Value of Tax Alpha

The Value of Tax Alpha

Parametric’s tax-managed Custom Core strategies are designed for investors who want flexible, tax-efficient equity index exposure. The goal of a tax-managed Custom Core strategy is twofold: first; we strive to construct a portfolio of individual stocks that provides close tracking to a desired exposure, or benchmark, on a pre-tax basis. Next, we work to outperform the benchmark on an after-tax basis by providing a source of realized capital losses, which can be used to offset realized capital gains through a continual, active tax-management process. “Tax alpha” is how we quantify the value of this active tax-management.

In the following analysis, we explore the two key drivers of tax alpha—the overall market return and cross-sectional stock volatility. Specifically, we use simulations to vary certain parameters while holding others constant. We also examine the expected variation of tax alpha as it relates to the age of the portfolio; and we make the point that while opportunities to tax-loss harvest over time may diminish, the value of the tax deferral compounds. While every client’s circumstances will be unique, our findings here are largely consistent with our three decades of experience running tax-managed Custom Core accounts for our clients.

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Tim Atwill
Tim Atwill, Ph.D., CFA

Head of Investment Strategy

 

 

Tim Atwill
Tim Atwill, Ph.D., CFA
Rey Santodomingo

Rey Santodomingo, CFA

Director of Investment Strategy – Tax Managed Equities
Rey Santodomingo

Rey Santodomingo, CFA

Martha Strebinger

Martha Strebinger

Investment Strategist

 

 

Martha Strebinger

Martha Strebinger

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