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Spring cleaning the portfolio
Chris Howland
Posted: 06 March 2018 20:11:38(UTC)
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Keith Cobby;58311 wrote:
...having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields...


Interesting Keith - this is something that I'd noticed and was thinking about how to run some sort of correlation analysis using AIC data to see if there was a total return/yield 'sweet spot' when I'd got an undisturbed hour to spare...

Going back to my original post, there are some IT I hold where if I had my time again, I wouldn't buy them (NAIT springs to mind). The replacements are likely to be from the FRCL/SMT school of investing rather than something simply for high yield....

However, the yield I've had (5.2% average) has more than supported my retirement lifestyle, so it's important to acknowledge a job well done. Times and investment needs change and I have time to think my new investment goals through before the new ISA season, but I think I know where I'm heading!

Chris

King Lodos
Posted: 06 March 2018 23:20:26(UTC)
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Chris Howland;58314 wrote:
Keith Cobby;58311 wrote:
...having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields...


Interesting Keith - this is something that I'd noticed and was thinking about how to run some sort of correlation analysis using AIC data to see if there was a total return/yield 'sweet spot' when I'd got an undisturbed hour to spare...

Going back to my original post, there are some IT I hold where if I had my time again, I wouldn't buy them (NAIT springs to mind). The replacements are likely to be from the FRCL/SMT school of investing rather than something simply for high yield....

However, the yield I've had (5.2% average) has more than supported my retirement lifestyle, so it's important to acknowledge a job well done. Times and investment needs change and I have time to think my new investment goals through before the new ISA season, but I think I know where I'm heading!

Chris


There is some theory in this .. If a company's profitable, and reinvesting its earnings in itself, then it's reinvesting them at (effectively) 1x book value .. So if it wants to buy a new PC for the office: the cost is simply a new PC.

If, however, a company's trading at 2x book value (so the shares cost twice as much as the tangible assets of the business – which is common), then when you take those same earnings you've been paid as a dividend, and use them to buy more shares, your shares buy you (effectively) half a PC.

So the more a good company can reinvest its own earnings (rather than pay them out) the more compounding of value there should be
2 users thanked King Lodos for this post.
Alan M on 07/03/2018(UTC), Chris Howland on 07/03/2018(UTC)
Mickey
Posted: 07 March 2018 10:23:06(UTC)
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King Lodos;58327 wrote:
There is some theory in this .. If a company's profitable, and reinvesting its earnings in itself, then it's reinvesting them at (effectively) 1x book value .. So if it wants to buy a new PC for the office: the cost is simply a new PC.

If, however, a company's trading at 2x book value (so the shares cost twice as much as the tangible assets of the business – which is common), then when you take those same earnings you've been paid as a dividend, and use them to buy more shares, your shares buy you (effectively) half a PC.

So the more a good company can reinvest its own earnings (rather than pay them out) the more compounding of value there should be

I am quite knackered today but this seems a load of twaddle to me, aren't you simply citing two entirely different book value scenarios? If the company reinvests in itself at 1x book value then that's a better deal than reinvesting dividends at 2x book value, seems pretty obvious. However, if the company invests in itself at 2x book value and I reinvest dividends at 2x book value, the difference is what?

Dealing costs would be pretty much the same in both instances.

I may be wrong of course, I can barely open my eyes at the moment :-)
1 user thanked Mickey for this post.
Chris Howland on 07/03/2018(UTC)
mattyboy
Posted: 07 March 2018 10:40:29(UTC)
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Keith Cobby;58311 wrote:
Chris, I agree with you about sub £50m funds but having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields. Too many managers are compromising their investment decisions by having to generate a specific yield.


Each to his own, and I'm not saying you're wrong, but my highest performers over the last three years are Princess Private Equity, European Assets, Murray International and Shires Income, all high yielders.

MB
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dlp6666 on 07/03/2018(UTC)
mattyboy
Posted: 07 March 2018 10:45:37(UTC)
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King Lodos;58307 wrote:

I think you can do very well with that kind of portfolio – and there are good arguments for it.

But you can also look at it as: how likely are you to find 20+ funds that outperform? And as with stocks, if you could do that, why would you buy your 20th favourite idea, and not just your top 8?
)


I take your point My Liege, but at my stage of life (my IT portfolio's dividends are funding a significant part of my retirement income.) I'm more concerned about picking 8 dogs - I recognsie my failings in not knowing which ITs are going to be high fliers in the future and which aren't.

So the security of wider diversification is important to me. I'm happy to settle for "good enough" and sleep better at night!
5 users thanked mattyboy for this post.
Mickey on 07/03/2018(UTC), Chris Howland on 07/03/2018(UTC), Guest on 07/03/2018(UTC), Captain Slugwash on 07/03/2018(UTC), Guest on 09/03/2018(UTC)
Keith Cobby
Posted: 07 March 2018 11:05:20(UTC)
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mattyboy;58337 wrote:
Keith Cobby;58311 wrote:
Chris, I agree with you about sub £50m funds but having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields. Too many managers are compromising their investment decisions by having to generate a specific yield.


Each to his own, and I'm not saying you're wrong, but my highest performers over the last three years are Princess Private Equity, European Assets, Murray International and Shires Income, all high yielders.

MB


European Assets is a good example (i hold this) because its high yield is part income, part capital return. The manager is not compromised by having to generate his high yield from income. More trusts are going this way and paying out a percentage of NAV as dividend.
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mattyboy on 07/03/2018(UTC)
Keith Cobby
Posted: 07 March 2018 11:08:22(UTC)
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Warren Buffett's Berkshire Hathaway doesn't pay a dividend as he says the company can be more profitable without.
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Chris Howland on 07/03/2018(UTC), mattyboy on 07/03/2018(UTC)
mattyboy
Posted: 07 March 2018 11:32:14(UTC)
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Keith Cobby;58340 wrote:
Warren Buffett's Berkshire Hathaway doesn't pay a dividend as he says the company can be more profitable without.


I'm sure he's right!

But I'm not Buffet (I wish!) - and unlike him I need an income from my investments. It's a personal thing I know, but I'm happier NOT having to decide which asset(s) to sell in order to provide my income. Plus, I'm not incurring transaction costs in withdrawing the divis.

I'm not looking for outperformance in general, just an increasing dividend stream that keeps up with or betters inflation. Good enough is fine by me.

A lot of these decisions come down to individual investor personality I think - there isn't necessirly a right or wrong way, what ever suits your needs and helps you to sleep at night.
5 users thanked mattyboy for this post.
Chris Howland on 07/03/2018(UTC), dlp6666 on 07/03/2018(UTC), Guest on 07/03/2018(UTC), Mickey on 07/03/2018(UTC), Captain Slugwash on 07/03/2018(UTC)
FarmerDoc
Posted: 07 March 2018 11:46:29(UTC)
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Chris, has your current portfolio beaten the FTSE All World Index over the long term? If not, you may be paying a lot with such a large portfolio that is a quasi-tracker. I would suggest comparing the geographical spread of your current holdings against the global market and, if there are significant differences between the two, ask yourself whether you think this difference gives you an advantage in terms of overall performance/volatility. Secondly, I would look at each holding in terms of long term (10 year) performance against its benchmark and review its current TER. Finally, make sure you are using the most cost effective platform given the overall size of your portfolio and the frequency of investing etc. Apologies if you already have researched all of the above.

Most of the comments so far have been about reducing the number of holdings in your portfolio to maintain or enhance performance. This needs to reflect your attitude to risk and tolerance to volatility. An alternative course of action might be to reduce holdings based on your judgement of their long term performance, cost and their place in a globally diversified portfolio and reinvest in, for example, Vanguard FTSE All World ETF (VWRL) or one of their Life Strategy Funds. If the answer to my first question is no, a shift towards global passive funds as your core merits consideration.
3 users thanked FarmerDoc for this post.
Harry Trout on 07/03/2018(UTC), Guest on 09/03/2018(UTC), Chris Howland on 09/03/2018(UTC)
MartynC
Posted: 07 March 2018 13:38:24(UTC)
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FarmerDoc;58346 wrote:
An alternative course of action might be to reduce holdings based on your judgement of their long term performance, cost and their place in a globally diversified portfolio and reinvest in, for example, Vanguard FTSE All World ETF (VWRL) or one of their Life Strategy Funds. If the answer to my first question is no, a shift towards global passive funds as your core merits consideration.


I agree - Passive Funds or an ETF such as VWRL could form the major core of a portfolio and possibly add a small number of ITs to cover areas such as small caps and emerging markets

As alternative to VWRL you could hold its regional constituents - VUSA, VERX, VUKE, VMID, VJPN, VAPX and VFEM for a lower running cost and to allow you to over or underweight a world region.
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Chris Howland on 09/03/2018(UTC)
King Lodos
Posted: 07 March 2018 17:05:09(UTC)
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Mickey;58334 wrote:
I am quite knackered today but this seems a load of twaddle to me, aren't you simply citing two entirely different book value scenarios? If the company reinvests in itself at 1x book value then that's a better deal than reinvesting dividends at 2x book value, seems pretty obvious. However, if the company invests in itself at 2x book value and I reinvest dividends at 2x book value, the difference is what?

Dealing costs would be pretty much the same in both instances.

I may be wrong of course, I can barely open my eyes at the moment :-)


Well when a company invests in its own operations, the book value its shares trade at is meaningless.

A £1,000 investment buys £1,000 of assets.

Take a hypothetical business with a book value of £1,000 .. Say it's a PC that mines Bitcoin and has an AI that handles customers .. And because it can just sit there, mining Bitcoin and handling customers profitably, it's priced at 10x book value.

If it takes £1,000 of earnings and invests them in another PC, then it's doubled its book value, and can double its operations.

If however it paid that £1,000 out as a dividend, and you wanted to reinvest in the business, you'd be buying £1,000 of shares in a business valued at £10,000, so you'd only increase your stake by 10%.

So in this case, dividends and buybacks are a bad idea if the business can reinvest profitably in itself
2 users thanked King Lodos for this post.
Mickey on 08/03/2018(UTC), Chris Howland on 09/03/2018(UTC)
Mr Helpful
Posted: 08 March 2018 11:58:54(UTC)
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Chris Howland;58066 wrote:

I recognise that there are too many holdings, this being a simple consequence of opportunism as money to invest became available. Time however doesn’t stand still and I’ve reached the point where I need to re-align the portfolio towards growth.
Before I embark on what would be a major re-structuring of the portfolio, I would really appreciate comment from other forum members, constructive or otherwise!
Chris


As a general rule only ever sell when price of a holding is at an all-time high,
AND ALSO quite fully valued.
These conditions are unlikely to be met at present.

Maybe resist the good-housekeeping urge to tinker for now?
Frying pan to fire?

Meantime perhaps reflect on the many fine ideas put forward, add them to a watch-list for eventual incorporation into the long-term Investment Plan, lined up for opportunistic buying/selling.

P.S. Don't see the number of holdings as unduly high.
What may be lacking is structure.
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Chris Howland on 09/03/2018(UTC)
Hank Elvis Dobbs (texan)
Posted: 08 March 2018 12:36:47(UTC)
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Fort...poised for a.....

"Wrong thread"

Money's money

tonight (soon) there's gonna be a 'jailbreak' somewhere in this town tonight there's gonna be a jailbreak ...so make sure your around...
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Chris Howland on 09/03/2018(UTC)
Chris Howland
Posted: 09 March 2018 13:35:51(UTC)
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Keith Cobby;58311 wrote:
Chris, I agree with you about sub £50m funds but having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields. Too many managers are compromising their investment decisions by having to generate a specific yield.


I downloaded the data from the AIC and ran a simple correlation check. I stripped out a few lines first though:

- All VCT
- Non GBP denominated trusts
- Zeros
- Any trusts less than five years old

This resulted in 238 trusts that remained. I plotted yield vs 5 year SPTR

There are a surprising number of trusts that have delivered pretty much nothing over five years (no yield and little or no growth), and given that a 5% yield re-invested over five years 'only' delivers 28% growth, there are some staggeringly good IT around (and these generally have a yield of less than 2%)



There does seem to be a Mark 1 eyeball upper limit running from ~9% yield (at zero SPTR) to 0% yield at 250% SPTR, which strongly supports your observation Keith.

Interestingly, there are also a large number of Trusts that have delivered in excess of 100% SPTR whilst also providing a decent (3% to 4%) yield for those who really need the money.


Chris
5 users thanked Chris Howland for this post.
Mickey on 09/03/2018(UTC), markus on 09/03/2018(UTC), Keith Cobby on 09/03/2018(UTC), King Lodos on 09/03/2018(UTC), Micawber on 10/03/2018(UTC)
A M
Posted: 09 March 2018 16:01:28(UTC)
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Quote:
Chris, has your current portfolio beaten the FTSE All World Index over the long term? If not, you may be paying a lot with such a large portfolio that is a quasi-tracker. I would suggest comparing the geographical spread of your current holdings against the global market and, if there are significant differences between the two, ask yourself whether you think this difference gives you an advantage in terms of overall performance/volatility. Secondly, I would look at each holding in terms of long term (10 year) performance against its benchmark and review its current TER. Finally, make sure you are using the most cost effective platform given the overall size of your portfolio and the frequency of investing etc. Apologies if you already have researched all of the above.

Most of the comments so far have been about reducing the number of holdings in your portfolio to maintain or enhance performance. This needs to reflect your attitude to risk and tolerance to volatility. An alternative course of action might be to reduce holdings based on your judgement of their long term performance, cost and their place in a globally diversified portfolio and reinvest in, for example, Vanguard FTSE All World ETF (VWRL) or one of their Life Strategy Funds. If the answer to my first question is no, a shift towards global passive funds as your core merits consideration.]


The Vanguard Global All-Cap Index Fund includes small cap companies and Emerging Markets so there would not be much point in buying a mix of trackers if you used this one, unless you wanted a higher exposure to any particular sector.
2 users thanked A M for this post.
Chris Howland on 09/03/2018(UTC), Tyrion Lannister on 09/03/2018(UTC)
Tyrion Lannister
Posted: 09 March 2018 19:40:41(UTC)
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Keith Cobby;58079 wrote:
I agree with Mickey, there's no point having holdings below 5%.


That depends on your objectives. If you're investing purely for growth then you have a point but it often makes sense to split your strategy. For example, I have around 4% each in Fundsmith and LT Global Equity. Originally it was going to be 10% in one but I couldn't decide which to go for.

Also, if you're investing for income, it makes sense to consider your monthly income. Splitting income funds can even out the dividends paid per month.
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Mickey on 09/03/2018(UTC)
Keith Cobby
Posted: 09 March 2018 20:40:09(UTC)
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Keeping holdings to 5% still could mean 20 which I would expect to be enough for any strategy.
Keith Cobby
Posted: 09 March 2018 20:42:14(UTC)
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Chris Howland;58458 wrote:
Keith Cobby;58311 wrote:
Chris, I agree with you about sub £50m funds but having done some analysis on my own holdings, total return is almost inversely proportional to yield. My best returns have come from trusts with low yields. Too many managers are compromising their investment decisions by having to generate a specific yield.


I downloaded the data from the AIC and ran a simple correlation check. I stripped out a few lines first though:

- All VCT
- Non GBP denominated trusts
- Zeros
- Any trusts less than five years old

This resulted in 238 trusts that remained. I plotted yield vs 5 year SPTR

There are a surprising number of trusts that have delivered pretty much nothing over five years (no yield and little or no growth), and given that a 5% yield re-invested over five years 'only' delivers 28% growth, there are some staggeringly good IT around (and these generally have a yield of less than 2%)



There does seem to be a Mark 1 eyeball upper limit running from ~9% yield (at zero SPTR) to 0% yield at 250% SPTR, which strongly supports your observation Keith.

Interestingly, there are also a large number of Trusts that have delivered in excess of 100% SPTR whilst also providing a decent (3% to 4%) yield for those who really need the money.


Chris


Very interesting analysis, thanks.
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