Franklin Templeton's Stanhope puts alpha ahead of tax in long-short

Tax-aware long-short strategies should be judged on the alpha their stock selection produces, according to Ehren Stanhope, chief investment strategist for Franklin Templeton's Canvas platform. Advisors who lead with the harvesting case risk setting clients up for disappointment, he told InvestmentNews in comments published Oct. 23.

"We fundamentally believe long-short strategies can provide significant benefit," Stanhope said, "but the value driver should be the alpha model, not the tax benefits." Conversations centered on what the short book can generate in losses have the emphasis backwards, he said.

The due-diligence question is whether the manager can attribute after-tax return to the long book, the short book, and the tax overlay, including whether the short book's contribution is measured net of its own costs.

Stanhope said direct indexing accounts have accumulated embedded gains after an extended market climb, leaving fewer positions below cost basis and less to harvest. He attributed the shift to long-term appreciation and said it is not a flaw in direct indexing.

Stanhope pushed back on the idea that a direct indexing portfolio becomes permanently locked. Harvesting is largest in the first few years after funding, he said, and volatility, new contributions, and cash from dividends and dividend reinvestments can keep generating opportunities. His firm still treats direct indexing as a low-cost core equity allocation.

Stanhope said interest in the long-short wrapper is strongest among very high-net-worth and ultra-high-net-worth investors, whose assets tend to carry an investment job and a tax job. The wrapper fits clients preparing for a liquidity event, managing a concentrated stock position, or offsetting private-market gains.