The Tax Aware Practitioner

What is one really trying to do in the investment world Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound. Whe n individuals hear their first presentation or read their first article o n tax-aware investing, they often ask, How do you identify or become a tax-aware practitioner This is an excellent question, since there is no direct...

The Sources and Impact of Taxes o n Investment Returns

If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once yo u get to know it, embodies all the essence of life greed, politics, power, goodness, charity. Sheldon s. Cohen Former Internal Revenue Service Commissioner An understanding of how taxes affect investment returns is essential to a p ortfol io manager's ability to add value net of fees and taxes. When the knowledge is combined with skill, managers can evolve...

Figure 1712 Moving A way From the Murky Middle A Coreand Satellite Approach

Tax- e ff icient core Highvalue-added satellites Tax- e ff icient core Highvalue-added satellites The murky middle consists of the vast majority of equity portfolio managers, who simply have little or no chance of outperforming the b enchmark on after-tax basis. Therefore, tax-aware practitioners naturally find comfort in allocating to the extremes that consist of a core manager emphasizing the tax-loss harvesting strategy on one end of the range of choices and The second way investors can...

Developing After Tax Asset Class Assumptions

American tax laws are constantly changing as our elected represen tatives seek new ways to ensure that whatever tax advice we receive is incorrect. t the Association for Investment Management and Research (AMR, now the CFA Institute) convention in 2003, economist Pe te r L. Bernstein shared four key points that he thought represented inflection points in the investment management industry.1 Bernstein brought to the forefront practices that have been accepted in investment policy development...

For an After Tax Composite

Equities After-Tax Composite 2004 2005 2006 2007 2008 required (if compliant with aimr-pps standards and showing after-tax performance) After-Tax Total Return ( ) 21.99 31.03 25.02 22.02 -6.17 Before-Tax Benchmark Total Return ( ) of Unrealized Capital Gains to Composite Assets of Taxable Portfolios Included in Both the U.S. Equities After-Tax & Before-Tax Composites Dollar-Weighted Anticipated Tax Rate Total Assets at End of Period (U.S. million Percentage of Firm Assets 33 36 39...

Practicesof Elite Tax Aware Equity Active Managers

My father has a great expression 'The capital-gains tax has created more millionaires than any other government policy. ' The capital-gains tax tends to make investors hold longer. That is almost a Ways the right decis ion. That s t at ement by Chris Davis has more truth than most investors would like to admit. There are times when the best thing the investor can do to maximize after-tax returns is simply not to sell positions with substantial unrealized capital gains. FIGURE 11.1, by...

Continuing Education Exam

Fo r CFP Continuing Education Credit and PACE Recertification Credit Earn five hours of credit toward your CFP Board continuing-education requirement as well as PACE Recertification credit by passing the following examonlineat www.bloomberg.com ceandenteringcode 1576TAX8. All the material has been previewed by the CFP Board of Standards. I f yo u wish to find out if this book and exam can be used to fulfill the CE requirement for a different organization, please contact its governing b d d e ....

Figure 62 Sample Display of Mutual Fund After Tax Return Reporting

Vanguard Tax-Managed Growth and Income Fund Average Annual Total Returns Return Before Taxes 17.86 -2.16 11.06 Return Before Taxes 17.86 -2.16 11.06 AII fund returns are adjusted to reflect fees. Each of the Vanguard Tax-Managed Funds assesses a 2 percent fee on redemption of shares held in the fund for less than one year and a 1 percent fee on re-demptlonsofshares heldlnthefundfor atleastoneyear butlessthanflveyears. lnception dateis September 6, 1994. AII fund returns are adjusted to reflect...

Figure 74 Income and Realized Gains Cash Flow Statement

Parametric Portfolio Associates Sample Quarterly Performance Report during the months ahead there will be less opportunity to add value through tax-loss harvestinginsubsequentperiods. The Income and Realized Gains section of the communique serves as the c ash flow statement of the report Figure 7-4 . The Parametric format addresses the three key areas essential to tax planning for a common stock portfolio dividend income and net realized short- and long-term capital gains. By tracking the year...

Figure 111 Tax Alpha Required Per Year for Holding Time to Justify a Sale at Given Cost Basis

Active portfolio management can outperform passive investing on an after- tax basis, but it is an extremely low-probability bet when relying on traditional methods. At this juncture, nontraditional methods are those that incorporate the impact of taxes in the portfolio construction process and trading practices that are not part of the tax-exempt account industry. The hope is that these tax-aware methods will become traditional practices in the years to come, but they are currently only being...

Figure 113 Before Fee and Tax Alpha for the Ten Years Ending

Percentile rank from top asset class 10 25 50 cusp as sell candidates and will be eliminated in the months ahead. Each o f these practices serves the client's objectives rather than catering to the whims of tax-exempt account consultants. Further insistence by clients and their advisers of managing by client objective will ultimately lead to enhanced wealth creation. We have discussed the chances that active managers will outperform p ass ive portfolios. To address this issue, we extract...

Measures of Tax Efficiency

A citizen can hardly distinguish between a tax and a fine, except that the fine is generally much lighter. There are fo ur key cal culat ions that practitioners may encounter for measuring the tax efficiency of the portfolio management process Ac co untant's ratio amount of long-term capital gains realized amountoftotal capitalgains realized C ap ture ratio Rat Rbt, where R equals the return after-tax and Rbt equalsthe return before-tax Relative wealth measure1 Rat - Rbt l Rbt X 1,000...

The Evolution of Tax Aware I nve stment Management

Only God knows where we got our tax system. The current b ody o f knowledge pertaining to tax-aware investment management emerged in the early 1990s. With the passage of the Employee Retirement Income Security Act of 1974 ERISA , investment firms and academic institutions allocated their resources with an eye toward issues in the expanding and highly profitable tax-exempt account area.1 As a result, during the 1970s and 1980s, most firms assigned their b est an d b rightest managers to manage...