Where and in what structures investments are held appear to be as increasingly significant as the type of assets and risk-reward characteristics of stocks, bonds and other areas. This publication examines some themes rippling through the wealth management world.

Asset “location” seems to be as strong a theme among investment strategists as “allocation” now – perhaps a situation caused by concerns of rising tax and regulations in parts of the world. There have been a mass of elections in 2024, such as in the UK, India and France. And the most significant, arguably of all takes place on 5 November.

Fears that taxes such as capital gains could rise have, along with other forces, put the location of investments into the limelight to an extent that appears to be relatively new by the standards of recent years. During the 1990s and subsequent 20 years, while tax wasn’t a negligible issue – it never is – it appeared not to be as significant as it is now. However, some of this is impressionistic, and there's no clear evidence of how significant the change might be.

As part of our September range of conversations with large wealth and asset managers about approaches to how assets are deployed, the “asset location” point came up. If or when policymakers tax carried interest on private equity, for example, or raise CGT, it is going to affect approaches to risk-taking and increase the attractions of sometimes less flashy investments that don’t attract political attention. Earlier in August, for example, this point was forcibly made by Partners Capital, a business overseeing about $55 billion in client money. For instance, getting details right – such as understanding whether a fund’s share classes enjoy “reporting status” – and hence separate capital gains and income, allowing them to be taxed separately – is crucial. This argument appears to cut against the view, as expressed in a book reviewed by this news service several years ago, that marginal tax rates aren’t a big disincentive to invest and work. 

With interest rates having risen post-pandemic – although now the cycle appears to be moving in the other direction – a lot of conventional asset allocation models have come back into fashion to some extent, even the old “60/40“ stocks/bonds split of old. That said, the rise of private market and alternative investing, which had a huge boost by ultra-low rates, seems to be a permanent feature.

Even before recent changes in the macroeconomic side and the potential rise in taxes, the location side of an investment used to come up in the use of “tax-loss harvesting.” By selectively selling specific investments, advisors can realise gains or losses in an account. Selling investments in a client's taxable portfolio that have dropped in value – i.e., “harvesting” those losses – will generate losses that can be used to offset gains the client’s portfolio has realised. Alternatively, advisors can help clients realise gains in their taxable portfolios to offset losses from other investments. Especially during volatile markets, tax harvesting can provide an effective way of using losses to enhance after-tax portfolio performance.

In the mix
Shelly Meerovitch, senior national director, global families, Bernstein Private Wealth, said both location and allocation have to be part of the mix today. 

“Allocation has a lot to do with a client’s risk appetite, financial needs and diversification. Location has to do with the after-tax performance of the allocation. For example, accounts that will need to support spending ought to be invested differently from accounts that are meant for long-term savings. While allocation in various accounts/locations may differ to maximise after-tax performance, the client’s overall allocation should still match goals," she told this news service. 

“Taxes are a key strategic and tactical driver of asset allocation. The after-tax return that a client gets to enjoy is what matters, so the expected return on any short-term, tactical investment idea has to consider a client’s tax rate and what they will actually receive in after-tax profit. From a strategic standpoint, having a strong tax harvesting strategy as part of your equity allocation can help offset gains elsewhere in your portfolio and noticeably improve a client’s after-tax return,” Meerovitch said. 

Looking at the location of assets, and the complexities of tax and related topics is called “investment infrastructure” – the shape of how investments are held as much as what they hold – is becoming a talking point. For example, in June this year, Cambridge Associates a global investment firm working with clients including family offices, issued a white paper, Optimizing Wealth Infrastructure for Families, authored by Sean Sullivan and Heather Jablow.

Cambridge Associates says it is a pioneer in understanding and explaining what is known as “investment administration” – the business of putting the building blocks of investment together, with an eye to governance, tax, ownership structures, consolidated reporting, portfolio administration (such as placing and signing off on trades, completing subscription documents, paying capital calls, cash monitoring, approving consent documents), terms of brokerage and custody accounts. 

Last week, Citi Private Bank issued a white paper, Asset Location & Global Mobility, which reflected on the range of options that UHNW families, often with foreign ties and connections, have over the optimum place to invest and work in, paying regard to the tax regimes of dozens of onshore and offshore centres. While non-US tax planning can be challenging for US expats, given the worldwide net of the IRS, the conversation is likely to continue on this area.

SEI, the Oaks, Pennsylvania-headquartered financial and technology solutions group has minted a term that it thinks speaks to some of the changes going on: the “new wealth portfolio.” And perhaps inevitably, the way that asset asset allocation and location is affected by technology came up in the conversation.

“Sitting at the intersection of investment management and technology, the "new wealth portfolio" is evolving with a dual purpose: deep personalisation for a household’s goals and maximization of the household portfolio’s terminal value,” Erich Holland, who leads the go-to-market strategy for sales and distribution for SEI’s Advisor business, told this publication.

“From exchange-traded funds to separately managed accounts to the retailisation of alternatives, the rise of new product types and structures has led to a greater ability for advisors to customize at the account level. Technology underpins those product structures and, when used effectively, it enables financial planning benefits like tax-loss harvesting and proper asset allocation and rebalancing,” Holland said.

“The integration of technology and investment management can improve total portfolio value outcomes by leveraging multi-account management to rebalance across account types for optimal asset location, enhancing the withdrawal process for tax efficiency, and managing for all tax-loss harvesting opportunities. The `new wealth portfolio’ benefits from more sophisticated household-level management and tax optimisation – delivering a new level of value for advisors and investors,” Holland added.

With technological tools growing more sophisticated, and tax and other government controls unlikely to decline anytime soon, the "location" of investment is likely to be as significant in coming years as the allocation side. Expect to read more about this trend in these pages in coming months. 

(As always, if you wish to comment, email the editor at tom.burroughes@wealthbriefing.com and deputy editor Amanda Cheesley on amanda.cheesley@clearviewpublishing.com. An earlier version of this article first appeared on Family Wealth Report, sister news service of this one.)