Friday, 10 January 2014
Investing by Numbers (Portfolio Buy)
But, like the instructions from a dodgy Satnav, always double-check your route through the stock market - it is probably good to sleep on any big decision and review it with a fresh mind.
So, onto today's rule-based purchase decision:
1) Look for high and sustainable yield, making sure (as far as it possible) that the capital value will be safeguarded. (High yield is defined as a real annual return - i.e. after inflation - of above 2-4%, depending on risk levels.)
2) Split the portfolio evenly between dividend shares and fixed-income (such as bonds and preference shares).
3) Limit any single security to 5% of the portfolio; also diversify by market sector as much as possible.
4) Build up 50% of the portfolio in geographically diversified (i.e. non-UK) ETFs investing in high-yield securities, consistent with maintaining reasonable overall portfolio yield.
OK, so today I need to top up the fixed-income side of the portfolio - what to buy?
5) Look at the possibility of topping up with available geographically-diversified ETFs.
I'm pretty well invested in all the ETF options that I've been able to find, although I could top up one at around 5% yield.
6) If ETFs do not seem to be attractive, review the current market for UK fixed-income securities.
My first port of call for these securities is Fixed Income Investments.
7) Given the current negative outlook for fixed-income (due to the withdrawal of QE), look for securities with a medium-term maturity (ISAs require a minimum of 5 years) selling below par (i.e. under £1.00 per unit) with a yield greater than the portfolio average (currently around 5.7%)
Hmmm. Here's a Lloyds Bank security LLPG 6.3673% Non-Cumulative Preference Share - maturing in 2019 (or is it 2020?) with an income yield of 7.3% and a yield-to-call of 9.5%. It is familiar, at least - I held the similar security, LLPE, and I sold it at a profit last year.
8) Check for any potential downsides or risks
I still have a big (negative) holding of Lloyds Bank shares, so I would be taking a larger position in Lloyds than is perhaps desirable. However, Lloyds seems to have settled down (and its share price is climbing). I feel reasonably confident about its future (and I bank there).
However, a bigger risk is what happens in 2019 (according to the prospectus): instead of being redeemed, the interest rate may be reset to 1.36% per annum above three-month Sterling LIBOR. This is currently running at only around 0.52% - implying a return of less than 2%; however, this is artificially low due to QE. Is LIBOR likely to be higher in 2019? Almost certainly - but how much higher is anyone’s guess. Hence the current price and high yield, I suppose, remembering that high yield is usually the bedfellow of high risk.
So, overall, this security ticks all my boxes. although I have to bend my diversification rule a little and take maybe a little more risk than I like.
[Purchase price: £0.92]
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.