Carillion's effect on sector average calculation

[Inaam Hussain]

Hi Stephen

Can I check the HYP mathematics with you please? Carillion was a stock that I owned and while it was trading let’s say I had 15 sectors in my portfolio. If I am adding new money, and pretend Carillion is still trading, then I’d be looking for the average value of 15 sectors. Now that Carillion is gone, then should I be looking at the average of 14 sectors ? or do I need to count Carillion’s sector, as money was allocated to it originally, but just consider that sector’s value as zero ? Also, is there any difference in the maths when topping up versus adding new money for this scenario ?

Many thanks in advance.

[Stephen Bland]

It’s the 14 sectors that you now own, excluding Carillion, which should be used to determine the average sector value. That’s because original cost is not relevant for this purpose.

Adding new money for an addditional sector or topping up an existing one both use average current sector value but in slightly different ways. In the former situation that average value is the amount to be invested in the new sector. In the latter, the idea is to locate those sectors which are below the average. These then form a short list from which to choose where the top-up cash will be allocated, normally the highest yielders which are Buys at the time.

The amount by which the sector is to be topped up is the sum sufficient to bring the chosen sector up to the current average but not above it, approximately. A few pounds here or there is not important.

[Inaam Hussain]

Thanks Stephen

[Inaam Hussain]

Sorry Stephen, just a question about the “topping up” process. If someone did the above exactly as you describe, and topped up a particular sector – when they came to top up next time around, what if that same sector turned out to be the most desirable (i.e. valued below the sector average, status is BUY, highest yield) ? Is it correct to go ahead and put further money into the same sector again ? What I mean to say is that when evaluating where to top up, does it matter if a sector previously received top up money ? I imagine not, and that the top up money goes to the most suitable, even if it’s the same as last time, but just wanted to check my understanding please. Thanks

[Stephen Bland]

Your thinking is correct in that it doesn’t matter which sector received top up cash in the past because past events are irrelevant for this purpose. The calculation for topping up is always based on the current situation, regardless of what happened earlier.

No need to apologise for asking further questions, I’m happy to deal with any queries.

[Inaam Hussain]

Thank you – much appreciated

[Jeffrey Beranek]

What are your thoughts on topping up sectors in previous HYP portfolios? I have a number of essentially ‘full’ and well balanced HYP portfolios that I ‘unitise’ so that I know when a sector is underweight. However, some sectors do not appear in all my HYP portfolios (such as house-builders or advertisers) that might be currently considered ‘buys’. Might it be okay to add more to such an ‘old’ sector, so long as it never exceeds the average sector size across all HYP porfolios – if you see what I mean. I understand you treat each new HYP as a separate entity, but presumably most people have all the shares bundled together in a single account and not all HYPs might have the same amount saved in it. If all the sectors on a per-HYP basis are largely in balance, would you think it’s better to concentrate on adding more to the current HYP, even if that might mean overweighting a popular sector (e.g. banking)?

Jeff.

[Stephen Bland]

As you indicate Jeff, my advice is to have just one HYP and not several. Topping up then follows the procedure I have described.

Where a portfolio was originally constructed from one of my earlier HYPs, then if the investor wishes to add new sectors from my later selections, that’s easily done whilst still maintaining just a single portfolio. The amount to be added into a new sector is the then sector average value as I mentioned in the latest TDL.

If for some reason you have operated multiple HYPs and wish to keep them that way, then logically you should treat each portfolio separately when using my topping up procedure. Thus the average sector values will vary between portfolios. But that’s really a clumsy and unnecessarily complicated way to run things and I don’t advocate this.

I suggest you should reconsider all your HYPs as one single portfolio, thereby making it simple to add new sectors or top up existing ones. In answer to your final point, when topping up you should never overweight a sector, you add only to the underweight sectors and even then just enough to bring it up to the new average. (ie. including the new money). Again this will be solved in your case buy merging all your HYPs into one. You’ll then know exactly how many sectors you have, the total portfolio current value and consequently the average sector current value and the margin available for topping up below average sectors or alternatively, adding new ones.

[Jeffrey Beranek]

Thanks, that’s exactly what I’m doing already, but I just wasn’t doing a very good job of explaining it! 🙂

If all the shares in a sector are on HOLD, then I would obviously stop topping them up. I could then start bringing that sector back up to the sector average if a company in that sector moves to a BUY.

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