Completeness Fund Approach

I believe this is one of the methods used to achieve diversification for investors who’s portfolio consists of a large low basis security. The key is that the investor also needs to own other investments so that by either using the cash flow (dividends) generated from these other investments or by borrowing (monetizing) against these liquid investments, the investor can gradually diversify buy purchasing other assets using money generated by these other investments.
If you hold a large low basis position, the only way for you to diversify is by selling this existing position which will triger a large tax event. So instead, you diversify gradually by using fund generated by your other investments…
 
Completeness Fund (CF) approach is one of the ways to diversify a concentrated portfolio. Assume you have a portfolio of $1,000,000 invested only in your co. stock - say a tech co.
Assuming that you do not want to sell the stocks, you can diversify your portfolio by buying other stocks/bonds that have low/no correlation with your tech portfolio. It will take a long time to achieve the required diversification, not to mention a lot of money. You can potentially leverage your existing investment to obtain the money.
Adv:
Potential for tax loss harvesting using investments in the CF
Can get diversification without selling the existing portfolio
Disadv:
Takes a long time to build a diversified portfolio
Requires that you have cash or leverage available
 
This is a method to deal with a concentrated position.
Essentially, you build a diversified portfolio around the concentrated asset so that it is no longer a concentration.
Obviously, this is kind of difficult for most investors, due to the definition of a concentration. If they have enough wealth to build a complete portfolio, then they don’t really have a concentration…
I think the more practical “real-life” version of this method is that you slowly sell out of the position over time to get to a diversified portfolio. So if you start out with most of your wealth in Exxon stock, selling some of it every year and using the proceeds to diversify. This can spread out the tax consequences but leaves you exposed to unsystematic risk.
 
if above explanations are for completeness fund, then what is a completion portfolio??
 
Completion portfolio has something to do with a core portfolio holding complemented with sattelight portfolios and then a “completion portfolio” which reduces the tracking risk between the portfolio and the benchmark, and one fo the downsides is the loss of misfit returns I think.
I could be totally off but this is what I remember.
 
good shot philly!
but your definition is for “COMPLETENESS FUND” just to remind you. Plus I’d add the completion fund is constructed to align the risk exposures of the fund and the benchmark. There you lose some of the misfit return.
 
it’s the other way around.
completion portfolio is the diversifying strategy for low-cost basis stock, completeness fund is used for minimizing risk exposures between the portfolio and the benchmark and maintaining the same active return… IMO
 
Thats right - maintaining return but minimizing risk. Now is this meant to minimize tracking risk to the sponsor benchmark (which by the way could be the improper benchmark?). Trying to remember which benchmark your supposed to mimick…
 
itstoohot Wrote:
——————————————————-
> if above explanations are for completeness fund,
> then what is a completion portfolio??
Good Question.
This is why ppl can get confuse about terminology in the L3. This is in no way easier than L2.
There is no meat, too many concept to retain by heart. This is one of the freaking comcept that I have no idea why I need to know it.
 
You need to know completion portfolio because it is one of the ways to avoid capital gains on a large low basis position. I think another method would be an exchange fund (several investors contribute their low basis positions into a portfolio in order to create a diversified portfolio in which you earn the diversified returns. You need to have a min. % of illiquid stocks, like 25% or so, and there is a min. lockup period of 7 years or so.) Two types of exch. funds as well, there is also a private type with private investors- slighrtly different.
 
PhillyBanker Wrote:
——————————————————-
> You need to know completion portfolio because it
> is one of the ways to avoid capital gains on a
> large low basis position. I think another method
> would be an exchange fund (several investors
> contribute their low basis positions into a
> portfolio in order to create a diversified
> portfolio in which you earn the diversified
> returns. You need to have a min. % of illiquid
> stocks, like 25% or so, and there is a min. lockup
> period of 7 years or so.) Two types of exch. funds
> as well, there is also a private type with private
Completeness Fund and completion of portfolio are two diffirent things. They sound the same but there are NOT. I don’t even recall where I read Completeness Fund but it an approach use for some thing I do not recall.
What I do know for sure it is not the same thing as completion portflio which a way to get rid of low basis stock.
 
AllLevelsPass Wrote:
——————————————————-
> Please can anybody explain this?
AllLevelsPass:
Which CFAI book has this concept? I forgot!
Thanks
 
Then completion fund it what I initially, incorrectly identified as a completion portfolio.
 
tibwa Wrote:
——————————————————-
> AllLevelsPass Wrote:
> ————————————————–
> —–
> > Please can anybody explain this?
>
>
> AllLevelsPass:
>
> Which CFAI book has this concept? I forgot!
>
> Thanks
Sorry. was away.
CFAI Book 4. Reading33:
Core Satellite and Completeness Fund approach.
I think thats different from what is beign discussed here.
 
AllLevelsPass Wrote:
——————————————————-
> tibwa Wrote:
> ————————————————–
> —–
> > AllLevelsPass Wrote:
> >
> ————————————————–
>
> > —–
> > > Please can anybody explain this?
> >
> >
> > AllLevelsPass:
> >
> > Which CFAI book has this concept? I forgot!
> >
> > Thanks
>
> Sorry. was away.
> CFAI Book 4. Reading33:
> Core Satellite and Completeness Fund approach.
>
> I think thats different from what is beign
> discussed here.
THanks, that what i thought. It is a vety hard concept to grasp. i will try to review again to see if I can come with something.
 
Completion fund - method used by low basis stock holders using cash flows from holdings( interest, div etc) and using losses to offset partial gains, the portfolio is shifted into a more diversified allocation. Of course this takes a long time as a stragegy
Completness portfolio - comes into the picture as a way of using active return.
There are 2 ways stated a core(passive) and satellit(active) approach, and a completness of funds approach - this states that the active allocation is done in such a way that the portfolio retains risk characteristics of the benchmark . the result is keeping an active approach while minimizing the active risk therefore a higher expected information ratio
 
it’s completeness fund
and completion portfolio
 
Actually they are the same ie Completeness Fund and Completion Portfolio. This definition is from Schweser:
Completion Portfolio: The investor identifies a target portfolio that they desire to hold, and purchases this portfolio either with existing funds, by borrowing funds against the concentrated position, or by using cash flows generated fromt the concentrated portfolio. Over time, any lossses in the completion portfolio are viewed as opportunities to realize offsetting gains by selling shares of the concentrated position, and these funds are reinvested in securities consistent with the target portfolio.
 
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