Tax-Efficient Portfolio Transition: A Tax-Aware Relaxed-Constraint Approach to Switching Equity Managers

The Journal of Wealth Management, Forthcoming

47 Pages Posted: 13 Mar 2020 Last revised: 16 Sep 2020

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Stanley Krasner

AQR Capital Management, LLC

Date Written: February 26, 2020

Abstract

For a taxable investor with a highly appreciated equity portfolio, replacing the portfolio manager is likely to trigger substantial tax liabilities. We focus on transitioning an appreciated equity portfolio to an actively managed strategy. We compare transition from an appreciated portfolio to a traditional long-only tax-agnostic equity strategy with transition to equity strategies utilizing more advanced portfolio management techniques such as tax-aware rebalancing and relaxed-constraint portfolio construction. We find that transition to a tax-aware relaxed-constraint strategy results in both high implementation efficiency and tax efficiency both during and after the transition. As a result, a tax-aware relaxed-constraint post-transition strategy significantly outperforms a traditional tax-agnostic long-only strategy in its ability to preserve and grow the investors after-tax wealth over the long term. We also discuss risks and limitations of the tax-aware relaxed-constraint approach.

Keywords: Manager Replacement, Portfolio Transition, Appreciated Stock, Capital Gains, Tax-Aware Portfolio Management, Relaxed-Constraint Strategies

JEL Classification: G11, G51, H24

Suggested Citation

Sosner, Nathan and Krasner, Stanley, Tax-Efficient Portfolio Transition: A Tax-Aware Relaxed-Constraint Approach to Switching Equity Managers (February 26, 2020). The Journal of Wealth Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3545001 or http://dx.doi.org/10.2139/ssrn.3545001

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Stanley Krasner

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

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