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Tactical and Tax Aware GTAA

Michael Aked, Robert Arnott, Paul Bouchey, Tianchuan Li and Omid Shakernia
The Journal of Portfolio Management Multi-Asset Special Issue 2019, 45 (2) 23-37; DOI: https://doi.org/10.3905/jpm.2018.45.2.023
Michael Aked
is director of research, Australia, for Research Affiliates, LLC, in Newport Beach, CA
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Robert Arnott
is founder and chairman of the board for Research Affiliates, LLC, in Newport Beach, CA
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Paul Bouchey
is chief investment officer for Parametric Portfolio Associates in Seattle, WA
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Tianchuan Li
is a researcher at Parametric Portfolio Associates in Seattle, WA
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Omid Shakernia
is senior vice president, asset allocation, for Research Affiliates, LLC, in Newport Beach, CA
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Abstract

Global tactical asset allocation (GTAA) has rarely been associated with tax-aware investing. Although GTAA can improve returns over a buy-and-hold strategy, more tactical trading (when profitable) typically leads to higher tax bills. If investors are careless about tax management, the GTAA alpha can easily be swamped by increased taxes. In response, many investors have been quick to embrace passive buy-and-hold strategies for which low turnover results in a lower tax bill. However, rather than abandoning GTAA in favor of lower taxes, investors can apply well-documented tax management methods of loss harvesting and tax-lot selection in their tactical trading. The authors show that investors can capture most of the benefits of GTAA, and even provide a boost to their after-tax returns, if they view the proactive management of tax consequences as an important part of the quest for asset allocation alpha.

TOPICS: Portfolio construction, legal/regulatory/public policy

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The Journal of Portfolio Management: 45 (2)
The Journal of Portfolio Management
Vol. 45, Issue 2
Multi-Asset Special Issue 2019
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Tactical and Tax Aware GTAA
Michael Aked, Robert Arnott, Paul Bouchey, Tianchuan Li, Omid Shakernia
The Journal of Portfolio Management Dec 2018, 45 (2) 23-37; DOI: 10.3905/jpm.2018.45.2.023

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Tactical and Tax Aware GTAA
Michael Aked, Robert Arnott, Paul Bouchey, Tianchuan Li, Omid Shakernia
The Journal of Portfolio Management Dec 2018, 45 (2) 23-37; DOI: 10.3905/jpm.2018.45.2.023
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  • Article
    • Abstract
    • THE TACTICAL MODEL
    • PORTFOLIO CONSTRUCTION
    • TAX MANAGEMENT
    • AFTER-TAX EXCESS RETURN DECOMPOSITION
    • OUR FINDINGS
    • ADAPTING TO DIFFERENT INVESTOR PREFERENCES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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