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Transcript:

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Hello everyone.

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\\xa0Welcome to unfiltered Finance. This is your host Tom Romano.

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\\xa0I want to welcome you all back. We have a very

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\\xa0interesting topic to discuss with you today. It\'s

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\\xa0the notion of investors keeping more money in

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\\xa0their pockets by bringing tax management into

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\\xa0their investment Holdings. Not only are

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\\xa0we going to talk about tax management, but some of the things investors should

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\\xa0be considering in terms of how they view Capital markets how they should be

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\\xa0investing and then we have a couple of special guests

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\\xa0to talk about some additional strategies that investors should

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\\xa0consider in terms of bringing tax

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\\xa0Alpha if you will to the table so joining

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\\xa0us is Phil McDonald who is the

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\\xa0president of the panoramic trust and managing director of

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\\xa0research of symmetry Partners as well as Glenn Shirley

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\\xa0who is a principal and head of investor relations

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\\xa0at quantino Capital Management Glen and

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\\xa0Phil. Thank you so much for joining us here today. Thanks for having me tone. Thanks Tom.

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\\xa0It\'s great.

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be with you, you know at quantino 100% of

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\\xa0our focus is on taxable investors and

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We\'re managing portfolios while also seeking

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\\xa0to generate really consistent and strong tax benefits

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\\xa0for clients. And that goal is to maximize their

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\\xa0after-tax wealth to help them keep as much return as possible

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\\xa0year to year and we couldn\'t be more thrilled to partner with Symmetry and

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\\xa0the incredible advisors that you serve. So thanks

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\\xa0for having us pleasure to have you both. I look forward

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\\xa0to to the today\'s dialogue. Sometimes taxes aren\'t the

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\\xa0most interesting topic. However, I think that

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\\xa0there\'s some very important information that investors should

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\\xa0be considering in terms of how they invest their assets. And

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\\xa0so thank you both for joining us. There\'s a couple

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\\xa0of different angles. I want to take this conversation, right? And the first

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\\xa0one 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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\\xa0to what we refer to as an evidence-based investment philosophy allowing

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\\xa0markets to produce the returns that

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\\xa0are investors are entitled to at the end of the day. So talk

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\\xa0to us a little bit from a tax standpoint

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\\xa0the benefits of an evidence-based investment

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\\xa0philosophy versus

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Paying for Alpha or active

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\\xa0money management. Mm-hmm. No, you raise a erase.

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\\xa0Very good point Tom. So our investment philosophy all

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\\xa0often refer to it as multi-factor investing. It

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\\xa0involves specific rules quantitative indicators

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\\xa0that research for

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\\xa0a very long time has indicated, you know

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\\xa0might create a premium over time. So following, you know,

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\\xa0a value and small and momentum and high quality

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\\xa0High profitability type of strategy you might

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\\xa0expect to do a little bit better than just a cap weighted

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\\xa0index over time what you get with

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\\xa0that again is, you know, rules-based very Diversified. So

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\\xa0for the most part low turnover right there,

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\\xa0there are there are some strategies that have

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\\xa0a little turnover specifically momentum. You probably have a little

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\\xa0bit higher turnover than a market capitalization way to index but

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\\xa0generally speaking, you know, these signals are relatively slow

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\\xa0moving you\'re very diverseified. Each holding is

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\\xa0a 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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\\xa0the portfolio very often. You don\'t have to trade a lot sell a

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\\xa0lot to reposition into the into the next

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\\xa0Holdings you would want. I mentioned momentum alone has has a

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\\xa0higher turnover as an individual strategy. There are

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\\xa0benefits in putting it together with other factors specifically

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\\xa0momentum and value work very well

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\\xa0together because they\'re negatively correlated and in the same portfolio,

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\\xa0the the turnover momentum can be

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\\xa0somewhat counteracted in reduced by having other factors

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\\xa0in there specifically value. So the

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\\xa0pairing of factors can help with the tax efficiency of

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\\xa0the portfolio, right momentum by definition is a high

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\\xa0turnover strategy. Meaning there\'s a lot of trading right now this

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\\xa0this signal is you know, essentially a year

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\\xa0or so a little less than a year. So you would

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\\xa0expect and that\'s the

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\\xa0standard kind of academic one year price momentum type of

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\\xa0indicator quantitative rule. So you\'d

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\\xa0expect momentum to lead to changes at about

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Near Horizon your portfolio, which is especially inconvenient

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\\xa0to with regard to tax

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\\xa0law because you know, you have the short-term long term type of

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\\xa0cap gain consideration as well. Sure. So I

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\\xa0mean we\'ve had a lot of conversations about on this podcast about

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\\xa0a fishing markets diversification Buy and Hold

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\\xa0stay the course, but what I\'m hearing you say is that just from a

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\\xa0tax standpoint it almost sounds like it\'s a convenient byproduct of

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\\xa0it hearing to a buy an old strategy. That\'s a

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\\xa0great way to think about it and you you mentioned relative to

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\\xa0other strategies. So I want to respond directly to

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\\xa0that as well. So let\'s just call, you know,

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\\xa0multi-factor Diversified investing as a strategy

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\\xa0and investment philosophy relative to you know,

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\\xa0kind of old-fashioned active management where a

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\\xa0manager is picking and choosing you were stocks

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\\xa0maybe reacting to Market events

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\\xa0making predictions turning the portfolio over,

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\\xa0you know, if you know, each position is about 10%

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\\xa0you know, just selling one position creates a lot

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\\xa0of turnover.

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Or so typically those actively managed strategies

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\\xa0that are more concentrated and and require more

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\\xa0trading are less tax efficient. Lord know

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\\xa0that absolutely makes sense and Glenn. I know that you share in our

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\\xa0view on how Capital markets work. Do you

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\\xa0care to add anything to fills comments? Well, I think tax laws

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\\xa0harvesting in general is a perfect strategy

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\\xa0to use evidence based investing

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\\xa0and I say that because tax laws are

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\\xa0visiting at its core is you have names in the portfolio that

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\\xa0are essentially winners. They\'ve appreciated we want

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\\xa0to 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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\\xa0in a really simple example you

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\\xa0would sell but at that moment when you sell that

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\\xa0name.

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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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\\xa0your evidence-based beliefs. If

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\\xa0you want to tilt the portfolio toward cheaper stocks or

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\\xa0stocks with better attributes of quality or profitability. If you

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\\xa0add that in to the stock

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\\xa0selection of replacing that name via, which

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\\xa0you\'ve realized that tax loss then we believe you

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\\xa0can add some nice return Over The Benchmark over

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\\xa0time.

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So yeah tax loss harvesting and offering after tax improvements

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\\xa0for clients can type very nicely with

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\\xa0evidence-based investing.

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Yeah, I think that intentional turnover if you will with

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\\xa0tasks lost harvesting does open up the door for some creativity

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\\xa0is what I\'m hearing. You say Glenn in order

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\\xa0of enhancing returns. I mean I\'ve seen in the past people liquidata

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\\xa0position, they might hold cash for 30

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\\xa0days 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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\\xa0opportunities 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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\\xa0assets special specifically

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\\xa0through a factor lens, right? That\'s right. And and

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\\xa0I would also add Tom that\'s one advantage of

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\\xa0the Symmetry platform versus maybe other tax loss

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\\xa0harvesting options is that you know with with quantino

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\\xa0involved we can add a modest long short extension

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\\xa0to a strategy which gives it some

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\\xa0unique 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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\\xa0So to speak, you know, there\'s only so much

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\\xa0deviation versus The Benchmark the clients willing

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\\xa0to 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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\\xa0evidence-based beliefs would maybe value momentum

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\\xa0you\'re taking up a little bit of that rich risk budget. So

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\\xa0by taking up that risk budget, you\'re reducing the

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\\xa0expected tax benefit because you\'re a

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\\xa0little bit more constrained and tax less harvesting.

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So one disadvantage of perhaps long only text less

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\\xa0harvesting with the long short extension that long

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\\xa0short extension itself is the engine for tax benefit

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\\xa0generation.

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So you can do a lot of created them things in

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\\xa0the portfolio. You could tilt toward your your factors and

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\\xa0your in your beliefs, but you\'re not giving up any expected

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\\xa0tax 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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\\xa0and Phil I think would agree with with you

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\\xa0that you know, there\'s no such thing as

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\\xa0a perfect portfolio, right? Every portfolio is

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As it\'s trade-offs or is

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\\xa0a compromise if you will and if you want tax efficiency

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\\xa0as a main goal Factor investing

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\\xa0might not be the best way to do it. It\'s a

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\\xa0better way of doing it versus just a beta portfolio. But

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\\xa0what I\'m hearing you say Glens you get kind of The Best of Both Worlds

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\\xa0by utilizing things like margin and

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\\xa0short positions. Is that correct? I would

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\\xa0I would agree that I would think the long short extension

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\\xa0itself introduces more creativity in

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\\xa0the portfolio because that

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\\xa0engine of tax benefit generation

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\\xa0is there it doesn\'t depend on the underlying portfolio

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\\xa0for 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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\\xa0of that portfolio as you see fit. Sure. No, I think that makes

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\\xa0a lot of sense. There\'s a lot of strategies that we\'re deploying now the 13030

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\\xa0which you\'re alluding to Glenn I think is very interesting but filament

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\\xa0in our experience, we\'ve seen our new

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\\xa0favorite word ossification, right which essentially means

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\\xa0that when you own a a basket of

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\\xa0security is whether it\'s ETS mutual funds are stocks at some

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\\xa0point you get to an area

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\\xa0over time where you can\'t do anything

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\\xa0with that portfolio because of embedded gains, right

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\\xa0and we\'ve seen that over the years with our portfolios.

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\\xa0Can you comment a little bit on that? Yeah, absolutely and

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The the irony in that

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\\xa0situation is you should want to get there right because

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\\xa0you want your portfolio to increase in value. So

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\\xa0the way you you get to the point of having

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\\xa0no unrealized losses in your portfolio to

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\\xa0clip and realize for for tax efficient

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\\xa0repositioning is your portfolio goes up

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\\xa0over time and there\'s some interesting research on this. I think there\'s broad

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\\xa0agreement that even in a

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\\xa0diversified long only portfolio. You probably

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\\xa0only have a single digit number of years, you know, some of

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\\xa0it\'s going to depend on your assumptions and where the market goes and and how

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\\xa0you\'ve invested and how your tax Lots look but, you know,

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\\xa0three four five years. Maybe might be the limit

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\\xa0you have to do.

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Efficient tax less harvesting and that type of portfolio before you

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\\xa0have to start to really give on the

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\\xa0risk budget and and we refer to this idea

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\\xa0of tracking error, which is you know, how different returns essentially

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\\xa0will look relative to a benchmark and you start

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\\xa0to to need to accept a lot of a lot of tracking error. If

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\\xa0you\'re not willing to accept some realization of gains in

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\\xa0in managing that portfolio. So all of a sudden, you know

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\\xa0portfolio you you might be paying somebody to manage and

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\\xa0do tax laws harvesting on becomes something

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\\xa0that might look a little bit more like an expensive

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\\xa0and noisy index. You don\'t have the ability to

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\\xa0do many transactions in that so, you know, the 1330 that

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\\xa0you and Glenn have started to talk about really frees up

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\\xa0the opportunity to do something with that portfolio sure

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\\xa0and you know, we talked a lot about direct indexing you

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\\xa0and I did a podcast of a few episodes ago

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\\xa0about direct indexing.

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And the more names the more tickers the

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\\xa0more opportunity you have to harvest losses, but even

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\\xa0with direct indexing when you hold maybe a hundred or so

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\\xa0underlying stocks you do get it

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\\xa0to a period where you you\'re eventually going to hold a basket

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\\xa0of very low cost basis with

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\\xa0high embedded gains securities.

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

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\\xa0You had alluded to like we want to see games in our

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\\xa0portfolio. However, you know, we want our investors to be

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\\xa0able to keep more in their pockets through through tax efficiency. So clunky.

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\\xa0We started going down the path of the

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\\xa01330 strategy, right and in direct indexing

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\\xa0certainly is a step up from a tax efficiency standpoint.

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\\xa0It certainly helps describe for us a little bit about

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\\xa0how that 130 30 works and multiple Market

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\\xa0environments if you will sure that you

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\\xa0Tom so, you know at the end of the day if you

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\\xa0have a hundred dollars of a direct indexing portfolio

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maybe assume that direct indexing portfolio maybe

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\\xa0has a 50% cost basis or a 60% cost basis

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\\xa0that tends to be roughly the cost basis where

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

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\\xa0You know what quantina would do would be take

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\\xa0that $100 portfolio use the the margin inherent

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\\xa0in that account just like clients who

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You know borrow us modest amount from their Equity port for

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\\xa0those from time to time use that same margin capability and then

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\\xa0we\'re going to go long thirty dollars in short

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\\xa0thirty dollars. So we\'re building a 130/30 strategy

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\\xa0using the margin borrowing of

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\\xa0that account. No other cash is required. That\'s an important part and

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\\xa0then if you think about that $30 long $30

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\\xa0short, that\'s gonna be Diversified across hundreds of stocks.

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\\xa0Every tax loss harvesting strategy needs breath. You

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\\xa0need just a lot of stocks to be invested in because you\'re gonna have winners

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\\xa0and losers and then you think about that portfolios the

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\\xa0market goes up as the market goes down. You have

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\\xa0a little bit of a structural Advantage versus long only long only

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\\xa0will tend to generate great tax benefits When the market dips

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

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\\xa0you know clients invest in equities because they believe

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\\xa0the Market\'s going to rise over time. So that short side of that portfolio is

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\\xa0really important in the consistency of

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\\xa0tax benefits over time. So if you have a

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\\xa0long short portfolio on top of

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\\xa0your direct indexing account, you\'re able to recharge

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\\xa0tax benefits, you know almost immediately after

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\\xa0you apply that long short extension. We can also use

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\\xa0that to clean up the portfolios as

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\\xa0Phil mentioned over time. You\'re tracking air may rise, you\'re making

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\\xa0some deviations versus The Benchmark. So the

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\\xa0risk in that portfolio is also Rising.

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So if you have an overexposure to say Information Technology,

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\\xa0those names have done really well over the past

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\\xa0five to 10 years. We can use the short book the short

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\\xa0$30 of that portfolio to reduce

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\\xa0some of that overweight which will help clients reduce

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\\xa0risk in those accounts as well. So it\'s a combination of

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You know using that long short extension obviously to

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\\xa0generate great text benefits and a consistent way for clients, but also

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\\xa0to give them a better and less risky Investment Portfolio along

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\\xa0the way. Thank you gentlemen, that that\'s very

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\\xa0insightful for our listeners. Thank you for for listening to

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\\xa0us. You can access this podcast and all of

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\\xa0our podcasts and our series anywhere you get your podcasts, we\'re

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\\xa0gonna continue this conversation. So for our listeners, be sure

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\\xa0to tune in for part two on our topic of investing

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\\xa0in taxes Cemetery Partners. LLC is

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\\xa0an investment advisor firm registered with the Securities

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\\xa0and Exchange Commission, The Firm only transacts business

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\\xa0in states where it is properly registered or

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\\xa0advisor does not imply any specific level of skill or

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Related content made reference to directly or indirectly

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\\xa0in this material will be profitable.

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As with any investment strategy there is

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\\xa0the possibility of profitability as well as loss due

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\\xa0to various factors including changing market

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\\xa0material is provided for educational and background use

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\\xa0information contained in this material Services the

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\\xa0receipt of or as a substitute for

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\\xa0personalized investment advice.