Concentrated legacy holding and a low tolerance for loss
A retired client, 64, has £2.6m investable: £1.1m in shares of her former FTSE 250 employer, £900,000 in a diversified portfolio and £600,000 cash. The employer shares have a base cost of £180,000. She needs £85,000 gross a year, rising with inflation; state pension provides £12,000 and a defined benefit pension £18,000. Her stated risk tolerance is low and she says she could not accept a loss of more than 10% in any one year. She wants ESG exclusions and has an emotional attachment to the employer shares, although she accepts the concentration is risky. She is unsure whether to sell immediately or wait for a higher price. The diversified portfolio is 80% equities and has no explicit ESG screen. She has no short-term debts and a two-year cash reserve outside the £600,000. She asks for a review of the whole portfolio.
1. Evaluate whether the current portfolio is consistent with the client's objectives, risk tolerance and liquidity needs.
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The portfolio is not consistent. The employer holding is about 42% of investable assets and is a single, undiversified equity risk; its beta, sector exposure and correlation with the rest of the portfolio are unknown. The £600,000 cash is about 23%, which is excessive for a long-term investor but also the only obvious source of stability. The £900,000 diversified portfolio at 80% equities is aggressive for someone who says she cannot accept a 10% annual loss; a 20% equity fall would breach her stated tolerance even before the employer shares are counted.
Her income need is £85,000 less £30,000 of pensions, so £55,000, or about 2.1% of £2.6m. That is a low withdrawal rate and gives real capacity to take risk, but capacity should not override tolerance. The advice should separate the two: explain that her financial capacity is stronger than her emotional tolerance, and design a portfolio to the lower of the two unless she is willing to revise her tolerance after education.
Liquidity is adequate because of the cash reserve, but concentration and ESG alignment are not. A formal risk-profiling discussion and a written capacity-for-loss assessment are needed before any rebalancing.
2. Recommend a plan to reduce the employer-share concentration, including how to manage tax and execution risk.
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I would recommend a phased sale over three to four tax years rather than an immediate block sale or an indefinite hold. The client should set a written disposal policy with pre-agreed price bands and dates, so the decision is not driven by loyalty or anchoring to a past high. Use the annual CGT exempt amount each year and consider selling sufficient shares to use the basic-rate band where available; the exact rate depends on her taxable income and the 2024/25 rules. Keep records of the £180,000 base cost and any corporate actions.
Execution risk should be managed by using limit orders, avoiding sale around results announcements, and not disclosing inside information. If she wants income, she could retain a small strategic holding, but I would cap it at no more than 10% of investable assets after the programme. Proceeds should be reinvested gradually into a diversified, ESG-aware portfolio to avoid reinvestment timing risk.
If she is charitably inclined, she could consider donating shares to charity, which may be more tax-efficient than selling and giving cash, but this must be client-led. The plan should include a review trigger if the share price falls materially or if a takeover approach emerges.
3. How should ESG exclusions be implemented without compromising diversification or the client's risk tolerance?
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ESG exclusions narrow the investable universe, so the starting point is to define the client's exclusion criteria precisely-for example, thermal coal, controversial weapons, tobacco-and decide whether they apply to direct holdings, funds or both. Broad exclusions can create sector and factor biases, so the portfolio should be tested for unintended tilts, tracking error and concentration.
Implementation options include broad market funds with explicit exclusion screens, a core-satellite approach with a diversified global core and a smaller sustainable satellite, and passive ESG indices where cost and liquidity are acceptable. I would not accept a portfolio that fails her risk tolerance merely to achieve a label. The adviser should show the expected effect on volatility, drawdown and diversification, and document why any residual exposure is acceptable.
Because her risk tolerance is low, the ESG overlay should be combined with a lower equity allocation and high-quality bonds, not used as a substitute for risk control. Review the holdings at least annually and obtain written confirmation of her exclusion list.