the earliest of which is now well over six years old. My belief that eternity is best for most results from observation of many private investors over a long time. Too many people make poor decisions on trading, the worst of which is selling too soon.

Despite my advice that eternity is the way to go, I have introduced two trading HYPs because I know that a number of readers want to see how that might work out. My HYPs 1 and 2 are eternity portfolios. 3 and 4 though are traders.

This being a yield-based strategy, I consider selling a share where its yield has fallen unacceptably low. There are two reasons why this could happen. Firstly a dividend cut unaccompanied by a proportionate share price fall and secondly a share price gain unaccompanied by a proportionate dividend rise. The former is far more likely to trigger a sale than the latter.

In the case of a share that has risen strongly to drive down the yield but which nevertheless is still delivering decent dividend increases, there is not really a big incentive to sell unless there is a suitable replacement at a much higher yield. That is not always so easy to find so that it is quite likely that I may hang on to a good HYP share even with a low yield.

A dividend cut without a commensurate price drop is a much more valid reason for sale in my view. This is what has happened with F&C Asset Management (LSE: FCAM) which features in trading HYPs 3 and 4. From a dividend of 11p which had been static for years, the company has announced that it will be reduced, to be based on cover. The current forecast for 31/12/07 is 6.08p, a big fall.

Stupidly in my view, the company announced the cut some weeks before publishing the figures. I said I would wait on the figures before coming to a decision. Those were released recently but seeing them I figured I'd hang on a bit to see how it panned out. Not badly as it happens because the price has recovered quite well and I am now selling.

FCAM leaves HYPs 3 and 4 at an exit price of 184.5p and therefore a forecast exit yield of 3.3%. This yield is too low for a share that it has soiled itself by cutting divis but I do stress this is trading HYP stuff. If the share was held in my eternity portfolios, it would not have been sold, however badly behaved. There are no expulsions, ever, from HYPs1 and 2.

Incidentally, FCAM made a small net profit for HYP3 of about £102 after dealing expenses on its £5,000 cost. For HYP4, where its purchase was much more recent, there was a small loss of about £212 after expenses on the same £5,000 cost. Thus I suffered no major capital loss or gain in either portfolio as a result of selling, not a bad result I feel given the slashed divi.

The replacements are for HYP3, Vodafone (LSE: VOD) , and HYP4, British American Tobacco (LSE: BATS) . In both cases the full proceeds of FCAM were reinvested in these shares. Vodafone's incoming forecast yield is 4.65% and BATS is 3.99%, both comfortably higher than FCAM.

HYP3 is a full portfolio and it wasn't easy to find a suitable replacement having regard to diversification. I already have BT (LSE: BT.A) so initially I avoided Vodafone as it is another phone company and there only two in the FTSE 100.

However, I would have had to go a long way down the yield rankings to find a differentiated sector. This would probably have been Royal Sun Alliance (LSE: RSA) as a non life insurer, but its yield was a lot lower than Vodafone and I already have Legal & General (LSE: LGEN) which although primarily life, does transact non life business. So I compromised by having two phones in return for the much higher yield of Vodafone over other possibilities.

HYP4 is under construction so that wasn't so much of a problem. I wanted a tobacco share anyway, there are only two choices left in the market and BATS is the better yielder so that was it. I am not against having another fund manager like FCAM but there are none that qualify right now.

So that's it for a bit of voluntary trading. I'll be facing some compulsory trading soon as Gallaher (LSE: GLH) which appears in HYPs1 and 3 looks like it will soon be taken out by a cash bid. Referring to my second paragraph above about corporate action, HYP1 has in its six years and four months of life faced quite a lot of that with Gallaher being the latest example, illustrating my point about even eternity HYPs changing quite a lot over the years.

I continue to maintain that eternity holding will produce the best long term returns for most HYPers.