Municipals Tech and Innovation Fixed Income White Paper

The Next Generation of Fixed-Income Tax-Loss Harvesting

How Tech-Driven Tax Optimization May Turn Losses into Gains

Aug 30, 2022
2 min read
A verdant field of ripening crops ready for harvesting. In the distance, a mountain range and the early glow of sunset.

What You Need to Know

Taxes matter to a bond investor’s bottom line. That’s why we’ve brought a digital, high-speed solution to fixed-income active tax management. By continually optimizing separately managed accounts to identify opportunities to harvest losses and by efficiently reinvesting the proceeds in tax-favorable opportunities, automated tax management has the potential to add more than 90 basis points to after-tax returns in some years, according to our in-depth analysis.

Download PDF
92 b.p.
Tax alpha, 2021, in initial investment year
with systematic tax optimization
1.5%
Cumulative tax alpha, 2018–2021,
with systematic tax optimization
1.2%
Cumulative advantage, 2018–2021,
of continual, digital tax-loss harvesting versus December-only, manual harvesting
Author
Gavin Romm, CFA | Head—Separately Managed Accounts

Today’s investors increasingly demand active tax management of their separately managed accounts (SMAs). And they should: Taxes matter to an investor’s bottom line. Our research shows that technology-driven, systematic tax optimization can help minimize an investor’s tax burden and materially boost after-tax returns.

Unfortunately, few fixed-income managers are up to the challenge. While many equity solutions already consider automated tax-loss harvesting essential, the bond manager who employs tech-driven tax optimization is a rare breed. The vast majority of bond managers provide only limited, manual and unsystematic tax management—and often only in the last months of the year. Others provide no tax management at all. And that leaves significant after-tax dollars on the table.

That’s why we’ve developed a high-performance digital engine for the active tax management of bond portfolios. AB’s proprietary technology, AbbieOptimizerTM, digitizes the municipal-bond portfolio construction process and enables a tax-loss harvesting strategy through sophisticated optimization, pricing, liquidity and execution tools.

By continually optimizing accounts to identify opportunities to harvest losses and by instantly reinvesting the proceeds in tax-favorable opportunities, automated tax management maximizes after-tax results. And that’s what all investors deserve from their fixed-income managers.

Past performance, historical and current analyses, and expectations do not guarantee future results.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Gavin Romm is a Senior Vice President and Head of Separately Managed Accounts (SMA). He is responsible for the management and strategic growth of AB’s SMA business across fixed income, equity and multi-asset. This includes the construction and ongoing evolution of AB’s deeply customized, technology-driven SMA investment platform, which delivers bespoke solutions to investors across a variety of commercial channels. Previously, Romm was a senior leader responsible for fixed-income technology and data initiatives, driving innovation through data science, quant and automation to enhance AB’s investment decision-making capabilities. Prior to that, he was a portfolio manager and member of the High Yield and High Income portfolio-management teams. Before joining AB in 2013, Romm was a fixed-income specialist at Bloomberg, where he developed and supported fixed-income cash bond and derivative analysis tools. He holds a BA in economics with a minor in entrepreneurship from Trinity College and is a CFA charterholder. Location: New York