TAX ALPHA: TAX ADVANTAGED INVESTING CAN ADD 1-3% TO PORTFOLIO RETURNS ANNUALLY, BETTER THAN MOST ACTIVE MANAGERS CAN DELIVER. LANGSTRAAT & WELCH EXPLAIN HOW ITS DONE

February 17, 2017

How to increase your portfolio’s performance by decreasing its tax bite. Tips from tax-advantaged investment pros Brian Langstraat and Scott Welch.

WEALTHTRACK Episode #1335; Originally Broadcast on February 15, 2017

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BRIAN LANGSTRAAT

  • Chief Executive Officer,
  • Parametric

SCOTT WELCH

  • Chief Investment Officer,
  • Dynasty Financial Partners

Consuelo Mack

Founding father Benjamin Franklin told us that, “In this world nothing is certain but death and taxes.” What he didn’t add was that one of them is somewhat within our control. And I am not talking about finding the fountain of youth; I am talking about our tax bill.

We spend most of our time on WEALTHTRACK focusing on building pre-tax wealth. We talk to top performing fund managers and highly regarded financial advisors, but we have rarely concentrated on after-tax returns. Neither does the financial services industry. This week we are going to rectify that. As one of this week’s guests told me you can’t eat pre-tax returns.

Taxes take a huge bite out of investment returns, an estimated 1-3% annually, higher than most management fees and more than the alpha, or performance, that active managers hope to deliver above the market year after year. The main tax culprit is trading, especially that generates highly taxed short-term capital gains, which is why low turnover portfolios, particularly passive index funds have such a performance advantage.

Taxes are a cost we have some control over, which is why we invited this week’s guests: two experts in tax-advantaged investing to join us.

Brian Langstraat is the CEO of Parametric, a global asset management firm with about $180 billion dollars of assets under management. More than $50 billion of that is in tax-advantaged investing strategies. Founded in 1987, it describes itself as providing: “Engineered portfolio solutions” to institutional and private clients. It constructs customized strategies to meet specific risk management, tax management and return objectives. Parametric is a subsidiary of Eaton Vance and runs several mutual funds for them including its Tax-Managed International Equity Fund and Tax-Managed Emerging Markets Fund.

Scott Welch is the Chief Investment Officer of Dynasty Financial Partners, which provides investment research, portfolio management, technology and practice management solutions to financial advisors and advisory teams. In that capacity, advice on optimizing tax consequences is near the top of his list. Welch is on the board of several industry groups including the IMCA and the Editorial Advisory Board of the Journal of Wealth Management.

Investors need every edge they can use to maximize their returns. It turns out tax-advantaged investment strategies can consistently add some hard to come by alpha.

If you miss the show on public television this week, you can definitely catch it on our website or on our YouTube channel. As always, we welcome your feedback on Facebook, Twitter or via the Contact Us link on our website.

Have a great weekend, a happy President’s Day and make the week ahead a profitable and a productive one!

Best Regards,

Consuelo Mathews Asia

MAXIMIZE YOUR AFTER TAX RETURNS

No Bookshelf titles this week.

Brian Langstraat’s One Investment:

Powerful Fundamental

  • Consider Core versus Satellite Portfolio Structure
  • CORE: Allocate where to capture market performance= passive indexes
  • SATELLITE: Allocate where to seek excess returns= active management

Scott Welch’s One Investment:

Public and Private

  • Own some passive index funds in portfolio
  • They are cheap
  • They give exposure to broad market
  • Own some private investments in portfolio
  • Private equity/ private credit offer long-term tax efficiency
No stock mentions in this episode.
WEALTHTRACK PREMIUM subscribers can access your copy here, otherwise this transcript is available here for purchase.

More information regarding WEALTHTRACK transcripts can be found here

This is the first appearance of these two guests on WEALTHTRACK

BILL AND MELINDA GATES: PHILANTHROPY WITH AN IMPACT

“The best investment any of us can ever make is in the lives of others.” Bill and Melinda Gates wrote a message worth sharing with WealthTrack viewers in their annual Bill and Melinda Gates Foundation letter. It is the answer to a letter they received from Warren Buffett, their close personal friend and the largest outside donor to their foundation. In 2006 Buffett pledged Berkshire Hathaway stock then worth more than $30 billion to the foundation to be given in 5% annual increments. So far the donations have added up to $17.26 billion. The Gates define the impact.


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