Strategy Overview

Taxes are a constant—they are constantly eroding returns.

As a taxable investor, ignoring this effect is tantamount to willingly accepting lower performance. While index funds and ETFs represent proven strategies to increase tax efficiency, they are only limited solutions.

For investors with sufficient assets, Aperio’s Active Tax Indexing strategy overlays sophisticated tax-loss harvesting on top of an index-tracking portfolio. Based on Aperio research, tax-loss harvesting elevates annual after-tax performance by an estimated 0.80% to 1.75%. Our work shows that this “tax alpha” is measurable, predictable, and achievable with significantly lower risk than strategies that attempt to boost pre-tax performance.

The strategy uses a separately managed account (SMA) for each client in which Aperio constructs a portfolio comprised of individual stocks that track a target benchmark. Taking advantage of the natural price movements in stocks, we continuously rebalance the portfolio to recognize tax-losses from securities that have declined. Recognized tax-losses can offset taxable gains in other areas of the portfolio, such as those gains from hedge funds, the liquidation of appreciated holdings, or the sale of private businesses. This reduction in taxes paid gives rise to an improvement in after-tax returns.

The approach offers an additional benefit beyond improving returns: portfolio customization. By utilizing portfolio optimization technology, Aperio can exclude certain stocks or industries (such as those where clients have concentrated holdings), while maintaining the core risk/return profile of the target index.

Aperio’s Active Tax Indexing strategy provides the advantages of conventional indexing—low-cost and transparent capture of equity risk premium—alongside a measurable and predictable tax alpha.

“A serious fiduciary with responsibility for taxable assets recognizes that only extraordinary circumstances justify deviation from a simple strategy of selling losers and holding winners.”

– David Swensen, Unconventional Success, 2005

Our Belief

You shouldn’t have to pay high fees to get equity returns. We don’t accept soft dollars. And we use our deep knowledge of areas like tax law and risk management to give clients great value.

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