The Performance Reporting Trap
The tables below illustrate three important points.
1. Tax efficiency is a critical factor in portfolio decisions and
management.
2. Published reporting of returns materially distorts actual returns
because withdrawals from a folio are not counted in the performance
reporting.
3. It is difficult for institutional managers of large cap funds to
outperform the S&P 500 Index.
TAX EFFICIENT PORTFOLIO
5% Per year Turnover
|
|
Assumed
Rates
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Beginning value |
|
10,000,000 |
10,807,500 |
11,680,206 |
12,623,382 |
13,642,720 |
Annual Portfolio Return |
10% |
1,000,000 |
1,080,750 |
1,168,021 |
1,262,338 |
1,364,272 |
Annual Portfolio Turnover |
5% |
550,000 |
594,413 |
642,411 |
694.286 |
750,350 |
Tax Rate Paid Annually |
-35% |
-192,500 |
-208,044 |
-224,844 |
-243,000 |
-262,622 |
Ending Value |
|
10,807,500 |
11,680,206 |
12,623,382 |
13,642,720 |
14,744,370 |
Reported Return |
10.00% |
Assumes zero
cost basis portfolio, taxes paid on portfolio turnover only |
After Tax Return |
8.08% |
*Returns
are annual compound returns |
TAX INEFFICIENT PORTFOLIO
20% Per year Turnover
|
|
Assumed
Rates
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Beginning value |
|
10,000,000 |
10,695,000 |
11,438,303 |
12,233,265 |
13,083,476 |
Annual Portfolio Return |
15% |
1,500,000 |
1,604,250 |
1,715,745 |
1,834,990 |
1,962,521 |
Annual Portfolio Turnover |
20% |
2,300,000 |
2,459,850 |
2,630,810 |
2,813,651 |
3,009,200 |
Tax Rate Paid Annually |
-35% |
-805,000 |
-860,948 |
-920,783 |
-984,778 |
-1,053,220 |
Ending Value |
|
10,695,000 |
11,438,303 |
12,233,265 |
13,083,476 |
13,992,778 |
Reported Return |
15.00% |
Assumes zero
cost basis portfolio, taxes paid on portfolio turnover only |
After Tax Return |
6.95% |
*Returns
are annual compound returns |
|