A Tax-Aware Approach to the Management of Multiasset Class Portfolios

Abstract

This article discusses a methodology for managing a mutliasset portfolio in a tax-efficient fashion. The author starts with the need to manage a taxable portfolio as a whole and avoid a focus on the optimization of individual asset classes sub portfolios. This approach involves combining individual physical securities and derivative instruments, applied to a global equity portfolio. A variety of physical and hybrid strategies are tested to evaluate the validity of the testing methodology and the value potentially added by hybrid strategies. The article concludes that investors unwilling to consider using derivative securities should lean in the direction of passive or almost passive strategies, as very little of the manager's pretax value-added seems to persist in an after-tax basis. By contrast, it demonstrates that a judicious use of derivative instruments together with physical securities may be able to preserve a meaningful fraction of the manager's alpha and thus justify confidence in active investment management strategies.