(PUB) Investing 2016

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12 • Fund Family Shareholder Association
efficiency for a moment. Or, better yet,
let’s talk about after-tax returns.
As I said, tax efficiency often gets
the headlines, but it’s really not the
most important metric for assessing the
overall performance of a fund when
taxes are your concern. For years I’ve
said that just because many index funds
are tax efficient and have low turnover,
that doesn’t mean they’ll make you
richer faster.
Vanguard, like so many other asset
managers, talks tax efficiency and after-
tax returns, but in the same breath,
advises that investors keep index funds
in taxable accounts and active funds in
tax-deferred accounts like IRAs. What
they’re doing is dumbing down the
advice they share with investors, falling
back on letting their tax tale wag the
investment advice dog.
Here’s Vanguard’s latest pitch:
“Investors should maximize the tax
efficiency of their portfolio because
taxes have the potential for taking the
biggest bite out of investment returns
over the long run.”
In fact, they often trot out the hack-
neyed advice that you can potentially
improve your returns by keeping less tax-
efficient funds in tax-deferred accounts.
Of course, you could also improve your
returns by buying better funds—but that
isn’t part of the Vanguard mantra.
I can understand why they take this
route. Vanguard doesn’t want you to
know that there’s another way to look at
fund performance or tax efficiency, and
they certainly aren’t going to provide
their investors with the data to make
up their own minds. Hence, the simple,
contrived and often wrong advice.
I have to say that I was encour-
aged some years ago when Vanguard
began to note that focusing on a low
turnover rate as the key to fending off
distributions was a “flawed” approach.
Vanguard tax maven Joel Dickson,
who also happens to help run the
quantitative side of Vanguard’s stock
shop, even said, “At the end of the
day, the question is whether you have
created wealth, not how much you
have reduced taxes.” As he’s put it,
the investor’s goal should not be to
“minimize capital gains” but rather to
“maximize after-tax wealth.”
Unfortunately, Joel’s wisdom doesn’t
always percolate down to those offer-
ing up advice to the masses. Tax effi-
ciency tells you nothing about a fund’s
returns—it only tells you the portion of
that fund’s returns you’re likely to keep.
Before you check out the table sum-
maries below and on page 13, let’s
define our parameters, and let me give
you a caveat. Both the returns and
tax-efficiency calculations I’ve done
cover the three- and five-year periods
ending March 31, 2016. (An expanded
set of tables, including a seven-year
table, is provided in the HTML ver-
sion of the issue at our members-only
website, .) I’ve
hit the funds with a heavy tax burden,
applying a 20% capital gains rate and
a 43.4% income tax rate, which incor-
porates the 3.8% health-care surtax
on high-income-earners. For qualified
dividend income, as specified under the
American Taxpayer Relief Act of 2012,
I’ve used the percentages reported by
Vanguard for each individual fund. The
funds in the tables are ranked by after-
tax returns. My one caveat here is the
same as I note when discussing roll-
ing returns versus static performance
calculations: These after-tax returns are
based on point-in-time calculations for
the single three-year and five-year peri-
ods ending in March. Why does that
matter? I’ll explain in a moment.
One fund characteristic that I haven’t
bothered to look at is turnover, because
Ranked by
After-Tax Return
3-Year
Return
Tax-Adj.
Return
Tax-
Effic.
U.S. Growth 13.5% 12.3% 91%
PRIMECAP 13.5% 12.2% 91%
Capital Opportunity 13.2% 12.2% 93%
Growth Index 12.4% 12.2% 98%
Social Index 12.4% 12.1% 97%
PRIMECAP Core 13.0% 11.8% 91%
T-M Capital Appreciation 11.6% 11.3% 97%
500 Index 11.7% 11.2% 96%
Morgan Growth 12.8% 11.0% 86%
LargeCap Index 11.4% 11.0% 97%
Growth & Income 12.2% 11.0% 90%
Dividend Growth 11.8% 10.9% 92%
High Dividend Yield Index 11.2% 10.6% 94%
Total Stock Market Index 11.0% 10.6% 96%
Strategic Equity 11.9% 10.6% 89%
MidCap Value Index 10.9% 10.5% 96%
MidCap Index 10.6% 10.3% 97%
T-M SmallCap 10.5% 10.2% 97%
Value Index 10.4% 9.9% 95%
MidCap Growth Index 9.9% 9.7% 98%
Equity Income 10.7% 9.4% 87%
Strategic SmallCap Equity 10.3% 9.3% 91%
Diversified Equity 10.6% 9.2% 87%
U.S. Value 9.9% 9.2% 93%
Dividend Apprec. Index 9.5% 9.1% 96%
SmallCap Value Index 9.4% 8.9% 95%
Selected Value 9.3% 8.2% 87%
SmallCap Index 8.4% 8.0% 95%
Windsor 8.8% 7.8% 88%
Extended Market Index 8.0% 7.6% 96%
Windsor II 8.5% 7.0% 82%
Balanced Index 7.6% 7.0% 92%
T-M Balanced 7.4% 7.0% 94%
MidCap Growth 9.2% 6.7% 73%
International Explorer 8.1% 6.7% 83%
Target Retirement 2060 7.1% 6.6% 94%
Global Equity 6.9% 6.6% 95%
Ranked by
After-Tax Return
3-Year
Return
Tax-Adj.
Return
Tax-
Effic.
Target Retirement 2055 7.0% 6.6% 93%
SmallCap Growth Index 6.8% 6.5% 96%
Target Retirement 2050 7.1% 6.5% 92%
Target Retirement 2040 7.1% 6.5% 92%
Target Retirement 2045 7.1% 6.5% 91%
Explorer Value 7.9% 6.4% 80%
Target Retirement 2035 7.0% 6.3% 89%
Wellington 7.8% 6.1% 79%
Target Retirement 2030 6.7% 6.0% 89%
STAR Growth 6.7% 5.9% 88%
Market Neutral 5.9% 5.9% 100%
Target Retirement 2025 6.3% 5.5% 87%
Explorer 8.0% 5.4% 68%
STAR 6.5% 5.3% 82%
Target Retirement 2020 6.0% 5.2% 87%
Total World Stock Index 5.7% 5.2% 90%
STAR Mod. Growth 5.8% 5.0% 85%
Wellesley Income 6.0% 4.5% 75%
Target Retirement 2015 5.3% 4.2% 80%
STAR Cons. Gro. 4.8% 3.8% 79%
Target Retirement 2010 4.4% 3.4% 77%
Managed Payout 5.6% 3.2% 58%
STAR Income 3.8% 2.8% 75%
Target Retirement Income 3.6% 2.8% 76%
International Growth 3.1% 2.7% 86%
European Index 2.9% 2.1% 73%
Developed Mkts. Index 2.4% 1.9% 78%
World ex-US SmCap Idx. 2.5% 1.7% 69%
Capital Value 5.0% 1.7% 34%
Convertible Securities 3.5% 1.2% 36%
International Value 1.3% 0.7% 58%
Pacific Index 1.0% 0.4% 40%
Total International Index 0.7% -0.0% Neg.
World ex-US Index 0.6% -0.2% Neg.
Emerging Markets Index -4.5% -5.4% Neg.
EmergingMkts Sel. Stock -5.2% -5.6% Neg.
After-Tax Returns Over Tax-Efficiency
TALES FROM PAGE 7 >