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VALUE INVESTING
By
I'm opening the new year value series with the latest two-monthly review of my two public high yield portfolios (HYP). I am constructing by monthly instalments a third HYP for readers of my Value Investor newsletter in which twelve shares have been selected to date. HYP1 The estimated value including reinvested income is £94,197, an increase of 25.6% on the original investment in 4.17 years. Equating to a compound 5.6% a year, this is ahead of cash. The portfolio capital is up 6.5% and continues to leave behind the market, the latter having fallen 23.4%. The result is that excluding income it is 39% ahead of it. Comparison with tracker funds on a reinvested income basis would show it to be even more ahead because its yield has always been higher than the market. HYP2 The estimated value including reinvested income is £107,025, an increase of 42.7% on the original investment in 1.75 years. Equating to a compound 22.5% a year, this is way more than cash. Don't expect this exceptionally strong rate of growth to continue though. The portfolio capital is up 30.4%, slightly more than the market which is up 28.0%. The result is that excluding income it is 2% ahead of it. Comparison with tracker funds on a reinvested income basis would show it to be even more ahead because its yield has always been substantially over the market. The tables below show the performance of each portfolio in more detail: General Comment When comparing HYP income with cash, note that interest suffers a far worse tax liability than dividends. In fact for both basic and higher rate tax payers gross interest on a given sum would have to be 25% higher than dividend income in order that the net incomes after tax are the same. So for example a dividend yield of 4% gives the same after tax income as gross interest of 5%. Both portfolios are beating cash and the market but the interesting thing is that HYP2 has beaten the market during a rise and HYP1 during a fall. This is the case both on the capital alone and even more so on a reinvested dividend basis. However, the winning margin is much narrower for HYP2 than HYP1 which is what I would expect, the principal reason for this being the much shorter existence of the second portfolio. I am so convinced that HYPs are the way to go, for both long-term growth savers and income investors who are happy with the risks of equities, that I have devoted a section of my Value Investor newsletter exclusively to the strategy. HYPs have just about everything that such investors seek. Features such as control, obviating the need to interpose a third party like a fund manager or insurer between you and your shares; simplicity; lack of management charges; the ability to switch seamlessly from growth to income without having to realise the investments and so on. The newsletter HYP has been doing quite well so far though on average it is only a few months old, having started in January 2004 with one new share a month being added. Unlike the public HYPs I feature here which are no-dabble, I am allowing trading for newsletter HYP though this will occur only infrequently. I expect to sell shares that are showing large gains coupled with low prevailing yields provided a suitable higher yielding alternative is available. In that way the portfolio realises a gain plus it increases total income. With these kinds of advantages, plus my belief that they will beat the market long term, HYPs win very strongly in my view against alternatives like index tracker funds, equity income funds, insurance company schemes, pension plans and other institutional investments. For details of how you can try the Value Investor newsletter for free for 30 days click here. Stephen holds shares in Alliance & Leicester, Lloyds TSB, Royal & SunAlliance, Scottish & Newcastle and United Utilities.HYP1 start date 13 November 2000
£ orig. no. price val move
invest price shs. now now %
Un. Util. (LSE: UU.) 5000 620 807 605 4882 -2.4
Gallaher (LSE: GLH) 5000 416 1190 687 8175 +63.5
Scot. & New. (LSE: SCTN) 5000 490 1010 390 3939 -21.2
Royal & Sun (LSE: RSA) 5000 393 1271 75 953 –80.9
All. & Leic. (LSE: AL.) 5000 645 768 916 7035 +40.7
Britannic (LSE: BRT) 5000 1020 485 462 2241 –55.2
Lloyds TSB (LSE: LLOY) 5000 705 702 461 3236 -35.3
Intercon. Hotel (LSE: IHG) 2500 380 658 638 4198 +67.9
Mitchells & But(LSE: MAB) 2500 356 691 328 2266 -9.4
Boots (LSE: BOOT) 5000 575 861 623 5364 +7.3
Land Sec. (LSE: LAND) 5000 771 651 1270 8268 +65.4
Ass. Br. Ports (LSE: ABP) 5000 321 1542 473 7294 +45.9
Hilton (LSE: HG.) 5000 232 2275 269 6120 +22.4
Rio Tinto (LSE: RIO) 5000 1120 442 1450 6409 +28.2
Anglo American (LSE: AAL) 5000 942 526 1105 5812 +16.2
Shell (LSE: SHEL) 5000 572 865 427 3694 -26.1
Totals 75000 79886 +6.5
FTSE100 6274.8 4806.0 -23.4
Income Yield on capital invested %
Year ended 13/11/01 £3,451 4.6
13/11/02 £3,474 4.6
13/11/03 £3,197 4.3
13/11/04 £3,205 4.3HYP2 start date 02 April 2003
£ orig. no. price val move
invest price shs. now now %
Lloyds TSB (LSE: LLOY) 5000 338 1479 461 6818 +36.4
Scot. & New. (LSE: SCTN) 5000 348 1436 390 5600 +12.0
Dixons (LSE: DXNS) 5000 87 5762 146 8412 +68.2
Un. Util. (LSE: UU.) 5000 546 915 605 5536 +10.7
Hays (LSE: HAS) 5000 78 6435 114 7336 +46.7
Legal & Gen. (LSE: LGEN) 5000 75 6696 104 6964 +39.3
BA Tobacco (LSE: BATS) 5000 580 862 890 7672 +53.4
Brad. & Bing. (LSE: BB.) 5000 297 1685 340 5729 +14.6
Hanson (LSE: HNS) 5000 320 1563 450 7033 +40.7
Land Sec. (LSE: LAND) 5000 736 680 1270 8636 +72.7
The BOC Group (LSE: BOC) 5000 795 628 975 6123 +22.5
BAA (LSE: BAA) 5000 465 1075 574 6170 +23.4
Shell (LSE: SHEL) 5000 394 1271 427 5427 +8.5
AMVESCAP (LSE: AVZ) 5000 311 1609 290 4666 -6.7
Anglo American (LSE: AAL) 5000 970 516 1105 5702 +14.0
Totals 75000 97824 +30.4
FTSE100 3753.4 4806.0 +28.0
Income Yield on capital invested %
Year ended 02/04/04 £4,564 6.1