Equity Portfolio Structure and Design in the Presence of Taxes

Abstract

The author addresses the issues selecting the policy normal equity mix among large and small capitalization stocks, or a value or growth style, together with the method of implementing this, that is through an active or a passive investment process. Focusing on the taxable investor, the author argues that equity portfolio structure is a particularly important subject in this case. Discussing the four decision points at which some tax may be incurred, he proposes five broad recommendations, which view the design of the equity portfolio from a long-term perspective. Thus, he suggests that taxable investors should reject conventional wisdom and rather opt for a broad core equity investment that is passive and tax managed, allowing for concentrated active managers with relatively small portfolios that are unconstrained with respect to risk and are not too focused on taxes.