CONTRIBUTORS
The Canvas Team
We have a long history of managing factor-based investment strategies in a manner that reduces real-world costs and delivers strong investment results. Since we started managing client money, tax management has been an integral component of the portfolio management process because we understand how taxes can drag on investment results.
Canvas, was built on top of our factor expertise, sophisticated risk modeling, and proprietary SMA infrastructure, powering us to efficiently and effectively manage client accounts to individual tax parameters.
Our tax management and tax loss harvesting (TLH) process aims to reduce the impact of taxes on returns by:
- Realizing taxable gains on a long-term, as opposed to short-term, basis to benefit from the lower long-term tax rate
- Opportunistically trading preferable tax lots that lessen the net tax impact—i.e. pairing gains with losses where possible
- Avoiding wash sales
- Having an awareness of dividend payments and their tax effects
- Transitioning portfolios in a tax-friendly manner from a current to desired state (where applicable).
From a single separately managed Canvas account, these tax considerations can be applied to single-style accounts or blended allocations across assets classes, market cap, and geography while accounting for personalization such as restrictions and tilts.
The advantage of separately managed accounts
Mutual funds and ETFs are efficient vehicles for obtaining broad market exposure but are less tax-efficient than commonly perceived. Because ETF and fund investors do not own the underlying securities, they are not able to benefit from opportunistic tax loss harvesting. Even though the stock market rises in about 71% of calendar years, roughly 36% of individual stocks deliver negative returns annually. The ability to harvest these losses accrues to a significant tax asset over time—even relative to tax efficient ETFs.
Source: FTSE Russell. As of 2024.
How we tax-manage Canvas portfolios
Long-term investors desiring to change allocations are often caught between the immediate tax costs of an allocation change and the potential benefit from the trade (stronger future returns, lower tracking error, increased diversification, etc.). We often refer to this as the “tax tail” wagging the “investment dog.” Unfortunately, the tax tail can incur formidable costs. Applying tax management during a transition and on an ongoing basis helps mitigate these costs. For Canvas accounts, we apply a simple 4-step process:
- We invest the portfolio while being mindful of tax impact during the transition from an existing portfolio. That means providing cost/benefit analysis for the portfolio transition and creating a plan to transition over time if appropriate.
- We regularly evaluate the portfolio for tax loss harvesting opportunities. Parameters can be set to manage to an annual tax budget or tolerance threshold that allows us to deviate from the portfolio’s strategy model to capture as many losses as possible.
- We reinvest proceeds from tax loss harvesting with an awareness of wash sale rules and to maintain target allocations, factor tilts, and risk exposures.
- We use accumulated losses to offset realized gains, lowering or eliminating the client’s tax bill.
WHAT ARE THE RISKS?
All investments involve risk, including the loss of principal.
CANVAS® is an interactive web-based investment tool developed by O’Shaughnessy Asset Management, L.L.C. (“OSAM”) that permits an investment professional to select a desired investment strategy for the professional’s client.
O’Shaughnessy Asset Management, LLC is a Franklin Templeton affiliated company.
WF: 9438115