Tax-Smart Portfolio Valuation and Performance Measurement

11 Pages Posted: 24 Mar 2021

See all articles by Andrew Kalotay

Andrew Kalotay

Andrew Kalotay Associates, Inc.

Date Written: March 24, 2021

Abstract

The reported performance of a portfolio is consequential for both investors and managers. One component of the return calculation is the beginning and ending value of the portfolio. The standard in the industry is to calculate portfolio values from the market prices of the constituent securities. Assuming that the portfolio can be liquidated at these prices, in the absence of tax considerations the market value accurately represents the true value of the portfolio, and therefore the resulting measure of performance is uncontroversial.

But what if the portfolio is taxable? Neither the market value nor the liquidation value accurately represents the true worth of a taxable portfolio. However, accurate values are essential to calculating the performance of mutual funds and ETFs. This is especially true for tax-exempt muni portfolios — interest is tax-free, but capital gains are taxable. We will explore three alternatives to pretax value: liquidation value, hold value, and the larger of these two, defined as tax-smart value. We recommend the tax-smart value to measure the performance of an actively managed portfolio.

Keywords: Taxable portfolio, after-tax return, capital gains, liquidation value, hold value, tax-smart value, tax-exempt bond, de minimis discount

JEL Classification: G11

Suggested Citation

Kalotay, Andrew, Tax-Smart Portfolio Valuation and Performance Measurement (March 24, 2021). Available at SSRN: https://ssrn.com/abstract=3811452 or http://dx.doi.org/10.2139/ssrn.3811452

Andrew Kalotay (Contact Author)

Andrew Kalotay Associates, Inc. ( email )

61 Broadway
New York, NY 10006
United States

HOME PAGE: http://www.kalotay.com

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