The Value of Tax Alpha
Parametric’s tax-managed Custom Core strategies are designed for investors who want flexible, tax-efficient equity exposure that provides many of the benefits of traditional index-based investing. The goal of a tax-managed Custom Core strategy is to provide broad-based, diversified exposure to a client-selected equity market segment (e.g. U.S. Large Cap). Each portfolio is managed to outperform, on an after-tax basis, an agreed upon benchmark. Portfolio management techniques are employed to reflect important client specific characteristics which includes the maximizing of after-tax return, ESG and related considerations, and income considerations. “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.