Abstract:
The after-tax performance of a municipal bond portfolio is important for both investors and managers. Pretax value is unsuitable for measuring performance; we recommend using the tax-smart value, which is the greater of after-tax liquidation value and hold value.
Missing from the tax-smart value is the time value of the tax-loss harvesting option, which affects expected performance. Tax-savvy managers should structure portfolios rich in tax-loss harvesting options. This can be accomplished by restarting the short-term clock, to utilize the higher applicable tax rate in the event of short-term capital loss, and by recognizing that certain bond structures are more suitable than others for tax-loss harvesting.
Bio:
Andrew Kalotay (Kalotay Advisors) is an expert on the quantitative analysis of municipal bonds, including risk management, tax management, and debt management. He is a prolific contributor to both the academic and practitioner literature, including his recent book ‘The Interest Rate Risk Management of Municipal Bonds’. He founded Andrew Kalotay Associates in 1990, and sold it to the Intercontinental Exchange in 2021. His firm provided bond analytics to some of the most sophisticated market participants. Previously he was with Salomon Brothers, and prior to Wall Street, he was at Bell Laboratories and AT&T. On the academic side, he directed the first graduate Financial Engineering program in the U.S. at Polytechnic University (now part of NYU), from 1995 to 1997. Previously he taught at Wharton, Columbia, and Fordham University. Dr. Kalotay holds a B.Sc. and M.Sc. from Queen's University and a Ph.D. from the University of Toronto, all in mathematics. He was inducted into the Fixed Income Analyst Society’s "Hall of Fame" in 1997.
