Asset Location—The Critical Variable

Abstract

The author explores the issue of asset location, focusing more specifically on the long run return and risk implications of using fewer or more asset locations. The article is structured in the form of a case study, which first introduces a hypothetical wealthy family and then discusses the various holding structures from which the family may select to achieve their investment goals more effectively. The author presents three possible solutions, comprising one, three and seven individual locations, identifying the principal portfolio composition differences and their implication on expected investment characteristics. The article illustrates the importance of a careful analysis of the various location options, showing that the seven-location portfolio provides both higher expected after-tax returns, lower volatility and lower initial portfolio diversification costs. The author concludes with a brief discussion of the concept of dynamic asset location, which allows an investor to enhance the tax-efficiency of his or her portfolio further, by using the potential to effect transactions between a grantor and a defective trust.