Mitigating out of market exposure
To illustrate the importance of mitigating any out-of-market exposure, let’s take the fictitious example of Mr Hines, a previous employee of Glencore, a FTSE 100-listed company and one of the world’s largest global diversified natural resources commodity producers and traders.
As at 27 June ’16, Mr Hines held 740 Glencore shares*, which he sold that day for £135 per share. Excluding charges – for the purposes of simplicity – the proceeds of his sale was £99,900.
In line with standard settlement periods, Mr Hines received the proceeds of his sale into his bank on 29 June (trading on day zero plus two working days). The same day he instructed his bank to transfer the proceeds to his offshore PPB provider.
On 30 June his offshore PPB provider repurchased shares in Glencore within his PPB. Unfortunately, by then the price had risen to £150 per share (excluding share dealing and bank transfer costs, again for the purpose of simplicity) so only 666 shares were purchased. This equates to a loss of 74 shares/£11,100. That’s more than an 11% loss over just four working days.
Clearly, no client would thank their adviser for this, unless the share price had fallen – which, of course, could have happened – and a gain made. That is a big risk to take and one that not many advisers and their clients, quite rightly, would be willing to take.
An in-specie transfer would have avoided the sale and repurchase and all 740 Glencore shares could have been successfully transferred electronically to his international PPB provider without giving rise to any such risk.
