moorfield wrote:Wizard wrote:Under this metric of Churn is a forced disposal, such as a takeover counted as Churn? If one is forced to take cash with no option to do otherwise, and then reinvests it is that churn? It feels even less like it to me than rebalancing actions.
That is market trading, or the "do nothing" option, which pyad recognized occurs from time to time and I would not include.
I would count churn as arising from any sale ordered by a HYP owner, systematic or otherwise or that circumvents market trading.
In daveh's case above, he sold ahead of the WMH takeover rather than waiting for the corporate action to complete for him.
Going further back, the "do nothing" option in the VOD/VZ disposal iirc was to receive VZ shares (or if not, it would have been cash?). Many people deliberately sold and rebought their VOD shares to avoid that I think - so more churn. (I think it's permissible btw to be holding overseas shares in a HYP as a result of market trading and the
Breelander Convention does provide some wiggle room for that.)
Edit: in any case, whether you agree or disagree with this, the amount of churn from such actions is likely to be small, provided you are not also selling six times a month elsewhere!
There is a problem with that when a takeover is done by a traditional offer (which is determined by acceptances of the offer) rather than by a scheme of arrangement (which is determined by shareholder vote). The problem is that technically, the shareholder doesn't sell the shares in such a takeover until either they accept the offer (a voluntary action) or the bidder goes through the legal process to compulsorily purchase the remaining shares, which typically takes months after accepting shareholders have received the cash - and doesn't result in
any more cash being received. Many shareholders don't (or hardly) notice that happening because their brokers' terms & conditions include stuff authorising the broker to accept such offers on behalf of the shareholder once the takeover has gone 'fully unconditional' (possibly with an "unless the shareholder explicitly instructs otherwise for the specific takeover" clause) - but of course accepting such terms & conditions is a voluntary action on the part of the shareholder... (And I don't think one wants some sort of general exclusion for voluntarily authorising someone else long in advance of specific conditions arising to sell on your behalf if and when those conditions arise - otherwise one gets "I'm a HYPer and run my HYP with zero churn - though admittedly my spouse sells six times a month on my behalf according to criteria I set out back in 2003" possibilities!)
So I think it would be a good idea at least to have a specific exception that accepting a traditional takeover offer after it has gone fully unconditional does not count for 'churn' purposes, even though it is technically a voluntary activity, because continuing not to accept it is almost always just delaying the inevitable (*).
Personally, though, I would primarily split churn into two categories:
*
Administrative churn when the sale is done for reasons that do not involve taking a view on the prospects of companies, but rather for reasons to do with running the HYP: things like selling in advance of a takeover because it seems almost inevitable that it will go through (**), bed-and-ISAing, avoiding shareholdings that the HYPer is going to consider administratively more trouble than they're worth (due e.g. to small size of the holding, complexity or foreignness (***)), etc.
*
Investing-led churn when the sale is done for reasons that do involve taking a view on the prospects of companies - such things as selling after a dividend cut because its dividend prospects now look poor, or selling a holding whose share price growth has outstripped its dividend growth and whose yield has therefore dropped 'too low' in order to 'trade up' to a higher yield.
That is probably not a totally well-defined split, as sales are often done for a combination of reasons - but usually, I find it's pretty clear that the reasons are very largely administrative or very largely investing-led. And when that isn't so clear, I'd apply an "if in doubt, it's investing-led" principle. For instance, quite often I sell some unsheltered holdings towards the end of the tax year for CGT reasons and use the proceeds either to buy other shares outside tax shelters (not the same shares, as that would defeat the CGT reasons) or for an ISA subscription, which I then spend within the ISA on either the same share or other shares. I would only count that as administrative churn in the case of an ISA subscription used to purchase the same share (i.e. bed-and-ISAing): in other cases, CGT planning would be the main reason and an administrative one, but I would consider the prospects of both the company switched out of and the company switched into when choosing the companies to sell and buy. Those considerations would not be the main reason, but still a significant one, and that's enough to make my reasons not "very largely administrative". (Though if e.g. 90% of the ISA subscription went into the same share and 10% into another, I probably would count my reasons as sufficiently largely administrative for it to count as administrative churn.)
One observation I will make is that the cases of churn in HYP1 that I mentioned in
viewtopic.php?p=416122#p416122 above are all administrative or at least arguably administrative: United Utilities in 2003 was a case of simplifying the administrative route through its complex rights issue; Mondi in 2007 was clearly motivated by avoiding a couple of tiny demerged holdings (one of them foreign) that would be inordinately troublesome for a demo HYP to track; Ladbrokes Coral in 2018 a matter of avoiding a decidedly messy set of takeover 'proceeds' which might have been quite troublesome to report on. I don't have much information about the motives for the Alliance & Leicester sale in 2008, but they're arguably similar to those for the Mondi sale: the takeover was going to result in a pretty small foreign holding (though not one as tiny as the Mondi holdings). HYP1 is often described as a 'non-tinkering HYP' - but would IMHO more accurately be described as an 'adminstrative-tinkering-only HYP'
(*) "Almost always" because it is possible (though highly unlikely) that such a takeover will get enough acceptances to go 'fully unconditional' (at least enough for the bidder to get more than half of the shares, which shuts out the possibility of any competing bidder winning a takeover battle, and bidders can set a higher 'acceptance condition' than that) but not enough acceptances (at least 90%) to proceed to compulsory purchase. So by accepting such a takeover offer before it gets to the compulsory purchase stage, a HYPer is voluntarily abandoning a faint possibility that by refusing to accept it they'll be able to continue holding the company, because the far more likely outcome is that the takeover proceeds will be 'dead money' not producing any income or other returns until the compulsory purchase goes through.
(**) That does involve taking a view on the prospects of the
shares, of course - i.e. that their prospects are that they're overwhelmingly likely to be sold for a particular amount of cash - but it doesn't involve taking a view on the prospects of the
company.
(***)
Not saying that HYPers are under any obligation to consider any of those things more trouble than they're worth - just that they can do so if they want.
Gengulphus