Portfolio New Year Review

There is nothing much new to report on the DIY Income Investor portfolio, although it continues to hit new historic highs in valuation.

The New Year is a good excuse to take stock and review the portfolio and the strategy for the coming year. However, I'm not expecting to change much on this winning formula.


After a chunky performance in 2016, the portfolio seemed to pause for breath in January before shooting up to new highs in February. I have not bought or sold anything, hence the lack of recent posts (holidays also helped to reduce my impact on cyberspace).

In reviewing the portfolio I try to look at:

• total return (including income and capital gain/loss)
• the trend in income
• any 'problem' holdings
• any systematic patterns in returns
• benchmarks of the broader market and of similar investment approaches

Total Return

The around-30% total return was very satisfying, although I had higher returns in 2012 and 2009.

Disclaimer: I calculate this very simply as:

final value - added capital - starting value / starting value

 As there was a large capital addition during the year the performance may be slightly overstated.

Income Trend

Income from the portfolio holdings has held up well with the current yield standing at 6.6%, although it is slightly lower than historic highs.

'Problem' Holdings

Investing is not an exact science - the evolution of stock market values is mainly random and difficult to forecast. My approach postulates some persistent distortions due to 'human nature' but the investment decisions based on these are obviously not foolproof - it does go wrong sometimes.

Fortunately there are not too many 'problem' holdings, but they include:

• Manchester Building Society: Buying these PIBS was based on a yield that was possibly 'too good to be true'. By some financial smoke and mirrors the Building Society was able to avoid paying the interest on these, resulting in a slump in the price (now currently at around 25% of the face value). My purchase was based on the - perhaps optimistic - assumption that this struggling building society would be rescued by a larger group, which would then offer to pay off the PIBS holders, So far, so bad - and it's my biggest paper loss and no income. Still, selling now would be the worst action to take.
• HNT (Huntsworth) is my second biggest 'problem' holding: I should have learnt not to trust 'media' shares. HNT is described as a 'healthcare communications and public relations group'. I (obviously) bought it purely on yield and regretted doing so. Current and forecast yield are around 4.5%, so I am happy to continue holding; the price seems to be recovering on good recent performance. 
• APF (Asia Pacific Holdings): although this bet on the value of mining royalties has generally a star performer, I still have a chunk - bought in 2014 - that is 'under water'. The current yield of around 5%, and the good situation looking forward, mean that I am happy to keep holding on to it and wait for a recovery in the price.
• CLLN (Carillion): After buying this infrastructure builder/support service supplier I had second thoughts, due to it's large pension obligation. I'm waiting for the price to recover in order to off-load it.  The yield is currently over 8%, indicating perhaps that the market is reluctant to t touch this, even with a barge pole. Still, it's a nice yield...

Systematic Patterns

A lot of the rise in portfolio value is due to the weakness of Sterling - hence most of the foreign-oriented ETFs are showing nice capital gains. These values could deflate if Sterling recovers.

For some reason, ISAs in my wife's name have performed better - and yes, they are stuffed with foreign ETFs. 

Benchmarks

Wider market (FTSE), Total Return

• FTSE100: 19.1%
• FTSE250: 6.7% 
• FTSE350: 16.8% 
• FTSE AllShare: 16.8% 

Similar investment strategies:

• IUKD (UK High Yield Shares): 8.5% Net Income Reinvested
• VHYL (All World High Yield Shares): 28.3% 'Standardised Performance'
• HYLD (Global High Yield Bonds): 11.9% Total Return

Conclusions

It looks like the DIY Income Investor portfolio has done well in 2016, both absolutely and relatively. However, this is not as good as it might seems as the key development seems to have been the fall in the value of Sterling. So although the portfolio is worth more in Sterling, the currency itself is worth less.

Which makes me think of the old observation about swans - seemingly serene but under the surface paddling like mad to overcome the current.



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.