CARILLION & INVESTMENT DIVERSIFICATION

Recent press have been full of stories about the collapse of Carillion, and the wider effects of the company’s liquidation. This article explores how investors could be exposed to individual companies, like Carillion, and how you may not even realise that you hold investments in a failed company. Watch our video to examine how professional investment diversification protected our clients from the Carillion liquidation.

Key points:

  • Video – Carillion & investment diversification
  • How investment portfolios are constructed
  • How your investment should be diversified
  • How to find out if your investment fund is invested in Carillion
  • Are our clients invested in Carillion?

 

How investment portfolios are constructed

When we recommend investments to our clients, we usually use collective investments. These are a variety of different structures such as unit trusts, OEICs, investment trusts, ETFs, and others. These investments follow a stated strategy of buying and selling which aims to grow your capital, and/or income.

Typically, these investments follow a particular sector, such as UK shares. Carillion might be an example of one such share that would be bought by your UK share fund. Our Prosper service uses model investment portfolios to develop recommendations for clients based on risk-based investments across a variety of investment sectors.

How your investment should be diversified

If you bought a UK share fund, you would typically hold between 50 to 200 individual company shares, like Carillion, within the fund. This helps to diversify your holding, so that you spread your losses if one company fails, such as is the case with Carillion. In simple terms, if you hold 100 shares in your fund equally, then your exposure to one company is limited to 1% of the fund. In the worst scenario that a company liquidates, you only lose 1% of your investments.

Our Prosper service takes this a step further by further diversifying your investments across up to 15 different investment sectors, in different proportions according to the risks you are prepared to take, and the expected returns or income you need. This helps you to diversify not only the type of investments, but the geographical spread, and will further limit your losses in the event that one investment fails.

How to find out if your investment fund holds Carillion

This is not as simple as you might want. Each investment fund will publish a factsheet to show how the fund works, its past performance, and some of the top holdings. Of course, Carillion might not be in the top holdings. You should first check your factsheet, but you may need to contact your investment provider, or your financial adviser.

Are our clients invested in Carillion?

Inevitably, with the number of clients we have, some will be invested in Carillion. More importantly, today we have contacted each client to tell them whether or not they ultimately hold assets in Carillion. We obviously hold records of the clients’ holdings, and are able to drill into this data to view the underlying individual investments. From this data, we were able to contact every client to show them whether or not they hold Carillion shares in their portfolio. We then provided the exact value, and percentage of their overall holding to show them their exact exposure.

Here is an example using an actual client’s data. In this case, the client’s holding in Carillion was 0.08% of the fund held, which in turn was a portion of their overall investment portfolio.

  • Client’s overall holding: £447,786
  • Amount held in Carillion shares: £36.47
  • Percentage of overall holding invested in Carillion: 0.0081%

What this shows is that proper diversification can dramatically limit your exposure to one particular company’s failure.

You can read more about our model portfolio investment performance here.

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.