active equity solutions
TAX ADVANTAGED EQUIT Y STRATEGY
Seek pre-tax benchmark returns and after-tax value through active tax investment strategies
For taxable investors looking for efficient market exposure and after-tax value, Northern Trust
offers the Tax Advantaged Equity (TAE) strategy, which seeks to maximize after-tax value.
Taxes are the single largest cost to taxable investors, and capital gains taxes can significantly
erode portfolio returns. Consequently, tax considerations should be one of the primary drivers
of the portfolio management process. Low-tax and tax-exempt investors seeking control over
gain/loss realization may also benefit from using TAE.
TAE STRATEGY seeks to deliver tailored objectives
Northern Trust’s TAE core investment approach offers proprietary active tax strategies that seek to
■■ Deliver the pre-tax return and characteristics of the defined benchmark,
■■ Maximize after-tax value to meet your specific goals, and
■■ Provide customization and flexibility throughout the investment process.
Dedicated portfolio managers focus on understanding your organization’s investment objectives
and tailoring portfolios to meet specific needs.
Customization
Portfolio
Manager
Interaction
Investment
Process
Dynamic
Trading
Transaction
Cost
Management
TAE
Solution
TAE meets changing needs through customization and flexibility based on ongoing portfolio manager
attention to tax strategies, portfolio construction and trading.
TARGETED TO SPECIFIC NEEDS
Using Northern Trust’s TAE strategies, investors can benefit from a highly risk-controlled
investment approach that uses active tax strategies to maximize after-tax value or to target gainor loss-realization as part of a strategic tax approach. Low-tax or tax-exempt investors can
also use our customized strategies to control the realization of capital gains and losses.
Current users of TAE include:
Taxable Investors
■■ High-net-worth individuals
■■ Institutional investors
■■ Insurance companies
■■ Non-qualified NDTs
■■ Settlement trusts
■■ VEBAs/Rabbi trusts
Low-Tax Investors
■■ Charitable lead unit trusts
■■ Charitable remainder
unit trusts
■■ Family and private foundations
■■ Foundations and endowments
■■ Grantor-retained annuity trusts
■■ Qualified NDTs
Tax-Exempt Investors
■■ 501(c)(3) organizations
■■ Tax-exempt state funds
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Important elements of our TAE strategy include:
Performance target – Match pre-tax benchmark returns and provide after-tax value.
TAE objectives – Provide proactive, targeted gain/loss recognition, active tax optimization and
transaction cost management as directed by the investor’s objectives.
Risk control – Use proprietary optimization to match the characteristics of the benchmark and
diversify uncompensated risks such as sector concentration, security risk and style tilt.
Benchmark – Can manage to any published regional, international or global benchmark or
customized benchmarks. TAE portfolios are currently managed against more than 30 different
regional and international indexes and custom-blended benchmarks.
BALANCING INVESTMENT, TAX OBJECTIVES
TAE seeks to balance benchmark return with active tax management. To demonstrate the impact
of this approach, we use a composite of client accounts benchmarked to the S&P 500 index. This
sample composite illustrates that TAE has generated strong results, measured against investor
objectives by
■■ Closely tracking the benchmark return on a pre-tax basis and
■■ Generating after-tax value over the benchmark.
Northern Trust TAE S&P 500 Composite (as of 12/31/12)
This performance
demonstrates the impact
that thoughtful integration
of an equity investment
strategy with customized
active tax management
can have on taxable
portfolio performance.
Pre-Tax and After-Tax Historical Returns Relative to the S&P 500: 2002-2012
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1 Year
3 Year
5 Year
10 Year
-0.5
Pre-Tax Relative Return
After-Tax Relative Return
Past performance is no guarantee of future results. Please see full performance disclosure notes on page 4 for additional
information.The S&P 500 benchmark is used for example purposes only. The TAE strategy is available using any published
regional, international or global benchmark or customized benchmarks as requested. Source: Northern Trust
ADDRESSing your EVOLVING NEEDS
We intentionally limit the number of clients that portfolio managers serve to provide increased
investor communication and customization. Collaborating with you, your consultants and
tax advisors, we evaluate the tradeoffs between active tax management and portfolio benchmark
tracking to establish the right balance for your portfolio.
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Portfolio objectives may evolve throughout the year, and portfolio managers collaborate with
you to analyze the potential impact of a change in tax strategy on overall portfolio characteristics.
By adjusting strategies for changes in your circumstances, Northern Trust’s TAE portfolio managers
use ongoing portfolio optimization to consider tax impact, tracking error and transaction costs. This
flexible, proactive interface between tax, return and risk considerations provides an effective
approach to customized tax management.
creating tax advantaged strategies to meet changing investment goals
Maximize Losses Harvested
(Tax Focused)
Loss-Harvesting
High
Active Tax Management
Take advantage
of Northern Trust’s
dedicated TAE portfolio
managers’ expertise and
in-depth knowledge of
the tax environment.
Tax Conscious
(Achieve Balance Between
Loss-Harvesting and Tracking)
Minimize Tracking Variance
(Index Focused)
Low
Low
Tracking Error
High
Passive Index Management
■■
■■
■■
■■
Investor considerations drive decision-making throughout the TAE investment process.
Active discussions focus on the trade-offs between tax management and tracking error to
meet your investment objectives.
Proprietary tax optimizer considers and incorporates risk, tax considerations and investordriven constraints on an ongoing basis, investing in a broad range of benchmark securities
to provide diversification as well as flexibility.
Regular trading allows for increased realization of gains/losses and consistent risk control,
while remaining mindful of wash sale restrictions.
Open communication exists between you and your Northern Trust portfolio managers
to discuss your investment objectives and alter them, whenever appropriate.
DELIVERING STRONG AFTER-TAX VALUE
Leverage Northern Trust’s 20-plus years of successful management of TAE portfolios with a
proven philosophy and process in providing global equity market exposure. A range of investors –
taxable, low-tax and tax-exempt – can use our expertise to seek strong after-tax returns through
active tax management.
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Northern Trust’s expert team
understands the complexities of tax
advantaged equity investing. Each
investor’s unique portfolio delivers
customized results through exceptional
service and an emphasis on communication among investment professionals,
investors, their tax professionals
and consultants.
for more information
To learn more, please contact
Tom Benzmiller, +1-312-557-3322,
[email protected] or contact your
relationship manager.
customized, flexible investment process
We believe the most efficient way to manage a taxable portfolio is to balance
tax objectives, risk and transaction costs through optimization.
Measurements
of Risk
Tax
Considerations
Benchmark
Considerations
Portfolio Guidelines
& Constraints
Proprietary
Tax Optimization
Transaction
Cost Management
Tax Advantaged Equity Portfolio
The Northern Trust Tax Advantaged Equity team’s collaborative approach develops
client-directed constraints, delivering a customized solution.
Description – The Tax Advantaged S&P 500 composite consists of portfolios indexed to the S&P 500 Index following quantitative processes. These portfolios are managed to effectively minimize tax liability. This
composite may include accounts that restrict the investment of income. Prior to 1/1/2004 this composite was called Tax Efficient S&P 500 and had a $15 million minimum for inclusion. The composite was created in
November 1999 when Northern Trust Global Investment Services became compliant with GIPS. Financial leverage is not employed as a part of the overall investment strategy of this composite. Financial derivatives, in
the form of futures contracts, options and ETFs, may be utilized for the purposes of liquidity, market exposure or investment opportunity. If fewer than five portfolios are in the composite for a full year, standard deviation
is deemed not applicable. Accounts below the minimum size of $5 million have been excluded from the composite. Performance results reflect the reinvestment of dividends and other earnings and are expressed in U.S.
dollars. Performance results are presented gross of investment management fees. Actual performance results would be reduced by fees. Annual fee schedule: First $50 million = 0.25%, Above $50 million = 0.15%. As
an illustration, a $50 million account which earned a 10% annual return and paid an annual fee of 0.25% would grow in value over five years to $80.5 million before fees and $79.6 million after deducting fees. Past
performance is no guarantee of future results.
IRS CIRCULAR 230 NOTICE: To the extent that this communication or any attachment concerns tax matters, it is not
intended to be used, and cannot be used by a taxpayer, for the purpose of avoiding any penalties that may be imposed
by law. For more information about this notice, see http://www.northerntrust.com/circular230.
LEGAL, INVESTMENT AND TAX NOTICE. Information is not intended to be and should not be construed as an offer,
solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment
advice or tax advice. Clients should under no circumstances rely upon this information as a substitute for obtaining specific
legal or tax advice from their own professional legal or tax advisors.
© northern trust 2013
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