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VALUE INVESTING
By
This is the latest regular two-monthly review of my high yield portfolios (HYP). The first, HYP1, is now two years and ten months old, while the newcomer, HYP2, is six months old. The FTSE 100 index is at 4,219.4 as I write and has risen 2% since the last review at the end of July 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 alternatives 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% to 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, other than the initial purchase cost of the shares. 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.) 1 5000 620 807 466 3760 -24.8
Gallaher (LSE: GLH) 5000 416 1190 570 6783 +35.7
Scot. & New. (LSE: SCTN) 5000 490 1010 368 3717 -25.7
Royal & Sun (LSE: RSA) 5000 498 994 93 924) –76.8
Royal & Sun rts (LSE: RSAN) 0 0 994 24 238) -
All. & Leic. (LSE: AL.) 5000 645 768 856 6574 +31.5
Britannic (LSE: BRT) 5000 1020 485 270 1310 –73.8
Lloyds TSB (LSE: LLOY) 5000 705 702 421 2955 -40.9
Intercon. Hotel (LSE: IHG) 2 2500 365 685 498 3411 +36.4
Mitchells & But(LSE: MAB) 2 2500 356 702 235 1650 -34.0
Boots (LSE: BOOT) 5000 575 861 668 5751 +15.0
Land Sec. (LSE: LAND) 3 5000 771 651 834 5429 +8.6
Ass. Br. Ports (LSE: ABP) 5000 321 1542 423 6523 +30.5
Hilton (LSE: HG.) 4 5000 232 2275 184 4186 -16.3
Rio Tinto (LSE: RIO) 5000 1120 442 1342 5932 +18.6
Anglo American (LSE: AAL) 5000 942 526 1128 5933 +18.7
Shell (LSE: SHEL) 5000 572 865 385 3330 -33.4
Totals 75000 68406 -8.8
FTSE100 6274.8 4219.4 -32.8
Income Yield on capital invested %
Year ended 13/11/01 £3,451 4.6
13/11/02 £3,474 4.6
Notes
1 United Utilities cost per share and total holding amended for its rights issue.2 Intercontinental Hotels and Mitchells & Butlers were acquired as a result of
HYP1
the division of the former Six Continents holding into these two new shares.
3 Land Securities reorganised in September 2002 resulting in a cash payment which
was used to purchase additional shares in the company.
4 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 421 6226 +24.5
Scot. & New. (LSE: SCTN) 5000 348 1436 368 5284 +5.7
Dixons (LSE: DXNS) 5000 87 5762 139 8009 +60.2
Un. Util. (LSE: UU.) 1 5000 546 915 466 4264 -14.7
Hays (LSE: HAS) 5000 78 6435 110 7078 +41.6
Legal & Gen. (LSE: LGEN) 5000 75 6696 96 6428 +28.6
BA Tobacco (LSE: BATS) 5000 580 862 648 5586 +11.7
Brad. & Bing. (LSE: BB.) 5000 297 1685 304 5122 +2.4
Hanson (LSE: HNS) 5000 320 1563 389 6080 +21.6
Land Sec. (LSE: LAND) 5000 736 680 834 5671 +13.4
The BOC Group (LSE: BOC) 5000 795 628 855 5369 +7.4
BAA (LSE: BAA) 5000 465 1075 476 5117 +2.3
Shell (LSE: SHEL) 5000 394 1271 385 4893 -2.1
AMVESCAP (LSE: AVZ) 5000 311 1609 498 8012 +60.2
Anglo American (LSE: AAL) 5000 970 516 1128 5820 +16.4
Totals 75000 88959 +18.6
FTSE100 3753.4 4219.4 +12.4
Notes
1 United Utilities cost per share and total holding amended for its rights issue.
The first portfolio is down about 9% but remains substantially ahead of the market which is down some 33%. The relative performance is 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 3.5%. 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 and Britannic, down 77% and 74% on cost while the top gainers are Intercontinental Hotel and Gallaher, both up about 36%.
Unusually, there have been two capital events since my last review in that Royal and United Utilities have both made rights issues. The United issue was a complex two-stage process that will not be completed until 2005. For simplicity, I sold the rights and reinvested the proceeds in the ordinary shares which involved no new cash. The above holding shows the new increased number of shares owned, the cost per share being revised downwards because the total cost remains at the original £5,000.
Royal's issue is very recent so I show the rights as a separate entry. By the next review, the rights will have been sold and the proceeds reinvested in the existing ordinary shares, again involving no new cash.
HYP2
The second portfolio remains well ahead of the market in its short life to date, up about 19% against a rise of 13% for the latter. It is too early to estimate meaningful figures that include accumulated income but since the start yield on the portfolio is expected to be around 6%, well above the market yield, it follows that the outperformance on a reinvested dividend basis must be even better than shown. It is worth noting too that the portfolio has in its short life beaten cash by a very large margin.
Even after only six months, the typical diversified portfolio phenomenon of large individual share fluctuations has already asserted itself powerfully, with Dixons and AMVESCAP both up about 60% while the biggest loser, United Utilities, is down 15%. The latter has experienced similar adjustments for the rights issue as shown under HYP1.
General Comment
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 through long periods in return for the risks. Calculating on a reinvested income basis, HYP2 has so far delivered in this respect while HYP1 has not, though it is still early days. However, if you look at the portfolios on an income withdrawn basis, as if a person was having to live on that income, then both are producing greater returns than cash, HYP2 much more so than HYP1 because it was launched when the market was much lower and obtainable yields consequently much higher.
It will be very interesting to compare the progress of HYPs 1 and 2 because they were launched respectively 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 though, 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 TSB shares.