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Measuring Tax Alpha
Aug 15, 2024
Wealth managers can use the concept known as tax alpha in conjunction with their existing performance-attribution framework to explain a client’s after-tax performance. Often the framework requires their making several assumptions with no clear guidance about how to specify them.
We propose two frameworks for the calculation of tax alpha — a shadow benchmark and an event-based approach — to provide transparency around an after-tax attribution calculation. The main difference between them is the choice of the reference portfolio. The approaches also differ in how they model client-directed actions, dividend payments and benchmark rebalancing. We further develop two versions of the shadow-benchmark approach. The following exhibit compares the approaches.
©2024 With Intelligence. Republished with permission from the Journal of Wealth Management, from: Laszlo Arany, Laszlo Hollo, Joseph Wickremasinghe and Raina Oberoi, “Measuring Tax Alpha,” Journal of Wealth Management 27, no. 2 (fall 2024).
Comparing how well the approaches meet the reference-portfolio assumptions
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Research authors
- László Arany, Executive Director, MSCI Research
- Laszlo Hollo, Executive Director, MSCI Research
- Joseph Wickremasinghe, Executive Director, MSCI Research
- Raina Oberoi, Managing Director, MSCI Research
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