Tax-Efficiency

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Tax-Efficiency

Postby Taylor Larimore » Fri Dec 21, 2012 12:51 pm

Bogleheads:

The importance of tax-efficiency is often overlooked. Consider the current before-tax and after-tax returns of these two large-blend mutual funds (Vanguard Total Stock Market (VTSMX) and PIMCO Fundamental Index Plus (PIXAX):

VTSMX-------1-Year---3-Years---5-Years
Before tax: 15.80%----11.79%-----1.81%
After tax:---15.47%----11.48%-----1.51%

PIXAX
Before tax: 27.98%----19.81%-----8.00%
After tax:---18.17%-----7.24%-----0.51%

Source: Morningstar

Past performance does not guarantee future performance.

Best wishes.
Taylor
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Re: Tax-Efficiency

Postby telemark » Fri Dec 21, 2012 1:18 pm

Turnover in PIXAX is 1047%. Well, yeah. But a bond fund that benchmarks against the S&P 500? That's just weird.
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Re: Tax-Efficiency

Postby dkturner » Fri Dec 21, 2012 1:19 pm

I guess we should plan on buying PIXAX in our tax deferred accounts rather than our taxable accounts. :wink:
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A weird fund.

Postby Taylor Larimore » Fri Dec 21, 2012 1:47 pm

telemark wrote:Turnover in PIXAX is 1047%. Well, yeah. But a bond fund that benchmarks against the S&P 500? That's just weird.


Telemark:

PIXAX plunged -43.92% in 2008. That's also weird if it's a bond fund.

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Re: Tax-Efficiency

Postby Doc » Fri Dec 21, 2012 1:53 pm

Taylor Larimore wrote:Bogleheads:

The importance of tax-efficiency is often overlooked. Consider the current before-tax and after-tax returns of these two large-blend mutual funds (Vanguard Total Stock Market (VTSMX) and PIMCO Fundamental Index Plus (PIXAX):

VTSMX-------1-Year---3-Years---5-Years
Before tax: 15.80%----11.79%-----1.81%
After tax:---15.47%----11.48%-----1.51%

PIXAX
Before tax: 27.98%----19.81%-----8.00%
After tax:---18.17%-----7.24%-----0.51%

Source: Morningstar

Past performance does not guarantee future performance.

Best wishes.
Taylor


Huh? A 94% tax rate for the five year period. I'm glad I am not in that bracket anymore. :annoyed
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Re: Tax-Efficiency

Postby Beat The Street » Fri Dec 21, 2012 1:55 pm

I think this is the fund where they buy index linked derivatives and put the collateral in the PIMCO Total Return to add alpha. It's a good strategy until the PIMCO Total Return blows up, but obviously not a tax efficient fund.
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Re: Tax-Efficiency

Postby Taylor Larimore » Fri Dec 21, 2012 2:13 pm

Doc:

Huh? A 94% tax rate for the five year period. I'm glad I am not in that bracket anymore.


How would you like to invest $50,000 in a mutual fund, never sell a single share, then seven weeks later receive a federal tax-bill of almost $9,000 for short-term gains?

Mutual Fund Tax Bombs

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Re: Tax-Efficiency

Postby Doc » Fri Dec 21, 2012 8:17 pm

Taylor Larimore wrote:Doc:

Huh? A 94% tax rate for the five year period. I'm glad I am not in that bracket anymore.


How would you like to invest $50,000 in a mutual fund, never sell a single share, then seven weeks later receive a federal tax-bill of almost $9,000 for short-term gains?

Mutual Fund Tax Bombs

Best wishes
Taylor


Taylor, in the link you provided there was a $22k STCG pay out and a tax bill for $9k for a tax rate of 39.6% some seven weeks later. If DR X had then sold his fund the day after the payout he would have incurred a $22k short term loss because the NAV of the stock would be reduced by the payout and his net loss would be zero and he would owe zero tax.

And no I would not like the circumstances that Dr X incurred. But his investment was not the Pimco fund and the tax penalty you sighted in your original post is 94% not 39%. Something is wrong with the data.

Taylor wrote:PIXAX plunged -43.92% in 2008. That's also weird if it's a bond fund.


It's not a bond fund. It's a large blend equity fund that uses derivatives to try to obtain the risk exposure of the underlying eRAFI index.

The premise is that the eRAFI, which adds a couple of extra earnings quality adjustments to its weighting methodology, should be a better choice than the original RAFI 1000 or more conventional market-cap-weighted stock indexes such as the S&P 500. Meanwhile, by using swaps to get market exposure to the eRAFI (which require only a minimal collateral commitment), the fund is also able to invest most of its assets in a bond portfolio similar to that of PIMCO Total Return.
Morningstar Analysts Report Premium content.

If you look at a growth chart for PIXAX it did have a severe plunge in '08 as did the S&P 500. PIXAX had even a more severe drop but it more than made up for that larger drop in the ensuing years.

Taylor, I agree with your premise that tax efficiency is important but you examples are inappropriate. M*'s tax analysis is based on the maximum tax rate at the time of the distribution which is not applicable to 98% of the population as our politicians have some frequently brought to our attention over the past few months.
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Re: Tax-Efficiency

Postby livesoft » Fri Dec 21, 2012 8:22 pm

Sometimes I think Mr. Larimore spends his day looking for interesting funds to report on here.

So let me ask a personal question publicly: How did you come to know about PIXAX as it would seem to be way outside your normal realm of interests?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Tax-Efficiency

Postby Clive » Fri Dec 21, 2012 8:47 pm

dkturner wrote:I guess we should plan on buying PIXAX in our tax deferred accounts rather than our taxable accounts. :wink:

PIXAX Expense ratio 1.2%

For 33.3% UDOW (3x Dow), 66.7% TIP the ER is 0.45%.

etfreplay.com backtest/etf portfolio indicates (year, 33/67 UDOW/TIP, DIA)

Feb - Dec 2010 (inception) +21% 16.7%
2011 11.9% 8.1%
2012 YTD 14.4% 11%

+55% vs +40% over the (less than) 3 years

when looking at each year individually (i.e. as though rebalanced back to 33.3/66.7 once each year).

50% SSO (2x SPY), 50% TIP yearly rebalanced versus SPY

2007 6.5% 5.1%
2008 -34.2% -36.8%
2009 28.1% 26.4%
2010 16.5% 15.1%
2011 5.2% 1.9%
2012 YTD 19.3% 16.3%

+31.2% vs +14.5%

And tax efficient space is potentially magnified :D
Last edited by Clive on Fri Dec 21, 2012 9:15 pm, edited 1 time in total.
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Source of information about interesting funds.

Postby Taylor Larimore » Fri Dec 21, 2012 9:05 pm

livesoft wrote:Sometimes I think Mr. Larimore spends his day looking for interesting funds to report on here.

So let me ask a personal question publicly: How did you come to know about PIXAX as it would seem to be way outside your normal realm of interests?


Livesoft:

As a former IRS Revenue Officer and a taxpayer who prepares his own tax returns, I am acutely aware of how taxes reduce mutual fund returns--so the giant tax-bite into PIXAX's returns and the Jason Zwieg article (which I knew about from many years' ago), is actually my normal realm of interest.

I receive rss feeds from several of the best financial newsletters. One of these, Mike Piper's latest Oblivious Investor, contained a link to a CNN Money article about taxes. This is where I got the basic information to compose my post (with the help of some Morningstar statistics).

The tax-bite of top mutual funds

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Taylor
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Re: Tax-Efficiency

Postby livesoft » Fri Dec 21, 2012 9:11 pm

Thanks for the reply. Merry Christmas!
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Morningstar Tax Analysis ?

Postby Taylor Larimore » Fri Dec 21, 2012 9:21 pm

Doc:
M*'s tax analysis is based on the maximum tax rate at the time of the distribution which is not applicable to 98% of the population


Morningstar does not include State and local taxes which can make the maximum tax rate higher than Morningstar's tax analysis. Each individual's tax rate is usually different from average. Nevertheless, I find that Morningstar figures are very helpful.

Best wishes.
Taylor
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Re: Tax-Efficiency

Postby baw703916 » Fri Dec 21, 2012 9:34 pm

The importance of tax-efficiency is often overlooked.


I only recall a few dozen threads on that topic on this board recently.

I have to agree with livesoft's earlier post. I had never even heard of this fund, nor seen it mentioned on the board ever. So looking over Morningstar's summary, here's what I find:

Holdings
Code: Select all
Type           % Net   % Short    % Long
Cash          -132.00   152.56    20.56
US Stocks        0.00     0.00     0.00
Non US Stocks    0.00     0.00     0.00
Bonds          119.48     1.37   120.85
Other          112.52     0.26   112.78


Yield: 11.25%
Load: 3.75%
Expense ratio: 1.19%

So, it is (more or less) a bond fund after all. (not sure what the 112% of "other" is). Yes, a bond fund can drop by 40% in a bear market if it has uses enough leverage and takes enough credit risk.

But just look at the yield!! Aren't high yields always better? :D

In fact, the tax efficiency is only about #4 or #5 on a long list of reasons to never, ever, ever own this fund.
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Re: Morningstar Tax Analysis ?

Postby Doc » Sat Dec 22, 2012 9:55 am

Taylor Larimore wrote:Doc:
M*'s tax analysis is based on the maximum tax rate at the time of the distribution which is not applicable to 98% of the population


Morningstar does not include State and local taxes which can make the maximum tax rate higher than Morningstar's tax analysis. Each individual's tax rate is usually different from average. Nevertheless, I find that Morningstar figures are very helpful.

Best wishes.
Taylor


According to the census bureau in 2009 there were 78.8 million family households in the US. Of these just under 75% had family incomes of less than $100k. http://www.census.gov/compendia/statab/ ... 2s0692.pdf The 15% tax bracket caps at ~$70k of taxable income in 2012 or about ~$100k of income before standard deduction and exemptions. These people pay no income tax on qualified dividends or LTCG.

I find that the Morningstar figures to be less than helpful for the vast majority of taxpayers. In fact they are actually misleading because so few people read the fine print in the definition.

Even acknowledging this deficiency it appears that the PIXAX numbers in the OP are wrong. The tax rate is just too high.
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Re: Tax-Efficiency

Postby RadAudit » Sat Dec 22, 2012 10:33 am

Taylor Larimore wrote:
livesoft wrote:Sometimes I think Mr. Larimore spends his day looking for interesting funds to report on here.

So let me ask a personal question publicly: How did you come to know about PIXAX as it would seem to be way outside your normal realm of interests?


Livesoft:

As a former IRS Revenue Officer and a taxpayer who prepares his own tax returns, ... the giant tax-bite into PIXAX's returns .... is actually my normal realm of interest.

Best wishes and Happy Holiday!
Taylor


Thank goodness there are folks like you out there. Happy Holidays.
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