Asset Location

Year-End Fund Distributions & Portfolio Management

Asset Location

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. 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.

Although many clients may not recognize the underpinnings of our Risk Management 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.

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 percentage tax impact as a percentage of NAV. For DFEVX, the estimated tax impact is 0.48% of NAV. Over the last 50 years, the average monthly return for DFEVX has been 1.53%, or approximately 0.38% per week. So it wouldn’t make sense to buy into DFEVX a couple of days before its recorded dividend date since I know that I will be incurring a estimated cost of 0.48% of NAV and only expect to receive 0.38% in return. Therefore, IFA would advise to stop purchasing that particular fund a week before its dividend record date, which happens to be 12/15/2014.

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

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 Risk Management 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.