Discussant: Leslie Papke, Michigan State University
John Shoven stated that the conventional wisdom regarding asset location comes from analysis of the corporate funding of DB plans. This conventional wisdom has tended to recommend corporate bonds inside the pension account, and stocks held outside in the taxable account. He said that an alternative was to hold municipal bonds in the taxable account and stocks inside the pension account. They examined 12 actively managed mutual funds, including one index fund, one corporate bond fund, and one municipal bond fund. They compared two strategies. In the first, equity was held in the pension account and municipal bonds outside. In the second, corporate bonds were held in the pension account and equity outside. They used actual security return data and found that the first strategy dominated in almost all scenarios. The only scenario in which holding equity outside dominated was the case of an extremely tax-efficient equity investment vehicle.
Leslie Papke wondered if past performance is a good indicator of future performance. She expects mutual funds to become more tax-efficient. Furthermore, she expects future marginal tax rates to be lower, which diminish the appeal of the equity inside/ municipal bonds outside strategy.
