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Tax-aware investment management has captured increasing attention in the investment literature since the mid-1990s. The timing of this increasing attention is curious, because taxing investment returns is a phenomenon that pervaded most of the 20th century following the passage of the Sixteenth Amendment to the Constitution in 1913. The amendment introduced a permanent, progressive income tax that quickly became a centerpiece of U.S. fiscal policy. Despite a long history of taxing investment returns, most modern portfolio theory is grounded in a pretax framework. Only until fairly recently have thought leaders begun to seriously consider the impact that taxes have on portfolio management generally.
An interesting question becomes whether recent academic work leads the implementation of tax-aware investment techniques in practice or whether industry is leading the academy. If industry leads the academy, researchers might find the investment practices of the tax-aware portfolio manager a useful starting point in developing more robust hypotheses and fertile ground for more advanced ideas. If the literature leads common practice, researchers might consider whether their ideas are being poorly communicated to industry or whether those ideas face insurmountable barriers that prevent them from being widely implemented.
This article examines the investment behavior of investment managers that manage taxable accounts as a first step to understanding how widely practitioners have adopted basic tax-aware investment management practices. Rather than focus on nuances or the specifics of the practitioners' approach to, say, tax loss harvesting or after-tax asset allocation, the article examines how widely these practices are adopted generally.
The following section outlines some of the primary tax-aware investment management themes that have emerged from the literature in the last 15 years or so, such as tax-adjusted asset allocation, holding period management, tax loss harvesting, and taxadjusted portfolio measurement and reporting. The third section describes the survey methodology and sample. The fourth section outlines the results. We provide some interpretation and discussion in the fifth section, and the final section summarizes and concludes with thoughts for subsequent study.
TAX-AWARE INVESTMENT LITERATURE
It is beyond the scope of this article to provide an exhaustive review of the tax-aware investment literature, although Jennings and Reichenstein [2006] review the private wealth management literature generally, paying particular attention to tax-sensitive investment management practices. Recently, several other...