Customization

Diversifying Single-Stock Concentration Using A Direct Indexing Strategy

The Challenge

The Client

An investor with a large, appreciated position in a technology stock from her former employer. 

The Objective

Diversify out of her position by implementing a sytematic, year-round tax managed diversification strategy that reduces the concentrated position over time, based on her tax preferences. 

Our Assignment
  • Reduce the concentrated position over time
  • Build around existing technology exposure by screening out a sector or specific stock in order to provide a diversified overall portfolio
The Outcome

Implemented a Custom Diversification Solution to Mitigate Risk

Selling a winning stock can be scary, but clinging to it may risk your financial goals. A custom diversification program can help mitigate single stock risk, manage capital gains tax, enhance portfolio value and reduce exposure to a concentrated stock. 

Leveraged a Direct Indexing Strategy to Provide a More Direct and Personal Way to Gain Market Exposure

The custom diversification program offered a plan for reducing the technology-stock position over time and invested the proceeds into broadly diversified stocks.    

Reduced concentration risk in stages

We tailored the length of the diversification period to meet the client’s desire to reduce the position while spreading the realization of gains over multiple years.

Transformed a concentrated portfolio

Because the client had exposure to technology from the concentrated position, the portfolio excluded the technology sector. Over time, the portfolio managers will be able to work with the advisor to adjust the target exposure as the client reduces her position in the technology stock.

The cited case studies represent examples of how we have partnered with various institutional clients on a broad range of services and offerings. The experiences outlined in the case studies may not be representative of the experience of other clients. The case studies have not been selected based on portfolio performance and are not indicative of future performance or success. This is not a testimonial for Goldman Sachs Asset Management’s advisory services.

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Risk considerations and disclosures

Equity investments are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. Different investment styles (e.g., “growth” and “value”) tend to shift in and out of favor, and, at times, the strategy may underperform other strategies that invest in similar asset classes. The market capitalization of a company may also involve greater risks (e.g. "small" or "mid" cap companies) than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements, in addition to lower liquidity.

The cited case studies represent examples of how we have partnered with various institutional clients on a broad range of services and offerings.  The experiences outlined in the case studies may not be representative of the experience of other clients.  The case studies have not been selected based on portfolio performance and are not indicative of future performance or success.  This is not a testimonial for Goldman Sachs Asset Management’s advisory services.   

There are several important considerations of the strategy. The forecasted time horizon for diversification will depend largely on the market environment and return of the concentrated stock positions. Stronger stock returns will result in a longer time to diversify while adhering to a fixed gain budget. Weaker returns would result in a shorter time horizon. Over the course of the diversification time horizon, the portfolio will have higher tracking error than the low TE and high TE strategy options. This may result in significant variability in performance of the portfolio relative to the benchmark. There are several factors that could contribute to gains being realized above the targeted amount (client directed flows, corporate actions, client specific customizations, etc.). The pre-tax performance may deliver much wider tracking error and thus higher performance variability than other TACS accounts given portfolios will be holding much of the concentrated stock in order to manage the tax impact.

Tax Considerations

The strategy may result in adverse tax consequences for the client including, but not limited to, wash sales. For example, data used for portfolio management may be incomplete, will be limited to information regarding the strategy account, and will not include information regarding positions held or transactions executed outside of the strategy account including other accounts managed by Goldman Sachs or its affiliates. As a result, portfolio management decisions may be based on incomplete information. All clients are strongly urged to discuss the tax implications of any transactions, including any potential wash sales, with their independent tax adviser. It is the responsibility of the custodian, administrator or such other third party appointed by the client, to obtain accurate and reliable information concerning the valuation of any securities which are comprised in the portfolio. Additionally, it is the responsibility of the client’s independent tax advisor to identify wash sales in the client’s portfolio.

Diversification does not protect an investor from market risk and does not ensure a profit.

Firmwide AUM includes assets managed by Goldman Sachs Asset Management and its investment advisory affiliates.

THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON'S OR PLAN'S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION.

Goldman Sachs does not provide legal, tax or accounting advice to its clients. All investors are strongly urged to consult with their legal, tax, or accounting advisors regarding any potential transactions or investments. There is no assurance that the tax status or treatment of a proposed transaction or investment will continue in the future. Tax treatment or status may be changed by law or government action in the future or on a retroactive basis.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. 

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this material and may be subject to change, they should not be construed as investment advice.

There is no guarantee that objectives will be met.

United States: In the United States, this material is offered by and has been approved by Goldman Sachs Asset Management, L.P. and Goldman Sachs & Co. LLC, which are registered investment advisers with the Securities and Exchange Commission.