Tax Alpha Case Study

The Challenge: A Highly Concentrated Portfolio with Substantial Taxable Gains

Michael Storer, Senior Regional Director at Symmetry Partners, shares how he used Symmetry’s Tax Alpha to solve a client’s specific challenge.

Give us some background.

MICHAEL STORER: With the great growth over the last 10 years—especially with some of the well-known name stock names like Tesla and Apple—we’ve had many clients come to us with very highly appreciated stock positions with a low cost basis.

It's good that they’ve experienced this growth. However, the flip side of that is: How do I use these monies without paying taxes? That’s always been a challenge.

Tell us about your client and their specific circumstances.

MIKE: A client had five stock positions totaling about $6.3 million with $3 million of capital gains in the portfolio. However, about 90% of the gain was in one stock position, General Dynamics.

The client’s Advisor asked if there was anything Symmetry had available that could help this client do two things:

1. diversify the portfolio away from just five stock options
2. mitigate any issue with paying taxes

How did you know Tax Alpha was the right solution?

MIKE: There are more complicated cases, but in this one was pretty straightforward. The client liked the positions he had. However, he recognized that it could be risky just to own five stock positions.

So, we determined that we could diversify the portfolio into a more U.S. market index-like portfolio, and at the same time mitigate any tax implication through this diversification.

How did you go about implementing that solution?

MIKE: In this particular case, General Dynamics was the large position we wanted to diversify, primarily because it had the most gain in it.

It's a long-short strategy. On the long end, we’ll look to diversify into a Russell 1000 portfolio, which is a basket of the top 1,000 U.S. stocks. We’ll immediately diversify the portfolio away from just the individual General Dynamics position.

On the short end, we’ll diversify into other stocks that are in the same industry as General Dynamics, thereby diversifying that position there.

Who was involved? How did the Symmetry team collaborate?

MIKE: Once I have the conversation with the client and the Advisor, we then bring our research team into the picture, and we do an analysis of the gains. We also consult with our sub advisor to help with the with the tax strategy.

Then we come together with a proposal that we can either help deliver with the Advisor or the Advisor can deliver on their own based on their expertise around our strategy.

What was the end result?

MIKE: The client really liked the really like the option in terms of being able to unwind this position, diversify it, and not pay taxes on it to a certain extent.

There are other options. One is Direct Indexing. The problem with Direct Indexing, is that after about five or six years, you run out of losses and then you’re stuck with a portfolio of stocks that has still has gain in it.

With our strategy, we take it to the next level. We’re able to bank losses for close to 20 years. And we can continue to bank those losses and continue to help offset any tax implication of selling any of these stock positions over time.

Can you tell us about the client experience?

MIKE: The one comment I got from the client, who were a husband and wife, is that they had delayed making a decision for about six months. Once we implemented the solution, they were saying: I wish we had done this six months ago, because we feel much more comfortable that we've made a decision and now we have a strategy that can help us continue to build wealth, but at the same time, do it in a very tax efficient way.

This material is for educational purposes and its intended use is for financial professionals. All content is for educational purposes and should not be considered investment advice, recommendation, or offer of any security for sale. 

Symmetry is an investment advisory firm registered with the U.S. Securities and Exchange Commission (SEC). The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training and does not constitute an endorsement of the firm by the SEC. 

Symmetry charges an investment management fee for its services. All Symmetry fees can be found in the Symmetry Form ADV Part2A located at www.symmetrypartners.com. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product, or any non-investment-related content referred to directly or indirectly in this material will be profitable or prove successful. As with any investment strategy, there is the possibility of profitability as well as loss.

Symmetry does not provide tax advice. Please note that (i) any discussion of U. S. tax matters contained in this material cannot be used by you for the purposes of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. 

Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking errors into your accounts. There may also be unintended tax implications. Prospective investors should consult with their tax or legal advisor prior to engaging in any tax-loss-harvesting strategy.