Download Presentation: long-term Impact of Trend Following on Taxes

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Question mark at end of hallwayThe traditional view of tactical asset management is that risk management and tax efficiency do not mix well. However, when systematic investing rules are constructed thoughtfully, trend following strategies can actually account for both.

To provide an example, we ran a simulation that uses model performance to test the impact of trend following on unrealized capital gains.

In our view, the data showed that since 2000:

  • Most of a buy-and-hold portfolio was made of up unrealized gains. Therefore, a financial advisor looking to make any change to the portfolio or strategy is likely to sustain a substantial taxable event.
  • On the contrary, the trend-followed portfolio, which had a process for systematically harvesting losses (and some gains), maintained a more palatable amount in unrealized gains.
  • A trend-following strategy has the potential to generate tax alpha over longer-term time horizons.

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Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.

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