HYP #3 - Why You Should Avoid Foreign Shares And Bonds In The Hunt For Yield

15th Nov '13 by Stephen Bland

4 comments 13814 reads

This is part 3 in the Stockopedia High Yield Portfolio series by Stephen Bland (HYP).

Last week I looked at the desirability of prioritising certain sectors over others in an HYP and also, when it may be a good idea to include more than one share from the same sector, dividing your sector unit investment equally between those selections. This was all under the general heading of rule-bending because most of my construction rules can, indeed must, be broken at times because too rigid adherence would not allow enough shares to be located for a suitable portfolio to be built at all. But all the rules with their permitted flexibility are subservient to the one inviolable law that is never be broken, diversification accompanied by equal investment in each sector.

This week I’ll take a look at the extent to which in my opinion some other investments may be included in an HYP, starting with foreign shares. Whilst I have never thus far included any foreign shares in any HYP I’ve constructed, I have been asked many times over the years whether this may apposite.

The reasons I’ve avoided shares listed abroad have nothing to do with xenophobia and more to do with practicalities. There are several objections as follows, in no particular order. I’m assuming here that the investor is based in sterling.

1. Avoid Currency Risk

First is currency risk. Clearly the capital value of a share held in a foreign currency will suffer exchange rate fluctuations in addition to the share price movements on its own stock exchange. That may be positive, negative or broadly neutral over time but whichever, it adds volatility, ie. more risk, to the sterling value.

Now before anyone points this out, it is true that I’ve always maintained that capital is virtually irrelevant or very much secondary at best in the HYP strategy so why am I concerned with the inevitable currency fluctuations of a foreign share? My response is that I intend HYPs to be a very low risk income investment, given the unavoidable risks that investors must accept for being in equities at all. More or less a Widows and Orphans equity approach. So I see little reason to add further risks to those already present, even to the capital.

Note that I don’t see the currency risks to the all-important dividends as…

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carla77

28th Nov '13

Stephen Bland is a breath of fresh air, the results of his original HYP (high yield portfolio) speaks volumes.
Focus on growing the yield and invariably the capital growth follows.
IFAs and brokers will of course hate him as he never sells shares, it is a simple and very successful method of growing income it has to be 100x better than any pension.

I recommend his newsletter to any cautious investor seeking income.

Peter Barrett

Cuthbert C

broadways

"...Focus on growing the yield and invariably the capital growth follows...."

"...it is a simple and very successful method of growing income it has to be 100x better than any pension...."

Q1) do you have any data to support those 2 assertions? If the technique is so successful then one would expect historic data to demonstrate that beyond any doubt. Does it?

Q2) why do you make a comparison between an investment selection system on the one hand (HYP) and a tax efficient wrapper on the other (pension)? A HYP approach can be applied to a pension or to non-pension investments. The 2 things are simply not in any way related to each other. They can exist together or separately. Comparing them is not so much apples and oranges and more like comparing a suitcase with a suit. One can be used to contain the other or they can be used separately.

Q3) Stephen is well known for expressing with some fervour the view that the capital value of an investment portfolio is not important and that the only thing that counts is the income stream. Personally I care very deeply about the capital value of my portfolio. I also care about the total return I achieve including both capital growth and income. I have never been able to understand the proposition that capital value is unimportant. What do you think? Would you be happy to have invested in bank shares that lost 95% of their capital value? (I think that sad fate befell Stephen at one point.....) Personally I've had such mishaps too, but I would never argue that they were anything other than calamities.

T

Stephen Bland

29th Nov '13

"...Stephen is well known for expressing with some fervour the view that the capital value of an investment portfolio is not important and that the only thing that counts is the income stream..."

You need to appreciate that this is not a general view of mine but refers specifically and solely to my HYP strategy. My other main equity interest was trading value shares and I wrote extensively for years about this on the Motley Fool. With the trading of value shares, or any trading strategy come to that, capital is what it is all about, trying to score gains.

I get the feeling that you have confused my two approaches of HYPs and value trading, which have diametrically opposed aims and rules. The former is purely an income strategy, the latter purely a gains strategy. You are not the first though, this used to happen frequently on the Fool, understandably perhaps. On Stockopedia thus far, I have confined my writing exclusively to HYPs so all my comments here must be read in that light.

"...Would you be happy to have invested in bank shares that lost 95% of their capital value? (I think that sad fate befell Stephen at one point.....) Personally I've had such mishaps too, but I would never argue that they were anything other than calamities."

Bank shares have appeared in several HYPs I have constructed in the past, including RBS and Lloyds, selected at a time when they appeared attractive selections for the strategy. Their worst offence is not having paid dividends for many years, not the capital value but yes their capital value is currently down 80-85%.

I don't think as you suggest that I have argued that these aren't calamities, of course they are. But all the portfolios with those shares have in fact done very well on income over the years, and capital for those concerned about it, despite what has happened to these two banks. A clear illustration that my insistence on wide diversification is a good defence.

What matters in the HYP strategy is the long term income stream of the whole portfolio, not the individual constituents. The same applies to the capital. Because of the mandatory wide diversification, it is almost inevitable long term that some shares will go through a bad patch and others a very good patch. The unpredictability of this is the whole point of diversification, aided by sticking to big caps which gives a good chance of recovery for those shares that do experience problems.

michaelevens

31st Oct '17

I tend to agree with mr bland as l do not now wish to read the reams of information about shares ,but prefer to buy as sensibly as possible and live on the dividend income. I accept that shares will rise and fall and sometimes some will not recover. Over the longer te rm this policy should work .It will suit some people but plainly not others.

HYP #3 - Why you should avoid foreign shares and bonds in the hunt for yield

1. Avoid Currency Risk

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Stephen Bland

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