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What Would Yale Do If It Were Taxable?

Patrick Geddes, Lisa R. Goldberg, PhD, and Stephen W. Bianchi, CFA
Published in Financial Analysts Journal, July/August 2015

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The information contained within this paper was carefully compiled from sources Aperio believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. In particular, none of the examples should be considered advice tailored to the needs of any specific investor. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.

With respect to the description of any investment strategies, simulations, or investment recommendations, we cannot provide any assurances that they will perform as expected and as described in our materials. Past performance is not indicative of future results. Every investment program has the potential for loss as well as gain.

Any forward-looking statements or estimates are based on assumptions, and actual returns are expected to vary from any such statements or estimates. No reliance should be placed on any such statements or forecasts when making any investment decision. The assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. The results and analysis are not guarantees of future results because they are derived from mathematical modeling techniques of the economic and financial markets that may or may not reflect actual conditions and events.

The performance figures reflected in the tables and charts in this report are hypothetical, shown for illustrative purposes only, and not based on actual investments. Furthermore, they do not reflect the deduction of any management fees, which would lower performance returns. Hypothetical performance has inherent limitations, and investors may experience investment results materially different from those portrayed.

The value added from the tax-advantaged equity strategy reflects Monte Carlo simulations based on the following assumptions:

  • Time Horizon: 10 years
  • Individual Stock Volatility: 41%
  • Dividend Yield: 2.0% - Bid/Ask Spread (round-trip): 0.08%
  • Annual Delisting from Index: 4.0%
  • Per-Share Commissions: $0.01
  • Expected Market Return: 7.0%

Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated, i.e., the examples and calculations are intended to be representative of some but not all taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax and asset allocation, there may be situations in which the recommendations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding. Taxpayers paying lower tax rates than those assumed or without taxable income would earn smaller tax benefits from tax-advantaged indexing or even none at all compared to those described.