Why is tax management important?
The simple answer: taxes have the ability to seriously erode returns.
Please see footer for important information1
According to Morningstar, as a whole, U.S. equity funds (active, passive, ETFs) gave up 2% of returns to taxes for the three-year period ending March 2019. That means a mutual fund with a 10% pre-tax, three-year annualized return actually had a return of only 8% on an after-tax basis. This loss of return (“tax drag”) of 2% is really a hidden expense ratio that can have a material impact on the long-term growth of a portfolio.
The good news is that Russell Investments’ expertise in tax-managed investing can help – and the proof is in our results. For the same three-year period, while providing consistent pre-tax returns, our Tax-Managed U.S. Large Cap Fund (Class S) gave up only 0.27% to taxes, while our Tax-Managed U.S. Mid & Small Cap Fund (Class S) surrendered just 0.04%.
Our tax-managed equity funds vs. peer group
Average annual tax drag for 3 years ending March 31, 2019
Please hover over the Russell Investment bar to see which Russell Investment product was evaluated relative to the peer group. View fund performance and prices.
Performance quoted represents past performance and should not be viewed as a guarantee of future results. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Current to the most recent month-end performance data may be obtained by visiting https://russellinvestments.com.
Did you know?
of taxable investments are invested in open-end mutual funds.
That’s why we believe tax-managed investing is an opportunity many investors can’t afford to ignore.
*Source: 2019 ICI Factbook
The potential impact of taxes on investors' wealth.
With a hypothetical view, you can see how reducing tax drag can impact an investor’s ending wealth. Consider the hypothetical growth of a $500k portfolio over 10 years at a 7.5% return each year. If the portfolio’s pre-tax return had a 2% tax drag, that portfolio would have an ending value of just over $850k. With no tax drag, that portfolio would have an ending value of $1 million.
Hypothetical growth of $500,000 over 10 years at 7.5% per year
10 year hypothetical impact of taxes assumed annual return of 7.5%
Note: This is a hypothetical illustration and not meant to represent an actual investment strategy. Taxes may be due at some point in the future and tax rates may be different when they are. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
How we manage for taxes.
We've been helping investors increase their after-tax returns for more than three decades. And we continue to invest in the capability.
Here's how we do it:
Explore our products
Advisors, create a proposal.
Try our tax-management tools to demonstrate the value of tax management to your clients.
Check out our recent "Tax-Talk" blog posts.
What is tax-managed investing?
Tax-managed investing is an approach designed to help tax-sensitive investors by seeking to minimize tax drag and maximize after-tax returns. This is typically accomplished by decreasing capital gains or dividends.
Of course, investments in a 401(k) or an IRA are typically tax-deferred. But for those who invest beyond tax-deferred vehicles, taxes have the ability to seriously erode investment returns.
For investors looking to keep more of their investment earnings, the decision to include tax-managed solutions may help. Tax-exempt bond funds, tax-managed mutual funds and tax-managed model strategies are designed to reduce the amount lost to taxes each year.
Why worry about capital gains?
Capital gains sound great. A gain means money was earned, right? But capital gains come with tax burdens. Inside of a tax-sensitive mutual fund, whenever the fund sells stocks or bonds that have a gain, that capital gain must be passed along to the investor as a shareholder of the fund. And capital gain distributions are something that investors often don’t pay attention to until year-end statements and 1099-DIV forms hit their mailboxes.
In simplest terms, a tax-managed investment approach can help minimize the amount of capital gains all year long. This means tax-managed investing can also minimize the size of the tax bill and let investors keep a bigger piece of the investment return.
What are after-tax returns?
After-tax returns are the returns on an investment that remain after taxes are subtracted. For any investment that is vulnerable to taxes, think of after-tax returns as the actual amount earned, once taxes are paid.
For example, let’s say an investor made a $1000 return on an investment, but, because of their tax bracket, had to pay 30% in taxes. Their overall return may have been $1000, but their after-tax return was only $700.
All investments have different tax exposures. Some funds have high before-tax returns, but low after-tax returns. Unless investors are in favor of giving more of their returns to the government, we believe that the after-tax return amount is the number investors should focus on. That’s why we focus so much energy and expertise on tax-managed investing.
Fund objectives, risks, charges and expenses should be carefully considered before investing. A summary prospectus, if available, or a prospectus containing this and other important information can be obtained by calling 800-787-7354 or by visiting the prospectus and reports page to download one. Please read the prospectus carefully before investing.