There isn’t any query that the market circumstances loved by buyers up to now in 2023 have been far superior to these in 2022, even with lingering volatility and large questions nonetheless being requested about excessive inflation and rising rates of interest.

The reprieve has been welcomed by buyers and monetary advisors, says Jeremy Milleson, director of funding technique at Parametric Portfolio Associates, however that doesn’t imply this yr has been with out its challenges. Amongst these, Milleson says, has been the concentrated outperformance amongst a handful of big-name firms, particularly earlier within the yr.

As Milleson not too long ago informed ThinkAdvisor, optimistic efficiency is at all times welcome in a portfolio, however one should take care to grasp the place the efficiency is coming from and what it appears like at a granular, stock-by-stock degree — particularly if one sees tax mitigation as an essential aim within the funding administration course of.

Milleson says portfolio managers at Parametric are asking simply such questions as the tip of the yr shortly comes into view, and the solutions are serving to them to grasp when, why and tips on how to have interaction in tax-loss harvesting efforts.

It’s difficult and interesting work, Milleson says, however the outcomes ought to ship added worth to shoppers who’re anticipating their advisors and managers to assist them scale back taxes whereas sustaining entry to the market’s full upside.

A Higher, if Uneven, Yr for Shares

As Milleson recollects, this yr has seen very sturdy efficiency from quite a lot of big-name shares, many (however not all) of them within the know-how sector, whereas the broader market as represented by the S&P 500 has loved extra muted positive factors — together with a roughly 3% drop within the third quarter.

So, whereas efficiency is up total, a lot of that efficiency has been centered round a comparatively restricted variety of firms, and there are nonetheless loads of positions with unfavourable returns.

“The so-called ‘Magnificent 7,’ for instance, noticed very sturdy efficiency up to now for the yr,” Milleson explains, referring to the grouping of Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta. “Their efficiency has moderated extra not too long ago, however they’ve nonetheless posted very strong positive factors for the yr.”

The results of this dynamic, Milleson suggests, is that any buyers whose portfolio methods have seen them underweight these key names have seen their efficiency lag considerably behind the total market index.

A associated result’s that buyers who’re pursuing tax-mitigation methods of their portfolios, comparable to tax-loss harvesting, have needed to be extra strategic about the place they’re sourcing mentioned losses.

“This yr has been take a look at case for why harvesting losses all year long must be a consideration for buyers who’re utilizing individually managed accounts and direct indexing,” Milleson says. “This method provides you the chance to personal the underlying property immediately, so the entire market doesn’t must be up or down at a given second so that you can benefit from doubtlessly short-lived alternatives in several elements of the portfolio.”

By the tip of this yr, the total market might possible be up, Milleson says, so “grabbing losses alongside the best way” goes to be prudent.

How Concentrated Efficiency Impacts Tax Administration

As Milleson explains, these combined market dynamics add a layer of complexity to the already sizable job of efficient tax-loss harvesting in direct listed portfolios and individually managed accounts.

“Keep in mind, after we are tax-loss harvesting, we’re promoting out of names which might be standing at a loss and thereby successfully trimming these names down so they’re underweight to the benchmark,” Milleson notes. “The query then turns into about simply how a lot you need to promote down these names, particularly when they’re the largest elements of the underlying index and the largest potential driver of efficiency trying ahead.”