Tax shenanigans

Today I've been twisting and turning like a twisty-turny thing to avoid paying capital gains tax when I move to Norway.  Overall I've basically sold SLXX and raised my stake in Tesco, British American Tobacco and Diageo.  In the process I've crystallised all my capital gains in all 4 stocks (by moving things in and out of ISAs).

Tesco, British American Tobacco and Diageo are now each 6.4% of my portfolio, up from 4.1%, 4.5% and 5.5% respectively.  SLXX was 5.1% of my portfolio.  There has been no overall change in my portfolio size.

I still have 3 capital gains that I need to crystallize:

• Berkshire Hathaway
• iShares Emerging Markets
• iShares Asia/Pacific Dividend

My gains in NWBD and LLPC are significant, but the bid/ask spread in these shares is large enough that it is not worth selling and rebuying them.

Trusts and funds

A slight departure from my usual material in this post - I'm going to look at some of the ways for a novice to invest in the stockmarket without going to the trouble of actually researching and buying individual shares.

Unit trusts vs Investment trusts vs ETFs
A unit trust is a vehicle that pools investors' money and uses it to invest in shares, bonds or other instruments.  When an investor buys units in the trust, these are created fresh and the fund manager uses the investor's cash to buy new investments.  When an investor cashes in their units, the fund manager must sell investments to realise the money required or (more usually) keep a small amount of cash on hand to deal with redemption requests.

In contrast an investment trust is a company that owns a pool of investments.  An investor buys shares in the investment trust at the market rate, and must buy them from another shareholder who is selling.  The shares are bought via a stockbroker in the same way as any other shares.  No new money is given to the fund manager, and the fund manager never has to sell investments to deal with redemption requests.  The share price of the investment trust will bear some relation to the value of its portfolio, but will not usually track it very closely.  The share price of the trust can diverge by more than 20% from its underlying net asset value, depending on supply and demand of its shares.

An Exchange Traded Fund (ETF) is like an investment trust, but one in which new shares can be created, or old ones destroyed.  This mechanism serves to keep the ETF share price very close to its underlying net asset value.

Active vs Passive management
ETFs are nearly always passively managed, i.e. they don't attempt to beat the market, simply to track a particular index (such as the FTSE 100).  Unit trusts and investment trusts are most often actively managed, i.e. they are run by a fund manager who buys and sells in order to try and outperform.

Superficially you might think that actively managed funds were a good thing - after all it's better to beat the index than just to match it.  The trouble is that the average fund manager will be exactly that - average.  There's no telling which manager will manage to beat the market, and which will underperform.  And this is where the really important part comes in - fees.  An average fund manager will give an average market return minus fees.

Fees
Unit trusts will usually charge a fee upfront when you initially invest (although you should be able to avoid this by buying via a fund supermarket), and then an annual management charge.  Investment trusts and ETFs will have no up-front fee, but you will have to pay stockbroker charges (say £15 or so) and (if the investment trust or ETF is UK-listed) stamp duty of 0.5% - and then an ongoing management charge is deducted from the investment trust's assets.

Actively managed funds will typicall charge a lot more than passively managed funds.  Here are some examples:

• Invesco Perpetual Income is an actively managed unit trust.  It has an initial charge of 5% (although you should be able to avoid that if you buy via a fund supermarket rather than a normal financial adviser) and an annual management charge of 1.5% plus 0.19% other expenses
• Legal And General UK Index is a passive unit trust.  It has no initial charge and an annual management charge of 0.4% plus 0.15% other expenses.
• Foreign and Colonial is an actively manageed investment trust.  It is UK-listed so you will pay 0.5% stamp duty up-front, plus stockbroker fees.  It has a total expense ratio of 0.58%.
• iShares FTSE 100 is a passive ETF.  It has a total expense ratio of 0.4%.  It is listed in Ireland, so there is no stamp duty to pay.

So what is the best type of fund?
I don't believe it's possible to pick a winning fund manager in advance, and therefore I am totally ambivalent about whether a fund is actively or passively managed.  What I can predict in advance is the fees that will be charged - and a fund that charges the lowest fees should, on average, give the best return over the long term.

Personally, therefore, I would opt for the cheapest type of fund, which usually means one that is passively managed and tracks a popular index such as the FTSE 100 or FTSE All Share.  The Legal and General fund is pretty good at 0.55% per year, but the iShares ETF is even better at 0.4% (plus £15 or so up front in stockbroker fees).

But which fund should I invest in?
I'm not here to tell you which fund you should invest in - except that you should keep the fees as low as possible.  I think for a UK-based investor a FTSE 100 or FTSE All Share tracker is perfectly adequate.  The FTSE 100 will tend to be more internationally diversified, whereas the All Share will cover a more diverse set of sectors.

Resources
trustnet has details on a huge number of unit trusts, investments trusts and ETFs.

If you want to invest in an actively managed unit trust then your best bet is probably going through a fund supermarket such as sfs (there are many others - google "fund supermarket").

If you want to invest in the Legal and General unit trust then you can do so directly through their website.

There are many online stockbrokers who will let you invest in ETFs, investment trusts and ordinary shares.  I use Motley Fool.

Vero - mission accomplished

My usual investing style is buy-and-hold, but last week I made a purchase for the very short term - Vero Software.  As I wrote here, Vero seemed on the verge of being acquired at what I thought almost certain to be a price higher than they were currently trading at.

Yesterday the announcement was made - and although it was marginally below the lower end of my expectations, it still gives me a 17% profit for what will be a holding period of ~2 months.  Enough shareholders have already committed themselves to voting in favour that the deal looks done and dusted.

I was expecting the offer to come in at about 18-24p, but in the end the offer was made at 17.5p, 40% above their recent average of 12.5p.  So I was slightly on the optimistic side, but left myself plenty of margin of safety by buying at 15p.

The purchase should be complete in mid-July, at which point I can collect my 17.5p per share.

I don't expect to do much trading of this sort, but when the opportunity presents itself I'm certainly not going to spurn it.

Goodbye Next, Hello Vero

Vero Software is a tiny IT company that provides software for the mould and die sector. They are on my radar because I'm a member of an investment club that has held their shares for the last year or so.

Their preliminary results came out today (http://investegate.co.uk/Article.aspx?id=201005101452136441L). The news was unspectacular - their revenue was down a bit, EBITDA up a bit, EPS down a bit. What caught my eye was this paragraph:

On 16th September 2009, the Company announced that it was in talks which may or may not lead to an offer for the Company. Discussions with more than one party subsequently followed and the Company is pleased to report that negotiations are now at an advanced stage and it expects to be able to make an announcement within the next two weeks. There can however be no certainty that an offer will be made nor as to the terms on which any offer might be made.

Now I was aware that Vero had been in talks about a potential offer, but at no point had they given a hint that negotiations were at an "advanced stage". So this came as a pleasant surprise.

Vero have been wibbling around at 12-13p per share for ages. Since talks about an offer have reached an advanced stage, I can only assume that someone is willing to offer a reasonable premium above the market price - lets say 18-24p. And if an announcement is due in under 2 weeks, the share price could move very quickly.

On that basis, I quite fancied a punt at ~15p, for a very quick 20-60% profit. Consistent with my aim for this year of realising most of my accumulated capital gains, I sold all of my Next shares (for a profit of 99%, including dividends) to free up some cash, and put up a little more than half the proceeds towards a buy order for Vero at 15p.

A bit under half my order was fulfilled before the end of the day's trading, and the rest remains outstanding as a limit order.

The shares I have manged to pick up now form 1.7% of my portfolio, and if the limit order is completed that will rise to 3.7%.

In 2 weeks time I might be looking rather foolish, but I think the shares look pretty cheap even ignoring the offer, so my downside should be limited. If it looks like I'm going to be lumbered with them for the long term then I'll make a more detailed post with my rationale for holding - at the moment this is purely a short-term play on this potential offer.