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

Tax-Advantaged Investing: Langstraat & Welch Explain How Its Done

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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.

Tax-Advantaged Investing

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.

 

Maximize Your After Tax Returns

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