Goldman Sachs Asset Management Preps Direct-Index SMA for Concentrated Portfolios
By Nate DiCamillo, December 15, 2023. As originally published in FundFire.
Goldman Sachs Asset Management is set to roll out a new direct-index separately managed account geared toward clients who are overexposed to a single stock or sector, executives at the wealth management firm told FundFire.
GSAM said it has already rolled out the SMA to select clients and will launch the offering in the first quarter of 2024. The manager will also give clients up to 10 years to transition assets into the strategy. Historically, GSAM had transitioned clients into diversified portfolios immediately, the firm said.
The SMA’s tax-loss harvesting capabilities aim to help clients with concentrated positios better diversify, said Sirion Skulpone, head of client portfolio management at the Goldman unit.
“The goal is to transition those existing portfolios to our more broadly diversified strategy with tax-loss harvesting,” she said. “The investors that are going to benefit the most are those in the highest tax brackets with lots of outside sources of capital gains.”
Clients will set their own capital gains budget and decide how many years they want to take to transition, Skulpone added.
Merrill Lynch is also looking to lengthen the typical transition period for clients moving between SMAs, from one year to two- to three-years, after it learned that clients preferred to realize between 20% and 30% of their capital gains within a single year.
Investors usually find themselves in concentrated stock positions when they are founders of a company that has gone public, employees who receive company stock compensation, heirs who have inherited stock, or individual investors who made “smart” stock picks over time, Skulpone added. This typically ends up being a brokerage to advisory transition when the client moves to diversify the concentration.
“Maybe they bought a bunch of Amazon 10 years ago, and they're millionaires now,” Skulpone said. “What these direct-indexing separately managed account strategies can do is help these investors diversify in a way that is tax managed and palatable for them from a tax perspective.”
Previously, GSAM had emphasized the risk of not being diversified and transitioned clients more quickly, she added.
But the firm has incorporated features into its digital tools that give clients the ability to view their “diversification glidepath,” which shows what could potentially happen to a portfolio under various market conditions, so clients can determine whether they want a faster or more gradual move toward diversification, Skulpone said. It's working now with its third party vendors to turn on the feature early next year.
To do this, GSAM created an algorithm which sells part of the concentrated stock as it moves to the new SMA, and builds a “completion portfolio” around the position to mimic the broader market. It then continues to tax-loss harvest the portfolio until it is no longer overly concentrated in one stock or sector, said Monali Vora, head of investment solutions at GSAM.
The new portfolio in the SMA aims to replicate the broad market from “a sector, industry and style perspective,” Skulpone said.
Quant technology is allowing clients to extend the time it takes to transition into a new portfolio, said Mike Casciano, president and founder of EVO Wealth Consulting.
“It costs money to have a [portfolio manager] doing that,” Casciano said. “Because you can do that through technology, it’s not a human person going back and looking at spreadsheets saying, ‘What should we sell?’”
While tax-loss harvesting is common, SMAs geared specifically toward tax transitions for clients who are concentrated in a single stock is something only a few firms specialize in, Casciano said.
Chicago-based fintech provider SpiderRock Advisors, for example, offers options-managed overlays that can speed up the transition away from a concentrated portfolio to a more diversified one, Casciano said.
Market trends and volatility tend to be the driver of how long it takes for a client to transition to a diversified portfolio, said Hiren Patel, head of advisor solutions for J.P. Morgan’s 55ip.
He declined to comment on whether 55ip was extending transition times but said the firm partners with financial advisors to create a target model strategy for transitioning in a way that doesn’t “place undue tax burden on the end client.”