Selling large part of HYP portfolio - guidance

[johnw11]

All,

I have been running my HYP in a SIPP for the last 9 years. I have decided to draw down the 25% tax free lump sum for a new business I have started. Please no comments as to if this is a good idea.

I am looking at the best way to sell some of my holdings to obtain the cash required. I do hold approximately 7% in cash as I have not purchased any shares in the last few months as I knew this decision was coming along.

Below is a table of the current portfolio. Just to clarify the column meanings.

Yield %. This is based on actual dividends paid in this Calendar year, and any dividends already declared. If a dividend has not been declared then last year's amount is used. Based on share prices as at 31/Aug/2019.
Income %. This is based on actual dividends paid in the current Calendar year, dividends already declared. If a dividend has not been declared then last year's amount is used.

**Note. Although I have not sold it I have removed GNK from the portfolio as I plan to sell that in the next day or two and I do not want that to mess with the calculations.



I then followed this process to decide what to sell.

1) I thought about selling small holdings, mainly LLOY, WG, WMH, but these all have a decent yield.

2) Do I sell in order of lowest yield. This would result in me selling all of AZN, TATE, BA, and approximatly 50% of GSK. Following this route also enables me to easily see what the future income will be.

3) I calculated the new portfolio total value after what I need to sell, and calculated the average holding. Any holding over the new average I worked out what I needed to sell. This led to seeing that for BATS, BLND, LGEN, NG, and TATE the amount to sell would be too small to be economical. The total of all these small amounts were spread across the other sales. The advantage to this is it results in large holdings being reduced to even up the portfolio. From a future income perspective though I am losing nearly 100% more income. This future income lost was done by using the yield % on the sale amount to work out the lost income.

So below shows the following

New Value % = The capital value after the proposed sale.
% to sell. The amount of the holding I will need to sell. Not particularly relevant to this, it was a calculation I made so as to not show any values.
Too Small. Indicates the shares where the amount to sell was less than was economical to sell with dealing costs.
Adj. value %. This would be the capital % of all holdings after the proposed sale.



At first I was going to go down the route of selling a lot of holdings so as to even up the portfolio. Going through creating this post though has me now looking at selling the 4 lowest yielders due to the loss of future income.

Any thoughts most welcome.

[SDN123]

A thought experiment that might help...

After you’ve made your sales and spent the money released the dividends will, of course, keep flowing in.

I assume from your post that you’re still committed to HYP. So what will you want to buy or top up once you have accumulated enough dividends?

Will you be happy to top up every existing share in your HYP?

Will you be worried that the overall portfolio yield is too low and look for a higher yielding share?

Will you be worried that the overall portfolio yield is too high and look for a “safer” (mid- to low-yielding) share?

How will those answers change between the scenarios you describe above? (Eg after you’ve made your planned sales.)

I can’t answer those questions for you, but if you answer honestly yourself you might find that it helps. (Hint1: if you might want to buy back a share you just sold, why sell it? Hint2: if you don’t want to top up a share you’ve kept, why keep it?)

HTH,

SDN

[idpickering]

Johnw11, i did exactly this when I went through drawing down my own SIPP, within which I ran an HYP alongside the one in my ISA. I decided to sell the lower yielding shares in the SIPP first. It took three years to drawdown the total value of my SIPP as to do it any quicker would’ve put me in a higher tax bracket. All that money was reinvested into my ISA to make it more accessible should I need the dosh quickly. I feel better having done this as I found the SIPP to be to restrictive, but that’s ot for this board.

Ian.

[TUK020]

I would go through two different exercises, each represent a different thought process, and then compare the outcomes.

Exercise 1: pruning list
a) list ones that you would sell out of because they are tiddler holdings
b) list ones where you have worries about their safety/sustainability (eg WG position on short tracker?)
c) list ones where they are the less favoured of multiple holdings in the same sector (i.e choose between BP & RDSB)

Exercise 2: Construct a new 15 share portfolio from the list of companies represented

I would then sell out completely of anything that has more than one strike against it from exercise 1, and didn't make it in exercise 2.
After that, work out how much more cash you need to realise, and make that into 5? partial sales to re-balance the remaining portfolio

[StepOne]

Hi,

I just wanted to make the point that even though LLOY has a decent yield, if it's only 0.28% of your portfolio, it must be delivering an insignificant amount of income. On a half million pound portfolio, generating 30k a year, the annual income from Lloyds would only be about £90. I would sell it. Probably also the other tiddlers as well, and then re-run the exercise to see what else needs trimmed.

StepOne

[Dod101]

I would sell all the utilities first, then B Land, BT and if I still need to sell more then probably look at the tobaccos.

If you do not already have one, I would make a list of the dsesirability of holding any share, for me, in terms of total return or my assessment of its performance for the future. Bottom of my list would almost certainly be the utilities, and just above that would almost certainly be British Land and BT. You have the opportunity of getting rid of shares you do not really like very much. You will have your own criteria of desirability and it may be simply current yield but that is up to you.

Dod

[tjh290633]

I think that I would look at rebalancing first, trimming back overweight holdings, then sell off the low yielding shares as required. Do it theoretically first, to avoid too many transactions.

TJH

[Dod101]

I think that I would look at rebalancing first, trimming back overweight holdings, then sell off the low yielding shares as required. Do it theoretically first, to avoid too many transactions.

If the OP does it theoretically there will be no transactions.

Dod

[Arborbridge]

I think that I would look at rebalancing first, trimming back overweight holdings, then sell off the low yielding shares as required. Do it theoretically first, to avoid too many transactions.

If the OP does it theoretically there will be no transactions.

Dod

OK, I know that was a witticism, but with the HYPTUSS it's easy to play around with "what if" alterations to see what the final position would be. I would recommend doing so, and also take note of TJH's comment about minimising the total number of transactions.


Arb.

[Dod101]

Should have put a smiley in I suppose. I have my shares more or less graded in to the ones I want to keep more or less forever, right down to the ones that I would not mind losing and that is how I would do the selling. Culling the smaller holdings is not very cost effective if that is a concern, and anyway it might be a perfectly good share so why sell just because it is a small holding?

That is how I came up with my list of the utilities, B Land and BT. Anyway we do not know I think what the aim of the HYP is but from the OP's comments it seems that he is looking to maintain a decent income so I suppose selling the lower yielders has some merit especially maybe at least some Astrazeneca after its quite spectacular run but it is mostly those lower yielders that I think are likely to give the best total return.

Dod

[Alaric]

Anyway we do not know I think what the aim of the HYP is

It's surprising this hasn't come up before, but if running a HYP as part of a SIPP and intending to take the 25% free of tax as a lump sum, you need a strategy to accumulate or obtain the withdrawal amount. That's likely to involve selling.

The managed "lifestyle" funds handle it by a gradual switch to fixed interest although most of them target 100% rather than 25% cash/near cash at retirement on the premise that an annuity will be bought or a complete reinvestment undertaken.

[moorfield]

Any thoughts most welcome.

Under the current political backdrop you might want to consider selling the whole lot, which will take about 10 minutes and cost ~£260, and restarting again in the New Year.

A worthwhile hedge against the prospect of a Marxist goverment by Christmas.

[moorfield]

It's surprising this hasn't come up before, but if running a HYP as part of a SIPP and intending to take the 25% free of tax as a lump sum, you need a strategy to accumulate or obtain the withdrawal amount. That's likely to involve selling.

One approach of course is simply to stop reinvesting dividends and start letting cash accumulate inside a SIPP, but that needs some forward planning before the event, at least 5 years I would suggest. However we drift O/T ...

[Gengulphus]

I think that I would look at rebalancing first, trimming back overweight holdings, then sell off the low yielding shares as required. Do it theoretically first, to avoid too many transactions.

If the OP does it theoretically there will be no transactions.

So as a way to avoid having too many transactions, it can hardly be bettered!

Gengulphus

[Lootman]

Under the current political backdrop you might want to consider selling the whole lot, which will take about 10 minutes and cost ~£260, and restarting again in the New Year.

A worthwhile hedge against the prospect of a Marxist goverment by Christmas.

Although I don't run a HYP per se I do run a dividend portfolio that contained many shares that people typically hold in a HYP. Or rather, did. Between April 2018 and May 2019 I have pretty much sold all of them. I did this partly because of the Brexit/Corbyn risk, and partly because the returns were poor compared with other markets whilst the risk is definitely elevated. Finally I wanted to decrease my exposure to sterling and to UK Inc. generally.

My approach was first to sell the shares I didn't like. A few of them have declined since then. I sold off various sectors that I don't like e.g. support services, retail, financials, utilities, tobacco.

Then I started with the smallest holdings that remained, figuring that anything less than 1% of the portfolio isn't worth the administrative effort. And worked my way up.

The process is complete. I still have some small and mid-sized UK shares, as I consider them to be in a different portfolio. I also run an AIM portfolio. But the only UK largecaps I now have are Unilever, Diageo, Compass, Smith & Nephew and Royal Dutch - the latter being the only one of those that would likely be bought for a HYP.

If I decide in the future I want a UK largecap portfolio again, perhaps because the FTSE-100 is bombed out, then I'd use CTY or VUKE, and keep things simple.