31-1 concentrated single-asset positions
1 introduction
2 concentrated
single-asset
positions:
overview
3 general
principles
of managing
concentrated
single-asset
positions
objectives in
dealing with
concentrated
positions
considerations
affecting all
concentrated
positions
institutional
and
capital
market
constraints
psychological
consideratiosn
goal-based
planning in the
concenrated
-position
decision
-making
process
asset location
and wealth
transfers
concentrated welth
decision making:
a five-step process
public traded
single-stock
positons
privately
owned
businesses
investment real estate
invesment
risks of
concentrated
positions
three major types
publicly traded stock
privately owned business
commercial or investment real estate
monetize
to access its cash value without
transferring ownership
concentration poses
problems needed
to managed
present risks
presnet tax, liquidity or other considerations
make a simple sale problematic
systematic
risk
the component that cannot eliminated by holding a well-diversified portflio
identify multiple sources of systematic risk
company-
specifi
risk
non-systematic or idiosyncratic that specific to a particular company's operations reputation and business environment
positively related to volatility of returns
lessens benefits of higher expected
capital accumlation over time
property-
specific risk
non-systematic risk that specifi to owning particular piece of real estate
company stock, options or other financial instrument
as part of executive compensation
a successful long-term
buy-and-hold investing strategy
a private company go public through IPO
significant portion of private business enterprise
hold as a standalone investment
dereived from inheritance
typical
objectives
risk reviewed and appropriateness
of risk reduciton considered
to reduce risk of wealth concentration
psychological considerations to cause underestimate
cash flow should
identified
to generate liquidity to diversify and
satisfy spending needs
fulfilling legacy and charitable intentions
to optimize tax efficiency
by structuring tansactions
not trigger immediate taxable event
min the tax will incur
client objectives
and concerns
not always appropriate for owner to reduce or eliminate the concentration
tax consequences
of an outright sale
often highly appreciated vs original cost
a significant embedded capital gains tax liability
often not psychological palatable to the family
liquidity
especially for privately owned businessed and investment real eatate
no readily available market for private company shares
may place different values on that property
margin-
lending
rules
determine how much a bank or brokerage firm ccan lend against securities positions that customs own
under rule-based system depend on strict rules
under risk based - portfolio margining
prepaid variable forward - certain forms of secured lending
considered off-balance-sheet debt and not subject to margin rule
securities laws
and regulations
the governing law
contractual restrictions
and employer mandates
IPO lockups
blackout periods
a right of first refusal
capital market
limitations
the ability to borrow shares is critical
the liquidity of the stock is vital
emotional
biases
overconfidence and familiarity // status quo bias // naive extrapolation of past returns // endowment effect // loyalty effects
→to question if an equivalent sum were received in cash
cognitive
biases
conservatism // confirmation // illusion of control // anchoring and adjustment // availability heuristic
→brought to the attention of the investor,
more receptive to correcting
one way to incorporate psychlogical considerations into asset allocation and portfolio construction
expands
the personal
risk bucket
the market
risk bucket
the
aspirational
risk bucket
to protection from povety or a dramatic decrease in lifestyle
allocaitons limit loss but yiedl below-market rates of return
tom maintain current standard of living
allocations provide average
risk-adjusted market returns
to increase wealth substantially
allocation to yield above-market returns
but wiht substantial risk
allocate concentrated positions
comprises owner's primary capital
comprises owner's primary capital
comprise owner's surplus capital
the asset location decision: the choice of where to place specific assets
wealth trasfer:
planning early before concentrated position appreciated greatly
estate tax freeze - an early ownership transfer of an estate corporation, partnership or limited liability company in which transfer junior equitiy interest to the children - non-voting common stock
to min transfer taxes
after significant appreciations
to contribute concentrated position to an entity -
family limited partnership
a limited partnership interest typically valued less -
a lack of marketability / non-controlling interest
charitably inclined
1 identify and establish objectives and constraints
2 identify tools / strategies that can satisfy objectives
3 compare tax advantages and disadvantages
4 compare non-tax advantages and disadvantages
5 formulate and document an overall strategy
*the traditioanl markowitz framework of diversifying market risk by incorporating notional risk buckets