Tax management is a frequently underappreciated investment technique—particularly within longer-term investment accounts. Is it really important to consider tax savings in long-term investments? Simply, yes. Equity investors can give up approximately 2% of savings on an annual basis by paying more than they need to on taxes. So choosing not to incorporate tax considerations may be equivalent to giving up 2% of your clients’ earnings—every year.
But not all tax management is alike. In all cases, the goal is to maximize after-tax returns. Different asset managers get to “max after-tax” through various techniques, which in turn yield very different results. Choosing to go the simplest route to tax management, investors may still give up several percentage points a year-- simply by poor timing. A broad statement: the simpler and less frequent the management, the less you may save on your taxes. And the corollary: you generally save more with a more sophisticated approach.
Timing is essential to an effective tax management strategy. An active approach can take advantage of more, and more timely, tax loss opportunities. Continual rebalances uncover additional occasions for tax loss harvesting. Annual or less frequent formulaic rebalance schedules are ill-equipped to consider the benefits of specific stock sale dates. As such, losses aren’t harvested at precisely the right time. Market opportunities are squandered.
Formulaic tax harvesting can also put your clients’ portfolio at risk from an investment perspective. A simple tax sweep takes place on a set schedule. It ignores the investment risks potentially set in motion by that timing. Investments sold for tax purposes on an annual basis may increase portfolio risk and/or decrease returns. Over time, such anomalies can cause significant deviations from the index.
Even if your clients’ tax harvesting opportunities are concentrated within a single sector, formulaic harvesting can introduce industry risk into their portfolios. This, too, can skew their investments from the benchmark over time.
As the chart below suggests, with smart tax-loss harvesting, a good manager can boost after-tax returns when the market goes up, while allowing for a more constant post-tax return in down markets.
A more sophisticated tax management strategy will properly balance tax with investment opportunities, considering the appropriate timing for both.
Traditionally, clients are charged more for strategies that take tax complexity into account. This makes sense, since annual algorithms are easier to run. But PGIM Quant Select offers sophisticated, active tax management for no additional fees.
PGIM Quant Select offers the clients of wealth managers more than a cursory glance at their capital gains. They get carefully timed purchases and sales, combined with a multi-factor investing approach that considers risk and return along with tax management opportunities.
While many tax-aware options sweep portfolios on an annual basis, PGIM Quant Select harvests losses more often. Accounts are reviewed on a daily basis, and rebalanced frequently, so investors can benefit from rapid market swings and changes in pricing. They can also sell out of current holdings gradually, rather than once a year—to take advantage of expedient harvesting opportunities that consider their investment strategy holistically.
With PGIM Quant Select, your more generous clients can also choose to share their accumulated wealth with the less fortunate, by donating tax lots with the most capital gains to charitable organizations. And since our active management helps reduce tax burdens on an ongoing basis, those contributions can continue from one year to the next.
Our separately managed account platform’s personalized options span more than tax management. Custom ESG is also available, with proprietary guidance provided by QMA, an asset manager with decades of institutional asset management experience. We look at ESG across industries, rather than focusing on a limited number of names to exclude from the portfolio. As with our active tax management offering, PGIM Quant Select’s ESG process carefully balances your client’s sustainability goals with investment risk and returns.
PGIM Quant Select combines ESG and tax management through multi-factor investing to help you deliver best-in-class active investing to retail clients, with customizable options traditionally reserved for large institutions.