Tags: denis | kleinfeld | After-Tax | Cash | Yield

After-Tax Cash Yield Is What Really Counts

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Monday, 29 Nov 2010 09:04 AM Current | Bio | Archive

What you get to keep is the only thing that counts at the end of any investment day.

With everyone so focused on chasing “yield,” it seems that the impact on an investor's taxes in determining the true rate of return on an investment has largely been forgotten.

As so many investors are now finding out, they relied on their investment advisers, brokers or money managers to make investment purchases, which we now know no one really understood.

Adding insult to injury, investors like you not only paid the investment fees, but also got stuck with the cost of tax consequences.

For investment managers, the incentive was — and still is — to maximize pretax returns since that is the yield on which they calculate their base compensation and incentive fees.

Understandably then, tax minimization was just not an important consideration for the person doing the investing — as opposed to you, whose money is being invested.

With next year's tax rates still being debated in Congress, the tax impact on investments is in the spotlight. Tax rates are already high and investors take quite a fiscal haircut as it is.

The potential for increasing capital-gain and ordinary-income rates merely highlights the importance of having investments that are tax efficient.

I have been told by many investment professionals that most investments — hedge funds, for example — are by their nature tax-inefficient. It makes sense when you consider all the factors.

The fund managers who are busy trying to create fee-producing yield don’t see the advantage of taking time to engage in extra strategies, such as long/short strategies, that could properly exploit the difference between capital-gain and ordinary-income rates to create more favorable returns for the investor.

Pretax yield is where their money is made.

Tax efficiency in fund management may be something that is considered important only as part of the marketing strategy to entice you to part with your money.

However, as an investor, the benefits of effective tax management, especially with today's pressures to get some yield, can make all the difference in having some extra money in your pocket — or you just being a vehicle to generate cash for the investment manager's pocket.

It is quite a simple analysis to see that reducing the amount of your money that you pay to the U.S. Treasury, from ordinary income rates to capital gain rates, is a major savings.

The extra cash return means quite a valuable premium when considering the investment returns, and the risks, in today's investment environment.

Tax strategies need to be carefully analyzed. Wall Street doesn't seem to have any problems in creating financial strategies that they can sell as technically legitimate tax-benefited investments. These financial structures are usually so complex that they aren’t even readily comprehensible to mathematical wizards. And then comes the Internal Revenue Service, whose displeasure with these arrangements has severe consequences.

Without question, investors need to discuss any investment strategies with their own professional tax advisers. Even under the best of circumstances, the interpretation of tax law can be uncertain and, of course, readily subject to change at the whim of the Congress or even by a simple change by a revenue ruling.

Investment-management or fund-adviser fees, and other administrative charges, are not the only costs that you must consider in computing overall yield. When it comes to investing, it is the after-tax cash yield that really counts.

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Kleinfeld
What you get to keep is the only thing that counts at the end of any investment day. With everyone so focused on chasing yield, it seems that the impact on an investor's taxes in determining the true rate of return on an investment has largely been forgotten. As so...
denis,kleinfeld,After-Tax,Cash,Yield
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2010-04-29
Monday, 29 Nov 2010 09:04 AM
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