The Other Alpha

I’ve been told by some old timers that the valuation business is almost perfectly hedged. What I mean by that is there is always some niche within the profession that is experiencing growth while others may be contracting. During the early phase of IFRS and the fair value expansion, I was gushing to this particular fellow how the need for our services should, theoretically, increase significantly. I’ll admit, I may have been a touch overly optimistic. He smiled knowingly and gently applied a more even keel. “It’s funny, I’ve seen this before. The nice thing is, this fair value enthusiasm will cool, and when it does, tax work or litigation, or some other source of demand will develop. Everyone is vilifying tax work now in favor of the shiny new fair value coin, but just wait – in five or six years folks will be embracing tax again.” I recall when he said that I thought to myself that tax valuation was where talented young practitioners went to die. Many of the folks I knew had been doing almost nothing but tax for years, and the work sounded antiquated and dull. That was four years ago. Funny how things change. With bubbles bursting all over the place in both the public and private sector, it seems like everyone is searching for funds. In the public sector, budget shortfalls occurring as a result of falling tax revenues have public officials and politicians wringing their hands. In the private sector, aspiring retirees and baby boomers are frantically searching for “safe returns” to make their portfolios whole and retirement a possibility. This is all occurring in what could be described as a flat economy at best.

Enter the tax alpha. Incremental savings from well devised tax strategies increases returns with zero additional risk. In finance parlance, that amounts to what is known as alpha. There is no better place to generate alpha at this point in time than in tax savings. In an environment of rising relative tax rates stemming from financial distress in the public sector and falling returns in the private sector across asset classes, wealth managers and their clients will pay increasing heed to tax strategy. As valuation practitioners ultimately responsible for quantifying tax savings, we will increasingly be called upon as the experts, synthesizing our knowledge of case law and valuation practice to assist in these endeavors. Of this I am certain. I already see it in the form of bulletins from established wealth management firms, which are solely focused on tax strategies with nary a peep about common themes such as asset allocation and investment strategies. Apparently they’ve gotten the memo too – investment alpha out, tax alpha in.

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By |2014-01-15T18:04:44+00:00April 1st, 2011|Featured, Select Articles|Comments Off on The Other Alpha