High Yield Still Doing Well

Stephen Bland reviews the performance of his four high yield portfolios.

I think the last time I wrote a review of all my complete demo HYPs was in October 2007. Since then the FTSE100 has fallen 12.3% and I've completed HYP4.

It's been a tough time for the market in general and the HYP strategy in particular recently, at least in capital terms, with many big cap high yielding shares faring quite badly. So I'm sure people would like to see a current report on their situations.

As I've written many times over the years though, such times are much more than merely likely, they are certain to happen on occasion. High yield portfolios won't always do well on their capital valuations in all periods, particularly if you look at the short term. They will, and HYP investors have to appreciate that this is inevitable, have weak capital patches when the whole market turns down and/or many high yield shares fall out of favour with the market and underperform.

But as we all know by now, this strategy is principally about obtaining an initially high and subsequently growing income over the very long term whilst giving only an occasional sidelong glance at capital on the way.

Remember, the test of success of the HYP approach is whether it has delivered that rising income long term. And if you ain't seeing it that way you ain't a HYPer as I define it. It is in this specific respect that HYPs differ from other share strategies, the latter nearly always aiming at capital gain.

And yes I know that showing capital performance in my reviews is somewhat at odds with my above comments. I do it because it is interesting and because readers want to see it. And because if I didn't show capital, some readers would probably accuse me of trying to cover something up.

Income £ 

Capital £

So what are we seeing here?

Income is certainly performing on the two earliest portfolios so far, rising at more than inflation, but I cannot know yet whether HYPs 3 and 4 will deliver because they are far too young. Note that none of the portfolios, not even my firstborn HYP1, have really been going long enough in my view to form a strong long term judgement on the all important income picture. Ten years, say, on all these portfolios and I'll have nailed it.

Anyway, so far the strategy is working as I planned it to the limited extent that these figures demonstrate.

Capital is mixed. Despite recent weakness in HY shares, the two older portfolios are still kicking Footsie's butt by a long way. Note that this is capital only, income withdrawn. Performance would be even more superior for a dividend reinvestor because the portfolio incomes are higher than the index.

Against the market beating performances of portfolios 1 and 2, my two latest HYPs are lagging the market on capital, HYP3 slightly and HYP 4 much more so.

The reason that HYP4 is the poorer is because the specific weakness in big cap high yielders is a recent thing, occurring over the last twelve months or so during the majority of this portfolio's construction.

HYP4, being of later construction than HYP3, is therefore far more affected by it than HYP3. Incidentally, because HYPs 3 and 4 were constructed by monthly instalments, their FTSE100 comparisons are weighted averages of the index over the construction period.

This weakness of high yielders is only a temporary effect, noise, fashion, sentiment, whatever you want to call it. Long term, I do not believe that the tendency for HY shares in general to do very well on capital has changed. The older a portfolio becomes, the more likely it is to deliver decent capital performance, provided it has first delivered on income.