STEPHAN MARITZ | Portfolio concentration — selling isn’t your only option

Recognising concentration risk is the first step — selecting the most appropriate strategy for managing it in the future is the next.

For many investors, concentration risk immediately becomes a question of what to sell and when. But selling is only one of several options.

Choosing not to sell may feel like maintaining the status quo, but it is still an active portfolio decision. Every year that passes without reviewing a concentrated position is another year in which a portfolio is heavily dependent on a single company.

That may prove to be the right decision if the share continues to outperform, but it shouldn’t happen by default.

Markets change. Companies change. Investors’ financial circumstances change. The objective should be to improve the portfolio’s risk profile while preserving long-term wealth. Selling may be part of that solution, but it does not have to be the starting point. There is more than one way to manage concentration risk.

Liquidity is one of the most common reasons investors reduce concentrated positions. Whether funding a property purchase, creating capital for a business opportunity, assisting family members or simply broadening their investment portfolio, many investors assume selling shares is the only practical way to unlock value.

The portfolio itself can sometimes provide that liquidity. Using a listed portfolio as collateral may allow an investor to access capital without disposing of shares and triggering capital gains tax (CGT).

Higher-quality, more liquid shares such as established blue-chip companies will generally allow investors to borrow a greater proportion of the portfolio’s value. The proceeds can then be used to diversify into other assets while allowing the original investment to remain intact.

It does not remove the concentration in the share portfolio, but it can reduce how concentrated the investor’s overall wealth is. It also creates flexibility to reduce the original holding more gradually and under more favourable circumstances.

Portfolio financing introduces borrowing risk and will not suit every investor. But if it is used carefully, it can provide flexibility that selling alone cannot.

Diversification doesn’t have to happen overnight. For many investors, a gradual approach can be more appropriate than a single large transaction. Reducing a concentrated position over time provides greater flexibility and allows portfolio decisions to be aligned with broader financial objectives rather than arbitrary deadlines or short-term market movements.

Portfolio financing introduces borrowing risk and will not suit every investor. But if it is used carefully, it can provide flexibility that selling alone cannot.

Tax is often the main concern. CGT should not be ignored, but nor should it become the investment strategy. Paying tax is often evidence that wealth has been created. The objective should be to maximise after-tax wealth over the long term, not simply minimise tax at every opportunity.

The pace of diversification should reflect the investor’s tax position, liquidity needs and tolerance for concentration risk.