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This discussion board seems to lean towards manager's interests.

Someone can tell me why all the hostility to some topics on this board.

Fans of HFEL can buy as many shares as they like come and tell us about their total returns and dividends and tell us how the manager's report states that the dividend is covered by earnings

Damienmoore,

Thanks. The situation is rather more exagerated that the Edison report indicates.
When I calculated the yield on the top 10 investments that are quoted in the monthly reports some time after the 2021 Edison report that yield averaged 3.8% and HFEL yielded 8% at that time.
Subtract the 1% annual fee and the true income yield on the fund was approximately 2.8%.
Therefore 5.2% of the 8% yield is a return of capital since gearing is relatively low.

We all know this is an income fund but in this case the income paid far exceeds the yield on the underlying assets owned by the fund.

I have been invested in this fund for about 30 years then the fund outperformed many Far East growth funds the yield was 3.8% and Micheal Watt was one one of the most respected managers in the sector.

The overly used phrase of 'do your own due diligence' certainly applies here.

I suspect the managers or their representatives make up many of the comments on this board. On occasion the Edison report addresses issues raised on this board.

Finally Damienmoore yes the phase 'probably' can be ommited.

Damienmoore

You are probably correct.
What really matters is total return against the sector. HFEL is weak here since as some people are now realising capital is simply being returned as income. If anyone has followed my previous posts I have given a full expalanation of the likely methods of producing this outsized income and its likely effect of the fund.

There was I must add a great deal of hostility when I first raised this issue.

I have written lots of posts on the likely sustainability of the dividend. Not bery popular on this notice board.

Thanks to Gerry's vigilence we now know:
1. Why fund turn over is so high.
2. Management style.
3. How they can maintain fund distribution about 2X the income from funds under management.

James

I am not familiar with some of these holdings.
AAIF I know. Certainly recommended a plain vanila income fund 4% yield appears to be well managed.
JCGI not a traditional income fund but a growth fund that pays out capital as income.
I am really not fond of selling capital to distribute to fund holders as income.
That said in the recent past this has allowed them to invest in areas that have produced a higher total return than most income funds.
Is MYI and SOI on your radar?
I have not done a deep dive into ASEI. The dividend looks to be on the high side so I would like to know from first principles how it is produced.
On the plus side recent capital performance has been good and reported earnings are growing.
I guess you know all this already.

JARA might be of interest. Maybe you can tell us about it.

Gerry & James

"I think it covers most of the issues we have discussed on here recently".
Funny that. I rather think they are looking at the chat.

James I hold MYI as well so I am aware of that sequence of events.
I don't think the issue at HFEL is comparable.
Do you continue to buy. I can't remember?

James et al

"if it yields that it’s undervalued or unsustainable which doesn’t seem to be the case here".
I am not convinced of the undervalued case here.

https://www.edisongroup.com/publication/compelling-income-and-recovery-potential/30350

Latest Edison report on HFEL.

James & Gerry

This is not a 7.7% yield in the traditional sense some of the 23,4p dividend they are paying is a repayment of capital dressed as income via these funky methods.

From the comments it seems many see this yield as an indication of value I would argue there is no more value here than AAIF and SOI's 4% yield.

For me I still hold but will not add. Income is important but I am wary of the risk of a dividend cut in the medium term especially if market conditions become unfavourable.

I suspect HFEL is reaching the limit of these various methods of adding income. If I am right earnings growth might stall or even fall. If not then hats off to the managers for being able to deliver a 7.7% yield and maintain or even grow capital.

Earnings growth will be a real bonus given the figures quoted earlier in this thread.

Conclusion

These techniques tend to decrease total returns because of costs and other inefficiencies when employing these strategies.

In my opinion best returns come from buying and holding companies that increase profits and dividends over time.
If anyone knows of other income boosting techniques and can show evidence or a model please join the chat.

Usually I would not evaluate an investment in this manner.
Normally I would consider market conditions and comparisons with other assets

From 'fundamentals 2' it seems there is no interest in the comparisons.
This would be the Macro view which I prefer.

Income from options

The income earned by HFEL through options is only about 9% of total income. So if the underlying portfolio yields 5% options income will take that to about 5.5%. I think the actual yield from the portfolio is somewhat less than 5% see the figures for the top 10 holdings listed earlier.

Here is how one version of option trading works.
Take our 1000 BP shares at 100p each. We can write call options on those share. This means the person who buys the calls will have the right but not the obligation to buy the shares at a set price.
If the calls are sold ‘at the money’ the call buyer will have the right not the obligation to buy the shares from now till some future date at 100p per share. For this right the buyer pays the writer a premium say 1p per share or £10 for 1000 shares. We or HL1 keeps this premium regardless.

If the price goes up? If BP shares rise to say 110p the buyer of the calls will exercise his right to buy the shares at 100p to profit from the 10p price rise. HL1 will get £10 + £1,000. However the shares are worth £1,100. HL1 has given up a £90 gain.

If the price does not move? HL1 simply pockets the £10 premium which will increase his total income to £60 if the shares had a 5% yield initially.

If the price goes down? HL1 simply pockets the £10 premium which will increase his total income to £60 if the shares had a 5% yield initially.

There are market conditions where writing call options can boost returns but in rising markets it tends to detract from returns.
Again this is a very simple model call options can be written out of the money “for more than the current share price”. In the money “for less than the current share price”.

Given the known figures I think dividend capture is the technique used to generate most of the income above that of the underlying portfolio yield.

Another way to boost the income is by the allocation of charges.
If HF1 holds BP 1000 shares at 100p each as managers they need to charge £10 at a 1% management fee if I subtract this from the £50 income the fund can only pay £40 in dividends.
They could deduct this fee from capital pay £50 income and erode the capital base over time.
HFEL appear to charge 33% to income and 67% to capital. This is in line with most income funds.

A third method is by using gearing and repaying the interest from capital not income.
HFEL usually maintains a low level of gearing so is not likely using this method.

Fourth is of course options which everyone knows about I will go over the basics in a later post.

Jamesmaggs

You are not missing anything.
The best managed funds do not do it as they are effectively swapping capital for income.
HFEL has had poor capital performance coupled with a high turnover.
A recent transaction with Rio with the details reported by Gerry suggests they performing this 'dividend capture'
This allows the funds yield to be more than that of the underlying assets.
One reason, I think there are others.

This is likely why SOI and AAIF only yield round about 4% but with better total returns.

This company was not managed like this several years ago.

https://www.youtube.com/watch?v=gBnFxAJkU3A

Called it dividend capture / dividend stripping.

Geryy,

What I describe is what I mean regardless of the name given to it.
You described the same thing exactly with Rio and knows how many other times that was repeated.

"Alternatively buying in the quiet period, months prior at say 95p waiting for the shares to rise as it approaches ex divi and then selling at £1 might work".

Yes but then you would get the capital growth and probably not collect the dividend.

In any event these are short term strategies the real money in stocks is made by buying and holding good quality companies that increase profits over time.

Dividend washing
let us say the underlying portfolio yields 5% how can this fund pay a dividend in excess of 5% one technique is dividend washing which can go something like this:
If we were to form a fund HF1 this fund invests in a market which has only 2 stocks BP and Shell.
Shell shares are priced at 100p, pays a 5p dividend it goes ex dividend on the 15th February and pays on the 15th March.

BP shares are priced at 100p, pays a 5p dividend it goes ex dividend on the 15th June and pays on the 15th July.

HF1 buys 100 Shell shares in January on February 15th it is entitled to a 5p dividend which it will receive in March. HF1 Has a market cap of £100
HF1 sells 100 Shell shares on February 20th but because it trades without the dividend the price will go down to 95p. HF1 will get £95 capital but got £5 in dividends.
HF1 buys 95 BP shares. BP shares still costs 100p because it trades with the dividend due in July.
HF1 will receive £4.75 dividend on 15th July. BP share price will fall when it has gone xd on 15th June.
At the end of the year the account looks like this:
Capital 95 * 95p of BP shares = £90.25
Income received £5 + £4.75 = £9.75
Yield 9.75 / 90.25 = 10.8% At any point the underlying share only yields 5%

We can see capital is reduced to pay the higher income.
Overall the return has not changed in this very simple theoretical model.

Respectful comments welcome

https://www.edisongroup.com/publication/consistently-high-and-growing-income/29746

Scroll down to Investment process at a reasonable price shows the HFEL yield at 4.8% historical 5.2% forward
This yield and earnings of the fund are not the same.

HFEL Yield 23.4 ÷ 300 = 7.8%
Earnings Yield 23.22 ÷ 300 = 7.74%
The first % number by the top 10 holding is the fund weighting, the second % number is the share yield.

Breakdown of HFEL income
£000s
Aug 2021 Investment income 37,236 Other income 3,103 % additional income from options 8.33%
Aug 2020 Investment income 35,344 .Other income 3,410 % additional income from options 9.65%

Top 10 Holdings
% of fund Yield
1 Australia & New Zealand Banking Group 3.9% 5.2%
2 Mcquarie Group 3.9% 3.01%
3 Mcquarie Korea Infrastructure Fund 3.9% 5.14%
4 KB Financial Group 3.7% 2.23%
5 Vinacapital Vietnam opportunity Fund 3.5% 2.4%
6 Hidustan Petroleum 3.2% 7.4%
7 Sun Hung Kai Properties 3.0% 7.36%
8 Taiwan Semi-Conductor 3.0% 1.3%
9 OZ Minerals 2.9% 0.92%
10 SK Telecom 2.9% 1.38%
Total 33%
Yield simple average 3.634%
Yield weighted average 3.789%

HFEL Yield 23.4 ÷ 300 7.8%
Earnings Yield 23.22 ÷ 300 7.74%

Please do not respond yet.
I want to see how the post looks then develop the model