VALUE INVESTING
High Yield Portfolio Update

By Stephen Bland (TMFPyad)
July 27, 2001

Time for another update of my high yield portfolio, the last one having been at the beginning of June. To make the whole thing clearer and more realistic I have introduced some further data. The main addition is that I have assumed an initial investment of £5,000 in each share. This is an income portfolio, so one would need that sort of money at least to derive much of a useful income. Then from this I have allowed for purchase costs of about 1%.

It was essential to show the cash values in addition to the share prices because of the takeover for cash of Blue Circle and its replacement last month by my selection of Hilton Group (LSE: HG.). The whole of the proceeds have been reinvested. Without the cash values it could not be seen how these transactions affected the overall value of the portfolio. The portfolio is for eternity, remember, no changes except where forced.

Since May the FTSE 100 has fallen by about 8.8% but the portfolio has fallen by only about 4.5% which is reassuring. In fact it is still showing a small profit over the original cost, up 3.8% in eight months despite a market which has dropped 15.8%, which is even more reassuring as it represents a substantial outperformance over this time. And that is after costs too, which are not included in the FTSE 100. Furthermore, the yield on the index back in November 2000 was only around 2% against the High Yield Portfolio's yield of 4.8% at the time. Consequently the total return of the HYP including income against the FTSE 100 on the same basis must be somewhat greater than the capital comparisons alone.

However people must not get hung up about the capital performance because, great though it is, it is not the primary object of the scheme. The primary object of the HYP is income, a good starting one and a growing one. It will therefore take a couple of years' dividend figures at the minimum to demonstrate whether it is achieving its main aim.

Here are the latest figures.

                                  orig   no. price   val. change  forecast
                           invest cost  shs.   now   now   (%)    yield

Un. Utilities (LSE: UU.)     5000  690   718   641  4602  -8.0     7.4
Gallaher (LSE: GLH)          5000  416  1190   456  5426  +8.5     5.8
Scot. & New. (LSE: SCTN)     5000  490  1010   525  5302  +6.0     5.6
Royal & Sun (LSE: RSA)       5000  498   994   477  4741  -5.2     5.9
All. & Leic. (LSE: AL.)      5000  645   768   775  5952 +19.0     5.0
Britannic (LSE: BRT)         5000 1020   485   892  4326 –13.5     6.7
Lloyds TSB (LSE: LLOY)       5000  705   702   662  4647  -7.1     5.5
Bass (LSE: BASS)             5000  723   685   718  4918  -1.6     5.0
Boots (LSE: BOOT)            5000  575   861   657  5657 +13.1     4.3
Land Sec. (LSE: LAND)        5000  771   642   871  5592 +11.8     4.0
Ass. Br. Ports (LSE: ABP)    5000  321  1542   425  6554 +31.1     3.5
Hilton (LSE: HG.)*           5000  232  2275   245  5574 +11.5     3.8
Rio Tinto (LSE: RIO)         5000 1120   442  1112  4915  -1.7     4.0
Anglo American (LSE: AAL)    5000  942   526   892  4692  -6.2     4.1 
Shell (LSE: SHEL)            5000  572   865   575  4974  -0.5     2.7

Totals                      75000                  77872  +3.8     4.9
FTSE 100                    6274.8      5286.1           -15.8     2.5

* Hilton acquired in June 2001 with cash of £5,330 realised from original 
constituent Blue Circle that was taken over.

It is interesting to see how in only eight months the individual shares have hugely diversified performances ranging from a loss of 13.5% on Britannic to a gain of 31.1% on Associated British Ports. Every single share though, even Britannic, is doing better than the FTSE 100 and giving a higher yield as well. That is very short term so don't expect this situation to continue: after some years I would be very surprised if a few of the shares aren't behind the index on capital performance even though I expect the HYP in total to beat the index.

Note that although it has increased in value since November 2000, the forecast yield has actually risen by a very small amount. This means that the companies are delivering the anticipated rising dividends and it means also that the yield on the original capital for someone investing at the start has already risen, exactly as expected.

I have been asked why I show the forecast yield rather than the yield on the original capital. The reason is that few if any people will have invested in this at the start. The idea, though, is that since it is an eternity portfolio and I am not going to change the selections except where essential, people can go in at any point and see what the likely current yield will be in the forthcoming year. That is an important fact for an income investor and enables the potential yield to be compared with other possible ways to invest for income.

Finally, I continue to believe that the HYP as well as being great for income investors will be a good capital performer in the long term which I anticipate will beat the FTSE 100. Consequently, a long-term investor not seeking income could use it for capital investment by reinvesting dividends, which over many years makes a  very substantial improvement to the performance.

Eight months is nowhere near long enough to prove my beliefs of course, try twenty years, something like that is the real test. So it is very much just my faith and experience in this area which leads me to make the above comments; there are no guarantees with shares. What I have seen though through contact with many investors over the years is that dilettante dabblers with long-term blue chip portfolios usually come off worse than a simple eternity strategy of no interference. Few possess adequate skill to make the call on changes.

The writer owns shares in Scottish & Newcastle.