VALUE INVESTING
High Yield Portfolio Update

By Stephen Bland (TMFPyad)
May 29, 2003

This is the latest regular two-monthly review of my high yield portfolios (HYP). The first, HYP1, is now about two and a half years old while the newcomer, HYP2, is just a couple of months old. The FTSE100 index has risen 9% since the last review at the end of March 2003.

I stress that the primary aim is growth of income not capital, although some people do use the concept as a growth vehicle by reinvesting dividends which, in my view, is an excellent idea. Note that these are merely demonstration portfolios to illustrate a high yield approach that is characterised by no dabbling over long periods. They are not a recommended set of shares, nor would I necessarily choose the same portfolios today.

It is worthwhile emphasising the highly attractive tax situation of dividend income compared with other types such as interest, rents or pension annuities. Dividends are tax free to a basic rate or lower rate taxpayer and liable to tax at only 25% on a higher rate payer.

Here are the latest figures. Cost includes all purchase expenses.

HYP1 start date 13 November 2000 

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

Un. Util. (LSE: UU.)          5000  690   718    620  4452  -11.0 
Gallaher (LSE: GLH)           5000  416  1190    614  7306  +46.1 
Scot. & New. (LSE: SCTN)      5000  490  1010    386  3899  -22.0
Royal & Sun (LSE: RSA)        5000  498   994    137  1362  –72.8
All. & Leic. (LSE: AL.)       5000  645   768    840  6451  +29.0 
Britannic (LSE: BRT)          5000 1020   485    212  1028  –79.4 
Lloyds TSB (LSE: LLOY)        5000  705   702    446  3131  -37.4 
Intercon. Hotel (LSE: IHG) 1  2500  365   685    448  3068  +22.7
Mitchells & But (LSE: MAB) 1  2500  356   702    207  1453  -41.9
Boots (LSE: BOOT)             5000  575   861    628  5407   +8.1 
Land Sec. (LSE: LAND) 2       5000  771   651    798  5195   +3.9 
Ass. Br. Ports (LSE: ABP)     5000  321  1542    383  5906  +18.1 
Hilton (LSE: HG.) 3           5000  232  2275    173  3936  -21.3 
Rio Tinto (LSE: RIO)          5000 1120   442   1216  5375   +7.5 
Anglo American (LSE: AAL)     5000  942   526    952  5008   +0.2 
Shell (LSE: SHEL)             5000  572   865    408  3529  -29.4 
Totals                       75000                   66506  -11.3 

FTSE100                     6274.8                  4071.9  -35.1 

Income                             Yield on capital invested 
Year ended 13/11/01 £3,451                    4.6%
           13/11/02 £3,474                    4.6%
Notes

1 Intercontinental Hotels and Mitchells & Butlers were acquired as a result of the 
  division of the former Six Continents holding into these two new shares.

2 Land Securities reorganised in September 2002 resulting in a cash payment which 
  was used to purchase additional shares in the company.

3 Hilton replaced Blue Circle which was taken over for cash at a profit over the 
  £5,000 cost, the whole of the proceeds being reinvested. This is why the total 
  original cost of Hilton derived from the above table is more than £5,000. The 
  start investment of £5,000 has though been retained here so as to maintain the
  original cost of the portfolio at its true figure of £75,000.

HYP2 start date 02 April 2003 

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

Lloyds TSB (LSE: LLOY)        5000  338  1479    446  6596  +31.9 
Scot. & New. (LSE: SCTN)      5000  348  1436    386  5543  +10.9 
Dixons (LSE: DXNS)            5000   87  5762    113  6512  +30.2
Un. Util. (LSE: UU.)          5000  614   814    620  5047   +0.9
Hays (LSE: HAS)               5000   78  6435     84  5405   +8.1 
Legal & Gen. (LSE: LGEN)      5000   75  6696     86  5759  +15.2 
BA Tobacco (LSE: BATS)        5000  580   862    662  5706  +14.1 
Brad. & Bing. (LSE: BB.)      5000  297  1685    350  5898  +18.0
Hanson (LSE: HNS)             5000  320  1563    346  5408   +8.2 
Land Sec. (LSE: LAND)         5000  736   680    798  5426   +8.6 
The BOC Group (LSE: BOC)      5000  795   628    778  4886   -2.3 
BAA (LSE: BAA)                5000  465  1075    503  5407   +8.1 
Shell (LSE: SHEL)             5000  394  1271    408  5186   +3.7 
AMVESCAP (LSE: AVZ)           5000  311  1609    349  5615  +12.3 
Anglo American (LSE: AAL)     5000  970   516    952  4912   -1.8 
Totals                       75000                   83306  +11.1 

FTSE100                     3753.4                  4071.9   +8.5 

The initial forecast yield on HYP2 is expected to be around 6%, historically a very high figure for an equity portfolio and enormously attractive for that reason. Launching as it did at around a low point in the market over the last few years, I have great hopes for this portfolio in the long run. It has already got off to a cracking start in its very short history, leading the index by a decent margin whilst securing an income that it is way in excess of the market.

Even after only a couple of months, the typical diversified portfolio phenomenon of large individual share fluctuations has already asserted itself with Lloyds and Dixons gaining over 30% whilst the two losers are down 2%. Notice the powerhouse of the financials with Lloyds, Bradford & Bingley, Legal & General and AMVESCAP amongst the strongest performers, all beating the market by a large margin. This is classical market recovery behaviour. Financials are amongst the most volatile shares in major market moves, falling much further on the way down then reversing this trend on the way up.

HYP1 is down 11% but remains miles ahead of the market. Its performance is even better with income accumulated since its yield is much higher than the market. In fact with dividends reinvested it is almost break even by now. Still worse than cash of course but leaving trackers nowhere and beating almost all equity income funds. I'm satisfied with it for these reasons.

The familiar pattern of large individual movements continues. So we have our same two dogs, Royal & Sun and Britannic which, although having risen handsomely in recent months, remain down 70-80% whilst the top gainers are Gallaher and Alliance & Leicester, up 46% and 29% respectively.

It will be very interesting to compare the progress of HYPs 1 and 2 because they were launched at what seems to be, with hindsight, around a market top and bottom respectively. Many people have asked about timing HYPs but I have always claimed that the right time is now. Now yesterday, now now and now tomorrow. In other words when you have the cash available and you are convinced this is the strategy for you, you should go in at that point. It's not for waverers though, you have to remain with it for ten, twenty years, keep the faith and ignore all market comment. Despite good evidence that a high yield approach works over the long-term, there are no guarantees and there may be periods of market underperformance.

I believe this strategy will leave trackers behind. The early evidence, though too soon to draw any long-term conclusions, is highly encouraging. Given the lack of investor involvement required, indeed advised, and the similar long-term timescales, this makes HYPs eminently suitable alternatives for those considering tracker funds in my opinion.

The author holds Lloyds and Royal & Sun shares.