July 24, 2022

Asset managers websites, factsheets and performance information submitted the different databases and investment consultants consists of gross of tax returns. While reporting the pre-tax returns is simple and most convenient for the managers, investors care about their after-tax returns. While the before tax returns of a portfolio managers are good initial first step in an investor selectin process , the tax considerations suggests that investors should research and obtain information regarding the portfolio after-tax return.A common justification for reporting only the before tax returns is that mangers do not know the tax status of their clients. But this argument ignores a crucial point. Depending on their investments style, two portfolio managers with the same before tax rate of return may not generate the same after-tax rate of returns for the investors. The reason for this is that different components of the return may be taxed at different rates which creates incentives to employ Tax Loss Harvesting, TLH, strategies in order to reduce the tax liabilities of the portfolio. Yet this does not necessarily provide an answer to other important issues such as whether the active manager return high enough to deliver a return net of tax and fees higher than the after-tax return delivered by a strategy? Another being whether the increased after-tax return large enough to compensate the investor for the deterioration in the risk/return characteristics of the TLH modified portfolio?

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