Completion Portfolio

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Out of the different diversification techniques for concentrated positions, the completion P/F approach takes the longest time to attain diversification. The explanation provided is as follows:
Sale of concentrated holding is used to offset losses on the position in the target P/F.
Why would this mean longer time to diversification?
- BN
 
Hmm…completion portfolio..sounds familiar…like everything else on the L3 forum…but I can’t recall what it is.
Well, based on what you have written above, I think it means that they need to wait for losses in the target P/F before they can sell portions of the concentrated holding to offset the losses.
Since, it’s not possible to determine how long it’s going to take to start making losses (although, I just have to think of a stock when it starts making loses), diversifying out of stocks could take a long time.
Is this the only definition of completion portfolio?..I felt there was another definition too.
 
The way I remember CP is that a concentrated position is balanced by adding several positions to the one low basis stock. Perhaps, the idea is that you add one stock at a time and create a well diversified portfolio - thus it takes longer to diversify. But on the other hand, you could purchase a basket of securities and diversify the holdings in one shot…I wonder how and why it would take a long time to diversify….
But, now I hope I’ll remember that CP takes time for diversification!!!
 
I think the idea of the completion portfolio is that if you have allocations to several different funds or managers, you might look at your risk factor exposures or your holdings and decide that the sum total deviates too far from your benchmark for your comfort.
The completion portfolio purchases or sells securities to bring your entire set of holdings+funds more in line with your investor benchmark/IPS, using whatever criteria you define as “close enough.”
The risk is that by doing this, you water down any alpha generation by your fund managers, since the completion portfolio will usually be somewhat negatively correlated with your fund performance (which is part the point, to reduce risk). By doing this with a completion portfolio, you leave the managers free to do what they think is best, and constrain them less.
 
BN Wrote:
——————————————————-
> Why would this mean longer time to
> diversification?
>
> - BN
the person with low-base stocks needs to harvest capital-loss to offset gains when he sells off his holdings. to accumlate capital-loss takes time. that’s why.
 
If the person does not have bucket load of liquid assets to start buying diversifying securities in the required amount, he or she is depends primarily on using income and loss harvesting from his still “incomplete” portfolio to fund further purchases. This can generally take a long time.
 
Hmm… my post seems to be way off base… I guess it’s back to the books for me! ;-)
 
another reason it could take a long time is if you have a concentrated position in a dividend paying stock and you start reinvesting the dividends in other companies to complete your port.
 
#1 Reason. Where is the money going to come from??? As with most this kind of investor, majority of their wealth is all tied up in 1 stock.
 
Steps:
1) Borrow money to buy completion portfolio
2) buy CP
3) take realized capital losses on losing components of the CP.
4) sell a proportional number of low-basis stock shares so that Capital gains are offset.
5) rebalance CP and use the remaining funds to pay back a portion of debt.
Essentially, you need to wait for some realized capital losses to offset the taxable gains you’ll take on your stock. Essentially you offset, your gains with the losses to avoid some taxes…
 
Awesome! That makes lotsa sense, and I can see why it would take a while to work.
 
I think what is missing and adding to the confusion is that you
Borrow AGAINST the large position to create your ideal portfolio…. Once you have the portfolio constructed you use any losses to offset gains on the Large position.
 
in addition to capital loss, there’s also tax credit on interest payments on borrowed money.
 
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