We take a look at investment clubs, discussing their benefits, how to set one up or join, and how to build a portfolio

Investment clubs offer a great way for groups of investors to profitably trade financial instruments as global markets claw their way back from the lean years of recession.

These clubs are – say the experts at The Share Centre – all the more important because they allow individuals to collaborate, pooling and selectively deploying their capital.

‘There are benefits to participating in an investment club, irrespective of whether you are new to investing or are experienced,’ says Guy Knight, sales and marketing director at The Share Centre, which offers a specialist investment club account. ‘You share in the risk and reward of the investing because of the community nature, you are also less likely to make rash decisions, and you’ll be learning all the time.’

1.    Reasons to join up

To enjoy these benefits you might consider banding together with family members, friends or other like-minded individuals and start a club of your own. Alternatively, you might consider joining an existing club. Either way, there are plenty of options for the novice and experienced investor alike to access and enjoy collective trading, at the same time as building a rewarding bespoke portfolio.

Carefully pick your partner

Such a portfolio could include a blend of holdings in equities, funds, investment trusts, corporate bonds, Gilts, exchange-traded products, and more complex investments. The Share Centre (www.share.com), which has more than 20 years’ success in the global financial markets, is a great place to find out more and offers online 24/7 access to all of these asset classes via its investment club account.

‘You want to be with a broker such as The Share Centre that understands the mentality of investment clubs,’ Knight says. ‘We understand what makes investment clubs tick. We have a large number of clubs that are clients and we know how much fun they can be.’

As with any foray into financial assets, The Share Centre warns that the value of investments can rise as well as fall, and that past performance is no indication of future performance. Says Knight: ‘In clubs, investors can be a bit more speculative than they might be as individuals, and that is because they share both the upside and downside of investments.

2.   How to get started

Best of both worlds

There are two ways to get involved in an investment club: join an existing one, or set one up yourself. At face value finding and joining an existing club appears the easiest approach, but it is not a straight forward path.

The very nature of investment clubs means they often have some degree of exclusivity and trust involved, with membership granted on a selective basis (family or colleagues). Privacy laws can also make it difficult – although not impossible – to locate clubs. ‘It is really difficult for complete strangers to join an existing club,’ says The Share Centre’s Knight.

Those who do break into an established community are often only aware of its existence because they know a member and make appropriate enquiries, or are tapped on the shoulder and invited into the fold. This usually involves having to stump up with a buy-in sum based on the portfolio size.

One of the difficulties of joining an existing club is it may not operate in a manner that suits your individual needs. Key considerations include investment strategy, risk profile, the level of subscription, and location.

‘You can learn quite a lot about a club by talking to its members,’ Knight says, adding this is a good way to assess whether you want to participate or not.

As a rule, monthly subscriptions fall into the £20 to £50 range, although some can be less, and others considerably more. Depending on membership and subscription, it is obvious some clubs meet and invest more frequently than others, and then at differing levels.

Thus, it stands to reason that it may be more beneficial to set up your own club and recruit a suitable stable of members, which means you can tailor its function from the outset.

‘For the most part, if you are looking to be part of an investment club you will probably set it up yourself,’ says Knight. ‘Most clubs start with a core of members who spend some time talking informally about how to get it off the ground.’

Collective considerations

The benefits of getting involved in club investing – whether joining an existing group or starting your own – are especially pertinent if you are new to the stock market, or are not familiar with the full gambit of financial assets available. The biggest plus is the power of collective knowledge and experience, which means you can benefit from other members’ skill in investing, and also their life and career experiences.

Another is the attractive option of spreading the time-consuming legwork of researching potential investments, which means your diligent efforts are not diluted. Rubbing shoulders with other investors can also speed up your investment learning curve, no matter how experienced you are, and pooling your resources reduces the risks to the extent of your own individual financial exposure.

If starting your own investment club is the way you decide to go then there are a few weighty points to be mindful of. All, as The Share Centre notes, are in the interests of probity and transparency, which are essential given the community nature of your club.

‘If you don’t deal with constitutions, choosing a bank, appointing officers and so on in the early meetings, your club will end as a complete and utter shambles,’ warns Knight. ‘You will actually find that people drop away quite quickly. Over time some of the more successful clubs can end up with six- or seven-figure sums, or more, and that’s why it’s crucial to get the formal side of things sorted out first.’

Once a cadre of club members has been identified and has expressed a bonafide interest in participating the next step is to hold an inaugural meeting. This should be conducted in a private location and in a professional manner, reflecting the significance of its agenda.

This meeting will establish the club’s aims and goals, legal structure, name, officers, draft its constitution and rules, set a subscription and joining fee(s), and appoint a banker and broker. All prospective members should have considered these matters beforehand so discussions can get down to bedrock quickly and effectively, and that lingering questions or concerns can be addressed at the earliest possible time.

The club’s aims and goals can include the level of risk acceptable to members, how much work and time they wish to dedicate to the project, and what members want to achieve from participating, for instance a target level of investment return.

‘Clubs tell us that the longer their members stay in the club, the better their investments seem to perform,’ observes Knight. ‘So as well as making it an enjoyable and happy experience, involved members make good financial sense too.’

The most frequently chosen legal structure is that of a partnership as incorporation involves considerably more paperwork and has tax implications. Key officers such as a chair person, treasurer and secretary should be identified and voted in. While the constitution is drafted at the inaugural meeting, the final version may in fact be ratified at a subsequent one, but before any members pay money in or investments are made.

The importance of a constitution should not be underestimated, as it sets out the day-to-day principles for operating the club in terms of rules, subscriptions, membership, joining fees, and voting rights, among other things. There are plenty of examples and templates of constitutions available on the internet, although your club should create one specifically for its own purposes rather than selecting a one-size-fits-all model that may prove inappropriate later on.

‘Whether or not you have legal training, you should go through the clauses of several constitutions and ask whether they are relevant and reasonable for your club,’ recommends Knight. The question of monthly subscriptions must be decided, and members should agree on an amount that they can all afford from their disposable income. Whatever your monthly amount, whether £10 or £100-plus, it should ideally be paid into the club bank account, which will be opened after the inaugural meeting and have two or three signatories.

HM Revenue & Customs (HMRC) needs to be notified (see contact details below) when an investment club is set up. It will issue the appropriate letters and forms along with a unique reference number for that club.

3.   Constitutional strength

Set down the rules

Without a constitution your investment club will be a directionless as a proverbial ship without a rudder. Most commonly, constitutions include sections on membership criteria, rules for transferring or disposing of holdings, membership termination, frequency of meetings, election of officers, appointment of a bank and stockbroker, such as The Share Centre, subscriptions and stipulate buy-in sums. They should also elaborate on voting rights and systems, preparation and presentation of financial statements, variations of the constitution and rules, the goals and financial aim of the club, and, perhaps, a statement on the desired risk profile of the investment portfolio.

Many of the above elements vary from club to club. It is important to spend some time getting the constitution just right; you don’t want it to be either too restrictive or too permissive. The constitution must be signed, dated and witnessed by all members before it becomes valid. Each member must be given a copy.

◊ Club Officers: Chairperson: holds the meetings, co-ordinates between members and ensures that everyone has an equal say and fulfils their obligations to the club.

Treasurer: manages monthly subscriptions, withdrawals, tax matters, income and expenses, unit valuation, probably also places club trades, and provides members with statements of investments for their annual tax returns.

Secretary: keeps records and minutes of meetings, and handles club administration.

◊ Voting Rights: Deciding how club members vote will ultimately determine how it operates and the investment decisions it makes. Some clubs have one vote per member, while others link voting rights proportionally to the number of units held by each member. Some clubs have constitutionally set limitations on how much voting power any one member can have, while others take a more laissez faire approach. All of these factors need to be considered, along with their future implications for the club. Whatever voting option your club selects to include in its constitution will have to be agreed by all, and any future variations will first necessitate an alteration to the constitution that is voted on by all members.

◊ Subscription fees: Subscription fees will be the lifeblood of your investment club and it is therefore critical that an appropriate level is set from the outset, and stated in the constitution. They can be altered from time to time, but this will require an alteration of the constitution. Some clubs insist on members contributing equal amounts, while others allow variable sums. Some allow subscriptions to be paid in cash or cheque at meetings, while others require the money be transferred into the club’s bank account. Make sure your aggregate monthly subscription is sufficient to meet the group’s investment goals.

◊ Meetings: Meetings are the cornerstone of every successful investment club, and they should be held regularly. Some clubs meet every month, others every two months, and some every three or four months. Your club’s meeting calendar should be held frequently enough to facilitate investment decisions, and for members to discuss club business effectively. If your club has a mandate to invest frequently, then its meeting schedule should reflect this. The opposite may also apply. Meetings are also a great forum to divide up club tasks and research assignments, and for appraising and reviewing the same. Each meeting must have a quorum, which means a certain number of members with voting rights must be present to approve decisions. This is something you should address in the club constitution. The nature of meetings can vary between clubs – some are more social in nature, while others are all business – and a format should be chosen that allows all members to be able to contribute, and for agenda items to be addressed in a timely manner. Some clubs like to keep their meetings more social in nature, while others take a more business-oriented format.

◊ Potential members: Most investment clubs are formed of small groups of people, often less than 20 and frequently around ten. The more members, the more difficult it can be to reach consensus on investment decisions. Successful clubs often have some connection between members, so they may be made up of friends, neighbours, colleagues, relatives and so forth. Trust and familiarity are key elements, so take pause before inviting any old person to join. You will need to explain to prospective members what you want to achieve with your club, and why. The finer details can be hammered out at meetings. Potential members can be approached informally or formally, but the decision to participate must be theirs alone. They need to be aware an investment club requires a financial and time commitment, and that the value of investments can rise as well as fall. All members must be prepared to contribute.

4.   Push up your portfolio power

Optimise asset allocation

The nitty-gritty of running a successful investment club comes down to the strategy it adopts, its asset selection, and its portfolio diversification. While all of these factors can change over time, for various reasons, those clubs that invest without a clear stance on strategy and diversification could be seen as courting disaster.

‘It might take several meetings to settle on a strategy, and all members have to be comfortable with it,’ says The Share Centre’s Knight. ‘These initial strategies are often quite broad in nature, and they can be refined over time as members become more comfortable and experienced.’

Some clubs, for instance, might limit their investments to equities, or specific sectors such as mining, pharmaceuticals, telecoms or financial stocks. Others might only dabble in blue-chip names. Others, still, might prefer the cut-and-thrust of Aim stocks with their promising risk-reward profile, or to use managed funds. There are two main types of strategy to consider:

◊ Aggressive strategy. The rump of your investment capital is placed in financial assets that promise higher-than-average returns, but have a higher level of risk. This type of investment might include Aim companies, stocks quoted on the ICAP Securities & Derivatives Exchange or low-grade corporate bonds.

◊ Conservative strategy. Here most of your money is employed in financial assets that offer steady but low returns, and have a commensurate risk level. This might include companies quoted on the London Stock Exchange’s (LSE ) Main Market and constituents of the FTSE 100 blue-chip index, Gilts, investment grade corporate bonds or low-risk funds.

A third route is a blended strategy, which encompasses a mix of the above two approaches. Says Knight: ‘Anecdotally, club portfolios are dominated by equities, and there will be a higher proportion of smaller caps compared with an individual’s portfolio. Typically clubs don’t invest in funds because members want to make the investment decisions themselves, rather than letting somebody else do it on their behalf. That’s half the fun of belonging to an investment club.’

Knight does warn that a tendency towards higher risk-reward investments means clubs should think carefully about portfolio diversification. He says some groups limit their risk exposure by restricting any given investment to just 10% to 15% of their portfolio. In other words, they don’t put all their eggs in one basket. For other clubs diversification involves spreading their investments across a variety of assets types and sectors.

‘It’s really up to each club as to how they diversify their portfolio, and we offer a wide range of financial assets for that to be achieved,’ says Knight who adds The Share Centre also offers a range of tools for clubs to actively manage risk, the most well-known of these being the stop loss.

‘In clubs that use stop losses, we will see an increase in the amount of cash they hold during volatile markets,’ he comments. ‘Typically, clubs can stay in cash for some time, especially if members are unsure of where the market is headed.’

The Share Centre man speaks from hard-won experience as chairman of an investment club that has successfully linked its strategy to its diversification protocols: ‘From the moment we introduced stop losses and a level at which we would take profits, we started to perform better because we took human emotion out of the equation.’

5.   The tax implications

Collective approach, individual responsibility

HM Revenue & Customs (HMRC) considers tax at the level of the individual member, rather than the club. It notes on its website: ‘Investment clubs are not charged to corporation tax. The individual member [of the club] is charged to tax on their proportionate share of any income or gains and is entitled to relief in respect of any share of capital losses.’

While HMRC has no rules on who may become a UK investment club member, it advises that non-UK members be familiar with and adhere to their local tax obligations.

For tax purposes, your club should provide you with a written statement outlining your share of any gains or losses in each tax year. These should be included in your annual tax return. HMRC fully outlines the tax treatment for investment clubs and their members on its website, www.hmrc.gov.uk.

Alexandra Madden, spokesperson for timetotrade, which provides an online investment club management system, underlines the importance of clubs taking care of their bookkeeping so that individual members can meet their tax obligations.

‘Individual members are liable for taxation on their share of income and capital gains,’ says Madden, noting they should receive monthly statements of financial performance. She also notes the importance of HMRC’s ‘Form 185’, which treasurers should fill in and give to members once a year, in time to complete their annual tax return.

‘That form gives a breakdown of what dividend income has been received by the club, interest, and capital gains on the sale of shares,’ explains Madden. ‘It also tells individual members how much has been apportioned to them, which they then enter in their tax return. At the end of the day clubs are dealing with people’s money, and that is not something that they should take at all lightly.’  

Around the UK there are plenty of investment clubs that use The Share Centre’s service for profitable collective investing. South Leicestershire-based The Linden Investment Club is among them, and its treasurer, Rob Folwell, has taken the time to share some of his pearls of wisdom on this type of investing.

The Linden Investment Club has been operating for about seven years. It has 14 members (and a quorum of four), meets monthly in a pub, and has a monthly subscription of £25 per member. In total its portfolio is worth about £34,000, give or take a little.

‘When we started the club we were up for anything to invest in, such as equities, gold, silver, premium bonds and so on,’ Folwell says. ‘But we always seem to go into equities. We have had a slight tendency to invest in the FTSE.’

At club meetings, members are each required to have picked at least three companies as possible investment targets, and done some research on them. As a rule, the companies are a mixture of those quoted on the LSE’s Main Market and Aim.

‘You will find that the voting (after discussion about the companies nominated) makes it clear what stocks the club wants to invest in,’ the 63-year-old adds, noting it is important for discussions about club business to remain focused. In terms of risk management, Folwell says the club uses a variety of tools offered by The Share Centre’s online platform, and particularly likes its trailing stop losses.

Trailing stop losses are those that trail a certain percentage behind a share price, allowing you to let profits run, with the benefit of being able to cut losses at the same time. The strategy has worked, and during its lifetime the club has enjoyed annual Christmas dinners and occasional barbeques that are paid for with its trading profits. Even after this, the club accounts show its portfolio is currently holding a profit of about £200 per member.

‘The key idea when we set this club up was to have fun,’ says Folwell. adding some other clubs he had observed were all business and it was ‘like watching paint dry’.

Over the past 12 months, The Linden Investment Club had done quite well with its portfolio, in spite of the state of the economy. At present the club holds about 20 different stocks. ‘We don’t like to leave cash unused,’ explains Folwell. ‘Sometimes we do, if we are waiting for a rights issue, or perhaps if we can’t see anything we want to invest right away.’

Further reading

◊ The Share Centre (www.share.com) platform provider for investment club trading

◊ timetotrade (www.timetotrade.eu) online investment club management system

◊ Financial Conduct Authority (www.fca.org.uk)  regulatory watchdog

◊ HMRC (www.hmrc.gov.uk)  for issues relating to taxation and investment clubs

◊ Investment Management Association (www.investmentfunds.org.uk) – trade body of the UK retail investment industry

◊ Proshare Investment Clubs (www.proshareclubs.co.uk) – a UK investment club association

◊ London Stock Exchange (www.londonstockexchange.com) – main provider of UK stock market platforms

THE TRADING COSTS

The Share Centre has a dealing option to suit your club’s needs. The ‘standard’ option is for those who deal occasionally and typically in smaller amounts. The ‘frequent’ option is for those who deal frequently or have a sizeable sum to invest.

The dealing options

Standard Frequent

Dealing option fee none £20 + VAT/quarter

Administration fee £2.50 + VAT/quarter £2.50 + VAT/quarter

Dealing commission 1%/deal, min. £7.50 £7.50/deal

Regular investing 0.5%, min. £1.00 0.5%, min. £1.00

Automatic reinvestment 0.5%, min. £1.00* 0.5%, min. £1.00*

*No minimum applies if contract is sent by email

….don’t forget the other dealing fees*

• PTM (The Panel on Takeovers and Mergers) levy: £1.00 on all transactions over £10,000

• Unit trusts and open-ended investment companies: There may be an initial fee to pay

* For an exhaustive range of fees (withdrawals, transfers etc), see www.share.com

MIX & MATCH ASSET CLASSES

The Share Centre offers access to thousands of individual instruments across seven broad groupings:

• Equities – access to shares quoted on the LSE’s Main Market and Aim, ICAP Securities & Derivatives Exchange, and to European and Northern American markets, providing they can be settled through CREST and are traded in sterling

• Funds – access to more than 2,000 funds, including open-ended investment companies and unit trusts

• Investment trusts – access to quoted collectives trading on the LSE

• Corporate bonds – access to those traded on the LSE in sterling

• Gilts – access to UK Government bonds

• Exchange-traded products – including exchange-traded funds and exchange-traded commodities quoted on the LSE

• Complex Investments – those defined as complex investments by the Financial Conduct Authority.

Join the club

Those interested in finding out more about how investment clubs operate and how to set one up can always attend the National Investment Club Conference 2013 which will be taking place on Saturday 9 and Sunday 10 November.

In its seventh year, the event brings together private investors and investment clubs to share their experiences. It will include seminars, discussion forums and presentations led by members of the UK’s leading investment clubs. Topics will include the legalities of setting up a club and basics of stock selection.

Alexandra Madden of event sponsor timetotrade, says: ‘This is the only event of its kind in the UK, where you can come meet other clubs and private investors from all over the country and learn from each others’ experiences, successes and mistakes and share ideas, approaches and investment strategies.

‘If you’re a brand new club or just starting out the event is good to get the basics such as how to draw up the constitution and how to keep track of subs. For more established clubs you get to look at stock-selection techniques and how to keep the club going.’

The event will be held at the Queen Elizabeth II Conference Centre in London and hosted by The World Money Show. To find out more and reserve your place email info@sensatus.com or telephone 01273 624 333. (SK)

HM Revenue & Customs

Attention: ‘Investment Club’ Services