Grow with Tax-Managed Strategies in 2023

By Rob Battista, SVP and Managing Director, Vestmark Advisory Solutions

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Although the market is off to a positive start in 2023, its trajectory has been volatile. 2022 was the S&P 500's worst year since 2008, and with many economists predicting a challenging outlook for 2023, there is little reason to believe market volatility will lessen this year.

The silver lining is that tax-managed separately managed account (SMA) strategies can potentially offer superior after-tax performance vs. their non-tax managed equivalents, enabling asset managers to help improve investors’ portfolio outcomes over time. We believe volatile (and down) markets offer an opportunistic backdrop for tax-optimized portfolio management, since there are generally more opportunities to sell securities for a loss to offset gains and lower the capital gains tax bill.

As a result, now is an ideal time for asset managers to begin offering tax-managed SMA strategies. By focusing on adding tax alpha to a portfolio through tax management and tax optimization, times like these can offer opportunities to create solutions that can genuinely help investors perform better over the long-term.

It’s always a good time to make it personal

It’s not only market conditions that make 2023 an ideal time to offer tax-managed strategies. Investors are demanding this from their advisors. As investors seek more highly-tailored and personalized solutions, many expect their advisors to deliver strategies designed to maximize after-tax returns while also staying close to their long-term objectives and goals.

Tax-managed SMAs offer advisors a way to engage in a highly personalized discussion with a client about their individual tax scenario and design a portfolio solution that is built for their specific situation. This isn’t a one-time thing, but an ongoing dialogue that keeps the personalization front and center for the client. In addition, the illustrations – as shown below – that advisors can share with clients about the long-term significance that minimization of tax costs can have for a portfolio over time can be profound for the advisor-client relationship. This, in turn, creates loyal followers for your firm.

Differentiating Portfolios by Adding Tax Alpha to Investment Alpha

When focusing solely on investment alpha, the priority is maximizing realized gains without any consideration for the resulting tax cost to the investor. This can result in “tax drag” – a reduction in after-tax returns due to the investor paying taxes on realized gains. Studies show that managing portfolios in this way – without actively considering tax consequences – can cost an investor significantly over the life of a portfolio.

In some cases, such as in the example below, this can result in investors missing out on as much as 33% of potential returns over time.

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Even a modest improvement in annualized returns due to tax alpha can drive substantial enhancements to long-term results. An academic study in Financial Analysts Journal forecast tax alpha potentially adding roughly 1.08% per year in returns.1

Vestmark’s Capabilities

If you believe that implementing tax-managed strategies would be a great new offering for your firm, it may still sound challenging, expensive, and time-consuming to launch. That’s precisely where Vestmark can help.

Vestmark offers a solution that can help you get tax-managed offerings to market quickly-with very little up-front expense or internal resource investment on your side, and with no ongoing program fees.

Vestmark's powerful technology platform supports our investment and service teams who have the experience and scale to support some of the largest firms in the industry. As a result, you can easily launch new offerings and gain scale and efficiency, whether you have an existing SMA business or are just getting started.

The Key Takeaway

With market conditions uncertain and fluctuating, we believe there are more opportunities to capitalize on tax-managed strategies, yield better long-term results for investors, and grow your business.

Vestmark’s solution can help make this a reality.

  1. Shomesh E. Chaudhuri, Terence C. Burnham & Andrew W. Lo (2020), “An Empirical Evaluation of Tax-Loss-Harvesting Alpha”, Financial Analysts Journal, 76:3, 99-108.


There are several investment-related risks associated with tax loss harvesting. There is potential that the tax loss harvesting may:(i) negatively affect the overall performance of an investor’s portfolio; and (ii) result in a temporary overweight and/or underweight of certain sectors, securities, and/or cash in an investor’s portfolio that influences performance, and VAS will not consider any other account that the investor may have. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit.

By Rob Battista, SVP and Managing Director, Vestmark Advisory Solutions