The Lemon Fool

In a previous post it was pointed out to me that my holding of a single company stock was a risk to my aspiration of early retirement.

It's 10,000 ish shares in a pharma company. My original plan was to continue to enjoy the ~5% dividend as I sold down the holding over the next ~12 years till my state pension kicks in. (and reducing / delaying any DC drawdown)

Now I'm thinking I should diversify this holding ASAP and am wondering what would be the best approach?

I'm thinking:

Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

What / how many issues have I missed with that plan?

Thanks for any words of wisdom!

Just a note to say to consider any possible "time" element between selling shares in a Non _ISA and receiving cleared cash that can be transferred into an ISA. It may be a case of selling shares, waiting for the cash to clear (2 days) and then transferring out to your linked bank account (2 days)before paying it into your ISA. You might wish to phase the ISA transfer (£40k in total) over several sells.

I would agree with getting it into ISAs asap. It will make life MUCH easier in years to come and not use up your tax allowance.

Yes, of course you need to diversify, probably looking at ex-UK as well. There are plenty of Investment trusts and ETFs that are giving good yields.

Steve

NearlyThere wrote:Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

My suggestion would be to choose a selection of Investment Trusts, rather than a tracker.

Take Witan, for example. I bought some for my granddaughter in 2001, on 21st December when the price was 380p. There was a 5 for 1 split in May 2019, and the current price is 215p, equivalent to 1075p or 2.83 times the original price. The FTSE100 index stood at about 5200 at the end of 2001, currently 6575, or 1.26 times the original value. Had you gone for a tracker, you would have foregone a considerable sum. The differential is 2.25 times.

That's just an example, but you could look at other global ITs, like F&C or Alliance, to get the comparison.

TJH

tjh290633 wrote: a selection of Investment Trusts, rather than a tracker.

Take Witan, for example.

Now the problem with anecdotes is.....there's always another anecdote:
'Neil Woodford investors take hefty loss as payouts begin'
https://www.theguardian.com/business/20 ... ss-payouts
But, in the absence of a systematic comparison which attempts to reduce bias, they're all we've got.

tjh290633 wrote:My suggestion would be to choose a selection of Investment Trusts, rather than a tracker.

Take Witan, for example. I bought some for my granddaughter in 2001, on 21st December when the price was 380p. There was a 5 for 1 split in May 2019, and the current price is 215p, equivalent to 1075p or 2.83 times the original price. The FTSE100 index stood at about 5200 at the end of 2001, currently 6575, or 1.26 times the original value. Had you gone for a tracker, you would have foregone a considerable sum. The differential is 2.25 times.

That's just an example, but you could look at other global ITs, like F&C or Alliance, to get the comparison.

TJH

Why are you comparing an IT that has less than 20% in the UK with a FTSE 100 tracker?

BoE

NearlyThere wrote:I'm thinking:

Gift half the shares to Mrs NT
Each of us transfer £20k worth to two S&S ISA's in this year and next, then diversify into some sort of index tracker inside the ISA.

Repeat in following tax years until all original holding gone.

What / how many issues have I missed with that plan?

When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

NearlyThere wrote:In a previous post it was pointed out to me that my holding of a single company stock was a risk to my aspiration of early retirement.

It's 10,000 ish shares in a pharma company. My original plan was to continue to enjoy the ~5% dividend as I sold down the holding over the next ~12 years till my state pension kicks in. (and reducing / delaying any DC drawdown)

Now I'm thinking I should diversify this holding ASAP and am wondering what would be the best approach?

The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?

Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

dealtn wrote:
The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?

I'm sorry, I don't understand that.

NearlyThere wrote:

dealtn wrote:
The "risk" is what happens to the value of the shares, and could occur at any time. Is it hedgeable either through a market instrument or a spreadbetting platform?

I'm sorry, I don't understand that.

You don't name the company so I don't know the answer.

Say you owned 10,000 shares in GSK. You make money if they go up in price, and lose money if they fall in price. As it is a significant size within your wealth you are at risk if it is the latter. You could sell your shares, but this might incur costs, take time, create tax implications etc. so your risk might fall only slowly, over time, and with costs. Your risk remains during this period.

As an alternative you can "buy" a hedge which is an opposite position with low cost and immediate, where you make money if GSK shares fall in price, which offsets your underlying long position. With a hedge in place this buys you time to deal with above mentioned issues. Such hedges don't exist for every (pharma) company, but do for many of the largest, either as market instruments or as spreadbets with providers.

dealtn wrote:
You don't name the company so I don't know the answer.

Say you owned 10,000 shares in GSK. You make money if they go up in price, and lose money if they fall in price. As it is a significant size within your wealth you are at risk if it is the latter. You could sell your shares, but this might incur costs, take time, create tax implications etc. so your risk might fall only slowly, over time, and with costs. Your risk remains during this period.

As an alternative you can "buy" a hedge which is an opposite position with low cost and immediate, where you make money if GSK shares fall in price, which offsets your underlying long position. With a hedge in place this buys you time to deal with above mentioned issues. Such hedges don't exist for every (pharma) company, but do for many of the largest, either as market instruments or as spreadbets with providers.

It is GSK shares. I just googled spreadbetting and now have a headache

NearlyThere wrote:

Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

If your plan is to diversify sooner rather than later, I'd think you'd save just by selling outside the ISA, contributing the cash to it, and buying the replacement fund/IT/ETF/whatever inside. That would be one charge for selling, and one for buying; doing it with Bed & ISA would be one at that time, but later followed by a sale charge, and a purchase charge. But if you don't want to replace the pharma shares in this tax year, then Bed & ISA would be the route to go.

It is GSK shares. I just googled spreadbetting and now have a headache

It really depends on how worried you are about diversification and that your GSK shares will plummet.

If you are going to need the money soon and really need what they are worth now, then I would investigate spread betting further. However, if you do not want the money in the near future and whilst the concentration in one share is bad, you plan to gradually diversify, then maybe you shouldn't bother so much about spread betting.

The bottom line with the hedging side of things is that if done properly, the value of your holding will not vary from the point at which you start the spread betting. If share price goes down, you will make money on the spread bet and lose money on the value of the shares. If the shares go up, you will make money on the value of the shares but lose it on the spread bet. The only issue here is that you will have to cover the loss on the spread bet with cash and so may have to sell some of the shares to cover it. Over all, you will be slightly worse of as there will be a cost to put this in place, but if the shares were to tank, your current position would be protected.

I think that if I was in your position and was looking long-term, I would take a risk and gradually diversify. However, if it was a different share or my timescale was shorter, then I think I would go for it. It depends on a variety of things, including the capital gain tied up in the shares (which dictates the timescale over which this can be done).

Chris

NearlyThere wrote:

Dod101 wrote:
When you transfer the £20,000 each year into the ISAs you will incur CGT because of course you have to sell outside of the ISA, put the cash raised into the ISA and buy in the ISA. Why not carry out the diversification at that point? So if I were you I would decide my diversification tactics before you do anything, then sell outside of the ISA, transfer the funds into the ISA and buy the new tracker or whatever inside the ISA. Otherwise you will have two lots of fees, well four actually if you count those for your wife as well as yours.

Dod

I don't think there will be CGT payable as gains in share value are not significant. I get the point on multiple fees, I am looking into "bed & ISA" approach

If CGT isn’t an issue why not gift enough shares to your spouse now such that you can then both sell making a gain within your annual CGT allowance of £12,300 each? Use the proceeds to buy an alternative investment to diversify your portfolio. Assuming you’ve used this year’s ISA allowance you could hold back £20k in cash and await the next tax year when you can make use of the next ISA allowance.

You can “transfer” shares for tax purposes by simply declaring that you hold them on trust for your spouse.

Bubblesofearth wrote:Why are you comparing an IT that has less than 20% in the UK with a FTSE 100 tracker?

BoE

To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH

tjh290633 wrote:
To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH

Your illustration shows that an IT with a Global spread would have beaten a FTSE 100 tracker so you were comparing apples and oranges. It does not demonstrate IT's are better investment vehicles than trackers.

If you want to make a more realistic comparison then you need to select a more realistic benchmark. Maybe a Global tracker? The FTSE has been a pretty poor cousin to most major markets over the past 20 years.

You also need to make sure dividend income is excluded or reinvested for both vehicles.

Making IT vs tracker comparisons is a worthwhile exercise but some care needs to go into selection criteria.

BoE

Bubblesofearth wrote:

tjh290633 wrote:
To illustrate that trackers can only follow the market. Also that there are better investments available.

TJH

Your illustration shows that an IT with a Global spread would have beaten a FTSE 100 tracker so you were comparing apples and oranges. It does not demonstrate IT's are better investment vehicles than trackers.

If you want to make a more realistic comparison then you need to select a more realistic benchmark. Maybe a Global tracker? The FTSE has been a pretty poor cousin to most major markets over the past 20 years.

Quite.

You also need to make sure dividend income is excluded or reinvested for both vehicles.

I would say included, otherwise we are back to apples and oranges again.

GBP TR for Witan 19 years to 30/11/2020 327%
GBP TR for MSCI World Index 19 years to 30/11/2020 342%

Even that is not comparing like with like as Witan runs a geared portfolio and the index is not geared, so Witan carries more risk than the market.

There are huge variations in performance between different funds over long periods as well, for example the Scottish IT TR over that period was 202%. Some did better, F&C managed 407%. Virtually all actively managed funds go through prolonged periods of underperformance and anyone picking just one fund runs the risk of getting in at the wrong moment. Fund manager risk can of course be mitigated by diversifying across fund managers, just as unsystematic risk can be mitigated by diversifying across companies.

Anyone needing to draw down heavily from an investment for several years before a pension becomes available should carefully consider the risks they are taking and whether all in equity investments are sensible. Especially those that use gearing.

The O/P should gift half the shares to Mrs NT. Each of you then can liquidate as much pharma holding as they can without paying CGT (£12300 allowance on the gains). If this means the sale is less than 4*allowance (£49200) they won't even need to mention it on their tax return. They can each put £20k into an ISA, and £2880 into a SIPP to get the tax relief (more if working). The gain is assessed against when you acquired the asset, not when you transferred it, but at least you get 2 allowances. See https://www.gov.uk/capital-gains-tax/gifts

Gawd knows why people mention active funds when the O/P has decided on trackers.

That sounds like a good plan to me. Agree with above re CGT advice. For reference, the tracker I use in an ISA is Fidelity Index World Class P Acc (the Inc distributing version outside of an ISA). This is my core holding. Cheers Adam