President Obama’s proposal to raise taxes on affluent households, detailed in his budget plan today, could be a boon for tax-managed mutual funds and other products that boast tax efficiency.
Portfolio managers think that a higher-tax environment will create more interest in tax-managed funds, which use a variety of strategies to offset gains with losses and produce higher after-tax returns.
“It is also expected to be a lower-return environment going forward for all asset classes,” said Duncan Richardson, executive vice president and chief equity investment officer at Boston-based Eaton Vance Corp, which offers 21 tax-managed funds. “In an environment of so much uncertainty, one thing that is certain is that you can get better control of the tax character of your investments.”
The downturn in the hedge fund sector may also generate interest, said Don Peters, portfolio manager of the three tax-managed mutual funds offered by Baltimore-based T. Rowe Price Group Inc.
“With higher tax rates, a continued flight from hedge funds and investors focused on after-tax returns, I am optimistic about tax-managed funds in the long term,” he said.
Still, many investors aren’t ready to make big changes.
“Every dollar has to be effectively deployed,” said Rick Stout, managing director at Benchmark Wealth Management LLC of Old Lyme, Conn., which has $110 million in assets under management.
“Many of our clients who are small-business owners are looking at the rising costs of health care,” he said. “Any little extra amount paid in tax will make it that much more difficult to hire new people or meet their retirement needs.”
If they do have money to invest, fixed-income investments, such as intermediate bonds, are attractive, Mr. Stout said.
Eric Kessler, principal at Arabella Philanthropic Advisors, a Washington-based firm that advises several dozen families with $100 million or more in assets, said that most clients are considering all their options.
“Investments that people were not considering a year ago, they are considering now, like more fixed income,” he said.
Those investors not already focused on tax efficiency may be looking at index funds, exchange traded funds and municipal bond funds, said Buz Aaron, vice president and director of taxes at Braver Wealth Management LLC. The Newton, Mass.-based firm has $400 million in assets under management.
Scott Donaldson, senior investment analyst at
The Vanguard Group Inc. of Malvern, Pa., agreed that investor interest in ETFs and index funds is growing.
“The budget seems to have taxes targeted more towards affluent investors, and for those investors, taxes have always been an issue,” he said. “They have already positioned their portfolios for higher after-tax returns.”
