Reducing Your Tax Bill - Part Two

Unfiltered Finance

English - March 09, 2023 10:00 - 18 minutes - 34.1 MB - ★★★★ - 8 ratings
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Previous Episode: Reducing Your Tax Bill - Part One

Next Episode: Choosing the Right Financial Advisor | Part One: Work with Someone You Trust

In our last episode, we discussed the importance of a portfolio’s asset allocation, and, how that relates to “Reducing Your Tax Bill”. In part two of this episode, we are joined once again by Symmetry’s Managing Director of Research and Investments, Philip McDonald, CFA, CAAIA & Glenn Shirley, CAIA, Head of Investor Relations for Quantinno Capital Management, to discuss the methods by which you can “re-charge that tax benefit”.

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.

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Hello listeners,

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welcome back to part two of our conversation on

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investing in taxes. Once again, I'm joined by Glenn

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Shirley from quantino and Phil McDonald from symmetry.

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Thanks gentlemen for joining us again, whether or not the market goes up

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or down when you have the long short overlay you have

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opportunities to to find losers losses.

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If you will to reach hard that tax benefit,

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it's some what counterintuitive right we're looking

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for Securities that have gone down in

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value, but I think the truth of the matter is is that when you

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own an ETF that's tracking an index or mutual

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fund that's tracking index. The reality is Phil

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you do own those losers. You just might not see them right? They're always

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that's right. Yeah looking at and that's

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a great Point looking at say in S&P 500 or

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Russell 1000 ETF. You you see one number,

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you know one one price

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one return but behind

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You're likely going to have dozens and dozens of positions

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that throughout the year and at year end

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are in or in a lost position. So in

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direct indexing, it just kind of breaks down that wrapper and

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you hold, you know hundreds of Securities directly. So

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you kind of see those a little bit more clearly sure and

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we've seen that in recent years right with some of these tech stocks

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the Fang stocks if you will Facebook Apple Amazon Netflix Google

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Etc. They were driving the returns of the S&P and there

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was a vast majority of those securities within the S&P that

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were in the red and by unwrapping it you can

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take advantage of those you still run into the issue of

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the portfolio seizing and what

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I mean by that is what we've been talking about having that portfolio

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get to a point where you don't have any room to make

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any trades without incurring some sort of tax consequence, but I

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think that's where the 1330 comes in right Glenn you're

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able to apply that strategy on

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top of an existing portfolio generate losses in

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any Market environment. And so

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So I think that that's a really interesting thing Glenn. Can you talk a little bit?

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I didn't mean to interrupt you, but could you talk a little bit about what is

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what happens with the risk exposure by putting that overlay on

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right investor with that 100 dollars 30 long

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30 short what what happens to the

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risk characters of that particular account? Sure. Yeah great

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question Tom. So if you look at if you just

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put on a 30% long 30% short

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portfolio. And you said what is the risk of

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that portfolio in isolation by itself? The answer

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to that is about one percent and that

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could be there be you know, standard deviation how much it's

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going to move around or it could be if you're if you're looking at that benchmarked

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to a you know, an index like

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the S&P 500 that would be one percent tracking here. So pretty

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modest, you know, a lot of active Equity strategies have tracking

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air easily of two percent or more. So we're

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not adding a lot of of risk just via that long

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short extension, but in reality as I mentioned you have

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these kind of Legacy accounts that

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Some elevated levels of risk that long short extension is

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a tool to reduce that risk. So even though

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you have a 1% risk in

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that long short extension in isolation. If you use that

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long short extension efficiently to reduce

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the total risk of the portfolio, then oftentimes we

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can also we can actually reduce kind of the total tracking

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error or risk versus The Benchmark of a

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tax less harvesting strategy often we can at least

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keep it the same. So when you look at a quantino kind

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of 130 30 tax loss harvesting account tracking errors

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typically one and a half percent on average

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and that's very very similar to what of

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what a clients are probably experiencing in their long only text less

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harvesting accounts as well. So just to reiterate what you're

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saying by applying the the 1330 extension to

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a portfolio the clients risk exposures still that

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principle investment is what I'm hearing you say,

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however, I think what I think a really really strong

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point is that it's not necessarily

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the risk by putting the overlay but it actually can be a risk mitigator Phil

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you and I have run across these many many times where investors

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come to us and we look at their existing Holdings

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and we're working on a Case right now

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where the investor who probably should

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have a balanced portfolio between Brawley Diversified

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stocks and bonds.

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Is stuck in a single stock position that they

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can't do anything with because of the

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fact that it's it's got such a low cost basis if

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they were to sell that security. They would be looking at some significant.

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Tax consequences, but only a single

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stock is a real risky Endeavor. Oh, no question,

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and I think

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This is such an incredibly powerful benefit of this

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strategy. And I think it it sometimes is you know

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mentioned second after the the tax Alpha

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and hey, you can keep more of what you earn but this is so

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incredibly powerful, you know, thinking of

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Really sad examples through time like Enron, you know things went

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very bad for people who held most of their company

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stock a lot of incentive plans. These

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days will give employees options and shares and

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all that. So this is an issue or a lot

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of investors and I think this solution really is, you know virtuous and

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really helping them in their Financial Health and just to

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maybe put a finer point on it and at the

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risk of being a little repetitive, you know, if you own a

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large amount of your, you know, large amount of your financial wealth

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is in an oil stock or a

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tech stock.

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Immediately in putting on the 13030 strategy

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the the 30 extension the

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30 more long can hold.

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Every other industry except that one you hold.

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Imagine that diversification and then the short can reduce

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that exposure to that one industry. So overnight in

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what in in the first, you know

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day of transactions you go from hey, I

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might end up like Enron or wow. My my

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financial wealth is gonna ride up and down with

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the price of crude oil or how Google does and

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immediately you're getting more

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of a diversified Market portfolio. Even if

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you're just shooting toward maybe an S&P 500 Index. It's immediately

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beneficial Glen. I don't know if you'd add

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anything to that but I really find that as you know, powerful benefit

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to the end investor. Yeah, the

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your correct fell the deals exchange solution that

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quantino offers is really a use case

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that came about from client feedback. We're fortunate to

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work with a lot of family offices. These are very wealthy families that

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have concentration in their portfolio.

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They built wealth via service to a public company or

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investing in a company that went public and eventually

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They want to turn the corner from you know,

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this this wealth that has been built by that concentration turning

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the corner toward wealth preservation and that

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means diversification. So how do we do that in a tax efficient manner?

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There's exchange funds that we you

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know that are really an option for very wealthy families, but

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really not for clients at scale. They're multi-million

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dollar minimums their private

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Fund Solutions and you know, you're vestly

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investing in a hedge fund that's gonna take seven years to diversify

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and they're very expensive. So we always knew

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that if we could use our capabilities to help clients diversify

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concentrated positions to be a pretty powerful thing and

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that 30 by 30 extensions the the way we do that so, you

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know, we put that long short extension on

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The extension generates tax benefits along the

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way we can use that extension to reduce the risk of

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that concentrated position. You're totally right there. And then

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over time as we generate those consistent tax benefits

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that gives us a mechanism to sell

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down that concentrated position, but we're always matching

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the tax benefits that we generate with the

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capital gains that we are realizing by selling down that

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position.

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And then once we sell we're rebalancing into a

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diversified index of the advisor and the client's Choice

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could be S&P 500. It could be Global stocks really whatever

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the asset allocation decision ends up

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being so yeah a typical even low basis very

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low basis position 20% cost basis. We

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can help diversify in a tax efficient manner

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in around seven years.

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That's very cool. It's a very clever strategy. I mean

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we're talking about tax benefits, but what we're really talking about is

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transitioning a

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Well, I would consider a concentrate risky portfolio very

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risky at times into something that

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is more suitable for that investor more Diversified but

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doing it in a way that they don't

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have to feel the the pain of unwinding

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those positions that might have some very significant embedded

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gains. You know it our

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industry we get

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picked on I guess for being very jargony right a lot

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of jargon and terms that a lot of folks that

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are not in this industry on a daily basis and

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we throw out the term tax Alpha quite a bit and

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I'll throw this question out to both the a Phil and Glenn.

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Can we just Define what tax Alpha is

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and then can you quantify it? Sure. Yeah. Yeah

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to us. I think of tax Alpha is

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tax savings.

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So, you know if if quantino generates

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a dollar of short-term

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capital loss.

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Then if you have a short-term gain

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a dollar of short-term gains, that saves you

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40.8 percent. So I've saved the client 40 cents

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41 cents in tax. If

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I'm using that short-term law stuff set long

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term gains that that long-term gains rate essentially 23%

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at the federal level. So I've

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saved clients, you know, 24 cents

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on that dollar of a capital loss.

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So if I can consistently generate Capital losses

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if quantino can consistently do that. We're letting

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clients offset the capital gains

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that they have in their portfolio.

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and they're just keeping more of the return from those capital gains

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year to year and those capital gains from can come from a lot of different,

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you know Avenues it could be

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Capital gains distributions from Mutual Funds. It could

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be long-term gains realized from rebalancing your portfolio

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Etc. So to me tax Alpha

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is keeping more of that return in the

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client's pocket paying less in capital gains and using those

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Capital losses as a vehicle to do that great.

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That's a that's a very eloquent definition of

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taxol. Do you care to add that? Yeah. I I like that

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definition as well. Yeah. One thing I'd say is

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that I think there's again pretty broad agreement

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that long only tax loss harvesting

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does have a benefit to the portfolio

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and it might be, you know one to two percent maybe maybe

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two percent on you know, really good implementations call

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it one percent. But again that has a

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horizon that's gonna likely track down as your portfolio

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ossifies seizes up turns into

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our favorite word. No, you know,

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nothing with unrealized gains. So, you know,

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you're talking 1% dish in

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Long only tax less harvesting type of tax Alpha that

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that is going to go away in a handful

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of years, right? Thank you for that. One of

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the the questions and this is gonna go really to

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investment vehicle more so than anything else. I've heard

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investors say like 2022 for instance.

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Horrible, no good very bad year for investors Equity fixed

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income both down investors who hold actively

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managed mutual funds.

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having negative return

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But they also got a pretty hefty tax bill

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in some scenarios right capital gains distributions in

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December. So Phil when investors

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are looking at open-ended mutual funds what are

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some of the things that they should be considering from a tax efficiency standpoint,

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you raise a good point and to some extent

241
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those examples of you know, being down and

242
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having a gains distribution. That's an unlucky

243
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combination of a handful of things right like it comes

244
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down to perform some fun what the

245
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Redemption level was how the fun generates cash

246
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to meet those redemptions and whether

247
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or not that's kind of gain realizing

248
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lost real estate realizing or neutral history of

249
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the mutual funds experience can maybe give you

250
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some insight into that as well as the strategy whether

251
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it's going to be, you know tax efficient in

252
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a neutral kind of scenario and whether

253
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it's you know, growing or stable

254
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as opposed to, you know, shrinking with a lot of redemptions.

255
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you mentioned tack sorry investment vehicles so very often

256
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we

257
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We compare mutual funds and ETFs and there are some important differences

258
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there on the income side, they're pretty

259
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even right funds all funds have to distribute income and

260
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they can choose the frequency with which they do that. Some of

261
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the differences really come into play with capital gains

262
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realization. Now mutual funds to me

263
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to Redemption they have to do that with the cash in the fund. They might

264
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have enough cash. They might need to sell to realize that

265
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to fund that Redemption and some of

266
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the things I mentioned earlier, you know, whether they have enough cash what

267
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their tax Lots look like how their age

268
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how they're Diversified how the fund's been performing, you know

269
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frequency and magnitude of redemptions all that will

270
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kind of impact whether or not you're end. They have realized

271
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game they need to distribute or not with ETFs.

272
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There's a little more complexity in how they're traded

273
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and some of the some of the capital gains efficiencies.

274
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So you and I can trade an ETF

275
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on an exchange and that doesn't involve the fund at all, you know, you

276
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sell share I buy a share from you and

277
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The fund's not involved funds doesn't need to find cash pretty

278
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simple. But there are some transactions that do

279
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involve the fund, you know, something called authorized participants help

280
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ETFs trade efficiently

281
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and sometimes they'll redeem directly with the fund the

282
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ETF the ETF has a choice

283
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to you know, redeem in kind or give Securities to that

284
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redeeming entity, right and in

285
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doing that there's no transaction. There's no realization

286
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of of gains and it gets

287
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even more interesting because that the fun can choose

288
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which shares to redeem out and they can often redeem

289
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out the lowest cost basis shares. Thereby, you

290
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know creating a very tax efficient fund vehicle.

291
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The investors still needs to pay tax on their gain

292
00:14:30.200 --> 00:14:33.800
if they sell their shares, right, but the

293
00:14:33.800 --> 00:14:36.700
fund itself can get pretty creative in

294
00:14:36.700 --> 00:14:39.300
in reducing cap games realization. So,

295
00:14:39.300 --> 00:14:42.300
you know, it depends sometimes on the strategy, you know,

296
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fixing strategies might not be as

297
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Efficient in an ETF as as Equity strategies and some

298
00:14:48.600 --> 00:14:51.200
mutual funds can certainly be very tax efficient. So, you know,

299
00:14:51.200 --> 00:14:54.300
it comes down to you know, I think education getting the

300
00:14:54.300 --> 00:14:57.200
right investment strategy and then, you know also choosing the right vehicle

301
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now, that's that's really interesting and we've had conversations

302
00:15:00.800 --> 00:15:03.100
on the differences between ETFs and mutual funds on

303
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this podcast. And what's really fascinating to me again,

304
00:15:06.300 --> 00:15:09.300
I'm gonna use the term convenient byproduct the creation of

305
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redemption process of an ETF isn't designed

306
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for tax efficiency. It's designed to

307
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making sure that the

308
00:15:18.200 --> 00:15:21.300
nav is equal to the underlying basket of

309
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stocks in that process in itself makes ETFs

310
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extremely tax efficient.

311
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So it's not the goal but it is is something

312
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that you get through that process, which is interesting. Okay,

313
00:15:32.700 --> 00:15:35.300
so just kind of recap here for

314
00:15:35.300 --> 00:15:36.600
our investors.

315
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When considering your tax status with your

316
00:15:41.100 --> 00:15:44.700
portfolios consider what we call an evidence-based

317
00:15:44.700 --> 00:15:47.400
investment philosophy Buy and Hold that

318
00:15:47.400 --> 00:15:51.700
tends to lead to not only a greater likelihood of outperformance

319
00:15:50.700 --> 00:15:53.100
by staying the course, but it

320
00:15:53.100 --> 00:15:56.500
reduces frictions reduces transactions in

321
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the portfolio. Thus leading to a higher level of tax efficiency consider

322
00:15:59.400 --> 00:16:03.000
the vehicles that you're using when using

323
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open-ended mutual funds gravitate towards

324
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more passively managed growing mutual

325
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funds ETFs certainly have tax benefits and

326
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for those investors that are deploying a

327
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direct indexing strategy. There's certainly more

328
00:16:17.200 --> 00:16:21.100
opportunities through the sheer number of names to identify losses

329
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to perform ongoing tax loss harvesting

330
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and then lastly Glenn against thanks for

331
00:16:26.200 --> 00:16:29.700
joining us adding a long short

332
00:16:29.700 --> 00:16:33.100
extension a 1:30 strategy certainly can

333
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help not only from a diversification standpoint,

334
00:16:35.100 --> 00:16:37.200
but also from

335
00:16:38.300 --> 00:16:42.000
Alpha generating strategy. So Glenn.

336
00:16:41.200 --> 00:16:44.300
Thank you so much for your time Phil. Thank you for joining us

337
00:16:44.300 --> 00:16:47.200
here for our listeners. Thank you for for listening to

338
00:16:47.200 --> 00:16:50.200
us. You can access this podcast and all of

339
00:16:50.200 --> 00:16:53.900
our podcasts and our series anywhere you get your podcasts and

340
00:16:53.900 --> 00:16:56.000
I look forward to our conversation next time. Thank you

341
00:16:56.200 --> 00:16:59.800
so much gentlemen, thank you. Thanks Cemetery Partners. LLC

342
00:16:59.800 --> 00:17:02.600
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343
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352
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353
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354
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355
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356
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00:00:01.800 --> 00:00:07.600 Hello listeners,

1 00:00:07.600 --> 00:00:10.900 welcome back to part two of our conversation on

2 00:00:10.900 --> 00:00:13.500 investing in taxes. Once again, I'm joined by Glenn

3 00:00:13.500 --> 00:00:16.500 Shirley from quantino and Phil McDonald from symmetry.

4 00:00:16.500 --> 00:00:19.100 Thanks gentlemen for joining us again, whether or not the market goes up

5 00:00:19.100 --> 00:00:22.800 or down when you have the long short overlay you have

6 00:00:22.800 --> 00:00:26.700 opportunities to to find losers losses.

7 00:00:26.700 --> 00:00:29.700 If you will to reach hard that tax benefit,

8 00:00:29.700 --> 00:00:32.400 it's some what counterintuitive right we're looking

9 00:00:32.400 --> 00:00:35.300 for Securities that have gone down in

10 00:00:35.300 --> 00:00:38.100 value, but I think the truth of the matter is is that when you

11 00:00:38.100 --> 00:00:41.600 own an ETF that's tracking an index or mutual

12 00:00:41.600 --> 00:00:44.300 fund that's tracking index. The reality is Phil

13 00:00:44.300 --> 00:00:47.600 you do own those losers. You just might not see them right? They're always

14 00:00:47.600 --> 00:00:50.200 that's right. Yeah looking at and that's

15 00:00:50.200 --> 00:00:53.300 a great Point looking at say in S&P 500 or

16 00:00:53.300 --> 00:00:57.300 Russell 1000 ETF. You you see one number,

17 00:00:56.300 --> 00:00:59.300 you know one one price

18 00:00:59.300 --> 00:01:01.500 one return but behind

19 00:01:02.300 --> 00:01:06.100 You're likely going to have dozens and dozens of positions

20 00:01:05.100 --> 00:01:08.200 that throughout the year and at year end

21 00:01:08.200 --> 00:01:11.900 are in or in a lost position. So in

22 00:01:11.900 --> 00:01:14.400 direct indexing, it just kind of breaks down that wrapper and

23 00:01:14.400 --> 00:01:17.700 you hold, you know hundreds of Securities directly. So

24 00:01:17.700 --> 00:01:20.800 you kind of see those a little bit more clearly sure and

25 00:01:20.800 --> 00:01:24.400 we've seen that in recent years right with some of these tech stocks

26 00:01:24.400 --> 00:01:27.400 the Fang stocks if you will Facebook Apple Amazon Netflix Google

27 00:01:27.700 --> 00:01:30.200 Etc. They were driving the returns of the S&P and there

28 00:01:30.200 --> 00:01:33.400 was a vast majority of those securities within the S&P that

29 00:01:33.400 --> 00:01:36.300 were in the red and by unwrapping it you can

30 00:01:36.300 --> 00:01:39.600 take advantage of those you still run into the issue of

31 00:01:39.600 --> 00:01:42.700 the portfolio seizing and what

32 00:01:42.700 --> 00:01:45.400 I mean by that is what we've been talking about having that portfolio

33 00:01:45.400 --> 00:01:48.000 get to a point where you don't have any room to make

34 00:01:48.300 --> 00:01:51.600 any trades without incurring some sort of tax consequence, but I

35 00:01:51.600 --> 00:01:54.900 think that's where the 1330 comes in right Glenn you're

36 00:01:54.900 --> 00:01:57.300 able to apply that strategy on

37 00:01:57.300 --> 00:02:00.700 top of an existing portfolio generate losses in

38 00:02:00.700 --> 00:02:02.200 any Market environment. And so

39 00:02:02.200 --> 00:02:05.100 So I think that that's a really interesting thing Glenn. Can you talk a little bit?

40 00:02:05.100 --> 00:02:08.200 I didn't mean to interrupt you, but could you talk a little bit about what is

41 00:02:08.200 --> 00:02:11.400 what happens with the risk exposure by putting that overlay on

42 00:02:11.400 --> 00:02:14.500 right investor with that 100 dollars 30 long

43 00:02:14.500 --> 00:02:17.100 30 short what what happens to the

44 00:02:17.100 --> 00:02:20.600 risk characters of that particular account? Sure. Yeah great

45 00:02:20.600 --> 00:02:23.300 question Tom. So if you look at if you just

46 00:02:23.300 --> 00:02:26.900 put on a 30% long 30% short

47 00:02:26.900 --> 00:02:29.300 portfolio. And you said what is the risk of

48 00:02:29.300 --> 00:02:32.500 that portfolio in isolation by itself? The answer

49 00:02:32.500 --> 00:02:36.000 to that is about one percent and that

50 00:02:35.100 --> 00:02:38.300 could be there be you know, standard deviation how much it's

51 00:02:38.300 --> 00:02:42.100 going to move around or it could be if you're if you're looking at that benchmarked

52 00:02:41.100 --> 00:02:44.200 to a you know, an index like

53 00:02:44.200 --> 00:02:47.400 the S&P 500 that would be one percent tracking here. So pretty

54 00:02:47.400 --> 00:02:50.500 modest, you know, a lot of active Equity strategies have tracking

55 00:02:50.500 --> 00:02:53.300 air easily of two percent or more. So we're

56 00:02:53.300 --> 00:02:56.300 not adding a lot of of risk just via that long

57 00:02:56.300 --> 00:02:59.500 short extension, but in reality as I mentioned you have

58 00:02:59.500 --> 00:03:01.600 these kind of Legacy accounts that

59 00:03:02.200 --> 00:03:05.700 Some elevated levels of risk that long short extension is

60 00:03:05.700 --> 00:03:08.200 a tool to reduce that risk. So even though

61 00:03:08.200 --> 00:03:11.400 you have a 1% risk in

62 00:03:11.400 --> 00:03:14.300 that long short extension in isolation. If you use that

63 00:03:14.300 --> 00:03:17.400 long short extension efficiently to reduce

64 00:03:17.400 --> 00:03:20.600 the total risk of the portfolio, then oftentimes we

65 00:03:20.600 --> 00:03:23.900 can also we can actually reduce kind of the total tracking

66 00:03:23.900 --> 00:03:26.400 error or risk versus The Benchmark of a

67 00:03:26.400 --> 00:03:29.200 tax less harvesting strategy often we can at least

68 00:03:29.200 --> 00:03:32.400 keep it the same. So when you look at a quantino kind

69 00:03:32.400 --> 00:03:35.900 of 130 30 tax loss harvesting account tracking errors

70 00:03:35.900 --> 00:03:38.400 typically one and a half percent on average

71 00:03:38.400 --> 00:03:41.400 and that's very very similar to what of

72 00:03:41.400 --> 00:03:44.300 what a clients are probably experiencing in their long only text less

73 00:03:44.300 --> 00:03:47.100 harvesting accounts as well. So just to reiterate what you're

74 00:03:47.100 --> 00:03:50.400 saying by applying the the 1330 extension to

75 00:03:50.400 --> 00:03:53.700 a portfolio the clients risk exposures still that

76 00:03:53.700 --> 00:03:56.300 principle investment is what I'm hearing you say,

77 00:03:56.300 --> 00:03:59.400 however, I think what I think a really really strong

78 00:03:59.400 --> 00:04:01.700 point is that it's not necessarily

79 00:04:02.200 --> 00:04:05.900 the risk by putting the overlay but it actually can be a risk mitigator Phil

80 00:04:05.900 --> 00:04:09.200 you and I have run across these many many times where investors

81 00:04:08.200 --> 00:04:11.600 come to us and we look at their existing Holdings

82 00:04:11.600 --> 00:04:14.200 and we're working on a Case right now

83 00:04:14.200 --> 00:04:17.600 where the investor who probably should

84 00:04:17.600 --> 00:04:20.500 have a balanced portfolio between Brawley Diversified

85 00:04:20.500 --> 00:04:21.600 stocks and bonds.

86 00:04:22.200 --> 00:04:25.900 Is stuck in a single stock position that they

87 00:04:25.900 --> 00:04:28.200 can't do anything with because of the

88 00:04:28.200 --> 00:04:31.200 fact that it's it's got such a low cost basis if

89 00:04:31.200 --> 00:04:34.600 they were to sell that security. They would be looking at some significant.

90 00:04:35.400 --> 00:04:38.400 Tax consequences, but only a single

91 00:04:38.400 --> 00:04:41.300 stock is a real risky Endeavor. Oh, no question,

92 00:04:41.300 --> 00:04:41.800 and I think

93 00:04:43.300 --> 00:04:46.400 This is such an incredibly powerful benefit of this

94 00:04:46.400 --> 00:04:49.600 strategy. And I think it it sometimes is you know

95 00:04:49.600 --> 00:04:52.600 mentioned second after the the tax Alpha

96 00:04:52.600 --> 00:04:55.300 and hey, you can keep more of what you earn but this is so

97 00:04:55.300 --> 00:04:57.100 incredibly powerful, you know, thinking of

98 00:04:58.200 --> 00:05:01.300 Really sad examples through time like Enron, you know things went

99 00:05:01.300 --> 00:05:04.400 very bad for people who held most of their company

100 00:05:04.400 --> 00:05:07.200 stock a lot of incentive plans. These

101 00:05:07.200 --> 00:05:10.400 days will give employees options and shares and

102 00:05:10.400 --> 00:05:13.000 all that. So this is an issue or a lot

103 00:05:13.500 --> 00:05:16.700 of investors and I think this solution really is, you know virtuous and

104 00:05:16.700 --> 00:05:19.400 really helping them in their Financial Health and just to

105 00:05:19.400 --> 00:05:22.600 maybe put a finer point on it and at the

106 00:05:22.600 --> 00:05:25.900 risk of being a little repetitive, you know, if you own a

107 00:05:25.900 --> 00:05:29.200 large amount of your, you know, large amount of your financial wealth

108 00:05:28.200 --> 00:05:31.600 is in an oil stock or a

109 00:05:31.600 --> 00:05:32.100 tech stock.

110 00:05:32.700 --> 00:05:35.800 Immediately in putting on the 13030 strategy

111 00:05:35.800 --> 00:05:38.400 the the 30 extension the

112 00:05:38.400 --> 00:05:40.000 30 more long can hold.

113 00:05:40.700 --> 00:05:42.900 Every other industry except that one you hold.

114 00:05:43.500 --> 00:05:46.900 Imagine that diversification and then the short can reduce

115 00:05:46.900 --> 00:05:50.000 that exposure to that one industry. So overnight in

116 00:05:49.500 --> 00:05:52.400 what in in the first, you know

117 00:05:52.400 --> 00:05:55.700 day of transactions you go from hey, I

118 00:05:55.700 --> 00:05:58.800 might end up like Enron or wow. My my

119 00:05:58.800 --> 00:06:01.400 financial wealth is gonna ride up and down with

120 00:06:01.400 --> 00:06:04.900 the price of crude oil or how Google does and

121 00:06:04.900 --> 00:06:07.400 immediately you're getting more

122 00:06:07.400 --> 00:06:10.000 of a diversified Market portfolio. Even if

123 00:06:10.200 --> 00:06:13.900 you're just shooting toward maybe an S&P 500 Index. It's immediately

124 00:06:13.900 --> 00:06:16.100 beneficial Glen. I don't know if you'd add

125 00:06:16.100 --> 00:06:20.400 anything to that but I really find that as you know, powerful benefit

126 00:06:19.400 --> 00:06:22.400 to the end investor. Yeah, the

127 00:06:22.400 --> 00:06:25.900 your correct fell the deals exchange solution that

128 00:06:25.900 --> 00:06:28.300 quantino offers is really a use case

129 00:06:28.300 --> 00:06:31.400 that came about from client feedback. We're fortunate to

130 00:06:31.400 --> 00:06:34.400 work with a lot of family offices. These are very wealthy families that

131 00:06:34.400 --> 00:06:37.500 have concentration in their portfolio.

132 00:06:37.500 --> 00:06:40.300 They built wealth via service to a public company or

133 00:06:40.300 --> 00:06:43.400 investing in a company that went public and eventually

134 00:06:43.400 --> 00:06:46.000 They want to turn the corner from you know,

135 00:06:46.300 --> 00:06:50.600 this this wealth that has been built by that concentration turning

136 00:06:49.600 --> 00:06:52.400 the corner toward wealth preservation and that

137 00:06:52.400 --> 00:06:55.500 means diversification. So how do we do that in a tax efficient manner?

138 00:06:55.500 --> 00:06:58.800 There's exchange funds that we you

139 00:06:58.800 --> 00:07:01.500 know that are really an option for very wealthy families, but

140 00:07:01.500 --> 00:07:05.200 really not for clients at scale. They're multi-million

141 00:07:04.200 --> 00:07:07.200 dollar minimums their private

142 00:07:07.200 --> 00:07:10.500 Fund Solutions and you know, you're vestly

143 00:07:10.500 --> 00:07:13.800 investing in a hedge fund that's gonna take seven years to diversify

144 00:07:13.800 --> 00:07:15.500 and they're very expensive. So we always knew

145 00:07:16.600 --> 00:07:19.800 that if we could use our capabilities to help clients diversify

146 00:07:19.800 --> 00:07:22.100 concentrated positions to be a pretty powerful thing and

147 00:07:22.100 --> 00:07:25.600 that 30 by 30 extensions the the way we do that so, you

148 00:07:25.600 --> 00:07:27.100 know, we put that long short extension on

149 00:07:27.700 --> 00:07:30.300 The extension generates tax benefits along the

150 00:07:30.300 --> 00:07:33.100 way we can use that extension to reduce the risk of

151 00:07:33.100 --> 00:07:36.200 that concentrated position. You're totally right there. And then

152 00:07:36.200 --> 00:07:39.300 over time as we generate those consistent tax benefits

153 00:07:39.300 --> 00:07:42.300 that gives us a mechanism to sell

154 00:07:42.300 --> 00:07:45.900 down that concentrated position, but we're always matching

155 00:07:45.900 --> 00:07:48.300 the tax benefits that we generate with the

156 00:07:48.300 --> 00:07:51.100 capital gains that we are realizing by selling down that

157 00:07:51.100 --> 00:07:51.400 position.

158 00:07:52.400 --> 00:07:55.700 And then once we sell we're rebalancing into a

159 00:07:55.700 --> 00:07:58.300 diversified index of the advisor and the client's Choice

160 00:07:58.300 --> 00:08:01.900 could be S&P 500. It could be Global stocks really whatever

161 00:08:01.900 --> 00:08:04.700 the asset allocation decision ends up

162 00:08:04.700 --> 00:08:07.400 being so yeah a typical even low basis very

163 00:08:07.400 --> 00:08:10.500 low basis position 20% cost basis. We

164 00:08:10.500 --> 00:08:13.400 can help diversify in a tax efficient manner

165 00:08:13.400 --> 00:08:15.100 in around seven years.

166 00:08:16.300 --> 00:08:19.100 That's very cool. It's a very clever strategy. I mean

167 00:08:19.100 --> 00:08:23.200 we're talking about tax benefits, but what we're really talking about is

168 00:08:22.200 --> 00:08:24.500 transitioning a

169 00:08:25.300 --> 00:08:28.900 Well, I would consider a concentrate risky portfolio very

170 00:08:28.900 --> 00:08:31.200 risky at times into something that

171 00:08:31.200 --> 00:08:34.700 is more suitable for that investor more Diversified but

172 00:08:34.700 --> 00:08:37.600 doing it in a way that they don't

173 00:08:37.600 --> 00:08:40.900 have to feel the the pain of unwinding

174 00:08:40.900 --> 00:08:44.000 those positions that might have some very significant embedded

175 00:08:43.300 --> 00:08:46.600 gains. You know it our

176 00:08:46.600 --> 00:08:47.500 industry we get

177 00:08:49.100 --> 00:08:52.000 picked on I guess for being very jargony right a lot

178 00:08:52.600 --> 00:08:55.100 of jargon and terms that a lot of folks that

179 00:08:55.100 --> 00:08:58.400 are not in this industry on a daily basis and

180 00:08:58.400 --> 00:09:02.000 we throw out the term tax Alpha quite a bit and

181 00:09:01.300 --> 00:09:04.300 I'll throw this question out to both the a Phil and Glenn.

182 00:09:04.300 --> 00:09:07.700 Can we just Define what tax Alpha is

183 00:09:07.700 --> 00:09:10.400 and then can you quantify it? Sure. Yeah. Yeah

184 00:09:10.400 --> 00:09:13.300 to us. I think of tax Alpha is

185 00:09:13.300 --> 00:09:13.900 tax savings.

186 00:09:14.900 --> 00:09:18.400 So, you know if if quantino generates

187 00:09:17.400 --> 00:09:20.900 a dollar of short-term

188 00:09:20.900 --> 00:09:22.200 capital loss.

189 00:09:22.700 --> 00:09:25.700 Then if you have a short-term gain

190 00:09:25.700 --> 00:09:28.500 a dollar of short-term gains, that saves you

191 00:09:28.500 --> 00:09:32.200 40.8 percent. So I've saved the client 40 cents

192 00:09:31.200 --> 00:09:34.900 41 cents in tax. If

193 00:09:34.900 --> 00:09:37.400 I'm using that short-term law stuff set long

194 00:09:37.400 --> 00:09:41.300 term gains that that long-term gains rate essentially 23%

195 00:09:40.300 --> 00:09:43.400 at the federal level. So I've

196 00:09:43.400 --> 00:09:46.800 saved clients, you know, 24 cents

197 00:09:46.800 --> 00:09:49.000 on that dollar of a capital loss.

198 00:09:49.900 --> 00:09:52.700 So if I can consistently generate Capital losses

199 00:09:52.700 --> 00:09:55.700 if quantino can consistently do that. We're letting

200 00:09:55.700 --> 00:09:58.500 clients offset the capital gains

201 00:09:58.500 --> 00:09:59.500 that they have in their portfolio.

202 00:10:00.100 --> 00:10:03.600 and they're just keeping more of the return from those capital gains

203 00:10:03.600 --> 00:10:06.200 year to year and those capital gains from can come from a lot of different,

204 00:10:06.200 --> 00:10:08.500 you know Avenues it could be

205 00:10:09.300 --> 00:10:12.300 Capital gains distributions from Mutual Funds. It could

206 00:10:12.300 --> 00:10:15.700 be long-term gains realized from rebalancing your portfolio

207 00:10:15.200 --> 00:10:19.000 Etc. So to me tax Alpha

208 00:10:18.700 --> 00:10:21.200 is keeping more of that return in the

209 00:10:21.200 --> 00:10:24.400 client's pocket paying less in capital gains and using those

210 00:10:24.400 --> 00:10:27.800 Capital losses as a vehicle to do that great.

211 00:10:27.800 --> 00:10:30.500 That's a that's a very eloquent definition of

212 00:10:30.500 --> 00:10:33.300 taxol. Do you care to add that? Yeah. I I like that

213 00:10:33.300 --> 00:10:36.100 definition as well. Yeah. One thing I'd say is

214 00:10:36.100 --> 00:10:40.000 that I think there's again pretty broad agreement

215 00:10:39.300 --> 00:10:42.700 that long only tax loss harvesting

216 00:10:42.700 --> 00:10:45.300 does have a benefit to the portfolio

217 00:10:45.300 --> 00:10:48.500 and it might be, you know one to two percent maybe maybe

218 00:10:48.500 --> 00:10:51.500 two percent on you know, really good implementations call

219 00:10:51.500 --> 00:10:54.400 it one percent. But again that has a

220 00:10:54.400 --> 00:10:57.600 horizon that's gonna likely track down as your portfolio

221 00:10:57.600 --> 00:11:00.300 ossifies seizes up turns into

222 00:11:00.300 --> 00:11:03.600 our favorite word. No, you know,

223 00:11:03.600 --> 00:11:06.400 nothing with unrealized gains. So, you know,

224 00:11:06.400 --> 00:11:09.100 you're talking 1% dish in

225 00:11:09.700 --> 00:11:12.600 Long only tax less harvesting type of tax Alpha that

226 00:11:12.600 --> 00:11:15.300 that is going to go away in a handful

227 00:11:15.300 --> 00:11:18.700 of years, right? Thank you for that. One of

228 00:11:18.700 --> 00:11:21.800 the the questions and this is gonna go really to

229 00:11:21.800 --> 00:11:24.200 investment vehicle more so than anything else. I've heard

230 00:11:24.200 --> 00:11:27.400 investors say like 2022 for instance.

231 00:11:28.200 --> 00:11:31.400 Horrible, no good very bad year for investors Equity fixed

232 00:11:31.400 --> 00:11:35.100 income both down investors who hold actively

233 00:11:34.100 --> 00:11:36.800 managed mutual funds.

234 00:11:37.900 --> 00:11:38.900 having negative return

235 00:11:39.900 --> 00:11:42.500 But they also got a pretty hefty tax bill

236 00:11:42.500 --> 00:11:45.600 in some scenarios right capital gains distributions in

237 00:11:45.600 --> 00:11:48.500 December. So Phil when investors

238 00:11:48.500 --> 00:11:51.200 are looking at open-ended mutual funds what are

239 00:11:51.200 --> 00:11:54.700 some of the things that they should be considering from a tax efficiency standpoint,

240 00:11:54.700 --> 00:11:57.700 you raise a good point and to some extent

241 00:11:57.700 --> 00:12:00.300 those examples of you know, being down and

242 00:12:00.300 --> 00:12:03.600 having a gains distribution. That's an unlucky

243 00:12:03.600 --> 00:12:06.600 combination of a handful of things right like it comes

244 00:12:06.600 --> 00:12:09.300 down to perform some fun what the

245 00:12:09.300 --> 00:12:12.400 Redemption level was how the fun generates cash

246 00:12:12.400 --> 00:12:15.900 to meet those redemptions and whether

247 00:12:15.900 --> 00:12:18.600 or not that's kind of gain realizing

248 00:12:18.600 --> 00:12:21.700 lost real estate realizing or neutral history of

249 00:12:21.700 --> 00:12:24.500 the mutual funds experience can maybe give you

250 00:12:24.500 --> 00:12:28.000 some insight into that as well as the strategy whether

251 00:12:27.300 --> 00:12:30.500 it's going to be, you know tax efficient in

252 00:12:30.500 --> 00:12:33.800 a neutral kind of scenario and whether

253 00:12:33.800 --> 00:12:36.500 it's you know, growing or stable

254 00:12:36.500 --> 00:12:39.500 as opposed to, you know, shrinking with a lot of redemptions.

255 00:12:40.400 --> 00:12:43.800 you mentioned tack sorry investment vehicles so very often

256 00:12:43.800 --> 00:12:44.200 we

257 00:12:45.100 --> 00:12:48.600 We compare mutual funds and ETFs and there are some important differences

258 00:12:48.600 --> 00:12:51.300 there on the income side, they're pretty

259 00:12:51.300 --> 00:12:55.200 even right funds all funds have to distribute income and

260 00:12:55.200 --> 00:12:58.900 they can choose the frequency with which they do that. Some of

261 00:12:58.900 --> 00:13:01.500 the differences really come into play with capital gains

262 00:13:01.500 --> 00:13:04.400 realization. Now mutual funds to me

263 00:13:04.400 --> 00:13:07.300 to Redemption they have to do that with the cash in the fund. They might

264 00:13:07.300 --> 00:13:10.500 have enough cash. They might need to sell to realize that

265 00:13:10.500 --> 00:13:13.000 to fund that Redemption and some of

266 00:13:13.100 --> 00:13:16.900 the things I mentioned earlier, you know, whether they have enough cash what

267 00:13:16.900 --> 00:13:19.300 their tax Lots look like how their age

268 00:13:19.300 --> 00:13:22.600 how they're Diversified how the fund's been performing, you know

269 00:13:22.600 --> 00:13:25.300 frequency and magnitude of redemptions all that will

270 00:13:25.300 --> 00:13:28.600 kind of impact whether or not you're end. They have realized

271 00:13:28.600 --> 00:13:31.800 game they need to distribute or not with ETFs.

272 00:13:31.800 --> 00:13:34.400 There's a little more complexity in how they're traded

273 00:13:34.400 --> 00:13:38.100 and some of the some of the capital gains efficiencies.

274 00:13:37.100 --> 00:13:40.400 So you and I can trade an ETF

275 00:13:40.400 --> 00:13:43.300 on an exchange and that doesn't involve the fund at all, you know, you

276 00:13:43.300 --> 00:13:44.900 sell share I buy a share from you and

277 00:13:45.100 --> 00:13:49.000 The fund's not involved funds doesn't need to find cash pretty

278 00:13:48.300 --> 00:13:51.400 simple. But there are some transactions that do

279 00:13:51.400 --> 00:13:54.700 involve the fund, you know, something called authorized participants help

280 00:13:54.800 --> 00:13:57.300 ETFs trade efficiently

281 00:13:57.300 --> 00:14:00.900 and sometimes they'll redeem directly with the fund the

282 00:14:00.200 --> 00:14:03.100 ETF the ETF has a choice

283 00:14:03.100 --> 00:14:06.600 to you know, redeem in kind or give Securities to that

284 00:14:06.600 --> 00:14:09.500 redeeming entity, right and in

285 00:14:09.500 --> 00:14:12.400 doing that there's no transaction. There's no realization

286 00:14:12.400 --> 00:14:15.100 of of gains and it gets

287 00:14:15.100 --> 00:14:18.400 even more interesting because that the fun can choose

288 00:14:18.400 --> 00:14:22.300 which shares to redeem out and they can often redeem

289 00:14:21.300 --> 00:14:25.000 out the lowest cost basis shares. Thereby, you

290 00:14:24.400 --> 00:14:27.700 know creating a very tax efficient fund vehicle.

291 00:14:27.700 --> 00:14:31.200 The investors still needs to pay tax on their gain

292 00:14:30.200 --> 00:14:33.800 if they sell their shares, right, but the

293 00:14:33.800 --> 00:14:36.700 fund itself can get pretty creative in

294 00:14:36.700 --> 00:14:39.300 in reducing cap games realization. So,

295 00:14:39.300 --> 00:14:42.300 you know, it depends sometimes on the strategy, you know,

296 00:14:42.300 --> 00:14:44.900 fixing strategies might not be as

297 00:14:45.100 --> 00:14:48.600 Efficient in an ETF as as Equity strategies and some

298 00:14:48.600 --> 00:14:51.200 mutual funds can certainly be very tax efficient. So, you know,

299 00:14:51.200 --> 00:14:54.300 it comes down to you know, I think education getting the

300 00:14:54.300 --> 00:14:57.200 right investment strategy and then, you know also choosing the right vehicle

301 00:14:57.200 --> 00:15:00.800 now, that's that's really interesting and we've had conversations

302 00:15:00.800 --> 00:15:03.100 on the differences between ETFs and mutual funds on

303 00:15:03.100 --> 00:15:06.300 this podcast. And what's really fascinating to me again,

304 00:15:06.300 --> 00:15:09.300 I'm gonna use the term convenient byproduct the creation of

305 00:15:09.300 --> 00:15:12.900 redemption process of an ETF isn't designed

306 00:15:12.900 --> 00:15:15.700 for tax efficiency. It's designed to

307 00:15:15.700 --> 00:15:18.200 making sure that the

308 00:15:18.200 --> 00:15:21.300 nav is equal to the underlying basket of

309 00:15:21.300 --> 00:15:24.700 stocks in that process in itself makes ETFs

310 00:15:24.700 --> 00:15:26.100 extremely tax efficient.

311 00:15:26.900 --> 00:15:29.900 So it's not the goal but it is is something

312 00:15:29.900 --> 00:15:33.700 that you get through that process, which is interesting. Okay,

313 00:15:32.700 --> 00:15:35.300 so just kind of recap here for

314 00:15:35.300 --> 00:15:36.600 our investors.

315 00:15:38.400 --> 00:15:41.100 When considering your tax status with your

316 00:15:41.100 --> 00:15:44.700 portfolios consider what we call an evidence-based

317 00:15:44.700 --> 00:15:47.400 investment philosophy Buy and Hold that

318 00:15:47.400 --> 00:15:51.700 tends to lead to not only a greater likelihood of outperformance

319 00:15:50.700 --> 00:15:53.100 by staying the course, but it

320 00:15:53.100 --> 00:15:56.500 reduces frictions reduces transactions in

321 00:15:56.500 --> 00:16:00.400 the portfolio. Thus leading to a higher level of tax efficiency consider

322 00:15:59.400 --> 00:16:03.000 the vehicles that you're using when using

323 00:16:02.300 --> 00:16:06.100 open-ended mutual funds gravitate towards

324 00:16:05.100 --> 00:16:08.400 more passively managed growing mutual

325 00:16:08.400 --> 00:16:12.000 funds ETFs certainly have tax benefits and

326 00:16:11.200 --> 00:16:14.400 for those investors that are deploying a

327 00:16:14.400 --> 00:16:17.200 direct indexing strategy. There's certainly more

328 00:16:17.200 --> 00:16:21.100 opportunities through the sheer number of names to identify losses

329 00:16:20.100 --> 00:16:23.500 to perform ongoing tax loss harvesting

330 00:16:23.500 --> 00:16:26.200 and then lastly Glenn against thanks for

331 00:16:26.200 --> 00:16:29.700 joining us adding a long short

332 00:16:29.700 --> 00:16:33.100 extension a 1:30 strategy certainly can

333 00:16:32.100 --> 00:16:36.100 help not only from a diversification standpoint,

334 00:16:35.100 --> 00:16:37.200 but also from

335 00:16:38.300 --> 00:16:42.000 Alpha generating strategy. So Glenn.

336 00:16:41.200 --> 00:16:44.300 Thank you so much for your time Phil. Thank you for joining us

337 00:16:44.300 --> 00:16:47.200 here for our listeners. Thank you for for listening to

338 00:16:47.200 --> 00:16:50.200 us. You can access this podcast and all of

339 00:16:50.200 --> 00:16:53.900 our podcasts and our series anywhere you get your podcasts and

340 00:16:53.900 --> 00:16:56.000 I look forward to our conversation next time. Thank you

341 00:16:56.200 --> 00:16:59.800 so much gentlemen, thank you. Thanks Cemetery Partners. LLC

342 00:16:59.800 --> 00:17:02.600 is an investment advisor firm registered with

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344 00:17:05.400 --> 00:17:08.300 transacts business in states where it is properly

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351 00:17:26.200 --> 00:17:30.200 strategy product or non-investment

352 00:17:29.200 --> 00:17:32.000 related content made reference to

353 00:17:32.600 --> 00:17:35.600 directly or indirectly in this material will be profitable.

354 00:17:36.600 --> 00:17:39.100 As with any investment strategy there is the

355 00:17:39.100 --> 00:17:42.700 possibility of profitability as well as loss due

356 00:17:42.700 --> 00:17:45.400 to various factors including changing market

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360 00:17:54.800 --> 00:17:57.200 is provided for educational and background use

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