Frequently Asked Questions
What is indexing?
With indexing, don’t I just settle for average performance?
Why should investors care about taxes when evaluating performance?
Why doesn’t everyone use indexing?
Isn’t indexing just plain boring?
How does tax-loss harvesting work?
How can Aperio’s clients use the benefit of a realized loss?
Will you take instructions regarding harvesting of losses?
Will you take in single stock positions and run a completion portfolio?
Do your systems keep track of tax lots and execute trades tax efficiently?
Can you report after-tax returns as well as pre-tax?
Does Aperio employ tax aware strategies in all of your products?
Should I expect high or low turnover for an account managed by Aperio?
Does Aperio’s money management service lower my risk?
What is indexing?
Indexing is an investment strategy that seeks to match the performance of a particular asset class as measured by an index by investing in all or a representative subset of securities comprising the index.
With indexing, don’t I just settle for average performance?
Indexing provides consistently above-average returns, as shown by numerous research studies on equity mutual funds. Over the long-term the Russell 3000 Index has beaten about 65-80% of active equity managers’ pre-tax returns, depending on the time period. When comparing after-tax returns, active managers fare much worse due to their high fees and tax-inefficiency.
Why should investors care about taxes when evaluating performance?
Money managers rarely calculate after-tax returns and most portfolio management systems are not equipped to measure the impact of taxes. Yet, while high pre-tax returns help portfolio managers win performance rankings, taxable investors get to keep only a portion of that return. Studies have shown that taxable investors typically surrender 2-3% of portfolio return to federal taxes. The combination of tax drag and poor performance (active managers typically under-perform their pre-tax index benchmarks by more than 1.5%) makes active management a poor alternative for maximizing after-tax returns.
Why doesn’t everyone use indexing?
Human nature causes many investors to overestimate their abilities to “beat the market”. Though indexing has been used by large institutions since the early 1970s, it has only been in the last decade that the benefits of indexing has received significant attention by individual investors and the media.
Isn’t indexing just plain boring?
Yes.
How does tax-loss harvesting work?
Aperio routinely rebalances each portfolio to recognize tax-losses. As a basic example, if ExxonMobil is in the target index and the stock price declines, we may sell and replace the shares with Chevron, another large oil company. The net result: the portfolio continues to hold an essentially unchanged position in the risk factors of a sizable oil firm. Meanwhile, the rebalancing generates a taxable loss that can be used to offset a current or future taxable gain, either in the account or elsewhere in the client’s economic portfolio. Aperio systematically executes the search for securities at a loss in each client’s portfolio daily.
How can Aperio’s clients use the benefit of a realized loss?
Realized losses can be used by investors to offset the same value of realized gains, including gains from hedge funds, other portfolios investments or the sale of low-basis concentrated stock holdings
Will you take instructions regarding harvesting of losses?
Our strategy works best when client preferences regarding timing of tax-losses can be incorporated into our trading.
Will you take in single stock positions and run a completion portfolio?
Our strategy is specifically designed to take in single stock positions and build a completion fund around low-basis concentrated positions.
Do your systems keep track of tax lots and execute trades tax efficiently?
Yes, we keep track of tax lots using our portfolio accounting system, which is integrated with our portfolio optimization program. Trades are initiated only after our traders use our after-tax optimization program to evaluate a client’s portfolio (in which positions are identified by tax lot). Aperio measures pre-tax return dispersion by what it calls tracking error, which is a measure of the portfolios pre-tax performance versus the index. In addition to tracking dispersion, Aperio estimates the dispersion for each portfolio depending on the portfolio size, number of securities, and the nature of the index being tracked.
Can you report after-tax returns as well as pre-tax?
Aperio reports both pre-tax and after-tax returns for both the portfolio and the benchmark.
Does Aperio employ tax aware strategies in all of your products?
Aperio can employ its active tax management approach to all strategies, although we do not include this approach for non-taxable clients. Aperio has specifically designed its portfolio management system to manage for, and report, after-tax returns.
Should I expect high or low turnover for an account managed by Aperio?
Since our strategy is specifically targeted toward generating tax-losses while tracking a pre-tax benchmark, our turnover tends to be high, but for most clients almost all transactions are targeted toward generating losses with no realized gains.
Does Aperio’s money management service lower my risk?
Yes. Aperio customizes its portfolios around existing client positions. The result is a portfolio with lower risk versus the original concentrated security portfolio and superior control over taxes.