Portfolio manager points to tech sector as area ripe for tax-loss selling consideration
For many investors, the year-end winter chill is a cue to revisit portfolios and do some much-needed tax-loss harvesting. But one top investment advisor is vehemently against that approach.
“I think investors will probably be wiser to take their losses as soon as they become an issue, rather than wait for the season,” says Wolfgang Klein, portfolio manager and senior vice president at CG (former Canccord Genuity). “You’re better off exiting early.”
As a discretionary portfolio manager, Klein is able to make decisions on tax-loss harvesting, among others, on behalf of his clients. While he rarely engages in tax-loss selling, he saw and seized the opportunity to do so for some tech names earlier this year.
“I did trip off a lot of gains, which gave me a reason to sell those stocks,” he says. “But more importantly, I didn’t think fundamentally that I should stay in those names. I believe the sector is going to remain out of favour for an extended period of time.”
The struggles in the tech sector this year have been well-reported through headlines around missed earnings, mass layoffs, and public apologies from CEOs of once high-flying firms. Despite the dour mood around technology, some are standing by the space, believing that today’s beaten-down prices may represent bargain opportunities for the future.
But the world is set to enter an era of higher inflation, and rising interest rates are taking a bite out of the future earnings of growth firms. Against that backdrop, Klein thinks the days of mega-cap tech leadership in the stock market may be numbered, and that there’s still a lot of excess money to be squeezed from some of the largest tech names.
“I think the baton has to be passed on. It’s a value environment, but I don’t know if the world’s positioned for value just yet,” he says. “I think money is rotating, so I’m positioning my portfolio for more of a value-oriented tilt.”
Just as there’s no perfect way to time a market bottom, Klein expects the decline of tech will not be straightforward. He recalls how the NASDAQ declined from its March 2000 peak for several months, then went through a relief rally only to later descend even further.
“If we get a relief rally, which we could be having now, investors looking to do tax-loss selling in tech might harvest less of a loss,” he says.
Rather than selling stocks that have taken losses purely for the tax-harvesting benefit, Klein urges investors to look at their fundamentals. If they’re fundamentally positioned for gains, he says, it’s better to buy into the weakness rather than add to the selling pressure. Selling too soon, he adds, also raises the risk of an investor getting whipsawed later on as they buy back into a recovery at a higher price.
“If you’re thinking about tax-loss selling, it should be something you’re going to sell anyway. And you might as well do it before year-end,” he says. “If you don’t cut your losses, they’ll cut you.”