Thursday 13 October 2016

Bond dilemma? (Portfolio Buy)

Profit-taking - by selling some of my largest holding APF - means the opportunity to buy something new.

It's trite to say but the 'buy' decision is what makes you money - coupled, of course, with selling at the 'right' time. Which is to say, it's difficult.

It helps to have an investing strategy. The DIY Income Investor strategy has developed over time but is still based on the early idea of the Income Pyramid that I came up with over five years ago - layers of different types of income-producing savings and investment.

Setting aside the cash component (which today is actually quite large - around a quarter of all the financial assets) the strategy is pretty simple:
  • high-yield investments with a (hopefully) sustainable income profile
  • diversification (<5% in any one security)
  • 50/50 split between dividend shares and fixed-income securities (e.g. bonds)
  • geographical and currency diversification, particularly using Exchange Traded Funds
  • 'sell' rules (to avoid selling too early but to allow profit-taking)

So, a first consideration when buying is to look at the profile of the portfolio. After a recent spate of buying dividend shares (to take advantage of the new Dividend Tax Allowance), the fixed-income portion of the portfolio was slightly under-represented.

This presented a bit of a dilemma. Given the recent fall in the value of Sterling, I did not want to buy overseas bonds, as this would lock in the current low value of the currency. I preferred instead to look for good UK options. After a bit of poking around I found something new to me that seemed attractive - a UK bond fund giving access to a wide range of commercial debt.

CQS New City High Yield Fund Limited (NCYF) is A Jersey closed-end investment company run by NCIM, which mainly invests in high yielding fixed-interest securities. It is currently yielding over 7%, with a management fee of 0.8%. The dividend yield has been steadily increasing over time and the Fund has a limited gearing, which is reassuring.

Of course, the danger with this type of vehicle is that the dividend is paid partially out of capital or borrowing - which does seem to be the case for 2015; but 2015 was a bad year (as I can testify from my own portfolio experience).

Although I am generally wary about 'funds' I haven't found a more attractive UK-based diversified bond ETF, so I'll watch how this performs.

[Purchase price: £0.60]

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.


  1. I see this goes XD on 27th October. I suppose that if you don't jump before then you only get three-quarters of the dividend in the next twelve months. Congratulations on APF, by the way. I am finding it really hard to decide to get out of some of it, for the reasons you mention in your last blog. Keep it up!

    1. Haha - I find myself watching the APF ticker, waiting for a spike so I can off-load some!

  2. On a similiar theme, the Telegraph's Questor has tipped:

    Lowland Investment Company plc (LWI)

    Although the yield is low - around 3%, this has risen by an average of 7.6% annually over the past five years and has been increased EVERY year since 1972 (except 2009 when it was maintained).

    The link for those interested is:

    Disclaimer: I have found advice by DIY income investor generally very good and questor a bit more patchy, so as ever - Do you own research!

  3. I've held NCYF for a few years, and the share has consistently been one of the best yielding in my portfolio. If that looks a little too risky, then HDIV may be a better option (5.53%). CMHY and IPE are also worth evaluating (5.18% and 6.47% respectively). FWIW I hold all of these.

  4. I also hold NCYF in my portfolio, but it makes a very small overall %age as I wanted to try it, and see how it goes - the dividends pay out nicely, however growth has been limited, and my ideal is a little of both. I am likely however to add further to it in the future when the time is right for me
    London Rob

    1. I agree Rob, the balance between growth and yield is a delicate one. I lean towards yield (I'm 'older' and so money now is better - there is a declining opportunity for money later!) and so NCYF plus the others I mentioned work well for me. I favour Investment Trusts (for many reasons) and am looking at SMT, FGT and TMPL for the very necessary component of growth in the portfolio.

      So far as NCYF is concerned, now is a reasonable time to buy if you intend to hold for a while. The premium is about 4% to NAV and widening due to the markets desire for decent yield. NCIM do not actively manage the premium/discount to NAV as some other IT do (e.g. CTY), however they do issue new shares when the premium becomes excessive (last round was about a year ago) and this obviously has an impact on the share price.

    2. Hi Chris,
      Makes sense if you are most focused on income, then why wait for the growth - I took it for the income in order to boost my reinvestment ability in other areas, so I can start my snowball well. I also own SMT - and its been a stellar performer so far, not only with reinvested dividends, but also on the growth front, so I am looking forward to that in another 10 years!
      I've got my eye on CTY at the minute, however I try to avoid buying any IT at a premium, so at the minute I am sitting on my hands (as I have been for the last 5 months), just waiting for something with a good enough safety margin!
      London Rob

  5. Thanks Rob,

    I'd also suggest IVI as one to watch. The Z stat suggest that it 'cheap' at the moment...

    Re: IT - it is best to assume that they always trade at a discount of 5% to 10%, unless the discount is actively managed. I bought CTY on the last major dip in the market and so have a yield of 4.05% from one of the better managed Large UK Cap IT.

    I think SMT will be my next buy - just a matter of when, and being patient while waiting for the moment to arrive!


    1. Hi Chris,
      Thanks - I will keep an eye on that one then, at the minute I fear we are fairly high up in the market, so I am still sitting on my hands. SMT I add to each year if I can, and so far its doing a stellar march, especially with dividends reinvested, its a nice combination.
      I also bought the Woodford Patient Capital. Its dipped below what I paid, and I have toyed with buying a bit more so that I can get over the threshold for automatic reinvestment of dividends, but yet to do so...