This month’s Newsclips highlights a recurring theme: the biggest drivers of investor outcomes are often hiding in plain sight. Andrew Ang reminds us that taxes can consume a meaningful portion of long-term returns. Andrea Rossi’s research shows that investment results can sometimes look different depending on how they’re measured. Alpha Architect explores how investors can improve after-tax outcomes through smarter financing decisions. And Henry Neville demonstrates that even diversified portfolios experience drawdowns when investors need protection most.
These topics may seem unrelated, but they share a common lesson. Successful investing is often less about predicting the future and more about understanding the rules of the game. Taxes, incentives, liquidity, financing costs, and risk management may not generate headlines, but they can have an outsized impact on long-term wealth creation.
SSRN: Uncle Sam’s Cut: A Century of the Federal Tax Drag on US Equity Returns
Andrew Ang tackles a deceptively simple question: How much of stock market returns do investors actually keep after taxes?
Using a century of historical tax rules and market data, Ang simulates a taxable investor holding the broad U.S. stock market from 1926 through 2025. His conclusion is striking: federal taxes have historically reduced long-term equity wealth by more than one-third. Across rolling 30-year periods, the average annual tax drag was 3.47%, peaking at 5.38% during the high-tax era of 1936-1965. Even in the relatively tax-friendly period from 1996-2025, taxes reduced annual returns by roughly 1.65%.
Flatrock Take:
Longtime Columbia Professor and former head of factor investing at Blackrock, Andrew Ang is one of our favorite long horizon researchers. His book Asset Management: A Systematic Approach to Factor Investing is frequently used as textbook for college-level coursework as well as having a healthy dose of much needed skepticism on alternative investments.
This time he is turning his attention to taxes noting the substantial drag to equity (supposedly the most tax efficient asset class) returns. Earlier this year, we noted in a Bloomberg article that “your tax drag can be 10-, 15-, or 20-times your expense ratio.” Ang’s research helps quantify that observation. This is one reason Flatrock places significant emphasis on after-tax portfolio construction, which can meaningfully improve investor outcomes without requiring higher risk or better market forecasts.
WSJ: Fund Managers Tell Tall Tales
Spencer Jakab highlights a less-discussed problem in active management: not only do many funds fail to beat their benchmarks, but the scorekeeping itself can be surprisingly flexible. Research from Professors Kevin Mullally and Andrea Rossi found that more than one-third of mutual funds changed their benchmark at least once over a 12-year period, often in ways that made their performance appear more favorable. The article also notes the impact of survivorship bias, as poorly performing funds are frequently liquidated and disappear from the historical record, making the industry’s overall results look better than investors actually experienced.
Flatrock Take:
John has gotten to know Professor Rossi as he serves on the University of Arizona Investment Committee, where he teaches in the Finance Department of the Eller school. In addition to this work, Rossi’s research has highlighted other areas where investors need to be more vigilant (including hedge fund fees.)
One of Flatrock’s core values is humility. We are humble about our ability to identify future winners ex-ante because, despite what the investment management industry sometimes suggests, consistently doing so is incredibly difficult. Research like Professor Rossi’s reminds us that performance can occasionally look better when the goalposts move.
Having spent years building investment products ourselves, we understand how the sausage gets made and, from time to time, how the label gets changed. That’s why we generally start with low-cost, diversified investment strategies and only embrace complexity, illiquidity, or higher fees when the opportunity is particularly compelling.
AlphaArchitect: Low-Cost Financing via Short Box Spreads
Alpha Architect explains how short box spreads, a long-standing options strategy used by institutional investors, can create a synthetic borrowing position. The strategy effectively allows investors to access financing secured by their portfolio while potentially receiving favorable rates compared to traditional margin loans. In certain circumstances, the financing costs may also generate deductions that can offset capital gains or other taxable income, improving after-tax returns.
Flatrock Take:
A bull market in financial assets combined with the prospect of higher financing costs creates an attractive environment for strategies like short box spreads. At its core, the strategy can provide relatively low-cost financing against a portfolio without requiring investors to sell appreciated securities. The tax treatment is an added benefit, as the accrued financing costs may help offset gains elsewhere in the portfolio, potentially improving after-tax outcomes.
We view this as another example of structural alpha.. In high-tax states like California, where the total tax burden can be substantially higher than federal-only estimates suggest, these types of tax-aware strategies can be particularly valuable. Sometimes the best investment outcomes come not from working harder, but from working smarter.
MAN Group: Don’t Look Down: Reflections on Cross-Asset Drawdowns
Henry Neville examines nearly a century of drawdowns across equities, bonds, gold, trend, value, momentum, and quality strategies. His central conclusion is simple: every asset draws down. The more important question is not whether losses will occur, but when, how severe they will be, and what else in your portfolio is likely to be falling at the same time. While diversification can reduce risk, it rarely eliminates pain, especially during major market dislocations when correlations often rise and many assets struggle simultaneously.
Flatrock Take:
Even well-constructed portfolios can experience meaningful losses during periods of market stress. More importantly, no portfolio is an island. Market downturns are often accompanied by disruptions elsewhere in an investor’s life: a job loss, declining business income, reduced bonuses, or other forms of financial stress. This is why we start with a Protective Reserve before investing in our All Seasons Growth allocation. A diversified portfolio can help investors stay invested through market turbulence, but a dedicated reserve can help them stay financially secure when markets and life decide to test them at the same time.
Closing Thoughts
Markets are constantly changing, but a few principles remain remarkably durable. Focus on what you keep after taxes, maintain humility when evaluating investment skill, look for structural advantages where they exist, and prepare for the reality that market stress often arrives alongside challenges elsewhere in life.
At Flatrock, these principles shape how we build portfolios and advise clients. As always, if any of these topics resonate with your own circumstances, we’d welcome the opportunity to discuss them with you.