Curt Overway, CFA®
Co-Head, Natixis Investment Managers Solutions
ManagingTaxable Investments
Natixis Advisors, LLC does not provide tax or legal advice.Please consult with a tax or legal professional prior to making any investment decisions.
FOR FINANCIAL PROFESSIONALS ONLY
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Clients’ Biggest Personal Financial Fears
2
How taxes may impact investments portfolio
Introduction
Investors Want Guidance in the Complicated Process of Managing Their Wealth
Source: Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research in February and March 2019. Survey included 9,100 individual investors in 25 countries, including 750 in the United States.
4.4%
7.1%
10.1%
15.6%
17.5%
18.4%
25.9%
34.7%
38.5%
48.5%
49.5%
0% 10% 20% 30% 40% 50% 60%
Education funding
Performance of my company
Job security
Accumulating debt
Real estate values
Cash flow
Not having enough money to save
Maintaining my standard of living
Taxes
Healthcare costs
Large unexpected expense
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Quantifying the Cost of Taxes
• Explaining After-Tax Mutual Fund Performance²
– Equity investors in top tax brackets lost 2.2% annually to taxes (1981–1998)
– Risk, pre-tax performance, investment style and expenses are important determinants of future after-tax results
• The Value of Tax-Efficient Investments³– Investors in top tax bracket lost 1.84%
annually to taxes (1995–2005)
• Tax-Efficient Asset Management: Evidence from equity mutual funds⁴
– Higher tax burden funds do not exhibit superior before-tax performance
– The average long-term capital gains overhang is 10.3% historically
Academic research
• Taxable investors gave up between 1% and 2% of return to taxes
• Carryover losses are typically used within 2 years of downturn
• Historically taxes are at least as importantas fees
Lipper Analytics | Tax Study
How taxes may impact investments portfolios
2010 2000–2009¹
3
1. Lipper Analytics 2010 Tax Study, Roseen, Tom, “Taxes in the Mutual Fund Industry - 2010,” Refinitiv, a Thomson Reuters company.2. Peterson, J.D., P.A. Pietranico, M.W. Riepe, and F. Xu, ”Explaining After-Tax Mutual Fund Performance.” Financial Analysts Journal, Vol. 58, No. 1 (January/February 2002).
Taylor & Francis Ltd, http://www.tandfonline.com & the CFA Institute, https://cfainstitute.org/. 3. Longmeier, G. and G. Wotherspoon, “The Value of Tax Efficient Investments: An Analysis of After-Tax Mutual Fund and Index Returns.” The Journal of Wealth Management, Fall 20064. Clemens, S. and Zhang, H., “Tax Efficient Asset Management: Evidence from equity mutual funds,” December 27, 2014
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Impact of Tax Drag
4
How Taxes May Impact Investment Portfolios
How taxes may impact investment portfolios
Growth of $100,000 (S&P 500®with 0%, 0.5%, 1% and 2% tax drag, 11/30/1995– 2/31/2020)
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.Tax drag is a measure of how much taxes reduce investment returns, after accounting for any tax liability generated by the investments. This tax liability can result from events such as capital gains, dividends and interest income. In this analysis we’ve assumed the top federal tax rates apply.
$984,385
$869,411
$767,827
$598,787
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000D
ec 9
5
Dec
96
Dec
97
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec
03
Dec
04
Dec
05
Dec
06
Dec
07
Dec
08
Dec
09
Dec
10
Dec
11
Dec
12
Dec
13
Dec
14
Dec
15
Dec
16
Dec
17
Dec
18
Dec
19
Dec
20
S&P 500S&P 500 with 0.5% tax dragS&P 500 with 1% tax dragS&P 500 with 2% tax drag
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Deficits and TaxesHow taxes may impact investments portfolio
Ongoing budget deficits and recent stimulus spending have led to very high levels of government debt• Both on an absolute level and
as a percentage of GDP
• Debt as percentage of GDP is currently well above previous peak (end of WWII)
Increased government debt generally implies higher future tax rates
While difficult to forecast tax law changes, it is more likely that income and estate tax rates will increase than that they will decrease
5
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Tax Code Changes Being ConsideredOutlook for taxes?
Additional taxes onHigh earners
Increased marginal rate for high-income households
Higher capital gainstax rates
Changes to estate taxes/ step up in basis
Increase incorporate tax rates
Will the tax policy changes be retroactive?
6
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Investment Vehicle Comparison – Tax Implications
• Client establishes own cost basis ineach security
• Taxable events occur when underlyingsecurities are sold
• Gains AND losses
• Greater ability to gift highly appreciated securities
2. Separately Managed Accounts
• Required to distribute net income and capital gains at least annually
• Cost basis is shared with other investors inthe fund
• ETFs can minimize capital gain distribution through creation/redemption process
• Investors taxed on distributions & when fund shares are sold
1. Mutual Funds and ETFs
Managing taxable wealth
7
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Tax Loss Harvesting (and Gifting) OpportunitiesHow taxes may impact investment portfolios
Winners and losers in S&P 500® (12/31/1990–12/31/2020)
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-100%
-75%
-50%
-25%
0%
25%
50%
75%
100%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
S&P
500®
annu
al re
turn
s
Perc
ent o
f pos
itive
mov
ers
vs.
nega
tive
mov
ers
in th
e S&
P 50
0®
Positive movers Negative movers Index return Avg. positive movers Avg. negative movers
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.Source: Thomson Reuters and Standard and Poor’s
8
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Equity Mutual Fund Distribution Trends 1991–2020Managing taxable wealth
Equity mutual fund history: capital gain distribution ratio
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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.Note: Distribution ratios are calculated by dividing total equity mutual fund capital gains distributions by year-end net assets for each year. Sources: Investment Company Institute 2021 Factbook and Natixis Investment Managers Solutions.
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Equity Mutual Fund Distribution Trends 1991–2020Managing taxable wealth
Equity mutual fund history: capital gain distribution ratio
10
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2000‒9%
2001‒12%
2002‒22%
2008‒37%
2018‒4%
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results.Note: Distribution ratios are calculated by dividing total equity mutual fund capital gains distributions by year-end net assets for each year. Sources: Investment Company Institute 2021 Factbook and Natixis Investment Managers Solutions.
S&P 500® negative calendar year returns
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Unified Managed AccountsManaging taxable income
• Overlay manager receives modelfrom subadvisors
– Implements strategies based on model portfolio provider instructions
– Customizes client accounts as needed
• Overlay manager serves as discretionary manager on client portfolios
• Overlay manager can coordinate activity across entire portfolio
– Increased opportunities for tax management
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Overlay Manager
Manager 1 Manager 2 Manager 3 Manager 4
Individual client
portfolios
Types of SMA StrategiesManaging taxable wealth Natixis Investment Managers | Solutions
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• Actively managed• Seek to outperform benchmark
• Typically, model portfolio based
• Client owns individual stocks in managed account
• Direct Index• Seek to track index performance pre-
tax but outperform after taxes
• Highly customized – each account managed individually
• Client owns individual stocks in managed account
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Direct Indexing – Industry Trends
• Increased coverage in general media including WSJ, CNBC, Forbes, US News
• Product launches and M&A activity– Vanguard/Just Invest
– Morgan Stanley/Eaton Vance
– Blackrock/Aperio
– Schwab
12.40%11.30%
9.60%
3.30%
Direct Indexing ETFs SeparateAccount
Programs
Mutual Funds
Projected 5-Year Growth Ratesby Product
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Natixis Investment Managers | Solutions
Source: Cerulli Associates
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Direct Indexing – ApplicationsManaged Account Sponsors’ Assessment of the Opportunities for Direct Index Customization, 2021
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Source: Cerulli Associates
Analyst Note:Sponsors were asked to stack rank opportunities for direct indexing on a scale of 1 to 6. Sponsors’ top-ranked attributes are shown as Major Opportunities while Moderate Opportunities represent their second-andthird-ranked choices.
16.1%
35.5%
48.4%
12.9%
16.1%
35.5%
38.7%
45.2%
51.6%
Major Opportunity Moderate Opportunity
Ongoing tax optimization (through an overlay portfolio manager and/or an algorithmic process)
Tax management for accounts that are transitioning
Environmental, social and governance (ESG) factors
Factor investing (tilting portfolio toward momentum, value, low volatility, or income)
Thematic Portfolio (portfolios tailored to specific investment themes)
Excluding industry sector
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Conclusions
Taxes have had a material impact on investor returns even during times of historically low tax rates
Opportunities to maximize after-tax returns vary by investment vehicle type (mutual fund vs. ETF vs. SMA)
There are a number of techniques that can be employed throughout the investor lifecycle that may increase the after-tax return
Tax management should be considered at every step of the financial planning, portfolio construction and management process
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APPENDIX
Disclosures
16
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice.There can be no assurance that developments will transpire as forecasted. Actual results may vary.
This document may contain references to third party copyrights, indexes, and trademarks, each of which is the property of its respective owner. Such owner is not affiliated with Natixis InvestmentManagers Solutions or any of its related or affiliated companies (collectively “Natixis”) and does not sponsor, endorse or participate in the provision of any Natixis services, funds or other financialproducts. The index information contained herein is derived from third parties and is provided on an “as is” basis. The user of this information assumes the entire risk of use of this information. Each ofthe third party entities involved in compiling, computing or creating index information disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness,timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.
All investing involves risk, including possible loss of principal. Please read the risks associated with each investment prior to investing. Detailed discussions of each investment’s risks are includedin Part 2A of each firm’s respective Form ADV. The investments highlighted in this presentation may be subject to certain additional risks.
Performance data quoted represents past performance and is no guarantee of future results. Indexes are unmanaged, do not incur fees, and include reinvestment of dividends and interestincome, if any. It is not possible to invest in an index.
Every situation is unique and this does not constitute tax advice. Please consult with your tax advisor.
Future tax rates and rates of return are unknown and will affect your personal outcome. All investments are subject to risk of loss. While we make every effort to ensure that our computations andgraphs are accurate, we make no guarantees of the numbers contained herein.
The index information contained herein is derived from third parties and is provided on an “as is” basis. The user of this information assumes the entire risk of use of this information. Each of thethird party entities involved in compiling, computing or creating index information disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness,timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.
Natixis Advisors, LLC provides advisory services through its division Natixis Investment Managers Solutions. Advisory services are generally provided with the assistance of model portfolioproviders, some of which are affiliates of Natixis Investment Managers, LLC. Natixis Advisors, LLC does not provide tax or legal advise. Please contact with a tax or legal professional prior tomaking any investment decisions.
Copyright © 2021 Natixis Advisors, LLC – All rights reserved
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To learn more about Natixis Investment Managers Solutions Direct Indexing Strategies,please contact our Sales Desk. Call 800-862-4863 3881675.1.1
Exp. 3/31/2022
Thank you
Natixis Advisors, LLC does not provide tax or legal advice.Please consult with a tax or legal professional prior to making any investment decisions.
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Curt Overway, CFA®
Co-Head, Natixis Investment Managers Solutions
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