Peter Crowley,
Managing Director,
Eaton Vance Wealth Strategies Group
Sponsored by Eaton Vance
When managing money for clients, most advisors discuss accumulation but rarely do we discuss tax efficiency and how that impacts a client’s wealth and portfolios. Can you discuss Eaton Vance’s Wealth Strategies approach?
Eaton Vance’s Wealth Strategies approach is twofold. First, we work to help advisors incorporate strategies that can reduce the overall tax drag in a client's portfolio. The advisor adds value by recognizing that clients don't typically get to keep pre-tax returns. Advisors and their clients tend to look more at after tax returns instead of viewing taxes as somewhat of a controllable cost of doing business. The benefit to the advisor is that we help the client become less focused on quarterly statements and more on the longer term picture.
Secondly, we are very consultative which tends to be unique to what most advisors have experienced. It is really about constructing a tax aware portfolio which requires the client to have cash available. Many times when a client owns a security in their portfolio they won't liquidate it because of embedded gains. We study the nature of the embedded gains and then propose a solution. We utilize in-kind transactions, meaning they actually fund us with securities and not cash. The demand for this approach has grown so much that we had to build a series of online tax calculators to help investors better understand the tax implications or potential benefits of different investment decisions. In essence, we are very granular on the tax side looking at the cost of each transaction.
How does active tax management enhance after tax returns?
When you really boil it down, it's about taking advantage of the opportunities that a fluctuating portfolio can present. It is about being constantly vigilant and opportunistic but in a way that the tax tail doesn't wag the dog. If you think about it, for example, a security may have started the year trading at $50 a share and ended the year trading at the same price. Most advisors would look at tax loss harvesting at the end of the year, however, clearly in this situation there is no ability to do that. The volatility pattern of that stock throughout the year could have created an opportunity to generate a tax loss. At Eaton Vance and through our affiliate Parametric, we look to be consistent and vigilant to generate tax losses which could be used in a myriad ways. If we can use the deduction or realized tax loss to offset gains elsewhere in a client's portfolio, your client keeps more of their wealth and lose less to taxes.
We can help raise the overall tax efficiency of the entire portfolio. The key is to do it systematically without hindering any portfolio construction goals. In other words, you don't want to sacrifice your portfolio performance expectations just to reduce the tax bill. It needs to be more balanced and nuanced. That is why advisors will generally partner with us.
Can you discuss how Parametric’s tax-managed Custom Core® strategies create flexible, tax efficient portfolios?
From a tax aspect, the flexibility really starts with the structure. With Parametric, we utilize separately managed accounts (SMAs) which provide a great platform for getting very granular when it comes to tax management. We don't deliver model portfolios which is becoming the industry norm — where everybody gets the same positions. We hand build each portfolio. That's because no two clients are the same and, frankly, no two entry points are the same either.
The flexibility lies in how we can look to shape a portfolio to match a client’s beliefs and needs, or even over exposures elsewhere in their portfolio. This might be achieved by putting a restriction on or adding a change to the portfolio to reflect a social or religious belief, implementation or even an investment, bias or tilt.
Initially, we generally start with an exposure that someone is looking for, such as the Russell 3000 or EAFE. Once we identify what they want to get exposure to, we work with the advisor to learn any preference or changes that the client would like to add. Next, we provide guidance on what it would look like from a tracking perspective. If your goal is to beat the Russell 3000 or, for example, you want to support Catholic Charities or restrict fossil fuels, what type of performance differential will that create as compared to the benchmark? Once funded, that's where the fun starts.
We constantly look for tax loss harvesting opportunities. Once we find them, we are very thoughtful. We actually replace the sold securities with other names with similar performance characteristics. This way we meet our first objective, which is to perform in line with the pre-tax view and the chosen benchmark, but also generate excess losses. In an SMA, the client owns the individual stocks, so the client owns the individual losses and they become portable. They could be used elsewhere in their portfolio. In summary, the goal is to provide performance in line with the chosen benchmark with tax efficiency plus additional realized losses that could be used by the client to offset other gains.
Can you discuss how Parametric’s Portfolio Overlay Strategies enable clients to express a particular market view “over” their portfolio?
Let’s start with an example. Let’s say a client had a portfolio of US stocks that largely correlated to the S&P 500 and that they feel very strongly that the index doesn't have much upside over the short term. Given that sentiment, they would like to enhance returns. They may wish to engage in an overly program that sells calls on the S&P 500. Conventional wisdom is that covered call programs do well in a flat to moderately improving market scenarios. However, another client may turn around and say, “Hey, I think the opposite. I think the markets have a ton of upside.” They may want to engage in an overlay program that would sell the downside and do put selling. We are managing these to implement and enhance the clients view. We can also do this in kind with assets that they already have. We do it in a very methodical, rules based manner so that we're not making the call. It's really purely about the clients call and enhancing their view on where they feel the market is headed. It could be tactical. It could be strategic. It really is all predicated off what the client’s view of the market is over the short and long term.
Can you discuss how you tailor portfolios to reflect client’s values and investment preferences?
Investors are getting far more aware of the power and impact they wield in the form of what they buy. It's akin to voting, but it's with your hard earned money, so you don't need to wait for an election. You could vote every day by where you put your dollars. It is really all about engagement. Through working with Calvert, another Eaton Vance affiliate that is a pioneer in engaging with corporate boards to help drive change, clients can be in the vanguard of responsible investing by investing with like-minded people who want to make a positive impact with their dollars.
We also have a pioneer in Parametric. Parametric engages with advisors and clients to create portfolios that can be very granular in terms of specific holdings. The holdings are be based off of the input the client provides. We want to be the manager that offers advisors the full spectrum of choice whether it be through Parametric or Calvert.
Once we know the wants and needs of the client, we can respond. It becomes very consultative. We work hand-in-hand with the advisor. After we have the client's input and understand their values and beliefs, we work with them to construct a portfolio that can best reflect those views. We need to be able to explain the potential ramifications in terms of tracking error and performance in relation to the benchmark. At the end of the day, clients want to exert their influence in areas that matter most to them. They also like to quantify the ramifications of incorporating it into their nest egg. It takes time and a lot of education. That is something that we have dedicated a lot of time to, devoting more resources to help the advisor educate their client.
Advisory services offered by Eaton Vance Management, Parametric Portfolio Associates LLC & Calvert Research and Management, SEC registered investment advisers and affiliates of Eaton Vance.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.
There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. The value of equity securities is sensitive to stock market volatility. Investing primarily in responsible investments carries the risk that, under certain market conditions, a strategy may underperform others that do not utilize a responsible investment strategy. In evaluating a company, the Advisor is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could cause the Advisor to incorrectly assess a company’s ESG performance. Option Strategy Risk - The effectiveness of an option strategy depends on a general imbalance of natural buyers over natural sellers of index options. This imbalance could decrease or be eliminated, which could have an adverse effect on a client portfolio. Taxes - Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation.
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