Introducing The John Doe Portfolio
Introducing The John Doe Portfolio
Providing Readers With A Real Life Example Of A Managed Money Account
The John Doe Portfolio
I recently added a new client for a managed account with approximately $540,000 in the account. It is a transfer from another investment advisor, so there were existing positions in the account. I received the client’s permission to write about the account as long as I kept him anonymous. The account was invested in approximately 2/3 individual stocks, and 1/3 mutual funds and ETFs. I already sold all of the mutual funds and ETFs in the account, and I have been selling some of the individual stocks in the account as well. Some of the stocks have been held for a long time and have significant capital gains. We will be meeting later this week to discuss the plan going forward.
I would like to sell some of the stocks that I find overvalued, but that would lead to a significant capital gains tax bill. For example, the account has a large Apple AAPL 0.00%↑ position, approximately 14% of the account, with a very low cost basis (a little over $3.00). If I sold the whole position, it would create a large tax bill, which is something I would like to avoid. To be clear, having significant capital gains is a good problem to have, but it means that a good portion of the account is in stocks that find to be well above fair value.
Walking The Fine Line
On one hand, you sell all the stocks and incur the capital gains, with the assumption that the new investments will outperform the old ones, including the impact of capital gains. On the other hand, you could hold all of the stocks and assume that you could deal with a large drawdown that could have been avoided. I plan to find the middle path, where we sell some of the old stocks (but not all), so any drawdown from overvalued stocks doesn’t have such a large impact.
The discussion next year I would like to avoid looks something like this: Hey, I’m your new investment advisor, here’s a massive tax bill from capital gains in my first year as your advisor. It’s not a great way to ingratiate yourself to a new client. Walking the middle path makes more sense. Here is what I sold, here is what I bought, and we do have capital gains, but the new investments are performing well and will offset the tax hit in 2024. I plan to provide trade updates and portfolio weights once things are up and running, but I plan to track the account value and how the account is doing. The purpose of this will be to provide an idea to prospective clients on how I might manage their account and deal with their investments on a personalized basis.
Commissions & Management Fees
One of the things that frustrates me with many investment managers is their fee structure. Some charge a percent of assets under management fee, others charge commisssions, and some charge a performance fee (the advisor collects a percent of anything over 10% for example). A lot of managers have a combination of the above. For example, hedge funds are infamous for their 2% of assets and 20% of performance structure. Others charge a percent of assets and a commission fee.
I decided I will be sticking with a pure percent of assets as my fee structure (0.6% annually). If the account balance increases, I make more as the investment advisor. If the account value decreases, I will make less as the investment advisor. I don’t charge commissions or a performance fee, so my incentives are lined up with the client. My goal is to increase the account value over time, and I don’t have any reason to churn the account or chase performance like other advisors.
Plans For The Account
I have already been investing some of the proceeds from the mutual fund and ETF sales into a couple sectors. I have been buying Petrobras, Ecopetrol, and Peabody Energy, and I plan to buy offshore companies like Transocean and Tidewater on pullbacks. I will also be adding other sectors that I haven’t written about yet, including stocks in the tobacco industry and a couple different Real Estate Investment Trusts (REITs).
While I’m fine being concentrated for my own portfolio, it makes sense to be a bit more diversified for a managed account. It won’t be a hard limit, but I don’t plan to put more than 10% in any individual stock and 30% in a sector. The actual amounts will vary, but I still think it makes sense to overweight certain sectors without putting an irresponsible amount of someone else’s money in one idea.
Conclusion
Hopefully this will provide readers with an idea of how I would manage their account if they are interested in a managed account. I think that Wall Street and other investment advisors have taken advantage of investors through egregious fees without providing outperformance. My goal is to build a portfolio with an attractive risk/return profile without charging ridiculous fees. I will provide updates on the portfolio, its performance, and I think readers will be interested to see a real money managed portfolio and its results. You should be able to get a general idea of how I manage money and my contrarian investment approach.
If you have any questions, feel free to reach out with any questions on the portfolio or my investment strategy.