With Direct Indexing, Process Matters

Kevin Maeda explains how process is a key differentiator between direct index providers, particularly for clients diversifying concentrated stock positions.

As a panelist for the Direct Indexing Master Class on Asset TV in July, Kevin Maeda discussed some of the differences between Natixis Investment Managers Solutions and other direct index providers. He also explained how direct indexing can be used to diversify concentrated stock positions based on an investor’s preferences and tax situation. Highlights include:
  • Direct index providers pursue two main objectives: maximizing tax efficiency and tracking an index.
  • Providers who prioritize tracking error generally use more stocks in their portfolios.
  • Providers who prioritize tax efficiency, like Natixis Investment Managers Solutions, use more compact portfolios.
  • While it is somewhat counterintuitive, the relative tax alpha as a percent of assets is about the same, regardless of portfolio size.
  • Natixis is willing to take on higher tracking error risk in order to capture all the tax alpha available.
  • Maeda points out that “we will take concentrated stock into the portfolio, even if it starts off at 100% of the account, but we do recommend that [clients] allow us to at least start transitioning the portfolio”.
  • Clients can choose to transition a concentrated position over a finite period of any length, and that period can change over time.
  • Alternately, clients may choose to fund the account with cash in addition to stock, build a portfolio around that, and then diversify over time using a capital gains budget.
Investing involves risk, including the risk of loss.

Natixis Advisors, LLC provides advisory services through its division Natixis Investment Managers Solutions. Advisory services are generally provided with the assistance of model portfolio providers, some of which are affiliates of Natixis Investment Managers, LLC. Natixis Advisors, LLC does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decision.