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Tax Aware
Investing

A Proactive Approach to Taxes

Gerstein Fisher specializes in managing money for individuals who pay taxes. By incorporating active tax management directly into our portfolio strategies, we help our clients keep more of what they earn on their investments.

Out-earning the market on a consistent basis is challenging enough—but when you factor in costs like fees and taxes, it becomes even more difficult. While taxes can be one of the largest drags on investor returns, in our view, too few investment managers take a proactive, systematic approach to managing the tax dimension of their clients’ investments.

The fact is that tax-aware investing can add up to one full percent to returns per year on an after-tax basis1 When compounded over time, this can make a meaningful difference in an investor’s bottom-line results. With all the uncertainty associated with investing, when there are certain gains to be had in returns, we are firm believers in working to capture them.

Adding Value Through Tax Loss Harvesting

By incorporating tax loss harvesting (TLH) into our quantitative, multi-factor investment approach, Gerstein Fisher helps minimize our clients’ overall tax liability. Tax loss harvesting is the process of selling securities in an investor’s portfolio at a loss and simultaneously replacing the sold securities with securities that have similar factor exposures and characteristics to the ones they sold. While no one likes to see a loss in any of the securities they own, losses do happen. Through TLH, we are able to turn these occasions into opportunities to help our clients save on taxes.

The first component of TLH is simple – if there is a security at a loss in your portfolio, you sell it to realize that loss. The loss can then be used to offset capital gains in other parts of the portfolio (or even outside the portfolio), reducing the final tax bill. The second component, replacing sold securities, is facilitated by Gerstein Fisher’s multi-factor approach. Using our multi-factor model, we can identify and purchase securities with similar factor exposures to those we’ve sold for a loss, thereby preserving the portfolio’s overall risk/return profile.

A simple example helps illustrate the process, and the impact on an investor’s tax bill:

tax-aware investing

 

Given that our objective is to reduce the costs associated with investing (we consider taxes to be a cost), our loss harvesting process takes into account any transaction or other costs that would offset the tax benefits we would realize from it. In fact, we model the potential impact of a transaction before deciding whether to buy or sell a security. And importantly (and in contrast to many of our industry peers), we are implementing TLH throughout the year—not just at year-end. This allows us to opportunistically take advantage of tax-beneficial transactions as they present themselves.

Tax Management Beyond Equities

When it comes to mitigating the impact of taxes on our clients’ finances, we don’t stop at their taxable equity investments. Our integrated approach to working with Private Clients means we are staying abreast of their total financial pictures—including events or transactions happening outside their investment portfolio that have implications for their overall strategy. For example, we may need to accelerate portfolio losses to offset against gains from the sale of a home. There may be tax implications related to the sale of a business that we need to consider in the context of the investment portfolio. We look at the complete picture.

Our focus on the smart management of taxes extends to our fixed income strategies as well. Between our deep research effort in the area of municipal bonds and the adoption of strategies that take advantage of the impact of interest rate movements on bond prices and coupons, we are as proactive about and aware of taxes on the fixed income side of the equation as we are on the equity side.

Additionally, Gerstein Fisher helps our clients optimize asset location (as distinct from asset allocation). This involves determining the types of accounts in which certain assets are best placed for tax-advantaged growth and disbursement based on when and for what funds will be needed. Related to this, we have experts on our team who work with our clients to design tax-advantaged strategies for transferring wealth to charities and/or future generations.

The bottom-line? Better bottom-line returns for our clients.
1 Arnott, Berkin & Ye (2001)

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