Thursday 3 April 2014

It's All About the Yield (Portfolio Sale)

The DIY Income Investor portfolio is based - for better or worse - on yield; the ratio of the historic and forecast annual income that the security will produce relative to the purchase price. The underlying assumption is that higher yields indicate that the Market is wary of the securities for some reason: they are out-of-favour and potentially high risk.

Usually these companies survive, the Market upgrades their future potential and the value of the holding increases. Sometime the recovery does not happen and the holding joins the 'dog' pen.

To reduce the risk associated with individual securities, I have been investing more in collective Exchange Traded Funds (ETFs) which have high yield characteristics. My reasoning is that, in this context, a whole class of securities or geographic region may be out-of-favour. However, this is still an 'income' portfolio and when yields get too low, it is time to sell the 'runt of the litter'.

ISXF is the ticker (on the London Stock Exchange) or the rather-complicatedly-named iShares Markit iBoxx £ Corporate Bond ex-Financials ETF. It targets Sterling-denominated corporate bonds with investment grade rating which - as it says on the tin - are issued by non-financial organisations.

The purchase of this ETF goes back to 2011- and the early days of the DIY Income Investor blog. At the time it yielded 4.6%, which only just qualified for my definition of high-yield - but I was keen then to buy a range of different ETFs.

As I wrote at the time: "I do not expect any significant capital growth - this investment is for income only, providing a diversification in the portfolio from the 'ups and downs' of share prices. We shall see!"

Well, three years later, the yield has slipped to 3.9% - the lowest in the portfolio (excluding a couple of long-term 'dogs'). Whilst this is still better than most cash returns, the Sword of Damocles that is the unwinding of QE means that most fixed-income securities will fall in value. I'm up slightly on the purchase price, so this has been a reasonably well-behaved puppy. But I'm thinking that perhaps the way to play fixed-interest is to go back to individual long-term bonds, PIBS and prefs with more attractive yields.

The stimulus for this particular sale was that I needed some cash in that particular trading account to buy my RSA share allocation - but that is a different story...

[Sale price: £113.41]

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.

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