doug2500 wrote:Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them. Would this be a normal approach?
You really need to make the accumulation-or-income-unit decision on the basis of what you want to know - do you just want to know the total return, which is what you get from accumulation units, or do you want to know the split between capital growth and income, which is what you get from income units (in the form of the income unit value and the "income per income unit" figure)?
doug2500 wrote:If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? ...
You need to decide what is 'inside' and what is 'outside' your portfolio, and to value your portfolio and do the unitisation calculations each time cash (*) moves between the two.
For accumulation units, treat dividends as appearing in principle 'inside' the portfolio, so there's nothing to do if they actually end up 'inside' and you need to do the unitisation calculations for the cash leaving the portfolio if they actually end up 'outside'.
For income units, treat dividends as appearing in principle 'outside' the portfolio, and regardless of where they actually end up, you divide the cash amount of the dividend by the current number of units and accumulate the result into your "income per income unit" figure. Then there's nothing more to do if they actually end up 'outside' and you need to do the unitisation calculations for the cash entering the portfolio if they actually end up 'inside'.
For the pretty standard set-up of a broker account which holds both shares and cash, with dividends paid into the broker cash balance, the easiest thing to do to regard both the shareholdings and the broker cash balance as 'inside' the portfolio and everything else as 'outside', and to calculate accumulation units. That way, you only have to do the unitisation calculations when you deposit cash into the broker account or withdraw cash from it. Buys, sells, corporate action payments and dividend payments are all entirely 'inside' the portfolio and everything else that you do with your finances is entirely 'outside', so none of them require anything doing about unitisation calculations.
Income units are rather more work for that set-up, because for them, the dividends appear in principle 'outside' the portfolio but actually end up 'inside' - so you have to do the "income per income unit" calculation and the unitisation calculation for the cash moving in for each dividend payment, with the latter requiring a portfolio valuation each time. Doing a portfolio valuation each time a dividend payment is made can get pretty tedious unless you automate it - I'll leave others to address the question of how to do that. Alternatively, if you're prepared to accept what will generally be pretty small inaccuracies, you can choose a period such as a month or a quarter, and treat all the dividends that arrive during the period as one payment. Ideally, you treat that payment as arriving in the middle of the period to minimise the inaccuracies, though that does have the drawback that the portfolio valuation needed for the unitisation calculation for a period needs doing mid-period, while the dividends total also needed for that calculation is only available at its end. Doing the valuation at the end of the period probably won't increase the inaccuracies all that much and means the whole job can be done at once.
Alternatively, you could treat only the shareholdings as being 'inside' the portfolio, with the broker cash balance and everything else being 'outside'. In that case, for accumulation units all movements of cash between the shareholdings and the broker cash balance (i.e. buys, sells, corporate action payments and dividends) are times that you have to value the portfolio and do unitisation calculations; for income units, the same goes for buys, sells and corporate action payments, but dividends just need the "income per income unit" calculation and accumulation. This might be a useful saving of work if dividends are sufficiently frequent compared with buys, sells and corporate actions. However, do note that it's actually calculating something rather different: basically, the performance of your shareholdings alone rather than of the shareholdings plus cash. Since the cash will almost certainly be producing a zero or near-zero return, the latter will generally be closer to zero than the former - only slightly closer if the cash is a small proportion of the overall value (as in a HYP), but it might be quite a lot closer for other strategies that involve more 'going to cash'...
The other standard broker set-up is that the broker account only contains shareholdings, but is linked to a bank account with payments for purchases and corporate actions that consume cash (e.g. taken-up rights) being debited to the account, and sales proceeds, other corporate action proceeds and dividends being credited to it. That makes it easiest to treat the shareholdings only as being 'inside' the portfolio and everything else 'outside', as in the last paragraph. Having the cash associated with the shareholdings 'inside' as well is possible, but either involves tracking which cash in the linked bank account is associated with the shareholdings and which with other things and producing notional payments between the two, or making it a dedicated bank account that is only used for that purpose, and through which all payments in and out of the portfolio are channelled. The former is possible, but involves a fair amount of error-prone work, so I strongly recommend the latter, which basically allows you to treat the linked bank account for that broker set-up as 'inside' the portfolio and so equivalent to the broker cash balance in the first broker set-up. It also incidentally works well as the 'buffer' account that is sometimes mentioned for smoothing out dividend income when you're drawing income, receiving all dividend payments and having a regular standing order of your monthly 'salary' into your current account.
A third, rather uncommon broker set-up is a CREST account, which has you directly on the company share register, meaning that dividend payments and some corporate action payments (and company communications) are normally (**) sent directly to you by the company, bypassing the broker - this is done to a bank account you've specified in a 'dividend mandate' to the company registrar, or by cheque if you haven't. This is basically like the second set-up above, except that you exert control over where the dividends, etc, go via the company registrar rather than via the broker; also, a CREST account may use either a broker cash balance or a linked bank account for the buys and sells.
Share certificates are similar to CREST accounts, except that you also do the actual holding of the shares and handle
all corporate action payments yourself (e.g. takeover proceeds are handled by the broker with a CREST account, but by you with a certificate), leaving brokers only doing the buys and sells.
doug2500 wrote:... And can you then aggregate them somehow?
You can aggregate separate ways of holding the shares - just use the combined set of the things that are 'inside' each as the set of things that are 'inside' the overall portfolio. But make certain you
either do accumulation units on all of them
or do income units on all of them: it might be possible to mix-and-match the two in some way, but even if you managed that, the figures that you would end up with won't be very meaningful!
As indicated above, setting up the right payment structure can make things quite a lot easier, especially by using one or two dedicated bank accounts as the linked bank accounts for brokers that have them and for dividend mandates from shares held in CREST accounts or as certificates. Accumulation units do tend to be easier, basically because they treat all payments in and out of the shareholdings identically, whereas income units treat dividend and non-dividend payments differently and it's basically not possible to streamline both completely. The flip side is that income units give you extra information that accumulation units don't - basically, the capital gain vs income split of the total return.
So essentially, you can have that extra information, but you have to pay for it with extra work - and only you can decide whether you value the extra information enough for it to be worth that price.
(*) Or shares or other investments, if you transfer them in or out of the portfolio - treat them as an amount of cash equal to their value on the day of transfer.
(**) I say "normally" because very occasionally, one goes via the broker - I've had this happen on a handful of occasions in the 17 years I've held my CREST account. I think it's caused by the payment catching shares being bought or sold 'in transit'.
Gengulphus