VALUE INVESTING
High Yield Portfolio Update

By Stephen Bland (TMFPyad)
July 25, 2003

This is the latest two-monthly review of my high yield portfolios. The first, HYP1, is now two years eight months old. The newcomer, HYP2, is just four months old. The FTSE100 index at 4,135.4 as I write has risen 1.6% since the last review at the end of May 2003.

I stress that the primary aim is growth of income not capital, although many people 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 with no dabbling. They are not a recommended set of shares, nor would I necessarily choose the same portfolios today. The strategy is intended for the very long-term, eternity as a minimum, and it follows that short-term fluctuations are of little importance.

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.

The portfolios should be considered in total as regards capital and income as if they were funds, with the distinct advantage of no charges. Investors in HYPs should not pay much attention to individual share movements which can be dramatic.

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    581  4172  -16.6 
Gallaher (LSE: GLH)           5000  416  1190    574  6831  +36.6 
Scot. & New. (LSE: SCTN)      5000  490  1010    366  3697  -26.1
Royal & Sun (LSE: RSA)        5000  498   994    148  1471  –70.6
All. & Leic. (LSE: AL.)       5000  645   768    816  6267  +25.3 
Britannic (LSE: BRT)          5000 1020   485    245  1188  –76.2 
Lloyds TSB (LSE: LLOY)        5000  705   702    466  3271  -34.6 
Intercon. Hotel (LSE: IHG)1   2500  365   685    470  3220  +28.8
Mitchells & But(LSE: MAB)1    2500  356   702    240  1685  -32.6
Boots (LSE: BOOT)             5000  575   861    666  5734  +14.7 
Land Sec. (LSE: LAND)2        5000  771   651    812  5286   +5.7 
Ass. Br. Ports (LSE: ABP)     5000  321  1542    382  5890  +17.8 
Hilton (LSE: HG.)3            5000  232  2275    192  4368  -12.6 
Rio Tinto (LSE: RIO)          5000 1120   442   1286  5684  +13.7 
Anglo American (LSE: AAL)     5000  942   526   1004  5281   +5.6 
Shell (LSE: SHEL)             5000  572   865    406  3511  -29.8 

Totals                       75000                   67556   -9.9 
FTSE100                     6274.8                  4135.4  -34.1 

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    466  6892  +37.8 
Scot. & New. (LSE: SCTN)      5000  348  1436    366  5256   +5.1 
Dixons (LSE: DXNS)            5000   87  5762    133  7663  +53.3
Un. Util. (LSE: UU.)          5000  614   814    581  4729   -5.4
Hays (LSE: HAS)               5000   78  6435    102  6563  +31.3 
Legal & Gen. (LSE: LGEN)      5000   75  6696     92  6160  +23.2 
BA Tobacco (LSE: BATS)        5000  580   862    662  5706  +14.1 
Brad. & Bing. (LSE: BB.)      5000  297  1685    313  5274   +5.5
Hanson (LSE: HNS)             5000  320  1563    344  5377   +7.5 
Land Sec. (LSE: LAND)         5000  736   680    812  5522  +10.4 
The BOC Group (LSE: BOC)      5000  795   628    847  5319   +6.4 
BAA (LSE: BAA)                5000  465  1075    503  5407   +8.1 
Shell (LSE: SHEL)             5000  394  1271    406  5160   +3.2 
AMVESCAP (LSE: AVZ)           5000  311  1609    443  7128  +42.6 
Anglo American (LSE: AAL)     5000  970   516   1004  5180   +3.6 

Totals                       75000                   87336  +16.4 
FTSE100                     3753.4                  4135.4  +10.2 

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, leading the index by a decent margin and securing an income that it is way in excess of the market.

Even after only four months, the typical diversified portfolio phenomenon of large individual share fluctuations has already asserted itself powerfully with Dixons gaining 53% and AMVESCAP up 43%. The sole loser, United Utilities, is down 5%.

HYP1 is down 10% but remains substantially ahead of the market, even better with income accumulated since its yield is much higher than the index. In fact with dividends reinvested it would be showing a small profit by now which I estimate at around 1.6%. 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, Britannic and Royal & Sun which, although having risen handsomely in recent months, remain down 76% and 71% on cost. The top gainers are Gallaher and Intercontinental Hotels, up 37% and 29% respectively.

Cash is an important target to beat over the long-term for which these portfolios are designed. I would not be too pleased if they beat the market yet failed to beat cash. Equities, to justify investment in them, should deliver a handsome premium over cash over long periods, in order to compensate for the risk of holding them.

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. Its not for waverers. You must be prepared to hold for the very long run, keep the faith and be immune to short-term comment and events.

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.