STRATEGIC ACTIVE TAX MANAGEMENT

Transcription

1 Fundamental Investing with Quantitative Tools STRATEGIC ACTIVE TAX MANAGEMENT Maximize Your After Tax Wealth 2017

2 Convergence Overview Fundamental Approach, Systematically Applied Founders have worked together for more than 20 years Long-standing performance track record that began in 2005 when the firm was founded Manage 3 Mutual Funds Manage over 300 SMA accounts Manage over $390 million in assets Mariner Holdings provides key operational, compliance, legal, marketing and accounting-related support Firm Members Years Experience David J. Abitz, CFA, President & Chief Investment Officer 24 Todd Hanson PMP, CSM, Senior Analyst, Director of Technology 24 Jonathan Franklin, Senior Analyst, Data Systems Manager 13 Justin Neuberg, CFA, Portfolio Manager 15 James Dwyer, Director of Sales 6 Amy Schwalenberg, Business Operations Manager 11 Data as of 12/31/2016 Convergence Investment Partners, LLC Page 2

3 The Convergence Approach to Active Tax Management Objective Track the U.S. Market pre-tax (eg. Russell 1000 Index or S&P 500 Index) Systematically harvest tax losses Systematically offset gains with realized tax losses Efficiently balance tracking error, turnover & losses Investment Process Establish each investor their own portfolio to track the index Track each individual security, in each portfolio and systematically harvest losses Rebalance portfolio to mirror the characteristics of the benchmark Convergence Investment Partners, LLC Page 3

4 Tax Management Matters $5,000,000 $4,000,000 Hypothetical Outcomes with Tax Managed Strategy Pre-Tax $3,000,000 $2,000,000 Unmanaged $1,000, years 8% annual pretax return 42.5% Tax Rate $- This is a hypothetical example used for illustrative purposes only. It assumes the investor is in the 42.5% tax bracket and assumes an 8% annual pretax return over 20 years. It is not representative of any specific investment or combination of any investments. It does not take into account state or local taxes, fees and expenses, the potential impact of net gains on adjusted gross income, the Medicare investment surtax, or dividends. No graph, chart, or formula should in and of itself be used to determine which securities to buy or sell. The assumed rate of return used in this example is not guaranteed, and you may have a gain or loss when you sell investments. Investments that have potential for a 8% annual rate of return also come with risk of loss. Convergence Investment Partners, LLC Page 4

5 Are there losses to harvest? 100% 50% 0% -50% % Positive Return % Negative Return Russell 1000 Index Return -100% Percent of Russell 1000 Index with positive or negative returns - calendar years, Convergence Investment Partners, LLC Page 5

6 The Convergence Approach to Active Tax Management Objective Track the U.S. Market pre-tax (eg. Russell 1000 Index or S&P 500 Index) Systematically harvest tax losses Systematically offset realized gains with realized tax losses Efficiently balance tracking error, turnover & losses Convergence Investment Partners, LLC Page 6

7 How an Active Tax Management Strategy Works Establish each investor their own portfolio to track the index Track each individual security, in each portfolio and systematically harvest losses Rebalance portfolio to mirror the characteristics of the benchmark Convergence Investment Partners, LLC Page 7

8 Does it work? Simulated losses harvested over staggered 10 year periods Each account has its own cost basis based on inception date Over longer time periods significant losses can be harvested Donation of low basis positions may improve loss-harvesting Periodic contributions may improve loss-harvesting Reinvestment of reduced taxes may improve loss-harvesting 10 year simulations; initial account value $1,000,000; monthly rebalance; 12.5% loss threshold. Final Account Values use Russell 1000 Index Total Return. *See disclosures for additional information on calculation method. Convergence Investment Partners, LLC Page 8

9 Convergence Active Tax Management Full market participation Systematically harvested losses Increased flexibility Convergence Investment Partners, LLC Page 9

10 Convergence Investment Team David J. Abitz, CFA President & Chief Investment Officer David Abitz is the President & Chief Investment Officer of Convergence Investment Partners, LLC and founded QIS Advisors, the predecessor firm to Convergence, in David has over two decades of investment experience as a professional money manager. As head of the investment group, David has developed and refined the team s proprietary stock ranking process that is anchored in the firm s philosophy of differentiating stocks based on underlying company fundamentals. David s investment discipline has been shaped by decades of experience in bottom-up stock selection in both long-short and long-only strategies. Prior to founding Convergence, David was Chief Investment Officer of the Custom Quantitative Solutions Group at BMO Investment Management (formerly M&I Investment Management Corp.) from 2000 to 2004, where he managed the Equity Income Fund, Tax Efficient Portfolios, and Dividend Income Strategies. David began his career in the early 90 s at M&I in Milwaukee, WI with diverse experiences as equity trader, equity research analyst, and co-fund manager. David is a Chartered Financial Analyst with a bachelor s degree in finance from the University of Wisconsin - Oshkosh and an MBA from the University of Wisconsin - Madison. He is a member of the Society of Quantitative Analysts, the Chicago Quantitative Alliance Group, the CFA Institute and the local CFA Society of Chicago. Certification Education CFA Bachelors from University of Wisconsin, Oshkosh Masters from University of Wisconsin, Madison Justin Neuberg, CFA Portfolio Manager Justin Neuberg is co-manager at Convergence Investment Partners, LLC for all the firm s products. He joined the firm in 2013 and is actively involved in the day-to-day research, monitoring, and management of each of the investment products at Convergence. Justin oversees the ongoing research of factor effectiveness, portfolio exposures, and the empirical results for the company s fundamentally-based products. In addition, Justin focuses on risk assessment and risk management for the various portfolio strategies. Justin has an extensive background in investment analytics and investment research. He has worked in financial services since Prior to joining the firm, Justin was an analyst and portfolio strategist at Mariner Wealth Advisors and CBIZ Wealth Management. During these years, he worked to develop a bond issuer scoring system which ranked over 400 corporate issuers on real-time financial statistics. Mr. Neuberg also developed a quantitative scoring system to rank global equity offerings based on company specific metrics for an Equity Income product, as the product s lead analyst. Justin is a CFA charterholder with a bachelor s degree in physics from the University of Virginia and an MBA (finance) from Georgetown University. He is also a member of the Chartered Financial Analyst Society of San Diego. Certification Education CFA Bachelors from University of Virginia Masters from Georgetown University Convergence Investment Partners, LLC Page 10

11 Convergence Investment Team Todd Hanson PMP, CSM Senior Analyst, Director of Technology Todd Hanson is responsible for overseeing all aspects of investment technology and investment operations at Convergence Investment Partners. Prior to founding QIS Advisors, the predecessor firm to Convergence, in 2004, Mr. Hanson held the position of vice president of technology for M&I Investment Management Corp., a $17 billion investment advisor. Previously he has held positions in financial services consulting, project management, banking, and operations management. Certification PMP, CSM Education Bachelors from Marquette University Masters from University of Wisconsin, Milwaukee Jonathan Franklin Senior Analyst, Data Systems Manager Jonathan Franklin is head of research for Convergence. Working alongside Mr. Abitz, Mr. Franklin s responsibilities cover all aspects of data management and integrity, empirical research, and portfolio management. With an extensive background in data management as a technical lead manager for Fair Isaac Corporation, Mr. Franklin has experience utilizing various database management programming languages to extract, validate, and transform data for client usage. His experience also includes the discovery and investigation of client data, design of client databases, and implementation of those designs for client utilization. Education Bachelors from Bethel College Jim Dwyer Director, Client Portfolio Manager Jim Dwyer joined Convergence Investment Partners in 2016 as Director and Client Portfolio Manager. Previously, Jim has been a strategic partner to the team at Convergence through his role as Regional Vice President at Montage Investments since In his role with Convergence Jim will continue to bring our investment strategies to partnering RIA s, Family Offices, Institutions, and Consulting Firms. Education Bachelors from University of Kansas Amy Schwalenberg Business Operations Manager Amy has been with Convergence since 2016 where she oversees daily client account maintenance, performance reporting, investment attribution, and data dissemination. Amy has worked in the financial services industry since Prior to Convergence, Amy held a similar role at Northwestern Mutual Life. She was also employed as a mutual fund accountant at Thrivent Financial and as a performance analyst for Robert W. Baird. Education Bachelors from University of Wisconsin Whitewater Convergence Investment Partners, LLC Page 11

12 Appendix Ten year simulations beginning in: Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net year 1 $(92,032) $- $(89,683) $- $(247,447) $- $(242,006) $794 $(278,098) $- year 2 $(19,176) $13,216 $(103,537) $(17,482) $(85,206) $(13,665) $(143,527) $(33,030) $(13,750) $(7,742) year 3 $(83,864) $15,878 $(73,134) $(8,818) $(112,639) $(32,749) $(13,672) $4,562 $(6,866) $22,741 year 4 $(88,258) $7,525 $(107,334) $(32,123) $(9,687) $364 $(5,030) $17,626 $(1,822) $16,322 year 5 $(92,618) $(16,041) $(3,442) $(2,703) $(2,309) $16,264 $(2,639) $14,812 $(10,038) $15,393 year 6 $(10,370) $2,848 $(6,525) $26,297 $(1,761) $13,979 $(7,292) $19,175 $(7,065) $42,898 year 7 $(7,332) $28,507 $(2,821) $23,416 $(3,433) $16,229 $(12,129) $32,862 $(172,779) $(48,403) year 8 $(401) $20,129 $(5,501) $23,519 $(9,271) $37,932 $(130,155) $(46,581) $(41,042) $(3,655) year 9 $(7,363) $27,974 $(7,042) $32,030 $(127,755) $(43,600) $(40,310) $(5,616) $(8,220) $16,683 year 10 $(10,599) $41,780 $(150,186) $(44,465) $(40,554) $(1,097) $(3,552) $10,277 $(22,100) $25,879 totals $(412,013) $141,816 $(549,205) $(331) $(640,062) $(6,343) $(600,312) $14,883 $(561,782) $80, Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net Short Term Net Long Term Net year 1 $(34,090) $- $(50,075) $590 $(62,849) $- $(43,659) $- $(68,442.00) $(6,240.00) year 2 $(4,939) $19,738 $(11,825) $(2,663) $(13,626) $1,602 $(14,840) $(5,969) $(248,342.00) $(85,737.00) year 3 $(9,865) $22,745 $(11,180) $1,357 $(14,889) $5,686 $(215,864) $(92,954) $(54,151.00) $(18,722.00) year 4 $(11,745) $21,379 $(11,267) $16,808 $(214,986) $(74,159) $(54,589) $(19,874) $(5,353.00) $10, year 5 $(7,490) $28,522 $(219,267) $(72,220) $(51,528) $(15,821) $(4,303) $13,636 $(13,590.00) $6, year 6 $(220,539) $(60,094) $(57,553) $(10,689) $(6,867) $17,774 $(17,039) $15,814 $(7,508.00) $17, year 7 $(56,581) $(10,005) $(7,345) $17,370 $(21,592) $16,486 $(3,498) $18,752 $ $20, year 8 $(12,586) $19,179 $(20,937) $21,416 $(4,997) $23,272 $(2,400) $22,698 $(2,955.00) $13, year 9 $(29,227) $36,704 $(3,868) $11,574 $(400) $22,161 $(6,495) $25,719 $(23,661.00) $36, year 10 $(2,326) $24,636 $412 $29,435 $(6,131) $15,644 $(26,198) $59,791 $(11,930.00) $25, totals $(389,387) $102,803 $(392,905) $12,978 $(397,864) $12,645 $(388,886) $37,612 $(435,150.00) $20, Assumptions: $1M invested, 10 year time period, first simulation started on 12/31/1996 & ends 12/31/2006; Portfolio is optimized to Russell 1000 Index monthly; 12.5% loss threshold. *See disclosures for additional information on calculation method. Convergence Investment Partners, LLC Page 12

13 Important Disclosures No Warranties Convergence Investment Partners, LLC ( CIP ) takes care to ensure that the information provided is accurate and up to date. However this documentation is provided without warranties of any kind, either express or implied, including but not limited to warranties of title or implied warranties of merchantability or fitness for a particular purpose, or non-infringement. Opinions expressed herein are subject to change without notice. The Company will not assume any liability for any loss or damage of any kind, whether direct or indirect, arising or caused by the use of any part of the information provided. Copyright You may not copy, reproduce, recompile, decompile, disassemble, reverse engineer, distribute, publish, display, perform, modify, upload to, create derivative works from, transmit or in any way exploit any part of this material, except that you may use for your own personal, noncommercial use. The analysis and presentation included in this material may not be re-circulated, redistributed or published without our prior written consent. Modification of the material s content would be a violation of our copyright and other proprietary rights. Additionally, you may not offer any part of this material for sale or distribute it over any other medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without our prior written consent. The information contained herein may not be used to construct a database of any kind. Nor may the information be stored (in its entirety or in any part) in databases for access by you or any third party or to distribute any database services containing all or part of the information without our prior written consent. Disclosures Past Performance is not a guarantee of future results. Any investment contains risk including the risk of total loss. There is no guarantee that an investment with the strategy will meet its investment objectives. No graph, chart, or formula should in and of itself be used to determine which securities to buy or sell. This presentation is limited to the dissemination of general information pertaining to CIP investment services and general economic market conditions. The information contained herein should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax Convergence Investment Partners, LLC Page 13

14 Important Disclosures (cont d) considerations. There is no guarantee that the views and opinions expressed in this presentation will come to pass. With regard to sources of information, certain of the economic and market information contained herein has been obtained from published sources and/or prepared by third parties. While such sources are believed to be reliable, CIP or their respective affiliates, employees, or representatives do not assume any responsibility for the accuracy of such information. The S&P 500 Index is a market-value weighted index provided by Standard & Poor s comprised of 500 stocks chosen for market size and industry group representation. The Russell 3000 Index is a measure of the performance of the largest 3000 US companies. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is reconstituted annually to ensure new and growing equities are reflected. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 Value Index measures the performance of the large cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values and the Russell 1000 Index. You cannot invest directly in an index. Comparison to a benchmark is for illustrative purposes only and the volatility of a benchmark may be materially different from the volatility of the strategy due to varying degrees of diversification and/or other factors. You cannot invest directly in any index. The full fee schedule for all Convergence Investment Partners products is available upon request. It should be noted that the collection of fees produces a compounding effect on the total rate of return net of management fees. Convergence Investment Partners reserves the right to modify fee structures on an account by account basis at its discretion. *Disclosures for additional information on calculation method: Information included on page 8 and page 12 is for illustrative purposes only. The information is provided to demonstrate tax loss harvesting over a ten year period. It does not represent actual results. The tax loss simulations shown on pages 8 & 12 were generated using a 12.5% loss threshold. A loss threshold is the level of loss that, during a rebalance, would trigger the sale of a security. The portfolio was generated using stratified sampling of the Russell 1000 Index (the benchmark) with a 0.20% posit level. The benchmark was stratified across the GICS industry groups and constituted monthly. The notion of posit level is to distinguish between core and non-core securities. Convergence Investment Partners, LLC Page 14

15 Important Disclosures (cont d) Cores are bought at benchmark weights whereas non-cores are purchased at one posit. Setting posit at 0.20% indicates that all securities with benchmark weights equal to or greater than 0.20% are to be considered core. Non-core securities are sampled based on a market capitalization objective function and are used to keep the industry weights in balance with the benchmark. If a security is sold for a loss, it is excluded, for a minimum of 30 days, from the population of securities used for re-replication. Simulated losses harvested do not represent actual trading and may not reflect the impact that material economic and market factors might have had on investment decision-making. Results are theoretical and are not based on the performance of actual portfolios. Results do not take into account management fees or trading costs. CIP is an SEC registered investment adviser with its principal place of business in the State of Wisconsin. Registration of an investment adviser does not imply a certain level of skill or training. CIP and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which CIP maintains clients. CIP may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by CIP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about CIP, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein or refer to the Investment Adviser Public Disclosure web site (www. adviserinfo.sec.gov). Please read the disclosure statement carefully before you invest or send money. Convergence Investment Partners, LLC Page 15