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2017 Year-End Distributions & Portfolio Management

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At Index Fund Advisors, it is standard operating procedure for us to tailor how we manage client portfolios at year-end in anticipation of dividend and capital gains distributions from the mutual funds that we buy. The gist of this strategy is that we do not want to buy into a taxable event (i.e. dividend and capital gains distributions), thus creating an even bigger tax liability for our clients.

Although many clients may not recognize the underpinnings of our Portfolio Management & Research Department, they can be rest assured that we are constantly running a cost/benefit analysis for our clients’ portfolios. Whenever a deposit or withdrawal or rebalancing task is requested, we are always asking ourselves what is the most cost efficient way of completing the task at hand. Although we believe in efficient markets, where millions of market participants are constantly setting prices so that they provide a positive expected return, we also know that there are costs involved in order to capture that expected benefit.

Year-end distributions are no different. Using the most conservative tax assumptions on different distribution types as well as long-term historical asset class returns, we can form an idea of when the cost of purchasing into a portfolio does outweigh the benefit of doing so. Dimensional Fund Advisors (DFA) provides us with their estimates on dividends, short-term capital gains, and long-term capital gains distributions so that we can better estimate tax implications for our investors. This allows our Portfolio Management and Research Department to make a decision as to when to stop buying a particular mutual fund based on the expected tax liability and the expected return of that particular asset class. We refer to these dates as “Stop Purchase Dates.” It is important to note that this process only applies to taxable accounts.

For example, if we look at the DFA Emerging Markets Value Portfolio (DFEVX), DFA has provided us income, short term capital gains, and long term capital gains distributions as a percentage of NAV. Applying the most conservative Non-Qualified Dividend, Short Term Gain, Qualified Dividend, Long Term Capital Gain, and Average Foreign Dividend tax rates, we can estimate the tax impact as a percentage of NAV. For DFEVX, the estimated tax impact is 0.26% of NAV. Over the last 50 years, the average monthly return for DFEVX has been 1.28%, or approximately 0.32% per week. So it wouldn’t make sense to buy into DFEVX a couple of days before its recorded dividend date since we know that we will be incurring a estimated cost of 0.26% of NAV and expect to receive less than that in return. Therefore, IFA would advise to stop purchasing that particular fund about a week before its ex-dividend date, which happens to be 12/15/2017.

Below is a table showing all of the different mutual funds that we utilize in taxable accounts along with their respective Stop-Purchase Date. We can resume buying these particular funds on the ex-dividend date. The table is organized by "Stop Purchase Date" starting with the earliest. 

Name Symbol Stop Purchase Date Ex-Dividend Date
One-Year Fixed Income DFIHX 11/6/2017 12/15/2017
Two-Year Global Fixed Income DFGFX 11/6/2017 12/15/2017
Global Real Estate Securities DFGEX 11/6/2017 12/15/2017
Short-Term Government DFFGX 11/7/2017 12/15/2017
International Small Cap Value DISVX 11/12/2017 12/15/2017
Social Fixed Income DSFIX 11/13/2017 12/15/2017
Five-Year Global Fixed Income DFGBX 11/15/2017 12/15/2017
International Small Co. DFISX 11/18/2017 12/15/2017
TM US Targeted Value DTMVX 11/19/2017 12/15/2017
TM US Marketwide Value DTMMX 11/21/2017 12/15/2017
TM US Small Cap DFTSX 11/23/2017 12/15/2017
Emerging Markets Small Cap DEMSX 11/25/2017 12/15/2017
US Social Core Equity 2 DFUEX 11/29/2017 12/15/2017
US Sustainability Core DFSIX 12/1/2017 12/15/2017
TA US Core Equity 2 DFTCX 12/5/2017 12/15/2017
International Vector Equity DFVQX 12/5/2017 12/15/2017
Global Allocation 60/40 DGSIX 12/5/2017 12/15/2017
International Core Equity DFIEX 12/8/2017 12/15/2017
International Sustainability Core DFSPX 12/9/2017 12/15/2017
International Social Core Equity DSCLX 12/9/2017 12/15/2017
Emerging Markets Value DFEVX 12/9/2017 12/15/2017
Global Allocation 25/75 DGTSX 12/9/2017 12/15/2017
TM International Value DTMIX 12/10/2017 12/15/2017
Global Equity DGEIX 12/10/2017 12/15/2017
TM US Equity DTMEX 12/11/2017 12/15/2017
Emerging Markets Core Equity DFCEX 12/11/2017 12/15/2017
Emerging Markets DFEMX 12/11/2017 12/15/2017
Emerging Markets Social Core Equity DFESX 12/12/2017 12/15/2017

For anyone making a deposit into a taxable account during the “Stop Purchase” Period, we would look to buy into a different asset class, if available. If the deposit is large enough to where we would need to buy across multiple asset classes, we would look for the best alternative that doesn’t push the overall asset allocation out of alignment, but there may be the chance that the deposit will stay in cash for a short period of time. Again, our Portfolio Management & Research Department is constantly doing this type of cost/benefit analysis for our clients.

Should you have any questions in regards to IFA’s policy on handling year-end distributions, feel free to contact your personal IFA Wealth Advisor at 888-643-3133.