BNY Mellon: More Family Offices Could Benefit From Tax-Managed Strategies

Some family offices say the strategies are too complex. BNY Mellon disagrees.

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Tax-managed investment strategies — ones that boost after-tax returns by generating losses that offset gains — are already wanted by family offices. BNY Mellon says they should be even more popular.

When it comes to tax-managed equity (TME) strategies, 43 percent of family offices are already using them, according to an inaugural report by BNY Mellon Wealth Management based on a survey of 189 family offices. The respondents spanned the globe and the majority managed an investment portfolio worth between $500 million and $5 billion.

Although many family offices are using TME strategies, the percentage could be higher, BNY Mellon says. Thirty percent of respondents said that they considered TME strategies but chose not to use them. Meanwhile, 27 percent have not considered them at all.

Seventy-one percent of offices perceive tax-managed strategies as too complicated, the most common drawback. But America’s oldest bank argues the strategies aren’t as intricate as some investors think and that a greater number of family offices stand to benefit form them.

“With many professionals planning to increase exposure to public equity and also to public fixed income, there is scope for some investors to further improve tax efficiency through TME and tax-managed fixed income (TMFI) integration,” the BNY report says.

While interest rates were higher, family offices expanded their allocations to fixed income and 34 percent of them plan to invest more in it, according to BNY Mellon’s report, making tax-managed fixed income (TMFI) strategies especially interesting right now.

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“The uncertain path of inflation and monetary policy, high government debt and geopolitical tensions have led to greater interest rate volatility and investors can capitalize on this by using tax-loss harvesting to improve after-tax returns,” the report said. “A rise in interest rates after a bond is acquired will typically result in an unrealized loss in the position, allowing the investor to sell to harvest the loss, while simultaneously buying another bond with similar characteristics. The realized losses can then offset gains elsewhere in the investor’s bond portfolio or other investments.”

Tax-managed fixed income is also highly relevant to cash management. Most surveys about family-office allocations show they keep about 10 percent in cash. Forty-one percent of family offices told BNY they use passive strategies to manage that cash management (meaning they rely on cash equivalents), but almost a third use more sophisticated cash bucketing techniques to increase yield, and 28 percent blend both tactics.

Another sign of a gap between the tax efficiency family offices say they want versus what they are doing to achieve that: Offices say that tax planning remains a priority. When asked about the relevancy of three industry trends — the safety and security of assets; tax-efficient investing; and ESG — 95 percent said the safety and security of assets was either “relevant” or “extremely relevant.” But the other trends weren’t far behind; 90 percent said the same about tax-efficient investing and 83 percent about ESG.

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