No. of Recommendations: 114
Well, it's 12 months since the date I somewhat arbitrarily chose for the first year's review of my demonstration HYP ( ), so I suppose it's time I did another one! I'll follow the same format as in that report - note that the initial section is largely (though not completely) unchanged from last year.

How the portfolio is run

The portfolio is in principle one that saves £600 per month, accumulating the regular savings along with any dividends and other cash payments received until they reach £1,800 or more, and then spends the accumulated cash on a share purchase with a £12 broker commission. It is therefore currently purchasing once per quarter, and expected to continue to do so for quite a while, but will eventually start purchasing more frequently when the dividend stream becomes large enough. It is a non-tinkering HYP, in the sense that it does not do voluntary sales. (I might make an exception to that if a corporate action produced a sufficiently compelling reason to do so. None has so far, though the second Lloyds open offer did look like doing so until its full details came out and revealed that there was a lapsed entitlements payment.)

The regular savings level was originally chosen to be an ISA allowance per year. I did not raise it when the ISA allowance rose to £10,200 per year (in October 2009 or April 2010 depending on age). I will also not be raising it in line with inflation when the ISA allowance starts to rise in line with inflation in April 2011 ( see ) - basically, it's one complication too many.

The share selection process is basically that I post to this board to ask for suggested additions to the portfolio, then post a poll or polls about the suggestions (including any I come up with myself) with some figures about each of them, then make a final decision on the basis of the figures and the poll(s). I treat the poll(s) as advisory only - i.e. I am entitled to overrule them - but have not yet found a need to overrule them.

Diversification is enforced by rules that any company that already makes up more than 5% of the portfolio, sector that makes up more than 10% of the portfolio, or major group of sectors (e.g. financials) that makes up more than 20% of the portfolio is excluded from candidacy. The primary measurement of the fraction of the portfolio is the percentage of the portfolio's forecast income it supplies, using DigitalLook's 1-year forecasts (unless I see good reason to overrule them, such as an announcement by a company about future dividend levels that has clearly not yet been reflected in the forecasts). A second measurement is the percentage of the cash put into purchases so far, and shares can be excluded by either measurement: this is to prevent major dividend cuts accompanied by major price drops from restoring a share, sector or group of sectors to candidacy.

In practice, I track the portfolio with a "1/8th scale model" in a Halifax ShareBuilder account. So the account actually receives regular savings of £75 per month, makes a purchase when its cash balance reaches £225, and pays a £1.50 broker commission for each purchase. I multiply all the account's figures up by 8 when I report on it and also round the numbers of shares (which Halifax account for as fractional amounts with 6 decimal places) to the nearest whole number after the multiplication - this produces some slight discrepancies in the reports, which I am willing to accept for the sake of keeping the work down. In particular, this means I am not interested in discrepancies such as a few pence on dividend amounts or a fraction of a share's worth on amounts paid or current values of holdings!

Also in practice, I don't guarantee to keep fully to schedule on running this HYP - other personal issues are liable to take priority, and indeed have done for the purchases that were due in January 2009 and January 2010. Both were fixed by instead doing two purchases in the following April. More generally, if something similar happens again (and I certainly cannot rule it out), the real-money nature of the portfolio means that I'll correct things in that sort of "catching up" way, not by trying to backdate things.

Summary of the second year of the portfolio's history

See for the history preceding this.

July 2009: Selected Tate & Lyle as its 5th share.

October 2009: Selected British American Tobacco as its 6th share.

November-December 2009: Lloyds has a rights issue (after two open offers in the previous year), which the portfolio deals with by letting the rights lapse and saving the lapsed rights payment for its next purchase.

January 2010: Start made on selecting its 7th share, but attempt aborted for personal reasons.

April 2010: Selected Scottish & Southern and Aviva as its 7th and 8th shares.

June 2010: BP announces that in response to its Gulf of Mexico oil spill, it is cancelling dividend payments due for the rest of 2010, and will next consider paying a dividend for the Q4 2010 dividend (which would normally be paid in March 2011).

Current state of the full-scale portfolio

See "How the portfolio is run" above for information about how these figures are prepared.

Company EPIC Shares Purchase Current Current Purchased FTSE benchmarks when purchased
cost price value 100 100-TR 350HY 350HY-TR
Lloyds LLOY 673 £1,800.00 55.26p £371.60 15/07/2008 5171.9 3075.52 2934.6 3326.17
BP BP. 421 £1,875.12 301.50p £1,270.32 07/10/2008 4605.2 2765.01 2780.3 3188.78
Vodafone VOD 1427 £1,838.80 143.25p £2,044.00 17/04/2009 4092.8 2516.59 2369.4 2794.82
AstraZeneca AZN 77 £1,841.68 2957.00p £2,272.56 17/04/2009 4092.8 2516.59 2369.4 2794.82
Tate & Lyle TATE 650 £1,930.24 449.00p £2,920.32 07/07/2009 4187.0 2606.88 2376.5 2847.48
Br.American BATS 98 £1,937.68 2119.00p £2,066.96 07/10/2009 5108.9 3208.57 2875.0 3484.21
Scot & Sthn SSE 176 £2,001.52 1125.00p £1,978.32 22/04/2010 5665.3 3622.09 3064.5 3803.40
Aviva AV. 516 £1,999.76 319.80p £1,651.52 22/04/2010 5665.3 3622.09 3064.5 3803.40
Cash: £1,869.84 £1,869.84
Total: £17,094.64 £16,445.44
consisting of:
Savings: £16,200.00
Dividends: £636.32
Lapsed entitlements/rights: £255.28
Interest: £3.04

Dividend breakdown:
Year 1 Year 2 Year 2 notes
Total for year £193.20 £443.12
LLOY £74.80 £0.00 Dividends not paid all year
BP. £118.40 £108.24 Three quarterly payments, fourth not paid
VOD £0.00 £112.08 Final + interim
AZN £0.00 £108.72 Interim + final
TATE --- £44.24 Interim only - bought too late for last year's final
BATS --- £69.84 Final only - bought too late for last year's interim
SSE --- £0.00 Not held long enough to get a payment yet
AV. --- £0.00 Not held long enough to get a payment yet


The dividend income for the year of £443.12 is about 3.5% of the average over the year of the total amount invested so far, which is about (£9,000 + £16,200)/2 = £12,600, or 3.8% of the portfolio value last year plus half a year's extra savings, which comes to £8,170.00 + £3,600.00 = £11,770.00. This is quite a lot lower than might have been expected, for various reasons:

* Cut dividends - mainly Lloyds, though BP has just started to affect things.

* Unfortunate timing relative to ex-dividend dates: Tate & Lyle in particular just missed getting last year's final payment by being bought a week after it had gone ex-dividend.

* The slowness in making the 7th purchase, which if that purchase had been made in January and had still been Scottish & Southern (not guaranteed!) would have resulted in an extra interim payment.

The last two of those are basically inevitable start-up timing effects that are liable to continue to happen with regard to new shares bought each year, but to be steadily swamped as time passes by the larger contributions from older holdings. The cut dividends are more of a concern, but since this portfolio is a no-tinkering one (and is not changing in that respect - tinkering this portfolio is too expensive for me, especially on the time and effort it would require), we'll just have to see how the situation develops with regard to both Lloyds and BP, and hope the rate at which it encounters further cut dividends drops from the current 25% of the shares purchased!

The capital value is about 1.5% up on the £16,200 invested so far. That's a "total return" figure, with dividends having produced a 3.9% gain on that capital and capital movements a 2.4% loss (*). The capital movements on individual shares vary widely - worst is Lloyds with a 65.2% loss (*); second worst is BP with a 32.3% loss; best is Tate & Lyle with a 51.3% gain; second best is AstraZeneca with a 23.4% gain. The fact that the overall capital loss is such a small figure illustrates the power of diversification pretty well!

(*) I'm including the money returned by the Lloyds lapsed rights and entitlements as capital movements, by the way.

I should add that that the performance is a bit disappointing, given that the market has risen on average since the investments were made. Specifically, a unitised calculation using the FTSE 350 Higher Yield Total Return (350HY-TR) index has £1,800 invested for each of the 8 purchases so far, producing the following purchases in an ideal 350HY-TR index tracker whose price is the index value in pence:

Purchase Value of Unit Units
date purchase price purchased
15/07/2008 £1,800.00 £33.2617 54.1163
07/10/2008 £1,800.00 £31.8878 56.4479
17/04/2009 £3,600.00 £27.9482 128.8097
07/07/2009 £1,800.00 £28.4748 63.2138
07/10/2009 £1,800.00 £34.8421 51.6616
22/04/2010 £3,600.00 £38.0340 94.6522
Total: 448.9015

The most recent 350HY-TR figure available from is yesterday's, and is 3340.74, which means that the value of that portfolio of ideal 350HY-TR index tracker units would be worth 448.9015 * £33.4074 = £14,996.63. Adding on the further cash of £1,800 that it would have saved in the last 3 months produces a portfolio value of £16,796.63, which the actual portfolio value of £16,445.44 has underperformed by 2.1%.

A similar calculation for the FTSE 100 Total Return (100-TR) index, which I have added to the index data I keep track of for this post, gives the following results:

Purchase Value of Unit Units
date purchase price purchased
15/07/2008 £1,800.00 £30.7552 58.5267
07/10/2008 £1,800.00 £27.6501 65.0992
17/04/2009 £3,600.00 £25.1659 143.0507
07/07/2009 £1,800.00 £26.0688 69.0481
07/10/2009 £1,800.00 £32.0857 56.0998
22/04/2010 £3,600.00 £36.2209 99.3901
Total: 491.2146

Yesterday's 100-TR figure is 3268.20, which means that the value of that portfolio of ideal 100-TR index tracker units would be worth 491.2146 * £32.6820 = £16,053.88. Adding on the further cash of £1,800 that it would have saved in the last 3 months produces a portfolio value of £17,853.88, which the actual portfolio value of £16,445.44 has underperformed by 7.9%.

I should add that with the average holding period of the shares in this portfolio being only slightly over 12 months, it's still much too early to draw any real conclusions. All of the above figures are still basically just for the sake of curiosity, plus making certain I am collecting all the data needed to do the calculations in future!

Links to this year's threads on this HYP

Review of the portfolio's first year (which contains links to that year's threads):

Fifth purchase:

Sixth purchase:

Aborted attempt at seventh purchase:

Seventh and eighth purchases:

Spin-off thread about the "1/8th scale model" technique I use to run the portfolio with a relatively small amount of real money:

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