Portfolio Implications of Triple Net Returns

Abstract

The author develops a methodology to estimate forward-looking long-term active and passive investment returns for major publicly traded asset classes from the perspective of a taxable investor who consumes triple net returns—after all expenses, taxes, and inflation. The author compares active and passive strategies by gauging triple-net-alpha, which is the amount of gross alpha necessary for an active manager to claw back all additional expenses and taxes to achieve a breakeven triple net return relative to a passive, investable alternative. The author then investigates through unconstrained mean-variance-optimization, adjusted for triple net returns, which asset classes are worth inclusion in portfolios across the risk spectrum. The findings suggest that taxable investors should own primarily low-cost, passively managed equities and municipal bonds. The author finds similar results for tax-exempt investors when considering double net returns—after all expenses and inflation.