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Clear Thoughts
Tax Efficient Equity Investing
| The tax system is confusing when it comes to investment, but since Clear Asset Management holds separate accounts with its investors, the portfolios are tax efficient. |
Clear Asset Management designed our investment process for long term benchmark beating performance. Across our six portfolios, our total turnover is slightly less than the average actively managed mutual fund. At Clear, when we designed our portfolio management system, maximizing tax efficiency was not a primary goal. Our portfolio management system will, when directed by our computers or trading rules, sell some or all of a stock to lock in a profit or to buy a higher ranked stock, without consideration to tax implications.
Each investor has a different time horizon, investment goal(s) and asset allocation strategies. To design the perfect tax efficient portfolio is nearly impossible and one that we would not even try to achieve. Potentially, included in an asset allocation strategy are taxable, tax deferred and tax exempt investments. When seeking to fund retirement, a second home, education or a lifestyle, it is all about how many dollars you have to achieve that goal. Clear focuses on delivering benchmark beating long term performance to help investors reach their financial goals. Consequently, investing in our portfolios is an ideal investment strategy for IRA and self employed SEP accounts. In fact, rolling over a 401k to a Clear IRA is a popular investment choice this summer.
Many investors divide the way they invest by allocating assets into multiple classes. Some are more efficient than others. Municipal bonds may be low yielding, but are viewed as tax efficient. Yet even tax exempt municipal bonds can be confusing. For example; this author is a New York City resident, so I would need to hypothetically invest in municipal bonds that are free from federal, state and city taxes to be truly exempt from taxation on the investment. In the end, every investment profile is unique; each investor has a different financial situation and investment objectives.
In stock investing, gains and losses is the primary measurement of success, and can potentially cause tax consequences. Many people believe that buying an index fund is tax efficient, simply because the funds in theory do not actually trade. This is only somewhat accurate as many of these funds own a large number of stocks, frequently hundreds of them (e.g., the S&P 500 index has 500 stocks). These stocks fluctuate in value daily, and the index fund itself changes holdings periodically, all causing a combination of short and long term capital gains and losses for the fund investors. So now the time horizon for each investor becomes a factor not only in performance, but also in calculating taxes.
Additionally, more stocks now pay dividends, with the decrease on dividend taxes, which are passed through as more tax liabilities to investors. Further, many funds purchase more than the index of stock they seek to mimic and buy derivative instruments and bonds to try and achieve synthetic performance to smooth out newly invested money and redemptions (none of which are issues with the separate account format employed by Clear Asset Management). As a result, the basic fund structure causes embedded capital gains, meaning that the fund investor is buying a taxable gain the day he or she purchases the fund.
At Clear, our largest focus is performance. Funds that attempt to replicate indices are by definition not actively managed and seek only to approach the performance of the index.
Active management means buying and selling for alpha, which simply put is additional performance. When an investor compares the Clear portfolios to the most popular index; the S&P 500, Clear solidly outperforms the index, regardless of what format an investor can purchase the index fund.
In the end, Clear Asset Management is judged by performance, has potential tax liabilities similar to actively managed mutual funds (without embedded taxable gains upon purchase) and in cooperation with our designated broker-dealer, keeps a tight accounting for the individual needs of each investor.
We believe delivering performance is the most important measure for our investors. Next week we will examine how and why as stocks move in our rankings we potentially buy and sell shares of existing holdings.
Please feel free to forward any questions to customerservice@clearam.com. However, please remember, individual tax advice needs to come from your accountant or tax advisor. We soon will add a new section to our web site with answers to frequently asked questions.
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