Diversification of concentrated stock

Advisor’s client had $20MM, representing 93% of her wealth, in low-basis Cisco stock. Aperio modeled outcome scenarios and built a presentation which the advisor used to persuade the client to liquidate 85% of the stock.

Challenge

Advisor’s client had a heavily concentrated position in Cisco stock.  Client was a widow whose husband worked at Cisco, and the stock had sentimental value, further complicating the advisor’s efforts to suggest a diversification strategy.

Aperio solution

Aperio analyzed diversification strategies, generated Monte Carlo simulations and drafted presentation materials for the advisor to share with her client. Aperio discussed with the advisor the costs associated with non-liquidation strategies, including collars and other derivatives approaches.  We ran 20 year Monte Carlo simulations to compare the after-tax median, 90th percentile, and 10th percentile expected real wealth of the concentrated position to a diversified portfolio. Diversifying provided superior ending wealth 75% of the time. Aperio prepared a presentation for the advisor to share with the client.

Impact

Client sold most of the Cisco stock and the Advisor used Aperio’s Active Tax Indexing strategy to tailor around the remaining stock and generate tax-losses to offset gains.  Client sold 85% of her Cisco exposure.  Aperio integrated remaining exposure into separate account tracking the MSCI ACWI Index. 

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Diversifying low-basis stock