Is Your Alpha Big Enough to Cover Its Taxes?

Research Affiliates

Rob Arnott

Research

27 Pages

Rob Arnott looks back at his famous paper, which says taxes are the single largest source of portfolio management inefficiency, often far outweighing the benefits of active management. He concludes that typical alpha generated by active managers is rarely large enough to compensate for the capital gains taxes triggered by their trading activity.

Key Takeaways

Tax drag matters: Taxes can outweigh other visible investment costs, making after tax results a critical part of fund evaluation.
Better fund signals: Lower turnover and lower dividend yield were associated with stronger tax efficiency in future periods.
Structure helps: Smart beta and ETF based approaches showed potential tax advantages versus many traditional active funds.
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