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Building a More Tax-Efficient Portfolio – The Gerstein Fisher Tax-Managed Equity Strategy


At Gerstein Fisher, we recognize that taxes can be one of the largest drags on investors’ bottom-line results. Yet taxes remain largely overlooked in the field of investment management. Gerstein Fisher’s Tax-Managed Equity strategy uses a quantitative approach to provide investors with core asset class exposure with tilts to specific risk factors, while adding an active tax management overlay. The strategy offers investors the potential for significant post-tax alpha.

When selecting investments with which to implement their strategic asset allocations, many investors rely on low-cost, passively managed index funds. Though more tax efficient than many active strategies, index funds are still not immune to the negative impact of taxes on investors’ bottom-line results. Let’s look at a quick hypothetical example that illustrates this point: suppose an investor named John pays no taxes on capital gains or income and investor Jane pays 40% taxes on income and 20% taxes on capital gains. John and Jane both invest $100,000 in an S&P 500 index fund at its inception in 1976. They decide to make no further contributions and lock their investments away for 41 years. At the end of 2016, John is happy to see that his investment is worth $6,408,417. Jane, on the other hand, finds her investment value to be $3,759,915 –more than $2.5 million less than John’s (see Exhibit 1). Jane lost nearly 40% of her investment gains to taxes. This example shows how significant the effect of taxes is on a taxable investor’s portfolio over extended time periods.

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