As asset managers continue to add products that can help investors manage their taxes, the volume of money flowing into such vehicles continues to rise. According to a new report from Morningstar, assets in tax-managed SMA accounts reached over $500 billion at mid-year 2024, representing an increase of 67% in just a year and a half. During the same period, assets held in tax-managed mutual funds grew by approximately 22% to $73 billion.
The bulk of the tax-managed SMA assets are dedicated to direct indexing, which allows for individually tailored tax management because it involves investing in the underlying stocks of an index. However, Morningstar found other strategies gaining popularity with investors, including ETF model portfolios, active equity and fixed income. Morgan Stanley’s Parametric remains the leader in the space, with a total of $245 billion in tax-managed assets, most of them in direct indexing.
While Morningstar expects direct indexing to remain the most common tax management strategy in the short term, its researchers note that some asset managers are beginning to dedicate more resources to other options. They bring up the examples of JP Morgan’s 55ip, which currently has most of its tax-managed assets in model portfolios, and AB, which has focused on municipal bonds and their tax-loss harvesting capabilities.
Morningstar found that assets tracking model portfolios by asset managers totaled $450 billion as of June 30, 2024, an increase of 50% over two years. When home-office models of wirehouses and broker/dealers were included in the tally, the volume of assets in model portfolios reached trillions of dollars.
Considering these developments, Morningstar researchers predict that the next step in the tax-managed strategies space might be growth in the adoption of unified managed accounts, which can combine SMAs, ETFs, mutual funds, individual securities and private investments.