The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Asset Class Strategies

The need to develop optimal asset class strategies is discussed at length in Chapters 11 through 16. For purposes of our present discussion, the important point is that the tax treatment of the various asset classes will significantly affect the selection of strategies that will be optimal for taxable investors. Over time, for example, we know that value strategies have outperformed growth strategies. But much of the return of value investing comes from the high dividend stream typically paid out by “value” companies, and, until recently, that dividend stream was taxed at very high rates. This doesn't mean that taxable investors should have avoided value stocks and value managers, but it does suggest that the relative exposure of a taxable investor to value strategies would have been different—lower—than the typical exposure a tax-exempt investor might seek.

Similarly, taxable investors should typically hold a lower exposure to most hedge fund strategies than will tax-exempt investors,² because the short-term gains produced by most hedge funds are taxed at a very high rate. Placing hedge strategies in an IRA or other tax-sheltered account can help, of course, but most substantial investors will not hold IRAs that are of any significant size relative to their entire asset base.

Similar analyses must be pursued in each asset class to ensure that tax considerations have been taken into account—not, I hasten to add, that tax considerations should always be decisive—in ...