FTSE100 to break through the 7000 barrier?

dtsazza

Thrugelmir wrote: »

Indexes are based on the market capitalisation of the companies that constitute the particular index.

FWIW, share buy-backs wouldn't affect market capitalisation.

Share prices do rise - but they do so because there are less shares in circulation.

A company with a market cap (valuation) of £1.2m and one million shares in circulation, will trade for 120p per share. If the company then decides to buy back 200k shares, it's a company with a market cap of £1.2m and 800k shares in circulation. So each share trades for 150p. (This makes sense, because one share now represents 0.000125% of the same underlying business, instead of 0.0001% as before. So all else being equal, it should be worth 25% more.)

The share price has gone up, but the market cap - and the influence on the FTSE index - is unchanged by the buy-back.

StevieJ

dtsazza wrote: »

FWIW, share buy-backs wouldn't affect market capitalisation.

Share prices do rise - but they do so because there are less shares in circulation.

A company with a market cap (valuation) of £1.2m and one million shares in circulation, will trade for 120p per share. If the company then decides to buy back 200k shares, it's a company with a market cap of £1.2m and 800k shares in circulation. So each share trades for 150p. (This makes sense, because one share now represents 0.000125% of the same underlying business, instead of 0.0001% as before. So all else being equal, it should be worth 25% more.)

The share price has gone up, but the market cap - and the influence on the FTSE index - is unchanged by the buy-back.

That doesn't sound right, surely (simplistically) cash would reduce by the buyback (reducing the value of the company by an equivalent amount), but the number of shares would also fall leaving the shareprice unchanged (all being equal).

Generali

StevieJ wrote: »

That doesn't sound right, surely (simplistically) cash would reduce by the buyback (reducing the value of the company by an equivalent amount), but the number of shares would also fall leaving the shareprice unchanged (all being equal).

It pushes up the value of the shares (supply falls, demand remains unaltered) and returns cash to shareholders in a very tax efficient way, especially for Americans.

chucknorris

Thrugelmir wrote: »

Never invest for the tax relief. The underlying investment is the key.

With VCT's the dividends paid often include the repayment of capital. As the fund will be realising and liquidating assets. As a consequence the value of the shares will diminish over time. As there net asset value falls. People often get sucked in by 8% yields only to be disappointed with the final outcome.

As long as VCT holdings represent a small part of your portfolio (under 10%). Then maybe worth a punt. Though my personal bugbear is fund fees. Below are the fees for Puma VCT 11.



The fund managers are going to be the real winners. As have a guaranteed return.

I know what you are saying about not investing for the tax relief, nevertheless if it otherwise looked OK the tax relief would attract me. BUT when you look at the expenses assuming it folds (as planned) in the 6th year:
14.1% Annual fees (6 years x 2.35% pa)
1% Promoter fee (discounted from 3% at HL)
0% Commission fee (lets make an assumption it makes 0% (no loss) over the 6 years)
15.1% total fee
27.8% actual gain tax relief 42.9% (of the net investment, rather than gross) 0% gain and 15.1% fees

If I compare this to Vanguard's world high dividend ETF:
With an annual fee of 0.29% and paying around 3.8% dividend yield after tax at 25% = 2.85%, so after 6 years paying 15.36% (net of tax and expenses), in 6 years it wouldn't be too unreasonable to make a 'guestimate' of about 12.44% growth, particularly if you take a 'I'll only sell if it is high' attitude (otherwise keep if for the decent dividend).
27.8% actual gain

If I ask myself which assumption which would I be feel safer with, the VCT making 0% (no loss) or the ETF making 12.44% over 6 years, the answer is I would feel much more relaxed about the ETF. Especially bearing in mind any significant downside is far more likely with the VCT, and with any upside you have to give up 20% of profit via the performance fee.
Conclusion: Forget about VCTs.

EDIT: I realise the above is a very crude assessment, but it is enough to put me off. If only I could invest in providing VCTs instead of actually investing in them ,now that would get my attention.

wotsthat

Generali wrote: »

It pushes up the value of the shares (supply falls, demand remains unaltered) and returns cash to shareholders in a very tax efficient way, especially for Americans.

I always prefer spare cash to be returned as a special dividend. I don't really like management assuming I want this spare cash invested in the same shares. Special dividends will reduce the market cap and, maybe I'm being cynical, this causes management ego damage and reduces their ability to negotiate compensation deals.

wotsthat

chucknorris wrote: »

I know what you are saying about not investing for the tax relief, nevertheless if it otherwise looked OK the tax relief would attract me. BUT when you look at the expenses assuming it folds (as planned) in the 6th year:
14.1% Annual fees (6 years x 2.35% pa)
1% Promoter fee (discounted from 3% at HL)
0% Commission fee (lets make an assumption it makes 0% (no loss) over the 6 years)
15.1% total fee
27.8% actual gain tax relief 42.9% (of the net investment, rather than gross) 0% gain and 15.1% fees

If I compare this to Vanguard's world high dividend ETF:
With an annual fee of 0.29% and paying around 3.8% dividend yield after tax at 25% = 2.85%, so after 6 years paying 15.36% (net of tax and expenses), in 6 years it wouldn't be too unreasonable to make a 'guestimate' of about 12.44% growth, particularly if you take a 'I'll only sell if it is high' attitude (otherwise keep if for the decent dividend).
27.8% actual gain

If I ask myself which assumption which would I be feel safer with, the VCT making 0% (no loss) or the ETF making 12.44% over 6 years, the answer is I would feel much more relaxed about the ETF. Especially bearing in mind any significant downside is far more likely with the VCT, and with any upside you have to give up 20% of profit via the performance fee.
Conclusion: Forget about VCTs.

EDIT: I realise the above is a very crude assessment, but it is enough to put me off. If only I could invest in providing VCTs instead of actually investing in them ,now that would get my attention.

Your example isn't quite fair - you've assumed ETF's always return 3.8% pa and VCT's 0%.

I might be a bit special but I think it is worth investing for tax relief especially as retirement looms. In your example about I'd put £40k into the ETF via a SIPP and £15k via an ISA.

Assuming I wasn't renting or paying a high mortgage rate, had some rainy day cash and still looking for investments I'd look at VCT's - the charges are high but they add some excitement and the tax relief helps mitigate the risk.

chucknorris

wotsthat wrote: »

Your example isn't quite fair - you've assumed ETF's always return 3.8% pa and VCT's 0%.

I might be a bit special but I think it is worth investing for tax relief especially as retirement looms. In your example about I'd put £40k into the ETF via a SIPP and £15k via an ISA.

Assuming I wasn't renting or paying a high mortgage rate, had some rainy day cash and still looking for investments I'd look at VCT's - the charges are high but they add some excitement and the tax relief helps mitigate the risk.

I definitely agree about the tax relief, but I already invest up to the £40k max allowance in my SIPP and the £15k for my SS ISA every year, so there isn't any more capacity for me to further invest via those wrappers.

As for being fair, I specifically mentioned the VHYL Vanguard ETF (rather than all ETFs) which I intend to invest in anyway, it does currently return about 3.8% (its target dividend yield is 4%), obviously that is an approximation, but I am not going to run a monte-carlo type analysis for a £40k investment, back of a fag packet calculation will suffice, I am happy enough with my comparison. Naturally I'm willing to listen to other opinions, but you haven't said anything to make me reconsider. I don't need to take on higher risk to make high profits, so the ETF is risky enough for me, if I was in my 20's and less wealthy, I might have taken a different view. What drew me to the VCT was the tax relief, but as Thrug said you can't ignore the product detail, just because it offers tax incentives.

EDIT: I think 0% and 12.44% are reasonable, VCTs are quite risky, more so IMO than the Vanguard VHYL ETF (which offers some regional and sector diversity), and a quite a few existing VCT's that I looked at had actually lost (or are losing) money (sometimes the tax relief made up for it, sometimes it didn't).

Thrugelmir

chucknorris wrote: »

I know what you are saying about not investing for the tax relief,

That comment was very generic. Surprising how money people assume that VCT's are a good investment on the back of the tax relief alone. Risk plays little part of their thinking.

chucknorris

Thrugelmir wrote: »

That comment was very generic. Surprising how money people assume that VCT's are a good investment on the back of the tax relief alone. Risk plays little part of their thinking.

The tax relief enticed me enough to look at them, but after looking, and thinking about it, I would rather pay tax on what I would normally invest in. My real problem with them is that I don't really know enough about what I would actually be investing in, so I would need to have great faith in the fund manager.


EDIT: I won't feel bad if they do well, despite not investing, but if I did invest and they performed badly, I would feel like a mug.

mystic_trev

mystic_trev wrote: »

I'm feeling very uneasy about the current Market. Having said I'll stick with it, today I've sold two thirds into cash. I'll review the situation in three months time.

I'm now currently 75% cash in my Pension i.e. SIPP. It looks like I may have made the right call?