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Hello listeners,

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\\xa0welcome back to part two of our conversation on

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\\xa0investing in taxes. Once again, I\'m joined by Glenn

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\\xa0Shirley from quantino and Phil McDonald from symmetry.

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\\xa0Thanks gentlemen for joining us again, whether or not the market goes up

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\\xa0or down when you have the long short overlay you have

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\\xa0opportunities to to find losers losses.

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\\xa0If you will to reach hard that tax benefit,

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\\xa0it\'s some what counterintuitive right we\'re looking

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\\xa0for Securities that have gone down in

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\\xa0value, but I think the truth of the matter is is that when you

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\\xa0own an ETF that\'s tracking an index or mutual

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\\xa0fund that\'s tracking index. The reality is Phil

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\\xa0you do own those losers. You just might not see them right? They\'re always

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\\xa0that\'s right. Yeah looking at and that\'s

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\\xa0a great Point looking at say in S&P 500 or

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\\xa0Russell 1000 ETF. You you see one number,

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\\xa0you know one one price

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\\xa0one return but behind

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

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\\xa0that throughout the year and at year end

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\\xa0are in or in a lost position. So in

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\\xa0direct indexing, it just kind of breaks down that wrapper and

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\\xa0you hold, you know hundreds of Securities directly. So

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\\xa0you kind of see those a little bit more clearly sure and

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\\xa0we\'ve seen that in recent years right with some of these tech stocks

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\\xa0the Fang stocks if you will Facebook Apple Amazon Netflix Google

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\\xa0Etc. They were driving the returns of the S&P and there

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\\xa0was a vast majority of those securities within the S&P that

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\\xa0were in the red and by unwrapping it you can

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\\xa0take advantage of those you still run into the issue of

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\\xa0the portfolio seizing and what

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\\xa0I mean by that is what we\'ve been talking about having that portfolio

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\\xa0get to a point where you don\'t have any room to make

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\\xa0any trades without incurring some sort of tax consequence, but I

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\\xa0think that\'s where the 1330 comes in right Glenn you\'re

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\\xa0able to apply that strategy on

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\\xa0top of an existing portfolio generate losses in

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\\xa0any 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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\\xa0I didn\'t mean to interrupt you, but could you talk a little bit about what is

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\\xa0what happens with the risk exposure by putting that overlay on

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\\xa0right investor with that 100 dollars 30 long

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\\xa030 short what what happens to the

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\\xa0risk characters of that particular account? Sure. Yeah great

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\\xa0question Tom. So if you look at if you just

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\\xa0put on a 30% long 30% short

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\\xa0portfolio. And you said what is the risk of

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\\xa0that portfolio in isolation by itself? The answer

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\\xa0to that is about one percent and that

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\\xa0could be there be you know, standard deviation how much it\'s

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\\xa0going to move around or it could be if you\'re if you\'re looking at that benchmarked

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\\xa0to a you know, an index like

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\\xa0the S&P 500 that would be one percent tracking here. So pretty

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\\xa0modest, you know, a lot of active Equity strategies have tracking

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\\xa0air easily of two percent or more. So we\'re

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\\xa0not adding a lot of of risk just via that long

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\\xa0short extension, but in reality as I mentioned you have

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\\xa0these kind of Legacy accounts that

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Some elevated levels of risk that long short extension is

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\\xa0a tool to reduce that risk. So even though

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\\xa0you have a 1% risk in

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\\xa0that long short extension in isolation. If you use that

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\\xa0long short extension efficiently to reduce

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\\xa0the total risk of the portfolio, then oftentimes we

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\\xa0can also we can actually reduce kind of the total tracking

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\\xa0error or risk versus The Benchmark of a

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\\xa0tax less harvesting strategy often we can at least

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\\xa0keep it the same. So when you look at a quantino kind

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\\xa0of 130 30 tax loss harvesting account tracking errors

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\\xa0typically one and a half percent on average

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\\xa0and that\'s very very similar to what of

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\\xa0what a clients are probably experiencing in their long only text less

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\\xa0harvesting accounts as well. So just to reiterate what you\'re

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\\xa0saying by applying the the 1330 extension to

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\\xa0a portfolio the clients risk exposures still that

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\\xa0principle investment is what I\'m hearing you say,

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\\xa0however, I think what I think a really really strong

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\\xa0point 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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\\xa0you and I have run across these many many times where investors

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\\xa0come to us and we look at their existing Holdings

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\\xa0and we\'re working on a Case right now

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\\xa0where the investor who probably should

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\\xa0have a balanced portfolio between Brawley Diversified

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\\xa0stocks and bonds.

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Is stuck in a single stock position that they

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\\xa0can\'t do anything with because of the

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\\xa0fact that it\'s it\'s got such a low cost basis if

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\\xa0they 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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\\xa0stock is a real risky Endeavor. Oh, no question,

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\\xa0and I think

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This is such an incredibly powerful benefit of this

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\\xa0strategy. And I think it it sometimes is you know

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\\xa0mentioned second after the the tax Alpha

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\\xa0and hey, you can keep more of what you earn but this is so

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\\xa0incredibly powerful, you know, thinking of

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

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\\xa0very bad for people who held most of their company

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\\xa0stock a lot of incentive plans. These

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\\xa0days will give employees options and shares and

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\\xa0all that. So this is an issue or a lot

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\\xa0of investors and I think this solution really is, you know virtuous and

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\\xa0really helping them in their Financial Health and just to

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\\xa0maybe put a finer point on it and at the

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\\xa0risk of being a little repetitive, you know, if you own a

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\\xa0large amount of your, you know, large amount of your financial wealth

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\\xa0is in an oil stock or a

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\\xa0tech stock.

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Immediately in putting on the 13030 strategy

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\\xa0the the 30 extension the

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\\xa030 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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\\xa0that exposure to that one industry. So overnight in

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\\xa0what in in the first, you know

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\\xa0day of transactions you go from hey, I

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\\xa0might end up like Enron or wow. My my

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\\xa0financial wealth is gonna ride up and down with

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\\xa0the price of crude oil or how Google does and

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\\xa0immediately you\'re getting more

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\\xa0of a diversified Market portfolio. Even if

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\\xa0you\'re just shooting toward maybe an S&P 500 Index. It\'s immediately

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\\xa0beneficial Glen. I don\'t know if you\'d add

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\\xa0anything to that but I really find that as you know, powerful benefit

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\\xa0to the end investor. Yeah, the

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\\xa0your correct fell the deals exchange solution that

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\\xa0quantino offers is really a use case

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\\xa0that came about from client feedback. We\'re fortunate to

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\\xa0work with a lot of family offices. These are very wealthy families that

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\\xa0have concentration in their portfolio.

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\\xa0They built wealth via service to a public company or

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\\xa0investing 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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\\xa0this this wealth that has been built by that concentration turning

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\\xa0the corner toward wealth preservation and that

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\\xa0means diversification. So how do we do that in a tax efficient manner?

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\\xa0There\'s exchange funds that we you

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\\xa0know that are really an option for very wealthy families, but

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\\xa0really not for clients at scale. They\'re multi-million

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\\xa0dollar minimums their private

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\\xa0Fund Solutions and you know, you\'re vestly

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\\xa0investing in a hedge fund that\'s gonna take seven years to diversify

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\\xa0and 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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\\xa0concentrated positions to be a pretty powerful thing and

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\\xa0that 30 by 30 extensions the the way we do that so, you

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\\xa0know, we put that long short extension on

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The extension generates tax benefits along the

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\\xa0way we can use that extension to reduce the risk of

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\\xa0that concentrated position. You\'re totally right there. And then

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\\xa0over time as we generate those consistent tax benefits

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\\xa0that gives us a mechanism to sell

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\\xa0down that concentrated position, but we\'re always matching

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\\xa0the tax benefits that we generate with the

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\\xa0capital gains that we are realizing by selling down that

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\\xa0position.

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And then once we sell we\'re rebalancing into a

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\\xa0diversified index of the advisor and the client\'s Choice

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\\xa0could be S&P 500. It could be Global stocks really whatever

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\\xa0the asset allocation decision ends up

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\\xa0being so yeah a typical even low basis very

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\\xa0low basis position 20% cost basis. We

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\\xa0can help diversify in a tax efficient manner

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\\xa0in around seven years.

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

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\\xa0we\'re talking about tax benefits, but what we\'re really talking about is

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\\xa0transitioning a

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Well, I would consider a concentrate risky portfolio very

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\\xa0risky at times into something that

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\\xa0is more suitable for that investor more Diversified but

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\\xa0doing it in a way that they don\'t

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\\xa0have to feel the the pain of unwinding

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\\xa0those positions that might have some very significant embedded

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\\xa0gains. You know it our

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\\xa0industry we get

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picked on I guess for being very jargony right a lot

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\\xa0of jargon and terms that a lot of folks that

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\\xa0are not in this industry on a daily basis and

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\\xa0we throw out the term tax Alpha quite a bit and

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\\xa0I\'ll throw this question out to both the a Phil and Glenn.

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\\xa0Can we just Define what tax Alpha is

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\\xa0and then can you quantify it? Sure. Yeah. Yeah

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\\xa0to us. I think of tax Alpha is

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\\xa0tax savings.

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So, you know if if quantino generates

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\\xa0a dollar of short-term

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\\xa0capital loss.

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Then if you have a short-term gain

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\\xa0a dollar of short-term gains, that saves you

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\\xa040.8 percent. So I\'ve saved the client 40 cents

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\\xa041 cents in tax. If

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\\xa0I\'m using that short-term law stuff set long

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\\xa0term gains that that long-term gains rate essentially 23%

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\\xa0at the federal level. So I\'ve

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\\xa0saved clients, you know, 24 cents

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\\xa0on that dollar of a capital loss.

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So if I can consistently generate Capital losses

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\\xa0if quantino can consistently do that. We\'re letting

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\\xa0clients offset the capital gains

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\\xa0that 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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\\xa0year to year and those capital gains from can come from a lot of different,

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\\xa0you know Avenues it could be

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Capital gains distributions from Mutual Funds. It could

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\\xa0be long-term gains realized from rebalancing your portfolio

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\\xa0Etc. So to me tax Alpha

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\\xa0is keeping more of that return in the

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\\xa0client\'s pocket paying less in capital gains and using those

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\\xa0Capital losses as a vehicle to do that great.

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\\xa0That\'s a that\'s a very eloquent definition of

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\\xa0taxol. Do you care to add that? Yeah. I I like that

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\\xa0definition as well. Yeah. One thing I\'d say is

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\\xa0that I think there\'s again pretty broad agreement

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\\xa0that long only tax loss harvesting

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\\xa0does have a benefit to the portfolio

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\\xa0and it might be, you know one to two percent maybe maybe

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\\xa0two percent on you know, really good implementations call

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\\xa0it one percent. But again that has a

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\\xa0horizon that\'s gonna likely track down as your portfolio

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\\xa0ossifies seizes up turns into

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\\xa0our favorite word. No, you know,

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\\xa0nothing with unrealized gains. So, you know,

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\\xa0you\'re talking 1% dish in

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Long only tax less harvesting type of tax Alpha that

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\\xa0that is going to go away in a handful

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\\xa0of years, right? Thank you for that. One of

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\\xa0the the questions and this is gonna go really to

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\\xa0investment vehicle more so than anything else. I\'ve heard

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\\xa0investors say like 2022 for instance.

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Horrible, no good very bad year for investors Equity fixed

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\\xa0income both down investors who hold actively

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\\xa0managed 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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\\xa0in some scenarios right capital gains distributions in

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\\xa0December. So Phil when investors

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\\xa0are looking at open-ended mutual funds what are

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\\xa0some of the things that they should be considering from a tax efficiency standpoint,

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\\xa0you raise a good point and to some extent

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\\xa0those examples of you know, being down and

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\\xa0having a gains distribution. That\'s an unlucky

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\\xa0combination of a handful of things right like it comes

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\\xa0down to perform some fun what the

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\\xa0Redemption level was how the fun generates cash

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\\xa0to meet those redemptions and whether

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\\xa0or not that\'s kind of gain realizing

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\\xa0lost real estate realizing or neutral history of

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\\xa0the mutual funds experience can maybe give you

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\\xa0some insight into that as well as the strategy whether

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\\xa0it\'s going to be, you know tax efficient in

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\\xa0a neutral kind of scenario and whether

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\\xa0it\'s you know, growing or stable

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\\xa0as opposed to, you know, shrinking with a lot of redemptions.

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you mentioned tack sorry investment vehicles so very often

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\\xa0we

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

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\\xa0there on the income side, they\'re pretty

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\\xa0even right funds all funds have to distribute income and

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\\xa0they can choose the frequency with which they do that. Some of

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\\xa0the differences really come into play with capital gains

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\\xa0realization. Now mutual funds to me

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\\xa0to Redemption they have to do that with the cash in the fund. They might

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\\xa0have enough cash. They might need to sell to realize that

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\\xa0to fund that Redemption and some of

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\\xa0the things I mentioned earlier, you know, whether they have enough cash what

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\\xa0their tax Lots look like how their age

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\\xa0how they\'re Diversified how the fund\'s been performing, you know

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\\xa0frequency and magnitude of redemptions all that will

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\\xa0kind of impact whether or not you\'re end. They have realized

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\\xa0game they need to distribute or not with ETFs.

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\\xa0There\'s a little more complexity in how they\'re traded

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\\xa0and some of the some of the capital gains efficiencies.

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\\xa0So you and I can trade an ETF

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\\xa0on an exchange and that doesn\'t involve the fund at all, you know, you

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\\xa0sell share I buy a share from you and

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

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\\xa0simple. But there are some transactions that do

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\\xa0involve the fund, you know, something called authorized participants help

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\\xa0ETFs trade efficiently

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\\xa0and sometimes they\'ll redeem directly with the fund the

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\\xa0ETF the ETF has a choice

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\\xa0to you know, redeem in kind or give Securities to that

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\\xa0redeeming entity, right and in

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\\xa0doing that there\'s no transaction. There\'s no realization

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\\xa0of of gains and it gets

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\\xa0even more interesting because that the fun can choose

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\\xa0which shares to redeem out and they can often redeem

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\\xa0out the lowest cost basis shares. Thereby, you

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\\xa0know creating a very tax efficient fund vehicle.

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\\xa0The investors still needs to pay tax on their gain

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\\xa0if they sell their shares, right, but the

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\\xa0fund itself can get pretty creative in

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\\xa0in reducing cap games realization. So,

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\\xa0you know, it depends sometimes on the strategy, you know,

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\\xa0fixing strategies might not be as

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Efficient in an ETF as as Equity strategies and some

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\\xa0mutual funds can certainly be very tax efficient. So, you know,

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\\xa0it comes down to you know, I think education getting the

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\\xa0right investment strategy and then, you know also choosing the right vehicle

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\\xa0now, that\'s that\'s really interesting and we\'ve had conversations

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\\xa0on the differences between ETFs and mutual funds on

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\\xa0this podcast. And what\'s really fascinating to me again,

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\\xa0I\'m gonna use the term convenient byproduct the creation of

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\\xa0redemption process of an ETF isn\'t designed

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\\xa0for tax efficiency. It\'s designed to

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\\xa0making sure that the

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\\xa0nav is equal to the underlying basket of

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\\xa0stocks in that process in itself makes ETFs

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\\xa0extremely tax efficient.

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

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\\xa0that you get through that process, which is interesting. Okay,

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\\xa0so just kind of recap here for

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\\xa0our investors.

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When considering your tax status with your

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\\xa0portfolios consider what we call an evidence-based

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\\xa0investment philosophy Buy and Hold that

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\\xa0tends to lead to not only a greater likelihood of outperformance

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\\xa0by staying the course, but it

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\\xa0reduces frictions reduces transactions in

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\\xa0the portfolio. Thus leading to a higher level of tax efficiency consider

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\\xa0the vehicles that you\'re using when using

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\\xa0open-ended mutual funds gravitate towards

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\\xa0more passively managed growing mutual

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\\xa0funds ETFs certainly have tax benefits and

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\\xa0for those investors that are deploying a

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\\xa0direct indexing strategy. There\'s certainly more

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\\xa0opportunities through the sheer number of names to identify losses

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\\xa0to perform ongoing tax loss harvesting

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\\xa0and then lastly Glenn against thanks for

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\\xa0joining us adding a long short

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\\xa0extension a 1:30 strategy certainly can

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\\xa0help not only from a diversification standpoint,

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\\xa0but also from

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Alpha generating strategy. So Glenn.

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\\xa0Thank you so much for your time Phil. Thank you for joining us

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\\xa0here 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 and

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\\xa0I look forward to our conversation next time. Thank you

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\\xa0so much gentlemen, thank you. Thanks Cemetery Partners. LLC

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\\xa0is an investment advisor firm registered with

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\\xa0the Securities and Exchange Commission The Firm only

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\\xa0transacts business in states where it is properly

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\\xa0registered or excluded or Exempted from

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\\xa0registration requirements registration of

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\\xa0an investment advisor does not imply any specific level

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\\xa0of skill or training and does not constitute an

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\\xa0endorsement of the firm by the commission. No one

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\\xa0should assume that future performance of any specific investment investment

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\\xa0strategy product or non-investment

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\\xa0related content made reference to

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\\xa0directly or indirectly in this material will be profitable.

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As with any investment strategy there is the

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\\xa0possibility of profitability as well as loss due

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\\xa0to various factors including changing market

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\\xa0conditions and/or applicable laws.

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Content may not be reflective of current opinions

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\\xa0or positions. Please note the material

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\\xa0is provided for educational and background use

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\\xa0only moreover. You should not assume that any discussion or

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\\xa0information contained in this material serves as

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\\xa0the receipt of or as a substitute for

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\\xa0personalized investment advice.