Reducing Your Tax Bill - Part One

The “Tax-Man” cometh! As this tax season proceeds ever forward, many investors are asking themselves the same question - “am I going to take a large tax-hit this year?” We cannot say how much you’ll be taxed on your present investments. But, we believe it’s possible to structure your portfolio in a manner that mitigates tax-loss, and, leaves more money in your respective pockets. Joining us today is Philip McDonald, CFA, CAIA, Symmetry’s Managing Director of Research and Investments & Glenn Shirley, CAIA, Head of Investor Relations for Quantinno, to explain how investors can more effectively structure their portfolios and avoid an excess of taxation.

If you have any questions or would like more information, reach out to us at https://symmetrypartners.com/contact-us/

You can also find us on Facebook, YouTube, Twitter, and LinkedIn. As always, we remain invested in your goals.

Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, excluded or exempted from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. No one should assume that future performance of any specific investment, investment strategy, product or non-investment related content made reference to directly or indirectly in this material will be profitable. As with any investment strategy, there is the possibility of profitability as well as loss. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions.   Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.   Transcript:  

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Hello everyone.

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 Welcome to unfiltered Finance. This is your host Tom Romano.

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 I want to welcome you all back. We have a very

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 interesting topic to discuss with you today. It's

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 the notion of investors keeping more money in

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 their pockets by bringing tax management into

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 their investment Holdings. Not only are

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 we going to talk about tax management, but some of the things investors should

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 be considering in terms of how they view Capital markets how they should be

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 investing and then we have a couple of special guests

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 to talk about some additional strategies that investors should

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 consider in terms of bringing tax

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 Alpha if you will to the table so joining

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 us is Phil McDonald who is the

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 president of the panoramic trust and managing director of

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 research of symmetry Partners as well as Glenn Shirley

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 who is a principal and head of investor relations

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 at quantino Capital Management Glen and

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 Phil. Thank you so much for joining us here today. Thanks for having me tone. Thanks Tom.

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 It's great.

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be with you, you know at quantino 100% of

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 our focus is on taxable investors and

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We're managing portfolios while also seeking

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 to generate really consistent and strong tax benefits

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 for clients. And that goal is to maximize their

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 after-tax wealth to help them keep as much return as possible

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 year to year and we couldn't be more thrilled to partner with Symmetry and

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 the incredible advisors that you serve. So thanks

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 for having us pleasure to have you both. I look forward

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 to to the today's dialogue. Sometimes taxes aren't the

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 most interesting topic. However, I think that

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 there's some very important information that investors should

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 be considering in terms of how they invest their assets. And

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 so thank you both for joining us. There's a couple

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 of different angles. I want to take this conversation, right? And the first

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 one I think I want to to go towards is

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Specific investment philosophies, right? So Phil we adhere

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 to what we refer to as an evidence-based investment philosophy allowing

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 markets to produce the returns that

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 are investors are entitled to at the end of the day. So talk

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 to us a little bit from a tax standpoint

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 the benefits of an evidence-based investment

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 philosophy versus

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Paying for Alpha or active

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 money management. Mm-hmm. No, you raise a erase.

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 Very good point Tom. So our investment philosophy all

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 often refer to it as multi-factor investing. It

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 involves specific rules quantitative indicators

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 that research for

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 a very long time has indicated, you know

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 might create a premium over time. So following, you know,

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 a value and small and momentum and high quality

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 High profitability type of strategy you might

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 expect to do a little bit better than just a cap weighted

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 index over time what you get with

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 that again is, you know, rules-based very Diversified. So

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 for the most part low turnover right there,

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 there are there are some strategies that have

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 a little turnover specifically momentum. You probably have a little

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 bit higher turnover than a market capitalization way to index but

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 generally speaking, you know, these signals are relatively slow

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 moving you're very diverseified. Each holding is

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 a small percentage of your portfolio.

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So for the most part, you don't have to turn over

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 the portfolio very often. You don't have to trade a lot sell a

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 lot to reposition into the into the next

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 Holdings you would want. I mentioned momentum alone has has a

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 higher turnover as an individual strategy. There are

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 benefits in putting it together with other factors specifically

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 momentum and value work very well

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 together because they're negatively correlated and in the same portfolio,

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 the the turnover momentum can be

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 somewhat counteracted in reduced by having other factors

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 in there specifically value. So the

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 pairing of factors can help with the tax efficiency of

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 the portfolio, right momentum by definition is a high

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 turnover strategy. Meaning there's a lot of trading right now this

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 this signal is you know, essentially a year

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 or so a little less than a year. So you would

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 expect and that's the

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 standard kind of academic one year price momentum type of

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 indicator quantitative rule. So you'd

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 expect momentum to lead to changes at about

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Near Horizon your portfolio, which is especially inconvenient

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 to with regard to tax

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 law because you know, you have the short-term long term type of

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 cap gain consideration as well. Sure. So I

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 mean we've had a lot of conversations about on this podcast about

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 a fishing markets diversification Buy and Hold

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 stay the course, but what I'm hearing you say is that just from a

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 tax standpoint it almost sounds like it's a convenient byproduct of

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 it hearing to a buy an old strategy. That's a

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 great way to think about it and you you mentioned relative to

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 other strategies. So I want to respond directly to

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 that as well. So let's just call, you know,

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 multi-factor Diversified investing as a strategy

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 and investment philosophy relative to you know,

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 kind of old-fashioned active management where a

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 manager is picking and choosing you were stocks

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 maybe reacting to Market events

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 making predictions turning the portfolio over,

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 you know, if you know, each position is about 10%

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 you know, just selling one position creates a lot

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 of turnover.

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Or so typically those actively managed strategies

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 that are more concentrated and and require more

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 trading are less tax efficient. Lord know

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 that absolutely makes sense and Glenn. I know that you share in our

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 view on how Capital markets work. Do you

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 care to add anything to fills comments? Well, I think tax laws

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 harvesting in general is a perfect strategy

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 to use evidence based investing

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 and I say that because tax laws are

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 visiting at its core is you have names in the portfolio that

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 are essentially winners. They've appreciated we want

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 to hold those continue to hold those names.

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But you're gonna have stocks that have gone down those stocks

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 in a really simple example you

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 would sell but at that moment when you sell that

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 name.

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You have to replace it with another stock.

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So at that moment, that's a perfect time to utilize

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 your evidence-based beliefs. If

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 you want to tilt the portfolio toward cheaper stocks or

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 stocks with better attributes of quality or profitability. If you

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 add that in to the stock

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 selection of replacing that name via, which

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 you've realized that tax loss then we believe you

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 can add some nice return Over The Benchmark over

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 time.

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So yeah tax loss harvesting and offering after tax improvements

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 for clients can type very nicely with

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 evidence-based investing.

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Yeah, I think that intentional turnover if you will with

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 tasks lost harvesting does open up the door for some creativity

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 is what I'm hearing. You say Glenn in order

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 of enhancing returns. I mean I've seen in the past people liquidata

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 position, they might hold cash for 30

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 days or might replace it with an ETF.

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But Glenn what I'm hearing you say is that when that happens, there's

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 opportunities to be a little bit more.

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Creative I guess the word when it comes to reinvesting those

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 assets special specifically

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 through a factor lens, right? That's right. And and

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 I would also add Tom that's one advantage of

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 the Symmetry platform versus maybe other tax loss

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 harvesting options is that you know with with quantino

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 involved we can add a modest long short extension

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 to a strategy which gives it some

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 unique advantages versus long only text less harvesting so

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And long only tax loss harvesting. You'll typically have a risk budget.

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 So to speak, you know, there's only so much

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 deviation versus The Benchmark the clients willing

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 to take

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but with that risk budget

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If you do tilt toward maybe you're

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 evidence-based beliefs would maybe value momentum

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 you're taking up a little bit of that rich risk budget. So

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 by taking up that risk budget, you're reducing the

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 expected tax benefit because you're a

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 little bit more constrained and tax less harvesting.

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So one disadvantage of perhaps long only text less

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 harvesting with the long short extension that long

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 short extension itself is the engine for tax benefit

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 generation.

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So you can do a lot of created them things in

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 the portfolio. You could tilt toward your your factors and

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 your in your beliefs, but you're not giving up any expected

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 tax benefit.

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If you're if you're employing that long short extension.

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Yeah, I kind of want to hang on that point Glen because we say

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 and Phil I think would agree with with you

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 that you know, there's no such thing as

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 a perfect portfolio, right? Every portfolio is

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As it's trade-offs or is

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 a compromise if you will and if you want tax efficiency

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 as a main goal Factor investing

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 might not be the best way to do it. It's a

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 better way of doing it versus just a beta portfolio. But

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 what I'm hearing you say Glens you get kind of The Best of Both Worlds

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 by utilizing things like margin and

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 short positions. Is that correct? I would

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 I would agree that I would think the long short extension

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 itself introduces more creativity in

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 the portfolio because that

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 engine of tax benefit generation

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 is there it doesn't depend on the underlying portfolio

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 for those strong and consistent text benefits. So,

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You have a lot more flexibility to implement the core part

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 of that portfolio as you see fit. Sure. No, I think that makes

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 a lot of sense. There's a lot of strategies that we're deploying now the 13030

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 which you're alluding to Glenn I think is very interesting but filament

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 in our experience, we've seen our new

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 favorite word ossification, right which essentially means

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 that when you own a a basket of

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 security is whether it's ETS mutual funds are stocks at some

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 point you get to an area

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 over time where you can't do anything

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 with that portfolio because of embedded gains, right

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 and we've seen that over the years with our portfolios.

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 Can you comment a little bit on that? Yeah, absolutely and

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The the irony in that

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 situation is you should want to get there right because

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 you want your portfolio to increase in value. So

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 the way you you get to the point of having

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 no unrealized losses in your portfolio to

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 clip and realize for for tax efficient

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 repositioning is your portfolio goes up

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 over time and there's some interesting research on this. I think there's broad

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 agreement that even in a

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 diversified long only portfolio. You probably

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 only have a single digit number of years, you know, some of

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 it's going to depend on your assumptions and where the market goes and and how

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 you've invested and how your tax Lots look but, you know,

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 three four five years. Maybe might be the limit

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 you have to do.

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Efficient tax less harvesting and that type of portfolio before you

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 have to start to really give on the

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 risk budget and and we refer to this idea

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 of tracking error, which is you know, how different returns essentially

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 will look relative to a benchmark and you start

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 to to need to accept a lot of a lot of tracking error. If

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 you're not willing to accept some realization of gains in

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 in managing that portfolio. So all of a sudden, you know

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 portfolio you you might be paying somebody to manage and

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 do tax laws harvesting on becomes something

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 that might look a little bit more like an expensive

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 and noisy index. You don't have the ability to

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 do many transactions in that so, you know, the 1330 that

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 you and Glenn have started to talk about really frees up

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 the opportunity to do something with that portfolio sure

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 and you know, we talked a lot about direct indexing you

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 and I did a podcast of a few episodes ago

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 about direct indexing.

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And the more names the more tickers the

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 more opportunity you have to harvest losses, but even

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 with direct indexing when you hold maybe a hundred or so

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 underlying stocks you do get it

238
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 to a period where you you're eventually going to hold a basket

239
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 of very low cost basis with

240
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 high embedded gains securities.

241
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And so and the irony is that's the goal.

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 You had alluded to like we want to see games in our

243
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 portfolio. However, you know, we want our investors to be

244
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 able to keep more in their pockets through through tax efficiency. So clunky.

245
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 We started going down the path of the

246
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 1330 strategy, right and in direct indexing

247
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 certainly is a step up from a tax efficiency standpoint.

248
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 It certainly helps describe for us a little bit about

249
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 how that 130 30 works and multiple Market

250
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 environments if you will sure that you

251
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 Tom so, you know at the end of the day if you

252
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 have a hundred dollars of a direct indexing portfolio

253
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maybe assume that direct indexing portfolio maybe

254
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 has a 50% cost basis or a 60% cost basis

255
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 that tends to be roughly the cost basis where

256
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You're kind of handcuffed from a tax benefit generation perspective.

257
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 You know what quantina would do would be take

258
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 that $100 portfolio use the the margin inherent

259
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 in that account just like clients who

260
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You know borrow us modest amount from their Equity port for

261
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 those from time to time use that same margin capability and then

262
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 we're going to go long thirty dollars in short

263
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 thirty dollars. So we're building a 130/30 strategy

264
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 using the margin borrowing of

265
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 that account. No other cash is required. That's an important part and

266
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 then if you think about that $30 long $30

267
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 short, that's gonna be Diversified across hundreds of stocks.

268
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 Every tax loss harvesting strategy needs breath. You

269
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 need just a lot of stocks to be invested in because you're gonna have winners

270
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 and losers and then you think about that portfolios the

271
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 market goes up as the market goes down. You have

272
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 a little bit of a structural Advantage versus long only long only

273
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 will tend to generate great tax benefits When the market dips

274
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But it struggles to generate tax benefits When the market Rises and

275
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 you know clients invest in equities because they believe

276
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 the Market's going to rise over time. So that short side of that portfolio is

277
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 really important in the consistency of

278
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 tax benefits over time. So if you have a

279
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 long short portfolio on top of

280
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 your direct indexing account, you're able to recharge

281
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 tax benefits, you know almost immediately after

282
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 you apply that long short extension. We can also use

283
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 that to clean up the portfolios as

284
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 Phil mentioned over time. You're tracking air may rise, you're making

285
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 some deviations versus The Benchmark. So the

286
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 risk in that portfolio is also Rising.

287
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So if you have an overexposure to say Information Technology,

288
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 those names have done really well over the past

289
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 five to 10 years. We can use the short book the short

290
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 $30 of that portfolio to reduce

291
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 some of that overweight which will help clients reduce

292
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 risk in those accounts as well. So it's a combination of

293
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You know using that long short extension obviously to

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 generate great text benefits and a consistent way for clients, but also

295
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 to give them a better and less risky Investment Portfolio along

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 the way. Thank you gentlemen, that that's very

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 insightful for our listeners. Thank you for for listening to

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 us. You can access this podcast and all of

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 our podcasts and our series anywhere you get your podcasts, we're

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 gonna continue this conversation. So for our listeners, be sure

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 to tune in for part two on our topic of investing

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The “Tax-Man” cometh! As this tax season proceeds ever forward, many investors are asking themselves the same question - “am I going to take a large tax-hit this year?” We cannot say how much you’ll be taxed on your present investments. But, we believe it’s possible to structure your portfolio in a manner that mitigates tax-loss, and, leaves more money in your respective pockets. Joining us today is Philip McDonald, CFA, CAIA, Symmetry’s Managing Director of Research and Investments & Glenn Shirley, CAIA, Head of Investor Relations for Quantinno, to explain how investors can more effectively structure their portfolios and avoid an excess of taxation.

If you have any questions or would like more information, reach out to us at https://symmetrypartners.com/contact-us/

You can also find us on Facebook, YouTube, Twitter, and LinkedIn. As always, we remain invested in your goals.

Symmetry Partners, LLC, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, excluded or exempted from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. No one should assume that future performance of any specific investment, investment strategy, product or non-investment related content made reference to directly or indirectly in this material will be profitable. As with any investment strategy, there is the possibility of profitability as well as loss. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions.   Please note the material is provided for educational and background use only. Moreover, you should not assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.   Transcript:  

00:00:01.800 --> 00:00:07.400 Hello everyone.

1 00:00:07.400 --> 00:00:10.800  Welcome to unfiltered Finance. This is your host Tom Romano.

2 00:00:10.800 --> 00:00:13.800  I want to welcome you all back. We have a very

3 00:00:13.800 --> 00:00:17.100  interesting topic to discuss with you today. It's

4 00:00:16.100 --> 00:00:19.400  the notion of investors keeping more money in

5 00:00:19.400 --> 00:00:22.900  their pockets by bringing tax management into

6 00:00:22.900 --> 00:00:25.300  their investment Holdings. Not only are

7 00:00:25.300 --> 00:00:28.200  we going to talk about tax management, but some of the things investors should

8 00:00:28.200 --> 00:00:31.200  be considering in terms of how they view Capital markets how they should be

9 00:00:31.200 --> 00:00:34.400  investing and then we have a couple of special guests

10 00:00:34.400 --> 00:00:38.000  to talk about some additional strategies that investors should

11 00:00:37.400 --> 00:00:40.700  consider in terms of bringing tax

12 00:00:40.700 --> 00:00:43.700  Alpha if you will to the table so joining

13 00:00:43.700 --> 00:00:46.100  us is Phil McDonald who is the

14 00:00:46.100 --> 00:00:49.400  president of the panoramic trust and managing director of

15 00:00:49.400 --> 00:00:52.700  research of symmetry Partners as well as Glenn Shirley

16 00:00:52.700 --> 00:00:55.700  who is a principal and head of investor relations

17 00:00:55.700 --> 00:00:58.200  at quantino Capital Management Glen and

18 00:00:58.200 --> 00:01:01.500  Phil. Thank you so much for joining us here today. Thanks for having me tone. Thanks Tom.

19 00:01:01.500 --> 00:01:01.800  It's great.

20 00:01:01.900 --> 00:01:04.900 be with you, you know at quantino 100% of

21 00:01:04.900 --> 00:01:07.200  our focus is on taxable investors and

22 00:01:07.900 --> 00:01:10.500 We're managing portfolios while also seeking

23 00:01:10.500 --> 00:01:13.300  to generate really consistent and strong tax benefits

24 00:01:13.300 --> 00:01:16.800  for clients. And that goal is to maximize their

25 00:01:16.800 --> 00:01:19.400  after-tax wealth to help them keep as much return as possible

26 00:01:19.400 --> 00:01:22.200  year to year and we couldn't be more thrilled to partner with Symmetry and

27 00:01:22.200 --> 00:01:25.200  the incredible advisors that you serve. So thanks

28 00:01:25.200 --> 00:01:28.300  for having us pleasure to have you both. I look forward

29 00:01:28.300 --> 00:01:31.300  to to the today's dialogue. Sometimes taxes aren't the

30 00:01:31.300 --> 00:01:34.300  most interesting topic. However, I think that

31 00:01:34.300 --> 00:01:37.300  there's some very important information that investors should

32 00:01:37.300 --> 00:01:40.700  be considering in terms of how they invest their assets. And

33 00:01:40.700 --> 00:01:43.000  so thank you both for joining us. There's a couple

34 00:01:43.100 --> 00:01:46.100  of different angles. I want to take this conversation, right? And the first

35 00:01:46.100 --> 00:01:49.000  one I think I want to to go towards is

36 00:01:50.100 --> 00:01:53.500 Specific investment philosophies, right? So Phil we adhere

37 00:01:53.500 --> 00:01:57.300  to what we refer to as an evidence-based investment philosophy allowing

38 00:01:56.300 --> 00:01:59.200  markets to produce the returns that

39 00:01:59.200 --> 00:02:03.300  are investors are entitled to at the end of the day. So talk

40 00:02:02.300 --> 00:02:05.700  to us a little bit from a tax standpoint

41 00:02:05.700 --> 00:02:08.200  the benefits of an evidence-based investment

42 00:02:08.200 --> 00:02:09.500  philosophy versus

43 00:02:10.500 --> 00:02:13.500 Paying for Alpha or active

44 00:02:13.500 --> 00:02:16.600  money management. Mm-hmm. No, you raise a erase.

45 00:02:16.600 --> 00:02:19.700  Very good point Tom. So our investment philosophy all

46 00:02:19.700 --> 00:02:22.800  often refer to it as multi-factor investing. It

47 00:02:22.800 --> 00:02:27.300  involves specific rules quantitative indicators

48 00:02:26.300 --> 00:02:29.800  that research for

49 00:02:29.800 --> 00:02:32.100  a very long time has indicated, you know

50 00:02:32.100 --> 00:02:35.400  might create a premium over time. So following, you know,

51 00:02:35.400 --> 00:02:38.900  a value and small and momentum and high quality

52 00:02:38.900 --> 00:02:41.600  High profitability type of strategy you might

53 00:02:41.600 --> 00:02:44.700  expect to do a little bit better than just a cap weighted

54 00:02:44.700 --> 00:02:47.300  index over time what you get with

55 00:02:47.300 --> 00:02:50.900  that again is, you know, rules-based very Diversified. So

56 00:02:50.900 --> 00:02:53.700  for the most part low turnover right there,

57 00:02:53.700 --> 00:02:56.300  there are there are some strategies that have

58 00:02:56.300 --> 00:02:59.000  a little turnover specifically momentum. You probably have a little

59 00:02:59.100 --> 00:03:02.600  bit higher turnover than a market capitalization way to index but

60 00:03:02.600 --> 00:03:05.600  generally speaking, you know, these signals are relatively slow

61 00:03:05.600 --> 00:03:08.500  moving you're very diverseified. Each holding is

62 00:03:08.500 --> 00:03:10.200  a small percentage of your portfolio.

63 00:03:10.700 --> 00:03:13.300 So for the most part, you don't have to turn over

64 00:03:13.300 --> 00:03:16.400  the portfolio very often. You don't have to trade a lot sell a

65 00:03:16.400 --> 00:03:19.200  lot to reposition into the into the next

66 00:03:19.200 --> 00:03:22.700  Holdings you would want. I mentioned momentum alone has has a

67 00:03:22.700 --> 00:03:25.900  higher turnover as an individual strategy. There are

68 00:03:25.900 --> 00:03:29.100  benefits in putting it together with other factors specifically

69 00:03:28.100 --> 00:03:31.100  momentum and value work very well

70 00:03:31.100 --> 00:03:35.000  together because they're negatively correlated and in the same portfolio,

71 00:03:34.600 --> 00:03:37.000  the the turnover momentum can be

72 00:03:37.600 --> 00:03:41.000  somewhat counteracted in reduced by having other factors

73 00:03:40.200 --> 00:03:43.200  in there specifically value. So the

74 00:03:43.200 --> 00:03:46.400  pairing of factors can help with the tax efficiency of

75 00:03:46.400 --> 00:03:49.200  the portfolio, right momentum by definition is a high

76 00:03:49.200 --> 00:03:53.100  turnover strategy. Meaning there's a lot of trading right now this

77 00:03:52.100 --> 00:03:55.800  this signal is you know, essentially a year

78 00:03:55.800 --> 00:03:58.300  or so a little less than a year. So you would

79 00:03:58.300 --> 00:04:01.200  expect and that's the

80 00:04:01.200 --> 00:04:04.400  standard kind of academic one year price momentum type of

81 00:04:04.400 --> 00:04:07.700  indicator quantitative rule. So you'd

82 00:04:07.700 --> 00:04:10.400  expect momentum to lead to changes at about

83 00:04:10.800 --> 00:04:14.500 Near Horizon your portfolio, which is especially inconvenient

84 00:04:13.500 --> 00:04:16.300  to with regard to tax

85 00:04:16.300 --> 00:04:19.600  law because you know, you have the short-term long term type of

86 00:04:19.600 --> 00:04:22.300  cap gain consideration as well. Sure. So I

87 00:04:22.300 --> 00:04:25.400  mean we've had a lot of conversations about on this podcast about

88 00:04:25.400 --> 00:04:28.100  a fishing markets diversification Buy and Hold

89 00:04:28.100 --> 00:04:31.600  stay the course, but what I'm hearing you say is that just from a

90 00:04:31.600 --> 00:04:34.500  tax standpoint it almost sounds like it's a convenient byproduct of

91 00:04:34.500 --> 00:04:37.300  it hearing to a buy an old strategy. That's a

92 00:04:37.300 --> 00:04:40.700  great way to think about it and you you mentioned relative to

93 00:04:40.700 --> 00:04:43.400  other strategies. So I want to respond directly to

94 00:04:43.400 --> 00:04:46.300  that as well. So let's just call, you know,

95 00:04:46.300 --> 00:04:49.300  multi-factor Diversified investing as a strategy

96 00:04:49.300 --> 00:04:52.400  and investment philosophy relative to you know,

97 00:04:52.400 --> 00:04:55.800  kind of old-fashioned active management where a

98 00:04:55.800 --> 00:04:58.500  manager is picking and choosing you were stocks

99 00:04:58.500 --> 00:05:02.000  maybe reacting to Market events

100 00:05:01.100 --> 00:05:04.400  making predictions turning the portfolio over,

101 00:05:04.400 --> 00:05:07.400  you know, if you know, each position is about 10%

102 00:05:07.400 --> 00:05:10.100  you know, just selling one position creates a lot

103 00:05:10.100 --> 00:05:10.700  of turnover.

104 00:05:10.700 --> 00:05:13.400 Or so typically those actively managed strategies

105 00:05:13.400 --> 00:05:16.500  that are more concentrated and and require more

106 00:05:16.500 --> 00:05:19.300  trading are less tax efficient. Lord know

107 00:05:19.300 --> 00:05:22.800  that absolutely makes sense and Glenn. I know that you share in our

108 00:05:22.800 --> 00:05:25.400  view on how Capital markets work. Do you

109 00:05:25.400 --> 00:05:28.500  care to add anything to fills comments? Well, I think tax laws

110 00:05:28.500 --> 00:05:32.200  harvesting in general is a perfect strategy

111 00:05:31.200 --> 00:05:34.600  to use evidence based investing

112 00:05:34.600 --> 00:05:37.100  and I say that because tax laws are

113 00:05:37.100 --> 00:05:40.300  visiting at its core is you have names in the portfolio that

114 00:05:40.300 --> 00:05:43.300  are essentially winners. They've appreciated we want

115 00:05:43.300 --> 00:05:45.400  to hold those continue to hold those names.

116 00:05:46.300 --> 00:05:49.700 But you're gonna have stocks that have gone down those stocks

117 00:05:49.700 --> 00:05:52.400  in a really simple example you

118 00:05:52.400 --> 00:05:55.400  would sell but at that moment when you sell that

119 00:05:55.400 --> 00:05:55.700  name.

120 00:05:56.500 --> 00:05:58.300 You have to replace it with another stock.

121 00:05:59.300 --> 00:06:02.600 So at that moment, that's a perfect time to utilize

122 00:06:02.600 --> 00:06:05.200  your evidence-based beliefs. If

123 00:06:05.200 --> 00:06:08.100  you want to tilt the portfolio toward cheaper stocks or

124 00:06:08.100 --> 00:06:11.900  stocks with better attributes of quality or profitability. If you

125 00:06:11.900 --> 00:06:14.400  add that in to the stock

126 00:06:14.400 --> 00:06:17.500  selection of replacing that name via, which

127 00:06:17.500 --> 00:06:20.200  you've realized that tax loss then we believe you

128 00:06:20.200 --> 00:06:23.200  can add some nice return Over The Benchmark over

129 00:06:23.200 --> 00:06:23.400  time.

130 00:06:24.100 --> 00:06:28.100 So yeah tax loss harvesting and offering after tax improvements

131 00:06:27.100 --> 00:06:30.200  for clients can type very nicely with

132 00:06:30.200 --> 00:06:31.700  evidence-based investing.

133 00:06:32.400 --> 00:06:35.500 Yeah, I think that intentional turnover if you will with

134 00:06:35.500 --> 00:06:39.000  tasks lost harvesting does open up the door for some creativity

135 00:06:38.500 --> 00:06:41.600  is what I'm hearing. You say Glenn in order

136 00:06:41.600 --> 00:06:45.600  of enhancing returns. I mean I've seen in the past people liquidata

137 00:06:44.600 --> 00:06:47.600  position, they might hold cash for 30

138 00:06:47.600 --> 00:06:49.700  days or might replace it with an ETF.

139 00:06:50.700 --> 00:06:53.400 But Glenn what I'm hearing you say is that when that happens, there's

140 00:06:53.400 --> 00:06:54.600  opportunities to be a little bit more.

141 00:06:55.700 --> 00:06:58.900 Creative I guess the word when it comes to reinvesting those

142 00:06:58.900 --> 00:07:01.400  assets special specifically

143 00:07:01.400 --> 00:07:04.500  through a factor lens, right? That's right. And and

144 00:07:04.500 --> 00:07:07.300  I would also add Tom that's one advantage of

145 00:07:07.300 --> 00:07:10.600  the Symmetry platform versus maybe other tax loss

146 00:07:10.600 --> 00:07:13.700  harvesting options is that you know with with quantino

147 00:07:13.700 --> 00:07:16.600  involved we can add a modest long short extension

148 00:07:16.600 --> 00:07:19.300  to a strategy which gives it some

149 00:07:19.300 --> 00:07:22.400  unique advantages versus long only text less harvesting so

150 00:07:23.200 --> 00:07:26.800 And long only tax loss harvesting. You'll typically have a risk budget.

151 00:07:26.800 --> 00:07:29.500  So to speak, you know, there's only so much

152 00:07:29.500 --> 00:07:32.600  deviation versus The Benchmark the clients willing

153 00:07:32.600 --> 00:07:32.700  to take

154 00:07:33.600 --> 00:07:35.200 but with that risk budget

155 00:07:35.800 --> 00:07:38.300 If you do tilt toward maybe you're

156 00:07:38.300 --> 00:07:41.500  evidence-based beliefs would maybe value momentum

157 00:07:41.500 --> 00:07:44.900  you're taking up a little bit of that rich risk budget. So

158 00:07:44.900 --> 00:07:48.000  by taking up that risk budget, you're reducing the

159 00:07:47.800 --> 00:07:50.300  expected tax benefit because you're a

160 00:07:50.300 --> 00:07:52.400  little bit more constrained and tax less harvesting.

161 00:07:53.400 --> 00:07:56.200 So one disadvantage of perhaps long only text less

162 00:07:56.200 --> 00:07:59.800  harvesting with the long short extension that long

163 00:07:59.800 --> 00:08:02.500  short extension itself is the engine for tax benefit

164 00:08:02.500 --> 00:08:03.100  generation.

165 00:08:03.800 --> 00:08:06.300 So you can do a lot of created them things in

166 00:08:06.300 --> 00:08:09.100  the portfolio. You could tilt toward your your factors and

167 00:08:09.100 --> 00:08:12.900  your in your beliefs, but you're not giving up any expected

168 00:08:12.900 --> 00:08:13.600  tax benefit.

169 00:08:14.600 --> 00:08:17.400 If you're if you're employing that long short extension.

170 00:08:18.300 --> 00:08:22.300 Yeah, I kind of want to hang on that point Glen because we say

171 00:08:21.300 --> 00:08:25.100  and Phil I think would agree with with you

172 00:08:24.100 --> 00:08:27.000  that you know, there's no such thing as

173 00:08:27.100 --> 00:08:29.200  a perfect portfolio, right? Every portfolio is

174 00:08:30.200 --> 00:08:33.500 As it's trade-offs or is

175 00:08:33.500 --> 00:08:37.500  a compromise if you will and if you want tax efficiency

176 00:08:36.500 --> 00:08:40.400  as a main goal Factor investing

177 00:08:40.400 --> 00:08:43.200  might not be the best way to do it. It's a

178 00:08:43.200 --> 00:08:47.000  better way of doing it versus just a beta portfolio. But

179 00:08:46.100 --> 00:08:49.500  what I'm hearing you say Glens you get kind of The Best of Both Worlds

180 00:08:49.500 --> 00:08:52.500  by utilizing things like margin and

181 00:08:52.500 --> 00:08:55.400  short positions. Is that correct? I would

182 00:08:55.400 --> 00:08:58.900  I would agree that I would think the long short extension

183 00:08:58.900 --> 00:09:02.100  itself introduces more creativity in

184 00:09:01.100 --> 00:09:06.000  the portfolio because that

185 00:09:04.500 --> 00:09:07.800  engine of tax benefit generation

186 00:09:07.800 --> 00:09:10.900  is there it doesn't depend on the underlying portfolio

187 00:09:10.900 --> 00:09:13.500  for those strong and consistent text benefits. So,

188 00:09:14.400 --> 00:09:17.400 You have a lot more flexibility to implement the core part

189 00:09:17.400 --> 00:09:20.200  of that portfolio as you see fit. Sure. No, I think that makes

190 00:09:20.200 --> 00:09:24.000  a lot of sense. There's a lot of strategies that we're deploying now the 13030

191 00:09:23.300 --> 00:09:27.200  which you're alluding to Glenn I think is very interesting but filament

192 00:09:26.200 --> 00:09:29.400  in our experience, we've seen our new

193 00:09:29.400 --> 00:09:33.100  favorite word ossification, right which essentially means

194 00:09:32.100 --> 00:09:35.400  that when you own a a basket of

195 00:09:35.400 --> 00:09:39.300  security is whether it's ETS mutual funds are stocks at some

196 00:09:38.300 --> 00:09:42.000  point you get to an area

197 00:09:41.200 --> 00:09:44.300  over time where you can't do anything

198 00:09:44.300 --> 00:09:48.000  with that portfolio because of embedded gains, right

199 00:09:47.300 --> 00:09:51.100  and we've seen that over the years with our portfolios.

200 00:09:50.100 --> 00:09:53.700  Can you comment a little bit on that? Yeah, absolutely and

201 00:09:54.900 --> 00:09:57.200 The the irony in that

202 00:09:57.200 --> 00:10:00.300  situation is you should want to get there right because

203 00:10:00.300 --> 00:10:03.200  you want your portfolio to increase in value. So

204 00:10:03.200 --> 00:10:06.600  the way you you get to the point of having

205 00:10:06.600 --> 00:10:09.500  no unrealized losses in your portfolio to

206 00:10:09.500 --> 00:10:13.100  clip and realize for for tax efficient

207 00:10:12.100 --> 00:10:15.100  repositioning is your portfolio goes up

208 00:10:15.100 --> 00:10:19.200  over time and there's some interesting research on this. I think there's broad

209 00:10:18.200 --> 00:10:21.500  agreement that even in a

210 00:10:21.500 --> 00:10:24.300  diversified long only portfolio. You probably

211 00:10:24.300 --> 00:10:27.200  only have a single digit number of years, you know, some of

212 00:10:27.200 --> 00:10:30.200  it's going to depend on your assumptions and where the market goes and and how

213 00:10:30.200 --> 00:10:33.200  you've invested and how your tax Lots look but, you know,

214 00:10:33.200 --> 00:10:36.600  three four five years. Maybe might be the limit

215 00:10:36.600 --> 00:10:38.400  you have to do.

216 00:10:39.100 --> 00:10:42.900 Efficient tax less harvesting and that type of portfolio before you

217 00:10:42.900 --> 00:10:45.300  have to start to really give on the

218 00:10:45.300 --> 00:10:48.200  risk budget and and we refer to this idea

219 00:10:48.200 --> 00:10:51.700  of tracking error, which is you know, how different returns essentially

220 00:10:51.700 --> 00:10:54.100  will look relative to a benchmark and you start

221 00:10:54.100 --> 00:10:57.600  to to need to accept a lot of a lot of tracking error. If

222 00:10:57.600 --> 00:11:00.700  you're not willing to accept some realization of gains in

223 00:11:00.700 --> 00:11:03.500  in managing that portfolio. So all of a sudden, you know

224 00:11:03.500 --> 00:11:06.400  portfolio you you might be paying somebody to manage and

225 00:11:06.400 --> 00:11:09.700  do tax laws harvesting on becomes something

226 00:11:09.700 --> 00:11:12.400  that might look a little bit more like an expensive

227 00:11:12.400 --> 00:11:15.100  and noisy index. You don't have the ability to

228 00:11:15.100 --> 00:11:18.500  do many transactions in that so, you know, the 1330 that

229 00:11:18.500 --> 00:11:21.100  you and Glenn have started to talk about really frees up

230 00:11:21.100 --> 00:11:24.800  the opportunity to do something with that portfolio sure

231 00:11:24.800 --> 00:11:27.600  and you know, we talked a lot about direct indexing you

232 00:11:27.600 --> 00:11:30.400  and I did a podcast of a few episodes ago

233 00:11:30.400 --> 00:11:31.900  about direct indexing.

234 00:11:32.400 --> 00:11:35.700 And the more names the more tickers the

235 00:11:35.700 --> 00:11:38.200  more opportunity you have to harvest losses, but even

236 00:11:38.200 --> 00:11:41.100  with direct indexing when you hold maybe a hundred or so

237 00:11:41.100 --> 00:11:44.200  underlying stocks you do get it

238 00:11:44.200 --> 00:11:48.300  to a period where you you're eventually going to hold a basket

239 00:11:47.300 --> 00:11:50.600  of very low cost basis with

240 00:11:50.600 --> 00:11:52.900  high embedded gains securities.

241 00:11:53.500 --> 00:11:56.100 And so and the irony is that's the goal.

242 00:11:56.100 --> 00:11:59.100  You had alluded to like we want to see games in our

243 00:11:59.100 --> 00:12:02.100  portfolio. However, you know, we want our investors to be

244 00:12:02.100 --> 00:12:06.500  able to keep more in their pockets through through tax efficiency. So clunky.

245 00:12:05.500 --> 00:12:08.000  We started going down the path of the

246 00:12:08.900 --> 00:12:11.800  1330 strategy, right and in direct indexing

247 00:12:11.800 --> 00:12:14.600  certainly is a step up from a tax efficiency standpoint.

248 00:12:14.600 --> 00:12:17.300  It certainly helps describe for us a little bit about

249 00:12:17.300 --> 00:12:20.500  how that 130 30 works and multiple Market

250 00:12:20.500 --> 00:12:23.400  environments if you will sure that you

251 00:12:23.400 --> 00:12:26.600  Tom so, you know at the end of the day if you

252 00:12:26.600 --> 00:12:29.900  have a hundred dollars of a direct indexing portfolio

253 00:12:31.900 --> 00:12:34.400 maybe assume that direct indexing portfolio maybe

254 00:12:34.400 --> 00:12:37.900  has a 50% cost basis or a 60% cost basis

255 00:12:37.900 --> 00:12:40.200  that tends to be roughly the cost basis where

256 00:12:41.100 --> 00:12:44.700 You're kind of handcuffed from a tax benefit generation perspective.

257 00:12:44.700 --> 00:12:47.600  You know what quantina would do would be take

258 00:12:47.600 --> 00:12:50.800  that $100 portfolio use the the margin inherent

259 00:12:50.800 --> 00:12:52.800  in that account just like clients who

260 00:12:53.500 --> 00:12:56.200 You know borrow us modest amount from their Equity port for

261 00:12:56.200 --> 00:12:59.600  those from time to time use that same margin capability and then

262 00:12:59.600 --> 00:13:03.000  we're going to go long thirty dollars in short

263 00:13:02.400 --> 00:13:05.600  thirty dollars. So we're building a 130/30 strategy

264 00:13:05.600 --> 00:13:09.200  using the margin borrowing of

265 00:13:09.200 --> 00:13:12.700  that account. No other cash is required. That's an important part and

266 00:13:12.700 --> 00:13:15.000  then if you think about that $30 long $30

267 00:13:15.600 --> 00:13:18.400  short, that's gonna be Diversified across hundreds of stocks.

268 00:13:18.400 --> 00:13:21.600  Every tax loss harvesting strategy needs breath. You

269 00:13:21.600 --> 00:13:24.400  need just a lot of stocks to be invested in because you're gonna have winners

270 00:13:24.400 --> 00:13:27.900  and losers and then you think about that portfolios the

271 00:13:27.900 --> 00:13:30.500  market goes up as the market goes down. You have

272 00:13:30.500 --> 00:13:33.400  a little bit of a structural Advantage versus long only long only

273 00:13:33.400 --> 00:13:36.400  will tend to generate great tax benefits When the market dips

274 00:13:37.300 --> 00:13:40.600 But it struggles to generate tax benefits When the market Rises and

275 00:13:40.600 --> 00:13:43.100  you know clients invest in equities because they believe

276 00:13:43.100 --> 00:13:46.400  the Market's going to rise over time. So that short side of that portfolio is

277 00:13:46.400 --> 00:13:49.900  really important in the consistency of

278 00:13:49.900 --> 00:13:52.300  tax benefits over time. So if you have a

279 00:13:52.300 --> 00:13:55.300  long short portfolio on top of

280 00:13:55.300 --> 00:13:58.800  your direct indexing account, you're able to recharge

281 00:13:58.800 --> 00:14:01.300  tax benefits, you know almost immediately after

282 00:14:01.300 --> 00:14:04.400  you apply that long short extension. We can also use

283 00:14:04.400 --> 00:14:07.300  that to clean up the portfolios as

284 00:14:07.300 --> 00:14:10.700  Phil mentioned over time. You're tracking air may rise, you're making

285 00:14:10.700 --> 00:14:13.700  some deviations versus The Benchmark. So the

286 00:14:13.700 --> 00:14:15.500  risk in that portfolio is also Rising.

287 00:14:16.200 --> 00:14:20.300 So if you have an overexposure to say Information Technology,

288 00:14:19.300 --> 00:14:22.100  those names have done really well over the past

289 00:14:22.100 --> 00:14:26.200  five to 10 years. We can use the short book the short

290 00:14:25.800 --> 00:14:28.900  $30 of that portfolio to reduce

291 00:14:28.900 --> 00:14:31.900  some of that overweight which will help clients reduce

292 00:14:31.900 --> 00:14:34.500  risk in those accounts as well. So it's a combination of

293 00:14:35.400 --> 00:14:38.000 You know using that long short extension obviously to

294 00:14:38.400 --> 00:14:41.100  generate great text benefits and a consistent way for clients, but also

295 00:14:41.100 --> 00:14:45.000  to give them a better and less risky Investment Portfolio along

296 00:14:44.300 --> 00:14:47.300  the way. Thank you gentlemen, that that's very

297 00:14:47.300 --> 00:14:50.100  insightful for our listeners. Thank you for for listening to

298 00:14:50.100 --> 00:14:53.000  us. You can access this podcast and all of

299 00:14:53.100 --> 00:14:56.600  our podcasts and our series anywhere you get your podcasts, we're

300 00:14:56.600 --> 00:14:59.400  gonna continue this conversation. So for our listeners, be sure

301 00:14:59.400 --> 00:15:02.300  to tune in for part two on our topic of investing

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