As asset managers continue to add products that can help investors manage their taxes, the volume of money pouring into such vehicles continues to grow. According to a new report from Morningstar, assets in tax-managed SMA accounts topped $500 billion by mid-2024, representing a 67% increase in just a year and a half.. During the same period, assets held in tax-managed mutual funds increased by about 22% to $73 billion.
Most of the SMA assets managed by tax are dedicated to direct indexingwhich 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-style portfolios, active equity and fixed income. Morgan Stanley's Parametric remains the leader in the space, with a total of $245 billion in tax assets under management, most of them in direct indexing.
While Morningstar expects direct indexing to remain the most common tax management strategy in the near term, its researchers note that some asset managers are beginning to devote more resources to other options. They cite 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-collecting capabilities.
Morningstar found that asset managers' asset tracking model portfolios totaled $450 billion as of June 30, 2024, a 50% increase over two years. When home-office models of call houses and broker/dealers were included in the calculation, the volume of assets in the portfolios of the models reached trillions of dollars.
Given these developments, Morningstar researchers predict that the next step in the tax managed strategies space may be increased adoption of unified managed accounts, which can combine SMAs, ETFs, mutual funds, securities individual and private investments.