Breaking up is hard to do—when you’re not a discerning portfolio manager. If you’re managing your own portfolio, learn a couple of divesting strategies from these asset managers.
Rebalancing is required
Kelly Trihey, a private wealth portfolio manager with Industrial Alliance Securities in Montreal, says rebalancing clients’ portfolios includes assessing individual securities based on defined criteria, like price; assessing global holdings using a top-down approach; and maintaining the strategic asset allocation after market fluctuations.
Typically, she assesses portfolios monthly and rebalances quarterly, or whenever proportions climb beyond 5% of target weights.
“We added Loblaws at the end of November 2016,” she says, and divested Weston, a decision based on the companies’ financials, 12-month expected price and intrinsic value. “Loblaws had better potential growth than George Weston at that point in time.” Often, “since we’re not taking any sector bets, whenever we add a stock, we remove a stock from the same category.”
Before divesting, she considers the tax impact on the net performance of clients’ portfolios. “But ultimately you cannot have taxation guide your investment choices,” she says. “It has to be based on your criteria and performance of the stocks.”
When tax is top of mind
Tom Trainor, managing director of Hanover Private Client Corporation in Toronto, continually assesses clients’ tax positions both within the portfolio (gains/losses, interest, dividends) and from personal income (e.g., trust income and employment income). He also considers clients’ outside investments with other managers, and talks with clients’ accountants.
Based on that data, plus client conversations, he decides whether the client would benefit from tax-loss selling or income generation. Plus, “you also want an outlook on [your] long-term tax position,” such as changing tax brackets.
For instance, to take advantage of an expiring non-capital loss (which can’t be carried forward indefinitely, like capital losses), he rolled over the portfolio to create gains, after having the client and tax accountant sign off on the move.
“We sold every single position,” he says, at about 3:30 p.m. one day and repurchased at 9:40 a.m. the next. “You don’t have to wait overnight, but it gives you a better audit trail if the trades are done on two different days.” Also, there’s no 30-day waiting period to repurchase when realizing gains, as is required under the superficial loss rules.
The client made a small win on overnight market movements, but reaping tax benefits was the intention, he says. At institutional rates, the commission cost was low.
Rebalancing was done at the same time. “The client’s portfolio had moved around a little bit during the year,” says Trainor. “We rebalanced back to what we had outlined in the investment policy statement as their strategic asset allocation.”