'Market Trading' and multiple choice sectors

[Inaam Hussain]

Hi Stephen.

I’m confused and wanted to ask what happens with a multiple choice sector when, for forced ‘Market Trading’ reasons, one stock of a multiple choice is sold (or changes sector like SLA did) and the other stock remains ? For example, if I had SLA and LGEN in the insurance sector and now SLA has become a fund manager, then technically the new sector (fund management) and the old sector (insurance) only really received half the required investment originally. Is that significant and how should I think about this especially when adding new money ? Do I have to do anything to ‘rebalance’ things if I’m to remain consistent with HYP principles such as not favouring any particular sector ? Your thoughts on this would be greatly appreciated

[Stephen Bland]

Good question Inaam.

When adding new money, which could arise from accumulated dividends, new cash or both, the amount to invest in a new sector is always the then average sector value in your portfolio to avoid preference. Similarly if using the money to top up an existing sector, the amount to invest is only that much as required to bring it up to the then average sector value.

So if you have a situation as described, your average sector values will have altered. Here’s an example as you mention with SLA.

Whatever number of sectors you had prior to SLA leaving the insurance business you will now have one more, assuming you had no fund manager (FM) share already. Thus immediately your average sector value will have fallen a bit and very likely, both your insurance and FM sectors will now be some way below that new average.

Now you add new money. If it’s enough for a new sector that you have identified, and that’s what you want to do, the amount to invest in it is simply the new average sector value after taking into account that you now have one more sector in your HYP.

If it’s for a top up, then it’s the same process as any top up. Find the new average sector value and then look at those sectors which display the optimum combination of being underweight and their shares offering a good yield. Don’t assume that it may now be your insurance or FM sectors because of the changes, instead, make them compete with any other underweight sectors for the new money top up. It is likely that because of the changes, your insurance and FM sectors will be very underweight so these may well be the ideal candidate sectors for your top up, but don’t assume that in advance before carrying out the process I mention.

The top up could consist of adding to the existing share in a sector, or adding a new share to make it a Multiple Choice sector. But bear in mind that for MC, the rule is that you should invest equal sums in the MC shares in a sector so as not to prefer any, at cost or at current value where there is already one or more shares there.

Hope this helps and as always if chooosing from TDL selections, invest only in those shares shown as Buys at the time.

[Author]

Posts