Tax Loss Harvesting Newspaper Headlines

Tax-Loss Harvesting: What Were the Headline Opportunities in 2017?


Broad-market volatility (like we experienced in late January and early February) definitely creates opportunities for tax-loss harvesting—and in the midst of market turbulence, chances to harvest tax losses can be a silver lining. While broad-based volatility and weak markets are helpful for generating tax alpha, these conditions aren’t always required. For example, 2017 was a tremendously strong year for markets across the board, but a wide variety of opportunities for tax-loss harvesting were still present, stemming from weakness in particular sectors.

Tax-loss harvesting in 2017: No lack of opportunities despite strong headline numbers

2017 was a remarkably strong year for U.S. large-cap stocks, with the S&P 500® Index gaining 21.8%. For context, that is almost twice the index’s return in 2016 and more than triple its annualized 20-year return of 7.2%. What wasn’t reported in the headlines, however, was that more than one-third of the index constituents showed a year-to-date loss of more than 10% at some point. In fact, 90 constituents showed a loss of greater than 20% at some point in the year! 

As shown below, the overall index’s strong return can mask weakness in its subsets:

 Cumulative Return for 2017

Source: Parametric, Factset
For illustration purposes only. Not a recommendation to buy or sell any security. It is not possible to invest directly in an index.

If we examine the individual sectors, we see that energy had a tough time during 2017. As shown in the chart above, the sector experienced cumulative losses of more than 16% through August as crude oil prices declined. Subsequently, crude oil prices recovered dramatically, and energy stocks followed suit, rallying over the remainder of the year to eventually get back to even by year-end. 

Similarly, the telecommunication services sector provided a wild ride over the course of 2017. Its cumulative losses amounted to more than 13% in mid-July as large index names, such as Verizon and AT&T, faced challenges in the wireless business. The sector recovered afterward, only to decline further in November, bringing cumulative losses to nearly 16%, before rapidly climbing out of this performance hole to end the year at near breakeven. 

Did your tax strategy miss the opportunities in energy and telecom?

Both sectors demonstrate the dangers of waiting until year-end to harvest losses. Oftentimes, losses available intra-year are later erased. At Parametric, our systematic tax loss-harvesting process captured losses as the securities in these sectors marked their lows for the year, prior to their year-end recoveries. 

The bottom line

The general strength of the overall market can mask pockets of weakness, temporary or permanent, and give a mistaken impression that tax loss-harvesting opportunities are sparse. Despite the strong market returns in 2017, several sectors had performance challenges that led to marked declines intra-year, followed by recoveries by year-end. Our consistent year-round tax management process allowed us numerous opportunities to harvest losses, despite the strength of the overall market return during 2017.

Potential Parametric solution

One of the primary drivers of tax efficiency in a tax-managed Custom Core® account comes from tax-loss harvesting. Parametric portfolio managers will sell the majority of a basket of securities at a loss and simultaneously replace it with a different basket of purchased securities. The trade results in net tax losses for the client, which can offset capital gains realized by other parts of the portfolio, such as hedge funds.

Rey Santodomingo

Rey Santodomingo, CFA, Managing Director of Investment Strategy

Rey is responsible for all aspects of Parametric’s tax-managed equity strategies. As one of the primary strategists for Custom Core®, he works closely with taxable clients and advisors to design, develop, and implement custom portfolio solutions. Prior to joining Parametric in 2008, Rey was a vice president in product management at MSCI Barra. He earned an MA in financial engineering from the University of California, Berkeley, and a BS in chemical engineering from the University of California, Santa Barbara. A CFA charterholder, Rey is a member of the CFA Society of Seattle and a prior board member of the CFA Society of Seattle. He has also served as an adjunct instructor at Seattle University's Albers School of Business and Economics.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.