Option-Enhanced Tax-Smart Portfolio Value

Forthcoming in the Journal of Portfolio Management - April 2022

The right to execute a tax-beneficial transaction is an investor-specific option. The tax-smart value, which provides a rigorous basis for reporting after-tax performance to the investors, includes the intrinsic value of the tax option. Missing from the tax-smart value is the time value of the option, which is an indicator of expected performance.

This paper demonstrates how managers can maximize after-tax performance by structuring portfolios which are rich in tax optionality using two features: restarting the short-term clock, and strategic security selection. The results confirm that portfolios rich in tax optionality are expected to outperform those which are less so.

Download the article text here.

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