Mornngstar After-Tax Return Methodology Mornngstar Research Report 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or n part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
Contents Introducton 3 What Ths Means For Investors 5 Calculaton Assumptons 6 Calculaton Varables After-Tax Per-Share Dstrbuton Perodc Per-Share Fee 7 9 0 Pre-Lqudaton After-Tax Return 2 Post-Lqudaton After-Tax Return Number of Shares Acqured Cost Bass for Investments Held for Less than 2 Months Cost Bass for Investments Held for More than 2 Months Calculaton of Realzed Gan/Loss at Lqudaton Calculaton of Captal Gan Tax at Redempton 3 4 5 6 8 9 Concluson 20 Verson Hstory Verson Date Descrpton. 24 October 2003 Updated to reflect tax law changes from 2003.0 29 November 200 Orgnal publcaton Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 2
Introducton After-tax returns are measures of fund performance that take nto account the taxes a hypothetcal nvestor pays on fund dstrbutons and captal gans. Whle a fund s total return reflects the performance of the underlyng securtes, the after-tax return reflects the net gans or losses that an nvestor receves after payng taxes. Mornngstar ntroduced after-tax returns n July 993. Mornngstar currently reports after-tax returns for open-end mutual funds, closed-end mutual funds, and exchange-traded funds for the followng tme perods: year-to-date, one-month, three-month, sx-month, one-year, three-year, fve-year, 0-year, 5-year, and 20-year. In 200, the Securtes and Exchange Commsson (SEC) began requrng mutual funds to report standardzed after-tax returns n ther prospectuses. At that tme, Mornngstar updated ts methodology to be consstent wth the gudelnes publshed by the SEC. Ths document reflects Mornngstar s nterpretaton of those gudelnes. Ths document also reflects the changes that arose from the new tax bll n 2003, the Jobs and Growth Tax Relef Reconclaton Act. Ths bll lowered the tax rates for captal gans and ncome, and t ntroduced a new type of dvdend, qualfed dvdend ncome. Mornngstar updates effectve tax rates whenever there s a tax law change, but the 2003 tax bll prompted addtonal methodology changes to accommodate dstrbutons of qualfed dvdend ncome. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 3
The SEC defned two dfferent measures of after-tax total return: Pre-Lqudaton After-Tax Return (ATR pre ) The pre-lqudaton return reflects the tax effects of fund dstrbutons, such as short-term captal gans, long-term captal gans, and dvdends. Shareholders must pay tax on any dstrbutons they receve from the fund n the year n whch those payments are dstrbuted. The pre-lqudaton after-tax return does not reflect the captal gans/losses that nvestors mght ncur from sellng the fund at the end of the tme perod. Mornngstar also refers to ths measure as Return After Tax on Dstrbutons. Post-Lqudaton After-Tax Return (ATR post ) The post-lqudaton return reflects the tax effects for an nvestor who sells the fund at the end of the tme perod. In ths case, the nvestor owes taxes not only on dstrbutons, but also on any captal gans realzed upon sellng the fund. If the fund s prce apprecated over the course of the holdng perod, the nvestor would owe taxes on those gans. If the fund lost money, the nvestor mght have captal losses that could partally offset other gans. The captal gans/losses can be shortterm or long-term, based on the nvestor s holdng perod. Mornngstar also refers to ths measure as Return After Tax on Dstrbutons and Sale. A Note on Loads The SEC specfed that sales charges should be ncluded n the after-tax calculaton. Therefore, these are techncally load- and tax-adjusted returns and not smply tax-adjusted returns. Therefore, a fund s after-tax return may be lower than ts total return because of tax reasons, sales charges, or both. Ths s relevant for all funds, but especally so for muncpal-bond funds. Because muncpal-bond dvdends are exempt from federal tax, most nvestors expect mun-bond after-tax returns to be dentcal to the total returns. However, the pre-lqudaton after-tax return could be notceably lower f the fund has front- or back-end loads or f t dstrbuted captal gans (whch are taxable) durng that tme perod. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 4
What Ths Means For Investors Taxes are a sgnfcant consderaton for many nvestors who own mutual funds n taxable accounts. Investors pay taxes on dvdends and captal gans that are dstrbuted by the fund to them, and they may also pay taxes on captal gans when they sell a fund. As taxes contnue to reduce nvestors real returns, many nvestors are searchng for better tools to manage and evaluate tax ssues. Tax-adjusted returns help nvestors understand the tax labltes assocated wth ownng a fund. Some funds nvest n bonds and dvdend-payng stocks and therefore dstrbute a lot of dvdends. Shareholders pay taxes on those dvdends, but ths s not necessarly a bad thng some nvestors seek a regular source of ncome. Other funds make a delberate effort to mnmze taxable dstrbutons. These funds, especally tax-managed ones, lmt dstrbutons by nvestng n stocks that don t pay dvdends and by carefully offsettng captal gans wth losses. Investors can compare the total return, load-adjusted return, and after-tax return of a fund to understand how loads and taxes affect ther real returns. For most funds, Total Return >= Load-Adjusted Return >= Pre-Lqudaton After-Tax Return The dfference between total return and load-adjusted return reflects what the nvestor pad n sales charges. For no-load funds, these numbers wll be the same. The dfference between load-adjusted return and pre-lqudaton after-tax return reflects the taxes the hypothetcal nvestor pad on fund dstrbutons. Load-adjusted and pre-lqudaton returns wll be the same for funds that dd not make any dstrbutons durng that tme perod. If the numbers are not the same, t reflects the gans that the nvestor lost to taxes. The relatonshp between pre- and post-lqudaton after-tax returns s not as consstent, because whle both versons nclude captal gans, only the postlqudaton verson accounts for captal losses. Therefore, f the nvestor experenced a captal loss upon sellng the fund, the post-lqudaton return could be hgher than the pre-lqudaton return f the captal losses offset some dstrbuton gans. Conversely, f the nvestor experenced captal gans upon sellng the fund, the postlqudaton return (whch reflects the taxes on those gans) wll be lower. On rare occasons, the pre-lqudaton after-tax return can be greater than the load-adjusted return or total return f the fund dstrbuted foregn tax credts, whch are ncluded for tax returns but excluded for other performance reportng. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 5
Calculaton Assumptons Mornngstar makes the followng general assumptons for the after-tax return methodology. Many of these assumptons were outlned n the SEC s gudance to mutual fund companes about ths calculaton. Dstrbutons are taxed at the hghest federal tax-rate prevalng for each type of dstrbuton. After-tax proceeds from those dstrbutons are renvested. The approprate current or hstorcal federal tax rate s appled to each dstrbuton based on the dstrbuton date. State and local taxes are gnored. The calculaton does not reflect the tax effects of the alternatve mnmum tax, exemptons, phase-out credts, or any ndvdual-specfc ssues. The returns reflect all recurrng bult-n fees and non-recurrng charges lke sales loads. Sales loads are not appled to renvested dstrbutons. Front-loads are the only fees charged at the start of an nvestment perod. As per ndustry practce, the deferred load s appled to the lower of ether the begnnng NAV or the endng NAV of the orgnal shares purchased. If the deferred load s structured on a sldng, tme-based scale, Mornngstar uses the lower of the two amounts that straddle a specfc tme perod. For example, f a fund has a scheduled deferred load of 6% for year 0- and 5% for year -2, Mornngstar wll apply the 5% load to the one-year after-tax return calculaton. 2 Mutual fund nvestors may have gans/losses from other nvestments to offset the gans/losses from the fund at the end of the holdng perod. However, any gans/losses wll be offset wthn the fund frst before beng offset aganst outsde gans/losses. 2 There s no ndustry standard for the applcaton of tme-based deferred loads; some fund companes lower the load on the annversary date whle others do not drop the load to the next breakpont untl the day after the annversary of the purchase. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 6
Calculaton Varables The pre-lqudaton and post-lqudaton after-tax returns are both based on the same common set of varables. Prces: P b = prce per share (NAV) at the begnnng of the holdng perod P e = prce per share (NAV) at the end of the holdng perod P = the renvestment prce (NAV) for all dstrbutons pad on day 3 Loads and Fees: FL = maxmum front load DL = approprate deferred load for that tme perod RL = approprate redempton fee for that tme perod FEE = perodc (wrap) fees charged to an account * Regular Dstrbutons: DIV = taxable nterest ncome and taxable non-qualfed dvdends dstrbuted on day ($ per share) QDI = taxable qualfed dvdend ncome dstrbuted on day ($ per share) 4 EXD = tax-exempt nterest ncome and dvdends dstrbuted on day ($ per share) STG = short-term captal gans dstrbuted on day ($ per share) MTG = md-term captal gans dstrbuted on day ($ per share) 5 LTG = long-term captal gans dstrbuted on day ($ per share) ROC = return of captal dstrbuted on day ($ per share) * 3 Whle t s rare, t s possble that a fund company could select dfferent dates for the payment and renvestment of a dstrbuton. If the renvestment date s past the end of the holdng perod (.e. the ex-date s before the end of the tme perod but the renvestment date s stll forthcomng), the renvestment NAV s assumed to be the endng NAV (P e ). * These types of fees and dstrbutons are possble, but they are farly unusual for mutual funds. 4 Qualfed dvdends were ntroduced as part of the 2003 tax bll and were effectve startng January, 2003. Qualfed dvdends are those that are ssued by domestc corporatons and some foregn corporatons, subject to certan requrements. 5 Md-term captal gans were effectve from July 29, 997 through Dec. 3, 997, for nvestments held for more than one year but not more than 8 months. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 7
Specal Types of Dstrbutons: COM = commodty/collectble gans dstrbuted on day ($ per share) * REIT = real estate nvestment trust (REIT) (secton 250) dstrbutons on day ($ per share) * SMB = qualfed small busness dstrbutons (secton 202) on day ($ per share) * LMB = qualfed fve-year gan dstrbuted on day ($ per share)*, 6 RCG = retaned captal gan dstrbutons on day ($ per share) * FTC = foregn-tax credt related to DIV dstrbuted on day ($ per share) * Tax Rates: TXI = the maxmum federal ncome tax rate at tme TXD = the maxmum federal qualfed dvdend ncome tax rate at tme TXS = the maxmum federal short-term captal gan tax rate at tme TXM = the maxmum federal md-term captal gan tax rate at tme TXL = the maxmum federal long-term captal gan tax rate at tme TXC = the maxmum federal tax rate on commodty/collectble gan at tme TXR = the maxmum federal tax rate on REIT gan (secton 250) at tme TXQ = the maxmum federal tax rate on qualfed small busness gan (secton 202) at tme TX5 = the maxmum federal tax rate on qualfed fve-year gans at tme TCORP = the maxmum federal corporate tax rate at tme 6 Qualfed fve-year gans were ntroduced n 200. The tax law of 2003 repealed the lower tax rates for these gans, although the lower rates wll be renstated n 2009 when the 2003 tax benefts are scheduled to dsappear. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 8
The after-tax dstrbuton on day s made up of two components: the dstrbutons pad to the nvestor mnus the perodc fees charged to the nvestor. [] ATD = ATD' FEE ATD = the net after-tax per-share dstrbuton/fee on day ATD = the after-tax per-share dstrbuton on day FEE = the perodc per-share fee charged to the nvestor on day 7 ATD represents the net amount that s renvested n the fund on day. Renvested dstrbutons wll ncrease the number of shares held by the nvestor; fees alone wll reduce the number of shares. After-Tax Per-Share Dstrbuton The after-tax per-share dstrbuton, ATD, s calculated as follows: ( DIV + FTC ) ( TXI ) + QDI ( TXD ) + STG ( TXS ) + MTG ( TXM ) + LTG ( TXL ) + COM ( TXC ) + REIT ( TXR ) + SMB ( TXQ ) LMB ( TX 5 ) + RCG ( TCORP TXL ) + ATD' = EXD + ROC [2] Ths formula apples the relevant tax rates for day to each dfferent type of dstrbuton. It reduces the full dstrbuton by the amount of tax applcable to each per-share dstrbuton. Nether tax-exempt dvdends (EXD ) nor return of captal (ROC ) are subject to tax, so those dstrbutons are not adjusted and the full amount s added to ATD. For example, f a fund had a $.20 long-term captal gan (taxed at 5%) and a $0.30 tax-exempt dvdend (taxed at 0%) on day, ATD would be $.32. ATD = $.20 (-0.5) + $0.30 = $.32 + 7 Ths fee s dfferent than the fund s expense rato. Ths fee represents account fees above and beyond any fund management fees, such as a brokerage account fee. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 9
Perodc Per-Share Fee Most perodc fees are expressed as a percentage of total assets. Ths account-level fee, F p, s converted nto a per-share fee, FEE. The perodc fee s not charged at the start of the nvestment perod. F p = perodc per-account fee charged to the total account value For example, f the account charges 25 bass ponts annually, and the fee s appled monthly, F p = 0.0025/2. Ths fee wll be taken from the nvestment perodcally based on the agreement between the nvestor and the fund company. The followng formulas determne the per-share fee at any gven pont n tme. The perodc per-account fee s multpled by a prce-per-share that has been adjusted for the ntal front load and any addtonal dstrbutons. The adjusted prce-per-share represents the account value-per-share on day. [3] For = 0 (the fund dd not pay any dstrbutons up to and ncludng day ), the adjusted prce-per-share reflects only the ntal front load. where FEE = F P ( FL) per-share fee p Adjusted prce per share = the cumulatve count of fee or dstrbuton events snce the begnnng of the tme perod [4] For = (the fund pad one sngle dstrbuton at day, but no dstrbutons pror to that tme), the adjusted prce-per-share reflects the ntal front load and the dstrbuton from day. ATD' FEE = Fp P ( ) + FL P Adjusted prce per share Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 0
[5] For > (the fund had multple dstrbutons and/or fee events pror to and ncludng day ), the adjusted prce-per-share reflects all such events. ( ) ATD' = + FEE F p P FL + P j= ATD P j j where j = another cumulatve count of fee or dstrbuton events snce the begnnng of the tme perod Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted.
Pre-Lqudaton After-Tax Return The pre-lqudaton after-tax return reflects the sales charges from buyng and sellng a fund and the maxmum federal tax rates on the dstrbutons at the tme the dstrbutons are renvested. It does not reflect the tax effects of the captal gans/losses ncurred upon sellng the fund (not lqudatng for tax purposes 8 ). Snce ths verson s pre-lqudaton, there s no consderaton of ndvdual captal gans or tax bass. [6] ATR pre where Pe = n ( ) ( ) FL RL DL ( FL) MIN( Pb, Pe ) = ATD + P P n = number of dstrbuton events n a holdng perod. b 8 Pre-lqudaton does not strctly mean that the hypothetcal nvestor dd not sell the fund. For load purposes, the calculaton assumes that the nvestor sold the fund and pad any applcable deferred loads or redempton fees. For tax purposes, the same calculaton assumes that the nvestor dd not sell the fund and therefore was not subject to captal gans taxes on the prce apprecaton. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 2
Post-Lqudaton After-Tax Return The post-lqudaton after-tax return reflects the sales charges from buyng and sellng a fund, the maxmum federal tax rates on the dstrbutons at the tme the dstrbutons are renvested, and the approprate (short- and long-term) captal gan tax from sellng the fund. [7] ATR where post Pe = n ( ) ( ) FL RL DL ( FL) MIN( Pb, Pe ) = ATD + P P TCGT = a per-share representaton of the total tax on captal gans/losses from the sale of the nvestment b TCGT The captal gans/losses from the sale of the securty can be short-term (holdng perod less than 2 months) or long-term (holdng perod greater than 2 months). The post-lqudaton methodology determnes the number of shares acqured and the cost bass of those shares n order to calculate the gan/loss for both the shortterm and long-term perods. Then, the net gans/losses are taxed at the approprate short- or long-term tax rates. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 3
Number of Shares Acqured Frst, determne the number of shares at the end of the holdng perod and then break that nto the long-term and short-term acqustons. Assume that the nvestor started wth one sngle share (mnus any porton pad for front loads). Total Shares = total number of shares at the end of the holdng perod assumng all after-tax dstrbutons are renvested. ST Shares = shares accumulated n the last 2 months of the holdng perod LT Shares = shares accumulated pror to the last 2 months of the holdng perod n = number of dstrbuton events n a holdng perod. m = number of dstrbuton events n a holdng perod excludng the last 2 months. If the holdng perod s 2 months or less, m=0. Ths number s used to track the number of shares that are over 2 months old and the cost bass assocated wth those shares. [8] Total Shares n = ( FL) + = ATD P [9] If the holdng perod s 2 months or less LT Shares = 0 [0] If the holdng perod s longer than 2 months LT m Shares = ( FL) + = ATD P Determne the number of short-term shares. [] ST Shares = Total Shares LT Shares Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 4
Cost Bass for Investments Held for Less than 2 Months Next, determne the cost bass of the nvestment. ST Bass = bass accumulated n the last 2 months of the holdng perod LT Bass = bass accumulated pror to the last 2 months of the holdng perod If the holdng perod s 2 months or less: [2] LT Bass = 0 [3] For n = 0 (the fund dd not pay any dstrbutons), the short-term bass s the same as the begnnng prce. ST Bass = Pb [4] For n = (the fund pad one dstrbuton), the short-term bass s the begnnng prce plus the after-tax dstrbuton amount (after the adjustments for fees, loads and certan dstrbutons). ( FL) ( ATD + FEE + ( TCORP ) RCG ROC ) ST Bass = Pb + [5] For n > (the fund pad multple dstrbutons), the short-term bass s the begnnng prce plus all the renvested after-tax dstrbutons (after the adjustments for fees, loads and certan dstrbutons). ST Bass = P b + ( FL) ( ) ATD + FEE + TCORP RCG ROC + n ATD + FEE + ( TCORP ) RCG ROC = 2 ( ) j= ATD + Pj j Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 5
Cost Bass for Investments Held For More than 2 Months If the holdng perod s longer than 2 months, splt the calculaton over two perods: short-term perod (the last 2 months of the holdng perod) and long-term perod (holdng perod mnus the short-term perod). Durng the long-term perod [6] ST Bass = 0 [7] For m = 0 (the fund dd not pay any long-term dstrbutons pror to the last 2 months), the long-term bass s the same as the begnnng prce. LT Bass = P b [8] For m = (the fund pad one long-term dstrbuton pror to the last 2 months), the short-term bass s the begnnng prce plus the after-tax dstrbuton (after the adjustments for fees, loads and certan dstrbutons). ( FL) ( ATD + FEE + ( TCORP ) RCG ROC ) LT Bass = Pb + [9] For m > (the fund pad more than one long-term dstrbuton pror to the last 2 months), the short-term bass s the begnnng prce plus all after-tax dstrbutons (after the adjustments for fees, loads and certan dstrbutons). LT Bass = P + ATD m = 2 + FEE + ( FL) ( TCORP ) RCG ROC ( ATD + FEE + ( TCORP ) RCG ROC ) b + j= + ATD P j j Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 6
Durng the short-term perod [20] If n = m (the fund dd not pay any dstrbutons durng the last 2 months), the short-term bass s zero (no shares were purchased durng that tme). ST Bass = 0 [2] If n > m (the fund pad dstrbutons durng the last 2 months), the shortterm bass s the sum of all after-tax dstrbuton amounts (after adjustments for fees, loads, and certan dstrbutons). ST = ( FL) ( ATD + FEE + ( TCORP ) RCG ROC ) Bass n ATD m j ATD j = + + + ( ) + m ROC P j j= Pj j = Lastly, return of captal dstrbutons lower the nvestor s cost bass, because they return to the nvestor a porton of ther orgnal nvestment. If the fund pad return of captal dstrbutons durng the short-term perod, these need to be subtracted from the long-term bass, as calculated n equatons [7], [8] or [9]. [22] n m ATDj LT Bass = LT Bass ( FL) ( ROC ) + = m+ j= Pj Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 7
Calculaton of Realzed Gan/Loss at Lqudaton The short- and long-term gans/losses per share are calculated by subtractng the respectve cost bass from the endng value of the account (prce shares), less any applcable redempton fees or deferred loads. If the holdng perod s longer than 2 months: [23] Long Term Gan = LTG = ( RL) LT Shares Pe DL ( FL) MIN( P, P ) LT Bass b e [24] Short Term Gan = STG = ( RL) ST Shares P ST Bass e If the holdng perod s 2 months or less: [25] LongTermGan= LTG = 0 [26] Short Term Gan = STG = ( RL) ST Shares P DL ( FL) MIN ( P, P ) ST Bass e b e Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 8
Calculaton of Captal Gan Tax at Redempton The total amount of captal gan taxes due at lqudaton s a combnaton of both short and long-term gans/losses. TXS e = The short-term captal gan tax rate at the end of the holdng perod. TXL e = The long-term captal gan tax rate at the end of the holdng perod. There are three dfferent possble scenaros: [27] Case : When both STG and LTG are postve or both are negatve, the total gans/losses are the sum of the respectve amounts multpled by the respectve tax rates. TCGT = ( TXS STG) + ( TXL LTG) e e [28] Case 2: When one (STG or LTG) s negatve, the other s postve and STG < LTG, the long-term porton offsets the short-term porton. For example, f STG= -2 and LTG= 5, the long-term gan s reduced by the short-term loss and the remanng $3 long-term gan s taxed at the long-term rate. TCGT = TXLe ( LTG + STG) [29] Case 3: When one (STG or LTG) s negatve, the other s postve and STG > LTG, the short-term porton offsets the long-term porton. For example, f STG= -6 and LTG=, the short-term loss s reduced by the amount of the long-term gan and the remanng $5 short-term loss s taxed at the short-term rate. TCGT = TXS e ( LTG + STG) Ths fnal amount of TCGT (the per-share tax on the gans/losses assocated wth the sale of the securty) s ncorporated nto the formula for the post-lqudaton after-tax return. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 9
Concluson Mornngstar calculates after-tax returns for open-end funds, closed-end funds, and exchange-traded funds usng the gudelnes set forth by the Securtes and Exchange Commsson. Investors can compare a fund s total returns, load-adjusted returns, and after-tax returns to understand how loads and taxes reduce ther real returns. Mornngstar After-Tax Return Methodology 24 October 2003 2003 Mornngstar, Inc. All rghts reserved. The nformaton n ths document s the property of Mornngstar, Inc. Reproducton or transcrpton by any means, n whole or part, wthout the pror wrtten consent of Mornngstar, Inc., s prohbted. 20