Actively managing taxes year-round by tax loss harvesting1 selected portfolio losses in an index-based separate account has the potential to positively affect a portfolio’s long-term return. In addition, both bull and bear markets present opportunities for tax loss harvesting. Because tax losses never expire, they can serve as part of a sound, long-term approach to managing potential capital gains.
Active Index Advisors® (“AIA”) employs tax loss harvesting as part of an overall tax management strategy. The AIA S&P 500® Cash Funded After-Tax Composite seeks to track the S&P 500® index on a pre-tax basis, while utilizing loss harvesting and tax management techniques to outperform on an after-tax basis.
Accounting for a range of potential portfolio factors
The amount of harvestable losses an investor can expect in an index-based separate account varies on a case-by-case basis. As the makeup of a portfolio changes over time, a variety of factors can affect the amount of losses that may be realized for tax accounting purposes.
Performance is shown gross of fees. Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.
Source: Standard & Poor's Financial Services LLC 1/31/18, Active Index Advisors®
- Whether the account was funded from cash or stock
- The cost basis of the stock
- Security or tax restrictions
- The timing around new account trading
- Ongoing market movement
- Environmental, social and governance (ESG) investing considerations
As the chart shows, realized losses tend to be larger in down markets, but there may be net realized losses in up markets as well. Over the past ten years, the AIA S&P 500® Composite has been able to harvest losses in 7 of 9 up markets.
Tax Planning, Rain or Shine
Because every portfolio is different, it is difficult to determine an average harvestable loss figure that can be applied to all investors. In fact, doing so could be misleading and set false expectations. However, there are likely to be opportunities to harvest losses for tax management purposes in most portfolios, regardless of how the market performs. While down markets are bad news for portfolio returns, investors who implement the right tax management strategy have the potential to bank portfolio losses, which can allow them to save money on taxes in the future.
Source: Standard & Poor’s Financial Services LLC, Active Index Advisors®.
1 Selling securities at a loss to offset a capital gains tax liability.
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. Gross performance does not take into account transaction costs, investment advisory fees, custody fees, or other expenses that were charged to clients' accounts or deductions for income taxes. The net performance results reflect the highest investment advisory fees charged to client accounts but not income taxes. Such fees will reduce performance over time. Net of fees performance reflects the deduction of a 2% annual fee, the highest wrap program fee applicable to a client account. Performance for periods of less than one year is not annualized. The after-tax returns shown are subject to the limitations of the specific calculation methodology applied. Since the client's actual circumstances and tax rates determined after the fact may differ from the anticipated tax rates used in this process, the reported returns may not equal the actual after-tax returns for specific clients. After-tax returns are calculated using the maximum federal and state tax rates for dividends, short-term capital gains and long-term capital gains. Individuals should consult their personal tax and/or legal advisors before making any tax or legal-related investment decisions.
Active Index Advisors® is a division of Natixis Advisors, L.P. Natixis Advisors is an SEC registered investment adviser. A complete list of composite descriptions, as well as additional information regarding the firm’s policies and procedures for valuing portfolios, calculating performance, and preparing compliant presentations, is available upon request. The AIA S&P 500® Cash Funded After-Tax Composite includes all fully discretionary, taxable, fee-paying portfolios that invest in the AIA S&P 500® which have initially been funded with cash. This strategy seeks to track the S&P 500® Index on a pre-tax basis by investing in a subset of securities from within the index, while utilizing loss harvesting and tax management techniques to outperform on an after-tax basis. The AIA S&P 500® Cash Funded After-Tax Composite is a sub-composite of the AIA S&P 500® Pre-Tax Composite. The composite was created in November 2007. The benchmark used is the S&P 500®, an index representing large-cap US stocks. Performance is expressed in US dollars. All results are time-weighted total returns that include the reinvestment of income and dividends. Returns are presented net of non-reclaimable withholding taxes. Management fees vary on asset size and are negotiated by the sponsor. The standard fee schedule is as follows: 0.30% on the first $5 million; 0.20% on the next $5 million; 0.15% on the next $10 million; 0.12% thereafter. Net-of-fees returns assume total custody, advisor, transaction, and investment management fees of 2.0%, deducted 1/12th per month from the gross composite return. Pure gross-of-fees returns do not reflect the deduction of transaction costs or fees. Effective January 2006, accounts with significant cash withdrawals are temporarily removed from the composite during the month that the withdrawal was taken. Currently, significant cash withdrawals are defined as cash withdrawals that are greater than 10% of an account’s market value. Details related to the policy and the threshold for defining significant cash withdrawals historically are available upon request. The after-tax returns shown are subject to the limitations of the specific calculation methodology applied. Since the client’s actual circumstances and tax rates determined after the fact may differ from the anticipated tax rates used in this process, the reported returns may not equal the actual after-tax returns for specific clients. After-tax returns are calculated using the maximum federal and state tax rates for dividends, short-term capital gains and long-term capital gains. Tax alpha is the benefit of loss harvesting, which is assumed to be used to offset gains inside or outside the portfolio in the period they are incurred, and thus credited to the portfolio returns. The after-tax benchmark is an estimate based upon the average capital gain realization rate and dividend yield of the index. The maximum federal and state tax rates for dividends and capital gains are utilized in the after-tax calculations. Natixis Advisors, L.P. does not offer tax advice. Clients should always consult with their tax advisor to discuss their personal situation.
All investing involves risk, including possible loss of principal. Please read the risks associated with each investment prior to investing. Detailed discussions of each investment’s risks are included in Part 2A of each firm’s respective Form ADV. The investments highlighted in this presentation may be subject to certain additional risks.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Unlike passively managed investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of the investment to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing.