Custom SMAs offer a sophisticated approach to portfolio management that can allow investors to access a variety of benefits. Custom SMAs can be tailored to personal investment goals, adjusting their holdings to suit a variety of investment styles and preferences while remaining focused on tax planning and tax management.
Fidelity has identified four common scenarios where Custom SMAs can provide solutions:
1. Providing tax-efficient core equity exposure
Custom SMAs offer a more flexible tool for providing core equity exposure than traditional funds. Like mutual funds or ETFs, custom SMAs can be built to closely follow a desired index. Unlike mutual funds or ETFs, they also provide the opportunity to harvest tax losses on an ongoing basis. Result: Index-like returns with the potential for reduced capital gains taxes.
2. Reducing portfolio concentration and more
A portfolio whose assets are concentrated in a handful of appreciated stocks or funds can present significant risk. Selling out of those positions immediately may realize substantial capital gains. Custom SMAs can help smoothly navigate this challenge, using a tax-sensitive approach to gradually reposition the portfolio over time while staying on track to pursue the investor’s long-term goals.
3. Customized investing
Custom SMAs can provide similar exposure as an index while being tailored to individual preferences and needs. That may mean excluding alcohol firms or green energy producers. It could also mean eliminating exposure to a certain sector or industry (an executive may want to remove exposure to his own firm’s sector), or excluding a specific ticker or country.
4. Planning for future taxable events
The sale of a business, investment property, or other assets may produce substantial capital gains. Custom SMAs can help mitigate the tax impact of such events by allowing investors to reserve losses in anticipation of an upcoming sale.
