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Episode 3: The ‘Tax Alpha’ Opportunities That Volatility Creates
Head of Tax-Advantaged Equity Mary Lukic outlines how volatility can support more “tax alpha” for tax-efficient equity strategies and create opportunities to implement these strategies, in an interview with CIO and CIO of Global Equities Mike Hunstad, Ph.D.
- Your Volatility Roadmap
- Institutional Investor
Key Points
What it is
Elevated volatility can create conditions for more efficient loss realization, offering the potential to increase tax alpha through active equity management.
Why it matters
With tax-loss harvesting, institutional advisors may be able to reduce tax drag and support attractive after-tax outcomes when market conditions allow for active rebalancing.
Where it's going
Ongoing volatility could support more frequent harvesting opportunities, especially for strategies designed to minimize long-term impact.
Mike Hunstad (MH): So there's been a lot of equity market volatility lately. And while it's always difficult to manage portfolios in a volatile environment, one silver lining, perhaps, is the ability to generate tax losses, reduce the tax burden of the portfolio. And something we refer to as tax alpha.
So Mary, maybe you can tell us a little bit about how does the current market volatility impact investors that are already invested in tax efficient products.
Mary Lukic (ML): Yeah. So market volatility as well as market declines help increase the opportunities to realize losses in client portfolios and adding after tax outperformance. What's really important during this time of increased volatility is that tax managers are looking at their portfolios daily, and they're trading on a regular basis. We want to capture those opportunities that the market provides. And we did that on our platform.
We traded 20% more in terms of the number of buys and sells we executed. And that resulted in about a 90% increase in the amount of losses that we captured for clients. This is reducing the clients tax burden, and it can aid in wealth accumulation over time.
MH: So what about investors that are not currently invested in tax efficient strategies?
ML: So for any clients who might be considering transitioning assets into a tax managed account, now might be a good time to take a look, because those, the value of those may have decreased, allowing for a lower tax burden in transitioning the assets. If you have concentrated stock such as single stock positions, ETFs or mutual funds, you might also be facing a lower cost of diversification.
If you had a tax managed portfolio alongside those concentrations, you might take a look to see if you've had any capital losses realized in the recent times so that you can help offset any gains in reducing those concentrations.
MH: So, Mary, the big question during this period of elevated equity market volatility, was your team able to generate tax alpha?
ML: Yes. We did see significant tax alpha generated across our client portfolios in the first quarter relative to the previous two quarters. And the goal of a tax advantaged equity strategy is to provide pretax returns that looks similar to the equity benchmark, while adding after tax value over the long term. In any market environment. Market volatility creates additional opportunities for us to be able to generate tax losses to increase value for clients over the long run.
MH: Thank you Mary. No one wants market volatility. But the silver lining here is the ability to harvest losses and generate that tax alpha.
ML: Thanks, Mike.
Main Point
Leveraging volatility to optimize tax efficiency
Elevated volatility may support more frequent and effective tax-loss harvesting, potentially increasing tax alpha. For institutional investors, active realization and rebalancing during market dislocations may help reduce tax drag and support more efficient outcomes over time.
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