What a Portfolio Manager Needs to Implement a Tax–Efficient Strategy

Abstract

Successful tax-efficient investing requires discipline. It tends to appeal to sophisticated investors who have waded through the tax-blind marketing clutter and concluded that it is either not applicable or is a low probability bet. The key to success for taxable investors is having both a stable and rational investment policy and a sound investment process that the stakeholders support. The evidence continues to build that the traditional approach of not differentiating between taxable and tax-exempt investors does not serve taxable investors well. Few managers are sufficiently talented to overcome the burden of taxes. This article addresses some of the issues taxable investors will face from the perspective of a portfolio manager. It pursues the question of what does a portfolio manager need to do his job well. The discussion includes some common pitfalls and suggestions regarding learning from the mistakes of others as well as what are reasonable expectations. Taxable investors will inevitably face some challenges with which tax-exempt ones will not be familiar.