Adopt glide path to a diversified portfolio

The relentless rise in equity markets over the past few years, coupled with the increasing use of stock options to compensate corporate executives, has given rise to a new phenomenon. Many midto senior-level corporate executives have become very wealthy even by global standards due to the options or shares held by them in their employer companies.

While this is a great place to be in, it also leads to problems. The value of their employer company’s shares becomes a major component of their wealth. Some keep getting additional option allocations every year. This means the value of their wealth is critically dependent on the continued good performance of a single share.

The value of this single share could range from 40 to

90 per cent of their portfolio. When combined with other holdings, the allocation to “domestic equity” or “international equity” becomes even more lopsided. At the same time, the individual remains excited about the prospects of his employer company and is “afraid” to sell.

While it is a good “problem” to have, it, nonetheless, is a problem. Many of our clients have this “problem”. While there cannot be a single, one-size-fits-all solution, certain common principles can be used to deal with it.

First, decide whether there is a need to right-size or trim the holding of the single share. The answer may seem selfevident, but the actual decision by the individual may be excruciatingly slow, as she struggles with the twin emotions of “greed” and “fear”.

This “problem” should be tackled in sequential steps. First, individuals normally find it easier to move from concentrated holding of a single share to a bouquet of holdings but in the same asset class (domestic or international equity). They may find it easier to tackle concentration risk first before addressing the lopsided asset allocation. Also, to address the fear of missing out on price increase after the sale, the individual should retain a significant number of shares, though it should be a smaller proportion of her portfolio.

Second, the sale of the single share should be framed in terms of reduction of holdings as a percentage of the portfolio, rather than as sale of an absolute number or value of shares. Such framing is important. It is far easier for an individual to accept that the value of the single share would be reduced from 60 to 30 per cent of the portfolio than to agree to the sale of shares worth so many crores.

Third, to take emotions and timing out of the equation, the decision should be implemented through a systematic movement over a pre-decided time frame (weekly or monthly and spread over a couple of years). Individuals are likely to find a time-based glide path towards a solution easier to implement.

Fourth, there should be a pre-agreed time frame for tackling the lop-sided asset allocation. Again, this needs to be done systematically and over a predecided period.

Fifth, find goals for which this good fortune will be used. There is something magical about how investment allocation decisions get resolved once the utilisation is decided.

Most individuals will find it difficult to go through a systematic process on their own. They will need a good advisor’s help to get them to stick to the preagreed plan.

It is said that a person’s character is revealed by how she handles misfortune. Truth be told, how good fortune is handled can be equally revealing of a person’s character.

In the case of many senior-level executives, their employer company’s shares at times account for 40-90 per cent of the portfolio, making it extremely concentrated