Beta shares DIVIDEND HARVESTER fund, an amateur’s opinion

Posted by Mike H on 17 October 2016 | Comments

What you win on the roundabout you tend to lose on the swings

HVST has been around for nearly 2 years so I thought I would see how it is performing. (Before we start, remember that I am not a professional investor, my assessment could well be wide of the mark)

Beta Share’s Chief Economist David Bassanese’s article clearly explains the slides and roundabouts of the HVST strategy

http://www.betasharesblog.com.au/this-years-harvest/#more-

http://www.betasharesblog.com.au/reap-what-you-sow-hvst/

Mind you it was an unfortunate time for beta shares to initiate this strategy as David explains. Performance to date may well be under long term levels.

The slides: The sad truth is when you are dividend “harvesting “you are buying the share higher pre dividend and selling lower ex dividend. So there is going to be a capital drop each time this happens. This seems to be have confirmed by the funds price performance, having fallen 10 % more than the ASX 20 over 2 years.

 http://www.betashares.com.au/products/name/australian-dividend-harvester-fund/#each-performance

The ASX 20 fell over the same time (mainly due to the shellacking that the financials have had). So there is roughly an additional 5 % capital loss p.a.  in the harvester fund compared to ASX 20 (Vanguards VLC)

http://www.asx.com.au/prices/charting/index.html?code=VLC&compareCode=&chartType=line&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=Bar&volumeMovingAverage=&timeframe

It may be my imagination but in a falling market high dividend shares seem to walk on water until the ex-dividend date and then fall precipitously to join the rest of the market. If is so it would only add to buy-sell cost of dividend harvesting.

Despite all the overall return on HVST  is performing better after franking, than directly owning all the usual suspects (e.g. the banks, TLS, PTM, AMP, MQG)

Note however the shares previously mentioned are all presently regarded as undervalued by Morningstar. You may well not benefit fully in price recovery if you have HVST ETF instead.

If my calculations are correct these shares have a total (price and dividend) performance before franking not far off that of  HVST.

 

Now we get to the swings.

The dividend payout averaged 13.9 % p.a.! (with franking included.) So, to maintain fund capital, you will need to replace decreased capital value each year out of these dividends

The VLC ETF (ASX 20) produced 6.5 % franked dividend payout p.a.  over the same time (with lower fees 0.2 % vs 0.65%? plus 0.25 % costs).

Over the last 2 years HVST is roughly 2.5 % pa ahead of the ASX20 after franking

WHY THIS WORKS

David seems to suggest a major reason that dividend stripping works in a relatively efficient market is due franking credits.

40 % of our shares are owned by overseas shareholders who cannot access these franking credits. If they sell just before going ex-dividend they could pick up, say, 20 % over their expected dividend The Australian based dividend “harvester” then collects the remaining half of the franking credit.

HEDGING

Beta shares also have a hedging strategy in place to minimize volatility. Unfortunately, this does not seem to protect you from sustained down turns as the figures and graphs show. (See David’s article). The decrease in volatility does not seem pronounced either.

IN CONCLUSION

It is still a bit early to judge. Not totally impressive yet but not to be sniffed at, and it could well do better in the future.

In this low income environment HVST may suit SMSF investors in retirement mode as part of their overall investment strategy. (esp. If you are looking for a long term investment and are prepared to replenish your capital “losses”). The fund also pays on a monthly basis so the regular income will suit some. You will still have to wait for the ATO to reimburse the franking component. Be sure to carefully do your own due diligence

I suspect that like most strategies, if enough investors copy it, it may stop working.

Just be wary falling markets.

(watch out for of rising ones too)

Regards

Mike H

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