Driving portfolio returns with tax-efficient investing

By Christopher Madpak, SS&C Technologies

Published: 18 September 2023

At a time when it’s increasingly tough to outperform the market, more and more fund managers are realising tax-efficient investment strategies are the smart, simple way to unlock operational and after-tax alpha.

Tax is one of the undeniable factors in portfolio performance. Experienced investors know tax efficiency is on the same level with asset allocation and security selection when it comes to delivering results – so they expect their managers to pursue strategies to optimise their tax positions. However, things like tax compliance and reporting are enormous responsibilities and operational burdens for investment fund managers. There’s no margin for error. Filing deadlines are unforgiving. And investors expect timely delivery of accurate tax information for their own filing purposes. 

Increasingly, fund managers realise tax accounting is not just a quarterly or annual exercise. We’re seeing more managers try to improve returns for investors through tax-aware strategies, by factoring tax impacts into their investment decisions before executing them. However, diligent tax-efficient investing requires access to real-time portfolio data and advanced analytics software. The problem is most firms don’t have it, so are unable to understand their precise tax position and the impact of their investment decisions. CPA firms, auditors and tax advisors are experts at long-term tax management; investors need more immediate access to data and expertise to optimise returns in real-time.

Today, technology can support tax-efficient investing and simplify the process of timely and accurate filing and reporting. But you must make sure the solution meets five key criteria:

1.    A single source of truth

     Too often in the tax compliance and analysis process, the tax team needs to go to multiple ledgers, spreadsheets or programmes to gather data. To avoid the resulting data redundancies and inconsistency, all portfolio and transaction data for tax reporting, compliance and analysis should be aggregated into one system.

2.    Seamless process integration

    The same applies to the performance of analytics and tax reporting. Wash sales may be done in one system, tax adjustments in another and tax reporting in yet another. The solution is to integrate every process into one system.

3.    Intelligent automation

    Today’s advanced automation technologies ensure data integrity and process efficiency – enabling decision-makers to spend less time corralling data and more time analysing it. 

4.    Advanced analytics

    Avoid stale data aggregated from multiple systems and vendors by having access to real-time tax data to inform trading, investment decisions and planning, including “what-if” scenarios. Insight is valuable year-round — not just at tax time.

5.    Investor-level tax analysis and reporting

       To communicate the tax benefits of your strategy to investors so they can understand their exposure and reporting obligations, you need access to time critical decision-support information. Having it centralised on one integrated platform makes the process much more swift and efficient.

Many managers may be so focused on the search for alpha, they miss an opportunity to add to their returns through tax-efficient investment strategies. The ability to manage a fund’s tax exposure all year-round has a number of potential benefits. It enables a firm to maximise alpha, or consistent after-tax returns in excess of designated benchmarks, through data-driven, tax-efficient investment strategies. At the same time, it can help minimise the overall tax impact on a fund and its investors while enabling the firm to meet its tax compliance obligations efficiently, accurately, and in a timely manner. Moreover, the ability to demonstrate a systematic approach to tax-efficient investing and communicate its benefits to investors can help fund managers strengthen relationships, engender loyalty and increase retention.

Fund managers who are serious about tax efficiency are turning to technology to deliver the mix of trusted data and smart analytics they need. Today’s intelligent technologies make it possible for investment managers to easily incorporate tax strategies into their everyday decision-making processes, while simultaneously mitigating the annual tax bite. Managers with a demonstrable systematic approach to tax efficient investing have a significant competitive advantage. So are you using differentiated strategies, or are you leaving money on the table?

Learn more at https://www.ssctech.com/