VALUE INVESTING
High Yield Portfolio Update

By Stephen Bland (TMFPyad)
September 28, 2001

A very interesting time to carry out a review of my HYP following the recent fall in the market. Assuming one's view of the shares is unchanged, and since this portfolio is forever my view by definition cannot change and hasn't anyway quite apart from the rigid "no changes ever" policy I set, then a downward movement in the prices of the shares can be only attractive. Starting yields will rise for new investors and the prospects for long term capital growth are enhanced because of the lower buying price.

For an investor already in the scheme capital fluctuations are irrelevant and must be ignored.  The income is the primary reason for investing in this portfolio, specifically a decent starting level and growth of that income that beats inflation is the aim. It is certain that there will be quite dramatic movements in the individual holdings over time and likely quite substantial fluctuations in the total value.

The income is also at risk of course, share dividends are not guaranteed. Anyone who cannot live with this should avoid investing in equities for income. However I tried to design the HYP to be able to withstand even a couple of total disasters within it such that in the long run, the income of the other shares would make up for such a loss, capital growth too. Here are the latest figures.  The start date is 13 November 2000. 

                                £  orig   no. price  val  move forec. 
                           invest  price shs.  now   now     % yield

Un. Utilities (LSE: UU.)     5000  690   718   608  4305 -13.9  7.9 
Gallaher (LSE: GLH)          5000  416  1190   442  5260  +5.2  6.0 
Scot. & New. (LSE: SCTN)     5000  490  1010   500  5050  +1.0  6.0 
Royal & Sun (LSE: RSA)       5000  498   994   326  3240 -35.2  7.6 
All. & Leic. (LSE: AL.)      5000  645   768   715  5491  +9.8  5.7 
Britannic (LSE: BRT)         5000 1020   485   718  3482 –30.4  8.4 
Lloyds TSB (LSE: LLOY)       5000  705   702   633  4444 -11.1  5.7 
Six Continents (LSE: SXC)    5000  723   685   602  4124 -17.5  5.8 
Boots (LSE: BOOT)            5000  575   861   585  5037  +0.7  4.8 
Land Sec. (LSE: LAND)        5000  771   642   813  5219  +4.4  4.2 
Ass. Br. Ports (LSE: ABP)    5000  321  1542   410  6322 +26.4  3.8 
Hilton (LSE: HG.)            5000  232  2275   183  4163 –16.7  5.2 
Rio Tinto (LSE: RIO)         5000 1120   442  1024  4526  -9.5  4.3     
Anglo American (LSE: AAL)    5000  942   526   795  4182 -16.4  4.3 
Shell (LSE: SHEL)            5000  572   865   481  4161 -16.8  3.4 
Totals                      75000                  69006  -8.0  5.5 

FTSE 100                    6274.8                4763.6 –24.1  2.8                           

Note how the portfolio has stood up very successfully to the market fall of 24.1% since November 2000 by losing only 8.0% plus of course it is delivering an income far higher than the FTSE100. But it's very early days compared with forever of course. Ten months is nothing, nowhere near long enough to gauge the long term performance. Income performance is far more important and as far as I can see from a quick look, most of the dividends having been declared already for the first year of operation, the required inflation beating rise has been duly delivered over the previous year.

Within the portfolio drop of 8.0% there are some massive individual swings from the biggest loser Royal & Sun down 35.2% to the biggest gainer AB Ports up 26.4%. This is to be expected with fifteen holdings in many different sectors. Overall there are six winners and nine losers at present. An interesting feature is that if you compare the market fall of 24.1% with the individual share movements of the HYP, only two shares out of the fifteen have fallen by more than this, being Royal and Britannic. The other thirteen have all done way better than the market, the worst of them being Six Continents which has dropped 17.5%.

The forecast initial yield for anyone contemplating investing at these prices is now 5.5%. If like me you believe that the HYP will produce the goods in the form of an increasing total income over time, this is a terrific rate into which to lock at current share prices. Interest rates have fallen recently thus bringing down returns on interest bearing investment sources. At the same time the HYP yield has risen, leading to a greater divergence between that yield and the rate available on bank deposits or gilts for example and making the equity solution for income seekers even more attractive than before because of the higher margin of dividend yield over cash.

Summing up, I am more than satisfied with the performance over the short period to date, both on the primary income and secondary capital grounds.

The author owns shares in Scottish & Newcastle.