Want to Optimize Risk and Return? Be Tax-Aware!

Many of our clients are interested in creating and managing optimized tax portfolios. But what’s the most practical way to get this done with the Axioma Portfolio Optimizer?

Picture this… an asset management company responsible for 1,000 tax-aware portfolios for high net-worth individuals, insurance companies, foundations, endowments and taxable trusts. The firm wants to withdraw investments to fund an international non-US portfolio while ensuring the withdrawal realized the least amount of gains possible and adhered to a strict investment mandate – sound difficult?  Not if you have the right solution and methodology. I won’t walk you through the entire use case here (here’s a link), but in it we discuss how a portfolio manager can fund and evaluate the tax-efficiency of an international strategy and back-test tax-sensitive optimizations using Axioma’s solutions. The Optimizer and associated API’s enable portfolio managers to leverage unique portfolio management constraints – including stock-specific directives, budget and purchase constraints, and more – to handle the asset manager’s 1,000 accounts, yet is scalable to support any amount of growth, as well as providing for easy manual intervention to account for changes in optimization strategy. The use case concludes with a number of key recommendations.

Among them:

  • When exploring tax-adjusted portfolio optimization, the portfolio manager should be aware of how to adjust the Optimizer to account for loss harvesting or a tax liability
  • It’s important to recognize how to use gross and net tax constraints when constructing a portfolio

Just because I’m so proud of it, here’s another link to the use case –  “A Case Study on the Tax-Aware Features in Axioma Portfolio.”

Walid Bandar

As Executive Director at Qontigo, Walid Bandar is responsible for product specialist teams, ensuring that clients are using Axioma’s products in the most optimal way. Prior to joining Axioma in 2015, Walid was at Northern Trust and Barra.