Gavin Romm, Head of Separately Managed Accounts for AllianceBernstein (AB), joined Keith Black, Managing Director of RIA Channel, to discuss the tax-efficiency benefits of managing equity direct indexing and fixed income in a balanced SMA.
Separately managed accounts (SMAs) allow investors to hold a professionally managed portfolio of securities in their individual accounts. Holding investments in an SMA allows for customization and tax efficiency. By managing taxable accounts in a different manner than non-taxable accounts, investment managers can add value by being aware of the tax implications of investment strategies. Taxable investors should evaluate investment returns on an after-tax basis than on the basis of total return.
Romm notes that the fastest-growing strategy held in SMAs is the direct indexing of equity portfolios, which has increased by 60% in the last decade. The second fastest-growing strategy, at 20% over the last decade, is municipal bonds, which is also a tax-efficient strategy. AllianceBernstein is the fifth largest manager of municipal bond SMAs as part of their $70 billion muni portfolio. There are a number of challenges to municipal tax optimization, including low liquidity and high transaction costs, that AB seeks to overcome with tools and technology.
Investors can mix equity direct indexing and bonds in a balanced SMA. In equity direct indexing, an index-like portfolio is held while specific stocks are sold whenever a substantial tax loss opportunity arises. There are benefits to holding both stocks and bonds in a tax-aware SMA strategy. Hard rebalancing is a systematic way of determining when to rebalance, while soft rebalancing can be accomplished by purchasing bonds with stock dividends or stocks with bond maturities and coupons. Tax-aware rebalancing strategies can add up to 16 basis points per year in tax benefits.
While most equity direct indexing solutions seek to track the performance of passive indices, AB also offers the AB Strategic Research Balanced Muni Portfolio (SMA) designed for tax efficiency in an actively managed equity and municipal bond portfolio.
AB has launched the SMA Design Center as a digital portal where advisors can customize an account to choose duration and index exposures while excluding sectors or issuers.
WEBCAST – The Active Edge: Tech-Enhanced Muni Bond Portfolios
Volatility has increased substantially across the municipal bond market—in fact, monthly return variability grew twofold in just the last four years as compared with the prior 10 years. This heightened volatility has created dislocations and opportunities, but only for investors with the right portfolio design and technology tools to exploit them. To add to an investor’s challenge, the municipal trading landscape has become increasingly fragmented due to the persistent rise in the popularity of separately managed accounts (SMAs), making it more difficult for managers to be active.
Register now to join a panel of experts from AB for a wide-ranging conversation on the changing nature of municipal investing, including:
- How active management can help exploit current market opportunities across the curve and credit spectrum and where tax-efficient inflation protection may fit in a portfolio
- Ways technological innovation can help active managers take advantage of volatility and add tax efficiency in today’s changing marketplace
- How to improve client outcomes through the marriage of quantitative analysis and fundamental credit research
- Insights into potential changes to tax policy as well as an update on the California wildfires, and how crisis often breeds opportunity
Accepted for 1 CFP® / IWI / CFA CE Credit