The Problem with HVST (Betashares Australian Dividend Harvester Fund)

For probably two years now I have been buying up the Betashares Australian Dividend Harvester Fund (HVST), which is a exchange traded managed fund listed on the ASX. The appeal of this fund is that it pays a very high dividend yield (about 10% to 14%) and pays this dividend monthly. The monthly dividend payment normally gets paid into my bank account in the middle of the month, and every payment is roughly the same. Hence HVST makes living off dividends very easy. This is why I have accumulated over $100k worth of HVST.

However, it is becoming increasingly clear that there are many flaws with this fund, the main one being that it has not performed well in the last few year compared to the ASX 200.

HVST vs ASX 200 from 2014 to 2017
HVST has significantly underperformed the ASX 200 over the last few years (chart from CommSec).

That being said, I am not criticizing the fund or Betashares. I was well aware that the dividend harvesting technique employed by the firm would result in less upside when markets were going up. This is a result of the fund manager buying high dividend paying stock just before dividends are paid and then selling the stock after the dividend is paid. As stock prices normally go down after dividend payment (as the company’s value goes down in line with its reduction in cash) then naturally a dividend harvesting technique would result in lower capital gains.

Something else surprising is that during downturns in the ASX 200, HVST also went down considerably as well, which makes me question the firm’s risk management overlay employed. According to the article Managing risk: the toxic combination of market downturns and withdrawals in retirement on the Betashares Blog:

One way to help manage sequencing risk is to apply a dynamic risk exposure strategy, which seeks to reduce downside market risk…. BetaShares combined its expertise with Milliman to launch the BetaShares Australian Dividend Harvester Fund (managed fund) last November. The fund invests in large-cap Australian shares with the objective of delivering franked income that is at least double the yield of the Australian broad sharemarket while reducing volatility and managing downside risk.

Based on this description, I was hoping that the fund’s risk management overlay would reduce downside movements, but the chart of the performance of HVST against XJO shows that when XJO turns downwards, HVST goes down by as much. When XJO goes up, HVST tends not to go up much if at all, which results in HVST falling by about 20% over the last few years while XJO has managed to increase in value by a modest 5% during the same time period.

As I said, this does not mean I will not continue to invest in this fund. The regular and high monthly dividend payments are extremely convenient, and any capital losses made by the fund over time, in my opinion, can be compensated for by investing in ETFs in riskier sectors e.g. investing in tech stocks, emerging market, or small caps or even by investing in internally leveraged ETFs such as GEAR. For example, if you invest half your money in HVST and half in GEAR, you get the convenience of monthly regular dividends from HVST and any capital loss is compensated for with your investment in GEAR which should magnify upside market moves. Note that a limitation of the half HVST and half GEAR strategy is that when the market goes down, GEAR will go down significantly as well. Furthermore, another problem with both GEAR and HVST is that they have management expense ratios that are significantly higher than broad-based index ETFs mostly from Vanguard or iShares. Both HVST and GEAR have management expense ratios of 0.80 percent whereas Vanguard’s VAS is 0.14 percent and iShares’s IVV is 0.04 percent.

Nevertheless, I do recommend many products from Betashares. One ETF that I am interested in from Betashares is their new sustainable ETF called the Betashares Global Sustainability Leaders ETF (ETHI). I normally buy ETFs in batches of $10k to $25k at a time, so I intend to buy a batch of ETHI and write a blog post about it later. I have mostly positive views about Betashares as they provide a great deal of innovative ETFs.

Update 18 June 2017: The poor price performance of HVST is explained in the Betashares blog article Capital vs. Total Return: How to correctly assess your Fund’s performance. If performance includes income as well as franking credits, the gross performance of HVST looks more favourable.

30 thoughts on “The Problem with HVST (Betashares Australian Dividend Harvester Fund)”

  1. Hi there,
    Just letting you know that when looking at the performance of a fund like HVST and particularly when comparing to other indices like the S&P/ASX 200 it’s important to base this off a total return (check out the BetaShares article here on this http://www.betashares.com.au/insights/capital_total-return/)

    When comparing HVST on this basis, while it is still performing under the market, it doesn’t look nearly as bad (3% v.s 7% p.a. since inception)

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  2. the price of HVST was hit really hard (down about 10%) during May, June 2017 as there holdings at that time are only NAB, Wespac and Macquarie and the banks fall significantly during that time. it’s not diversified at all… not sure if HVST price would return to $20 mark

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  3. Nearly down to $18 is the share price of HVST , very worrying signs IMO, being a retiree I dont like seeing my money disappearing…might have to cut my losses if this continues, hate losing that juicy dividend every month but that share price seems
    to be on a spiral down that wont stop..

    Liked by 1 person

    1. Seems like there is still a fair bit of misunderstanding on HVST and in general the nature of high income funds. To put it simply, total return = capital return + income return. Thus, if the stock portfolio of any fund (including HVST) has a total return of less than the income return than BY DEFINITION the unit price of the Fund will drop. In other words, to the extent that the total return of HVST is less than 11% you can expect the unit price of that fund to drop by the difference between the total return and the income return. For example, if you believe long term total returns of Australian equities are say 8% you can reasonably expect that if you take all the income out of the fund in dividends that the capital price will drop 4% for that year. As such, over the long term the unit price of the HVST will continue to drop which does not mean that the fund is not doing what it is supposed to do. This will happen with ANY high income fund. The real benefit of this fund are the franking credits which are about double that of the sharemarket. This acts as “free” returns in the form of tax credits or refunds for low tax investors. For those investors wanting to keep capital higher the only way to go is via the DRP – the unit price will continue to drop but you will be compensated by more units in the form of the DRP. BetaShares recently put out a good explanatory paper recently, see http://www.betashares.com.au/wp-content/uploads/2017/06/Revisting_HVST_Strategy_final.pdf

      Hope this helps people better understand this fund!

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      1. David you can keep spouting this garbage, but as the dividend each month gets less and less, the losses far outweigh the returns. Personally I have lost several thousand dollars and only made a few hundred. If you were in any way MANAGING this fund, you would make smarter choices and better investment decisions. This company as a whole has a woeful record for investing compared to Vanguard or iShares who for some reason do not need to issue papers justifying spiralling losses.

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      2. Gday Brett, Understand your frustration and with HVST at $17.48 today it just keeps getting worse.
        To be fair to David he has only explained how the mechanics of how the stock works, problem is Betashares didnt offer that same explanation in their advertising/PDF’s etc and now that the market is sour on banks in particular you dont have the safety margins anymore to be be making money in this type of arrangement with the market trapped between 5600-5700 points.
        Their risk management strategy/overlay doesnt seem to work in the present market conditions and the stock seems doomed to fall further…
        The dividends are getting less which also points to a struggle to find companies paying high dividends especially with all the banks struggling and other notables like Telstra.
        Betashares need to do something quickly to change things up although I continue to be amazed that punters are pouring money in and the FUM increase.
        I guess when the rest of the market is offering 5% average and you are being offered 11.5% it seems to good to be true and its a bit of a lesson in investing even when its a large investment company like Betashares behind the idea…
        Like i said to others, glad I sold when I did as I hate losing money and I’ll be watching closely to see if HVST can be turned around…miss that divvy though..
        I

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      3. The price drop in HVST has definitely affected my net worth by five figures. My solution is to follow BetaShares advice and DRP 50% of the dividends. Hopefully now the capital is stable, but having lower dividends is not ideal, and I won’t be putting any new money into HVST.

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      1. Rule of thumb with losses is about 6-8% then you should sell depending on time in the market and history of the stock.
        This isnt CBA we are talking about so there is no reason to be over optimistic of a big bounce recovery, however like you I am down around 10-11% . I guess those juicy dividends have kept me from pushing the button on HVST, but even though the stock steadied today at $17.90 I’m ready to exit early next week if we dont get over $18..
        The premise of the fund is that you have to top up your losses with part of your extra juicy dividend when times are not so good….fine when the market is extra bullish and those blue chip bank stocks are tearing it up but when the banks get hit the price drops and when they go ex Div the price drops further so you are expected to make up the difference when the stock gets sold off for others with upcoming Dividends.
        In fact HVST relies virtually on the Banks for its money….I looked at the weighting of HVST stocks and its 63% STW, then four of the big banks making up most of the rest, now STW is a SPDR ETF thats major holdings are?…you guessed it, the big banks…..
        If you look at the mathematical dividend its about 11.5%…..but in reality those bank stocks are giving you 5-6% max and STW is around 4%…….we are not getting 11.5% on our money or even close so we cant be feeding money back into to top up our holding. Another problem we have is its reporting season and with CBA taking a hit today I expect a few of the other big banks
        to also get sold off when its their turn .
        So in short I cannot see how this stock will bounce back in the short term …..as I see it it only works in a real bullish market when the banks are flying and absorb any losses when the stock goes ex div and prices drop….
        If someone else has some other ideas or can give us hope then I’d love to hear it…

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      2. Fair enough Mark – all makes sense. Just note that it really isn’t possible to use technical analysis to evaluate a stock like HVST given the changing nature of the portfolio. Investors in any fund with high dividends like HVST need to understand a very basic premise…total return=capital return + income return. Therefore depending what one’s view of total returns out of a basket of securities this will imply what sort of capital decline one can expect assuming a 11% income return. HVST’s portfolio has definitely been smashed recently but of course that isn’t always the way it will be. However we can know for certain that unless total return is >11% there WILL by definition be capital falls – and that’s fine because you are getting 11% along the way. The franking credits themselves add another 3% p.a. assuming you get their full value (less if you are taxed but still something).

        Finally, one last thing I would say – HVST will actually underperform in a raging bull market (due to its risk management strategy). Instead, where one could expect HVST to outperform will be in a falling market where the risk management kicks in..

        Best of luck all in their journeys!

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  4. Calvin, I watched STW drop 13c off the price the other day and HSVT just followed it down…..as I said the 11.5% is a fallacy its just a nice mathematical figure that we can all dream and salivate over. In reality its what the banks are giving is what we get -Betashares fees. So say its 5%…..it just isnt sustainable, its operating more like an annuity…
    You are better owning the big banks out right…..problem is as this site suggests we are living off divvy’s and we all love that money every month so what do we do with our money if we take it out of HVST?
    Aurora’s monthly distribution funds are diabolical in terms of risk , other alternative is Latrobes 12 monthly account which goes at 5.2% but mortgage funds are scary…even though Latrobe claim not to have lost a cent over 65 years…
    Very hard to make your money work for you without high risk these days…

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    1. Monthly dividends are great which is why I am reluctant to sell any HVST, but I understand it is losing value. My plan is to top it off with other investments as well, such as the big banks. If your monthly payments are enough, you can afford to invest in other investments that pay eg quarterly. Another option is to focus on capital gains to make up for the capital losses of HVST, so eg have HVST but also invest in an asset class you feel will grow significantly soon to make up HVST falling in price. For example I suspect emerging markets will be promising.

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      1. I was looking at 3 different stocks that pay quarterly dividends have one paying me every month….ie DDR and RFF are two stocks I own and they pay out quarterly on different months of the year. …both are growing and pay healthy divvy;s 6.4 %and 5% . Not a real fan of REITS but ARF if I bought it would give me the other months of the year and at 5.7%.
        Emerging markets are promising but I cant get a handle on them yet and would probably go an ETF in that area but the divvys are still small.
        I wish Wilson asset management would bring out an income product or at least a quarterly payer, everything they bring out seems to work and they are super cautious with their money…

        Liked by 1 person

      2. Mark & Calvin are both right, even though it’s hard for HVST to bounce back but at the same time the monthly dividend is hard to resist.
        There are 2 other funds that I consider buying after HVST. YMAX of Betashares seems similar to HVST but it uses call options instead of harvesting technique and it pays quarterly, but I feel like the advertised yield looks similar to HVST’s and I doubt if we have to sacrifice some capital for the additional yield. The other fund is WDIV of SPDR, investing in international shares that pay big dividends. The yield could be lower, but we don’t have to worry about the concentration of Aussie market.
        Otherwise I might continue to put into VHY…

        Liked by 1 person

      3. I own both YMAX and UMAX both are ok….own VHY too and its excellent, I like Vanguard’s low fee approach.
        A sneaky little quarterly paying fund that I am looking at and has been around a while is the Australian Enhanced Income Fund AYF…quarterly distributions@5.8% and is only $6.08, its setup for retirees in the main ..over 5 years the share price has only moved about 50c each way so it seems safe and is a reliable payer…

        Liked by 1 person

      4. Thanks Mark and Alex for your input. I will look into AYF. I hold HVST as well as UMAX and IHD. Like I said, HVST has been disappointing. UMAX looks to be holding up thanks to strong US equities, but I suspect the recent collapse in the US dollar will hurt it. The main lesson from all this is to simply diversify. There are many potentially good dividend investments out there. Diversify across them.

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  5. HVST 7c up today as the market and Banks were up , we also saw Betashares redeem about 5.5 mills worth of HVST units….usually do that when demand is down and there is over supply in the market. Bit of a red flag IMO when that happens, maybe they might invest some of those dollars back in the fund but I doubt it.
    I’m hanging in there still but not with great confidence…

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  6. Seems like there is still a fair bit of misunderstanding on HVST and in general the nature of high income funds. To put it simply, total return = capital return + income return. Thus, if the stock portfolio of any fund (including HVST) has a total return of less than the income return than BY DEFINITION the unit price of the Fund will drop. In other words, to the extent that the total return of HVST is less than 11% you can expect the unit price of that fund to drop by the difference between the total return and the income return. For example, if you believe long term total returns of Australian equities are say 8% you can reasonably expect that if you take all the income out of the fund in dividends that the capital price will drop 4% for that year. As such, over the long term the unit price of the HVST will continue to drop which does not mean that the fund is not doing what it is supposed to do. This will happen with ANY high income fund. The real benefit of this fund are the franking credits which are about double that of the sharemarket. This acts as “free” returns in the form of tax credits or refunds for low tax investors. For those investors wanting to keep capital higher the only way to go is via the DRP – the unit price will continue to drop but you will be compensated by more units in the form of the DRP. BetaShares recently put out a good explanatory paper recently, see http://www.betashares.com.au/wp-content/uploads/2017/06/Revisting_HVST_Strategy_final.pdf

    Hope this helps people better understand this fund!

    Liked by 1 person

  7. I have read the Betashares damage control report and its just confirmed what I have been saying that the fund is a proxy annuity where the only real difference is that income levels can change.
    The fund was at $21.56 a year ago and now is battling at around $18….thats about a 16% drop…..they are talking examples of 4% every year at around 80c….
    Sure the banks struggled with the levy news etc but there are other issues, you look at the holdings and STW as I said was a 63% weighting and is made up of the banks as its top holdings….its an ETF where there are fees built in and of course that brings the return down to 4%. Why would you invest so heavily in a fee charging ETF made up of banks when you already have banks in the fund? . There are other stocks paying decent franking credits as well as decent dividends…
    To cover my losses and return the capital to my initial investment I would need to take up the 100% DRP plan for 12 months and hope the franking credits remain decent….great.
    The other problem they have and obviously why the revisiting strategy document was produced is a lack of understanding but also
    because the stock is being sold off as investors are doing their maths and panic selling causing further drops in the share price other than just through mechanics of the stock. I know several investors with decent holdings that have bailed out.
    When you see Units being redeemed as I said previously that doesnt do much for investor confidence either..
    Interesting that document also pointed to or pushing maybe some of those selling investors to other Betashares funds like YMAX and UMAX. etc ……

    Liked by 1 person

    1. Hi Mark,
      You’re right that for investors who take all the income out as distributions (i.e. rather than reinvest in the DRP) that HVST does act like a variable-rate annuity. The 4% drop I believe relates to the average sharemarket performance. In fact what actually happens to the underlying portfolio is all a result of the stocks that are being held. For example, HVST held banks when the bank levy was announced and banks got smashed and then happened to rotate out of the banks just when they recovered which led to poor performance.

      Just one thing about funds like HVST – when investors sell the stock this has no impact on the price of the stock – ETF like funds are open ended and so, unlike companies and LICs, buys and sells in the actual ETF itself has no impact on the stock price, so that is something you don’t need to worry about. It’s rather the underlying performance of the stocks themselves that cause rises and falls.

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      1. Hi David,
        Thanks for the reply and comments, unfortunately HVST fell another 8c today and thats around 17.5% for a year so I
        took my medicine early in the day and sold for around a 10% loss…Buy slow and sell fast they say, wish I had been a bit quicker but I kept the faith and hoped the market would turn. As you say the stocks that make up the ETF are what determine its outcome and and as I have said before when the banks take a hit HVST takes a big hit as it usually has a high weighting of bank stocks.
        The two brokers I deal with all have HVST as a strong sell and when you run the numbers through a few of their systems its very average reading for the future on a technical analysis basis.
        A few of the analysts are saying the market will test below 5600 points…thats going to wipe a fair bit of HVST for sure if that happens. IMO its a stock you can only hold in a very bullish market where the usual blue chip stars are flying providing growth and dividends, at levels around 5700 points its only going backwards and quickly.
        I think at 80c a year fall in price you can afford to cover the capital loss with part of your dividends but when its nearly a $4 loss that
        becomes impossible like its been this last 52 weeks..
        The fact betashares issued that document revisiting the fund tells you they are worried, the selling in the morning was very frantic too as investor sentiment was very negative..
        I hope it improves but one of the biggest mistakes investors can make is to keep losing stocks especially when losses become excessive…a rule I follow is sell 50% when losses get to 5% and sell the rest when its 10%. Wish I had taken my own advice with HVST but those juicy divvies affected my thinking…lesson learned.
        Good luck to you all and maybe I might be a HVST investor again in better market conditions..

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  8. Hi Mark,
    You’re right that for investors who take all the income out as distributions (i.e. rather than reinvest in the DRP) that HVST does act like a variable-rate annuity. The 4% drop I believe relates to the average sharemarket performance. In fact what actually happens to the underlying portfolio is all a result of the stocks that are being held. For example, HVST held banks when the bank levy was announced and banks got smashed and then happened to rotate out of the banks just when they recovered which led to poor performance.

    Just one thing about funds like HVST – when investors sell the stock this has no impact on the price of the stock – ETF like funds are open ended and so, unlike companies and LICs, buys and sells in the actual ETF itself has no impact on the stock price, so that is something you don’t need to worry about. It’s rather the underlying performance of the stocks themselves that cause rises and falls.

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  9. Fair enough Mark – all makes sense. Just note that it really isn’t possible to use technical analysis to evaluate a stock like HVST given the changing nature of the portfolio. Investors in any fund with high dividends like HVST need to understand a very basic premise…total return=capital return + income return. Therefore depending what one’s view of total returns out of a basket of securities this will imply what sort of capital decline one can expect assuming a 11% income return. HVST’s portfolio has definitely been smashed recently but of course that isn’t always the way it will be. However we can know for certain that unless total return is >11% there WILL by definition be capital falls – and that’s fine because you are getting 11% along the way. The franking credits themselves add another 3% p.a. assuming you get their full value (less if you are taxed but still something).

    Finally, one last thing I would say – HVST will actually underperform in a raging bull market (due to its risk management strategy). Instead, where one could expect HVST to outperform will be in a falling market where the risk management kicks in..

    Best of luck all in their journeys!

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  10. Just an update and even though I dont own the stock anymore I still follow its progress. HVST now below $17 and in freefall.
    Even Betashares would be shocked with how the stock has fallen and how quickly, they need to rework the stock’s mechanics and make it more durable . Think most shareholders would prefer a bit less income for more capital preservation, you can understand growth being poor in a income themed stock but the way its losing money is unacceptable and someone at Betashares needs to make some decisions on the future of the stock now..

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  11. I held HVST for a about year. In that time I discovered painfully that the risk management model they use is less than useful and a huge drag on performance .This is due amongst other things to the fact that they are using broad based ASX 200 futures contracts as a proxy hedge for a only few stocks. The basis risk is quite sizeable .

    As some have experienced the risk management strategy does not really seem to work when the market falls. Also Having watched their holdings of ASX futures hedges during the year its seem to be unable to adjust to the market turning even with volatility at record lows often times the hedge holding was around 35% 2-3 days after a rebound.

    I should have realised this was a nonsense before I invested but i fell for the advertising for the fund. Fortunately I dumped my sizeable holding in July . It seems that a lot of others have taken their medicine in this regard as well as the fund size has deteriorated by over 100 mio (at least 25 % ) since the end of June. My net result of down 1% after franking (income + capital loss) when the ASX was up about 10% was pretty miserable.

    I have invested in several funds of Beta Shares with mixed results and I see them as a bright and shiny organisation that generated new funds all the time , less for the benefits of the underlying investors and moreso for the benefit of Betashares.

    I now much prefer Van Eyk for ETF’s now as they seem to have a much more low key approach.

    Liked by 1 person

    1. Feel your pain, having been there and done what you have…..amazes me how the HVST stock continues to attract any investors.
      I have written a few replies on this site so I wont go over old ground, Dividend stripping/hopping is an old technique and I am yet to see clear evidence either way that it works/doesnt work. The stock went below $17 but has rallied back up and thats on the back of the banks also rallying….IMO the stock is totally reliant on the Banks and thats where the problem is.
      Have a couple of betashares stocks in UMAX and YMAX but you cant beat Vanguard’s high yield ETF ( VHY) IMO…safe, pays good divvies quarterly….Vanguard are the big boys on the block and there is a reason why…no fancy strategies, low fees and no gimmicks like HVST. Dont really Van Eyks ETF’s which ones appeal to you?…

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  12. I’m disappointed with HVST too, and can certainly understand the pain people are talking about. One thing I do have to keep coming back to though is that you can’t look at price when it comes to a fund like HVST. As I said in my comments above, unless total return is greater than 11%, this price will by definition keep falling. The thing to look at is total return. That said right now total return for HVST has been disappointing, but at least I believe that it doesn’t always need to be that way.

    So price return will absolutely keep falling (by definition) but total return is the one to watch and right now is poor. Let’s hope it can turn around.

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