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 is tax management important?
The simple answer: taxes have the ability to seriously erode returns.
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 $100k 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 $171k. With no tax drag, that portfolio would have an ending value over $200k.
Please try our interactive tool below and see how tax drag impacts your investment outcomes.
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Here's how we manage after-tax returns:
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:
Our tax-managed equity funds vs. peer group
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 June 2020. That means a mutual fund with a 10% pre-tax, three-year annualized return actually would have had a return of only 8% on an after-tax basis. This loss of return (“tax drag”2) of 2% is really like 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 0.21% to taxes, while our Tax-Managed U.S. Mid & Small Cap Fund (Class S) surrendered just 0.07%.
Average annual tax drag for 3 years ending June 30, 2020 1
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.
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Value of Tax Management
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