STRATEGIC ADVISERS, INC.
Tax-Sensitive Investment Management: Why Ben Franklin Was Wrong
By Jim Cracraft, Managing Director, Strategic Advisers, Inc.
“In this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin, 1789
This Product Perspective describes the tax-sensitive
KEY TAKEAWAYS
investment management1 techniques that Fidelity’s Strategic
•Investors can potentially lose a significant portion of their returns to taxes.3
Advisers, Inc. (Strategic Advisers), applies to taxable
•Compounding after-tax returns
can be important for wealth
creation; investors often incorrectly
focus only on pre-tax returns.
Although Ben Franklin’s celebrated saying, “In this world
nothing can be said to be certain, except death and taxes,”
reminds us that paying taxes is an inescapable fact of life,
there are opportunities to reduce or defer taxes by employing
specific tax-sensitive investment management strategies.
•Managing for after-tax returns can
require sophisticated modeling
tools, detailed tax-lot accounting,
and year-round attention.
accounts in its tax-sensitive managed account offering.2
The goal behind tax-sensitive investment management is
simply to keep more of what you earn. But too often investors
focus only on pre-tax returns when selecting their investments.
This may be shortsighted as the overall impact of taxes on
performance is significant: Morningstar cites that on average,
over the 88-year period ending in 2014, investors who did not
manage investments in a tax-sensitive manner gave up between
one and two percentage points of their annual returns to taxes.
A hypothetical stock return of 10.1% that shrank to 8.1% after
taxes would have left the investor with a 20% lower return rate
according to Morningstar.3 Although these findings vary based
on changing market conditions, potential tax consequences
are always looming. Simply put, taxes shouldn’t be ignored.
EXHIBIT 1:
Top U.S. federal tax rates
100%
80%
60%
40%
20%
Top income tax rate
Top capital gains tax rate
Data represents the top federal marginal ordinary
income tax rates and long-term capital gains tax rates,
including the Medicare surcharge, as reported by
http://www.taxfoundation.org/taxdata/show/151.html,
“U.S. Federal Individual Income Tax Rates History,”
1913–2013,” The Tax Foundation, September 9, 2011,
and “Top Federal Income Tax Rates on Regular Income
and Capital Gains since 1916,” Citizens for Tax Justice,
May 2004.
2016
1996
1976
1956
1936
1916
0%
Given that certain federal tax rates increased in 2013 and Congress
continues to debate changes to the tax code, many investors are
looking to employ tax-sensitive investment management strategies.
When tax rates rise, so, too, does the potential value of active
tax-sensitive investment management strategies.
Are You Making the Most of Tax-Sensitive Investment Management Techniques?
Many investors believe they have the time and resources needed to consistently monitor a taxable
portfolio for tax-savings opportunities. In reality, this is an incredibly time-consuming task and one that
demands research, analysis, and attention to detail throughout the year — not just at year’s end.
If you are not managing your portfolio using the techniques listed below, you may be paying more than
you need to in taxes.
2
Tax-Sensitive Investment Strategy
Description
¨ Defer Realization of Short-Term Gains
Taking advantage of the differences between
short-term and long-term capital gains tax rates is
a straightforward way to help reduce a portfolio’s
tax burden.
¨ Harvest Tax Losses
Selling one or more tax lots of an investment at a
loss may allow an investor to use the loss(es) to
offset realized capital gains and, potentially, a small
portion of ordinary income.
¨ Use Loss Carryovers to Reduce Future Taxes
Following a year with large portfolio losses, an
investor may be able to carry forward losses to
offset capital gains in subsequent years.
anage Exposure to Distributions
¨M
Understanding the potential tax consequences
of selling a fund or staying invested in the fund is
critical as cost basis and tax rates differ widely.
¨ Invest in Municipal Bond Funds or ETFs
Including municipal bonds and other asset classes,
as appropriate, in a portfolio may help an investor
attain desirable after-tax results.
FIDELITY INVESTMENTS | Portfolio Advisory Services
PERSPECTIVE
Paying Attention to Taxes May Boost
After-Tax Returns
At Strategic Advisers, our investment
managers seek to enhance after-tax returns
while balancing an acceptable level of risk
in a client’s portfolio by using a variety
of tax-sensitive investment management
strategies. We attempt to measure the
value of our tax-sensitive investment
management by calculating its strategies’
“tax alpha,”4 as defined in Exhibit 2. We
believe that using these tax-sensitive
investment management strategies is a key
to long-term investment wealth creation
and may help build better after-tax returns.
While the results for any particular period
may vary, and may in some instances be
negative, the tax alpha generated for
tax-sensitive composite portfolios has
returned anywhere from 2% to 63% in
value added to cumulative returns over
the 15-year history for which Fidelity has
measurement data (see Exhibit 2).
EXHIBIT 2:
Hypothetical Value of Tax-Sensitive Investment Management for Range of Strategies (12/31/2001–12/31/2016)
Investment
Strategy
Cumulative Return
Added from Tax-Sensitive
Investment Mgmt.8
After-Tax
Excess Return 5
Pre-tax
Excess Return6
Average Annual
Tax Alpha7
All Stock
0.96%
–0.95%
1.91%
62.60%
Aggressive Growth
0.14%
–1.35%
1.49%
45.07%
Growth
0.01%
–1.12%
1.13%
31.04%
Growth with Income
–0.07%
–1.01%
0.94%
22.26%
Balanced
–0.27%
–1.03%
0.76%
17.44%
Conservative
–0.45%
–0.75%
0.29%
1.82%
See Appendix A for detailed performance information, and see endnotes 4, 5, 6, 7, and 9 for more details on the calculation of these values.
Performance shown is for the period 12/31/2001 through 12/31/2016, which represents a period starting when Strategic Advisers began calculating
after-tax returns. Performance reflects client accounts managed by Fidelity® Personalized Portfolios. Fidelity Personalized Portfolios launched July
2010; performance prior to such date reflects only Fidelity Private Portfolio Service accounts. Past performance is no guarantee of future results.
Investment return and principal value of investments will fluctuate over time. Returns for individual clients may differ significantly from the composite
returns and/or may be negative. All returns are asset weighted and include reinvestment of any interest, dividends, and capital gains distributions, if
applicable. Only Fidelity Personalized Portfolios strategies that are all stock or utilize national and state-specific municipal bond funds are included.
Availability of state-specific funds depends on the client’s state of residence. Certain investment strategies, such as All Stock, may not be appropriate
or available for some investors. Please contact your Fidelity representative to discuss your situation and investment strategy.
A F TE R-TAX
PRE-TAX
PORTFOLIO
PORTFOLIO
EXCESS
RETURN
%
BENCHMARK
EXCESS
RETURN
%
BENCHMARK
After-Tax Excess Return: The amount by which the annualized
after-tax investment return for the composite portfolio is either
above or below the annualized after-tax benchmark return 5, 9
TAX
ALPHA
Pre-tax Excess Return: The amount by which the annualized pre-tax
investment return for the composite portfolio is either above or below
the annualized pre-tax benchmark return 6, 9
Tax Alpha: Represents the value added (or subtracted) by the
manager’s tax-sensitive investment management and is the difference
between the after-tax excess return and the pre-tax excess return7
Cumulative Return Added from Tax-Sensitive Investment
Management: Represents the hypothetical cumulative value of
the tax-sensitive investment management over the full time period 8
3
The cumulative value can really add
up, as shown in Exhibit 3. We created
a hypothetical example using an initial
$1 million investment in our Growth Strategy
composite (70% stocks/30% bonds and
short-term investments), from 1/1/2002
through 12/31/2016, with no contributions
or withdrawals. The results, in dollars, of the
potential additional value from tax-sensitive
investment management was $310,444.* 10
The tax-sensitive value is cumulative, assuming
that the tax savings are reinvested monthly,
something the hypothetical investor could not
do if he or she had to accrue cash in anticipation
of paying estimated capital gains taxes.
Strategies Used by Strategic Advisers for
Managing Investment Taxes
Some tax-sensitive investment management
strategies, described below in more detail,
are used by individual investors — such as
purchasing tax-free municipal bond funds
(see pages 8 and 9 for details). Others may
be more difficult to execute without the help
of an experienced investment professional.
For example, ongoing tax-loss harvesting
can require sophisticated modeling
tools and tax-aware investing expertise.
Understanding which strategies can most
benefit a portfolio, and how to apply them
simultaneously, is something our tax-aware
investment managers focus on continuously.
Our tax-sensitive investment management starts when you transition your account. Other firms may require you to sell all
of your securities and transfer in cash, but we will build a personalized portfolio around your highly appreciated holdings.
EXHIBIT 3:
Hypothetical Cumulative Value of Tax-Sensitive Investment Management — Growth Strategy*Our tax-sensitive investment
management starts when
you transition your account.
Other firms may require you
to sell all of your securities and
$2.23M
transfer in cash, but we will
build a personalized portfolio
around your highly appreciated
holdings.
$2.4
$2.2
$2.0
$1.92M
Portfolio Value ($M)
$1.8
$1.6
$1.4
$1.2
A potential increase
of $310,444 from
tax-sensitive investment
management
$1.0
$0.8
Hypothetical Account Value
with Tax-Sensitive Investment
Management
Hypothetical Account Value
without Tax-Sensitive Investment
Management
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
For illustrative purposes only
*Based on strategy composites. (See Appendix A for information on the composites.) These results and Exhibit 3 are hypothetical and
do not represent actual value added to client accounts. Returns for individual clients will vary. Performance shown represents past
performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, and you may lose money.
4
FIDELITY INVESTMENTS | Portfolio Advisory Services
PERSPECTIVE
1. Defer Realization of Short-Term Gains
To encourage shareholders to be longterm investors, the U.S. tax code effectively
penalizes investors for taking short-term
investment profits.
That’s why, for individuals in the top federal
tax bracket, capital gains from taxable
investments held less than one year are
usually taxed at 43.4%. But if an investor
waits to take the gain after owning the
investments for a year, the tax rate drops
to 23.8%. Taking advantage of the differences between short-term and long-term
capital gains tax rates is a straightforward
way to reduce a portfolio’s tax burden.
(See Exhibit 4.11)
While the “don’t sell until long term”
strategy is simple in theory, it can pose a
challenge in practice, especially for portfo-
lios that hold multiple individual positions
with many underlying tax lots (some short
term, others long term, based on when
they were purchased) with different levels
of embedded gains or losses. Even if the
holding period were the only criterion for
selling an investment, orchestrating these
moves in a diversified portfolio would require
a great deal of time and attention to detail.
Exhibit 4 shows the benefit of deferring a
sale of a short-term investment; however,
there is also a risk component to the equation. If an investment’s research outlook is
bleak or it adversely affects risk in the overall
portfolio, does deferring a sale still make
sense? Our tax-aware investment managers
monitor the tax lots in consideration of
capital gains deferral, but they also carefully
consider the risk and return expectations for
each security before trading.
EXHIBIT 4: Long-term gains cost less in taxes.
$10,000 HYPOTHETICAL PRETAX GAIN
An
investor
keeps
$5,660
After-tax
gain
$7,620
After-tax
gain
An
investor
keeps
Taxes
paid
23.8%
$2,380 Taxes
Short term
vs.
1 YEAR
Long term
Take a hypothetical investment with a pre-tax gain of
$10,000. In this case, the potential tax savings* available
as the result of waiting for a year are $1,960, assuming
the investor is in the top marginal tax bracket.
$10,000 (43.4% – 23.8%) = $1,960
The amount of time until long-term status is reached is
important. Consider a $100,000 investment made 300
days ago that is now worth $110,000 (a gain of 10%).
If the security were sold today, the tax bill would be
$10,000 x 43.4% = $4,340, with an after-tax return of 5.66%.
43.4%
$4,340 Taxes
REDUCING CAPITAL GAINS TAXES
Taxes
paid
However, assuming the value has held steady, by waiting
an additional 66 days, the tax liability drops to $2,380,
and the return increases to 7.62%.
*The taxes saved by waiting until a short-term investment gain
(<1 year) becomes a long-term gain (greater than one year) can be
calculated as follows: (gain $) x (short-term rate – long-term rate) =
tax savings.
For this example, we assume the investor is subject to the top capital gains rate and is paying 43.4% on short-term gains and 23.8% on long-term gains.
Tax savings will depend on an individual’s actual capital gains and tax rate and may be more or less than this example. This is a hypothetical example for
illustrative purposes only, and is not intended to represent the performance of any investment.
5
So why do so many investors fail to take
advantage of this economic benefit?
Similar to the techniques for capital gains
deferral, the theory is easier than the
practice. To effectively harvest losses on
an ongoing basis, an investment manager
must continuously analyze every tax lot
and decide when the tax-loss benefit
warrants trading, then sell the precise
lots that maximize that benefit. At the
same time, the integrity of the portfolio — a client’s risk exposure and diversification — must be maintained. For the
typical high-net-worth portfolio with many
2. “Harvest” Tax Losses
Savvy investors know that the government
not only shares in their profits, but also in
their losses. When one or more tax lots of
an investment are sold below their cost
basis (e.g., at a loss), the IRS gives the
investor the opportunity to use these losses
to offset realized capital gains and, potentially, a small portion of ordinary income.
This is a powerful tax-sensitive investment
strategy, because realized losses have an
immediate — and known — value to
the investor.
EXHIBIT 5: Tax-Loss Harvesting May Offer Significant Benefits During Volatile Markets
$250M
MANAGING FOR TAXES YEAR
ROUND MAY OFFER SAVINGS
OPPORTUNITIES
Tax Savings
DJ Total Stock Market (Price Index)
U.S. Stock Market Level*
$200M
$150M
$100M
Turbulent markets can offer
tax-loss harvesting opportunities.
$50M
6
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*The right axis and blue line represents the movements of the U.S. stock market as measured by
the Dow Jones U.S. Total Stock Market (Price Index).
Practicing tax-loss harvesting throughout
the year—and not just at year’s end—can
offer an investor numerous opportunities
to potentially reduce their tax hit. As you
can see in the chart to the left, tax-loss
harvesting can be especially effective
during volatile markets such as the ones
in January, February, July, and November
of 2016.
Strategic Advisers, Inc., seeks to add
value to clients’ portfolios by utilizing
tax-loss harvesting techniques on an
ongoing basis. In fact, Exhibit 5
highlights the potential tax savings
accrued from harvesting losses
throughout 2016 for clients in our
Fidelity® Personalized Portfolios.
Methodology: This chart represents the cumulative total tax lot losses harvested or potential tax savings in all accounts in good order in the Fidelity ®
Personalized Portfolios Program for calendar year 2016 with account values of $50,000 and above with at least 10 holdings. Each tax lot loss within the
population of accounts was evaluated. The specific tax rate applicable to the respective client account was applied to calculate the dollar loss of each tax
lot, applying the client’s ordinary income tax rate to short-term losses and applying the client’s capital gain tax rate to long-term losses. All capital losses
harvested in 2016 may not result in a tax benefit in the 2016 tax year. Any remaining unused capital losses may be carried forward and applied to offset
income in future tax years indefinitely.
Results will vary. In our analysis over the past four years, cumulative tax savings from tax-loss harvesting differed from year to year and was as small as half the
amount shown in the chart.
Source: Fidelity Tax Accounting System as of 12/31/2016.
6
FIDELITY INVESTMENTS | Portfolio Advisory Services
PERSPECTIVE
positions, this requires significant time,
computing power, and detailed tax-lot
accounting. The vast majority of individual
investors don’t have the time, desire, or
tools necessary to maintain continual
tax-loss harvesting.
Tax-loss harvesting is often thought of at
year-end, but academic research supports
a continual, year-round approach. A
study by Robert Arnott, Andrew Berkin,
and Jia Ye12 supports the notion that
frequent tax-loss harvesting actually
helps create more tax-loss harvesting
opportunities. This is because “new”
investments — purchased from tax-loss
harvesting proceeds — are more likely to
lose value in the short term and become
tax-loss candidates themselves (relative
to assets at a loss that aren’t sold but
maintained longer term). A tax-loss
harvesting simulation in the same study
resulted in almost 14% cumulative alpha
over 25 years, after taxes, assuming 8%
stock returns.13 Our investment managers
continuously look for tax-loss harvesting
opportunities, with the goal of turning
market volatility to their clients’ advantage
while seeking to avoid wash sales. (See
“Watch Out For Wash Sales” below.)
Of course, fees associated with selling
securities must also be factored into any
tax-loss harvesting analysis.
WATCH OUT FOR WASH SALES
Effective tax-loss harvesting requires close tracking
of potential wash sale rule triggers, whereby the
purchase of a substantially identical investment 30
days before or after a sale at a loss will defer the
benefit of that loss until the new shares are sold.
Unfortunately, many individual investors and advisors
may not be paying close attention: A survey by the
CFA Institute* showed that half of surveyed advisors
were not considering wash sales at all and only 22%
had automated systems to help avoid them.
When it comes to wash sales, Fidelity’s investment
managers leverage our technology and investment
platforms to minimize the triggering of wash sales in
the accounts they manage.
*“Tax-Aware Investment Management Practice,” by Stephen
M. Horan and David Adler, a 2009 study funded by the
Research Foundation of CFA Institute.
MANAGING TAX LOTS
Many investors do not have the time, sophisticated tools, or the desire to effectively manage a portfolio.
For example, effective use of cash from dividends, coupons, distributions, and contributions introduces
additional tax lots, which can be an impactful way to not only build long-term wealth, but also improve
after-tax returns.
Typically, clients often end up with dozens of tax lots per position — some at gains, others at losses, some
short term, others long term. Keeping track of the cost basis, purchase date, and short/long status can be
time consuming and complicated. While it may seem unnecessary to keep tabs on tax lots, doing so is a
must for successful tax-sensitive investment management.
Our investment managers closely monitor tax lots, and manually reinvest portfolio earnings — rather than
passively enabling dividend reinvestments. This way, they maintain full control over the next investment
purchased and tax lot created. They also trade specific tax lots. Often clients will have accumulated a
position by purchasing shares at different points in time. A tax lot is created each time you buy shares and
thus will have a unique holding period and cost basis. Selecting the most advantageous lot to sell can be
an effective way to help reduce your tax liability.
7
significant declines in value. Although the
persistent harvesting of tax losses by our
investment managers may have seemed
needless at the time, the strategy’s value
was demonstrated during the 2009 market
recovery. As most asset classes rebounded
sharply, the need to manage risk (by rebalancing) often resulted in taxable gains.
Fortunately, carryover losses from 2008
helped to offset these gains for many
clients — and, in some cases, gains were
realized in multiple years after 2009.
3. Use Loss Carryovers to Reduce
Future Taxes
Investment losses are not only valuable
for offsetting gains in the tax year when
they are realized, but also may be netted
against future realized gains through loss
carryovers.14
A relatively simple component of a
taxpayer’s annual tax return filings, the
loss carryover can have considerable
power to reduce future tax liabilities,
especially during periods of extreme
market volatility.
The chart below shows a hypothetical example of this. As you can see,
following a year with large portfolio
Take, for example, the 2008 market crash,
in which most asset classes experienced
Hypothetical example of how to carry
forward tax losses offset future gains.
EXHIBIT 6:
Hypothetical example of how carryforward tax losses offset future gains.
$10,000
$6,000
A net loss becomes
carryforward potential
$4,500 total
capital gain
$4,000
$4,000
$3,000
$1,500
$3,000
$2,000
Taxable gain:
$1,500
2009–2012
capital gain:
$11,500
$1,000
0
Capital Gain $4,000
Taxable Gain
$0
$2,000
$1,000
$4,500
$0
$0
$1,500
Net Loss
Tax Loss Carryforward
$10,000
Net loss
S&P 500 Index
1-year returns
®
Capital Gain
2008
2009
2010
2011
2012
–37%
27%
15%
2%
16%
Tax savings will depend on an individual’s actual capital gains, loss carryforwards, and tax rate and may be more or less than this example. T
his is a
Tax savings will depend on an individual’s actual capital gains, loss carryforwards, and tax rate and may be more or less than this example.
hypothetical
example for illustrative purposes only, and is not intended to represent the performance of any investment.
This is a hypothetical example for illustrative purposes only, and is not intended to represent the performance of any investment.
®
The S&P
IndexIndex
is anis unmanaged
capitalization–weighted
of 500stocks
common
liquidity,
The500
S&P 500(r)
an unmanaged market
market capitalization-weighted
index ofindex
500 common
chosenstocks
for size,chosen
liquidity, for
andsize,
industry
group and industry group
representation
to representU.S.
U.S. equity
equity performance.
representation
to represent
performance.
S&P 500 Data, FundFacts Web Viewer, FMRCo, May 28, 2013.
S&P 500
Data, Performance Workspace, FMRCo, December 31, 2016.
8
FIDELITY INVESTMENTS | Portfolio Advisory Services
PERSPECTIVE
losses, an investor is able to carry
forward that loss to offset capital gains
in subsequent years. In this example,
the investor used a $10,000 net loss
in 2008 by utilizing the carryforward
tax-loss strategy and avoided paying
capital gains for the next four years. It
wasn’t until 2012 that gains resulted in
a tax liability. This is important because
compounding is key to wealth generation, so it’s typically a good strategy to
defer paying taxes as long as possible.
4. Manage Exposure to Distributions
Each year, mutual funds must distribute
most of the fund’s net income to shareholders, which is usually taxable to those
shareholders if held in a taxable account.
So, another tax-sensitive investment
management strategy involves monitoring
capital gains distributions from mutual
funds and incorporating this information
into the investment process.
Selling a fund to avoid the tax liability of a
distribution is one option. However, even
when faced with a pending distribution,
this may not be the best course of action.
Depending on a fund’s cost basis and
performance expectations, it may well
be worth continuing to hold — especially
if the fund is highly rated or if possible
replacement funds also will be paying
distributions.
and analysis to make an informed
investment decision. The potential tax
consequences of selling a fund, and those
of staying invested in the fund, are not the
same for all investors, because cost basis
and tax rates differ widely. Our tax-aware
investment managers consider all these
attributes on a customized basis for
our clients.
5. Invest in Municipal Bond Funds or ETFs
Asset allocation decisions (e.g., how
much to invest in stocks, bonds, or shortterm investments) are arguably the most
important decisions that an investment
manager can make. Our asset allocation
strategies take a client’s federal and
state tax rates into account by including
municipal bonds and other asset classes,
as appropriate, to seek desirable after-tax
results.15 For clients in high tax brackets,
municipal securities may be beneficial
because they typically generate income
free from federal taxes and, in some cases,
also free from state taxes. Widespread
availability of municipal bond funds has
enabled many individual investors to
benefit from this tax-sensitive investment
management strategy. If appropriate,
our tax-aware investment managers also
incorporate municipal bond funds into
client portfolios, drawing on the extensive
analysis of our in-house research team.
Incorporating mutual fund distribution
information into the investment process is
very difficult for most investors because it
requires a significant amount of research
Though distributions from mutual funds can vary widely from
2009 total combined distributions. At Strategic Advisers, our
enabling us to estimate upcoming distributions and their tax
large gain, we may sell out of the fund or delay its purchase,
year to year, one study 16 estimates there were $213B in
proprietary research group monitors the funds we hold,
impact to our clients. If a fund is poised to distribute a
thereby avoiding a tax liability.
9
Other Possible Tax-Saving Strategies
Conclusion
For clients whose taxable savings are already
professionally managed with tax sensitivity,
there are other strategies to consider. One
such strategy is donating securities with longterm appreciation to charitable organizations.
When compared with cash contributions,
gifts of these appreciated securities can
result in an even bigger tax benefit to the
donor. This is because donors not only avoid
selling a security and realizing a capital gain,
but they also get an itemized tax deduction
for the appreciated value of the security.17
The more highly appreciated the security, the higher the potential benefit to the
investor. To encourage charitable giving of
securities, the IRS also allows the offsetting
of a significant portion of income (up to 30%
of adjusted gross income),18 so itemized
charitable deductions can potentially reduce
an individual’s marginal tax rate.
Tax-sensitive investment management techniques can potentially deliver significant tax
savings in a wide range of markets. However,
it can be challenging and time consuming
for an individual investor to implement most
tax-sensitive investment management techniques on an ongoing basis. Tax-sensitive
investment management is a service we
provide to help Fidelity® Personalized
Portfolios clients take advantage of the
strategies that seek to enhance their
after-tax returns.
Historical data tells a compelling story when
it comes to the benefits of tax-sensitive
investment management techniques. Over
the period for which measurement is available, Fidelity has seen anywhere from 0.29%
to 1.91% annual tax alpha added to clients’
portfolios (see Exhibit 2). The impact of these
tax savings cumulatively over a decade or
more can be very significant and it’s evident
that investing with a clear understanding of
taxes matters.
For more information, please contact your Fidelity Representative
at 800-544-9371.
APPENDIX A: PERFORMANCE DETAILS
Absolute Returns
1 Year
as of 12/31/2016
Composite
Return
5 Year
Benchmark
Return
Excess
Return
Composite
Return
Benchmark
Return
Life of Reporting
10 Year
Excess
Return
Composite
Return
Benchmark
Return
(since 12/31/2001)
Excess
Return
Composite
Return
Benchmark
Return
Excess
Return
All-Stock Strategy — Pre-tax
8.92%
10.26%
–1.34%
11.05%
12.22%
–1.17%
4.48%
5.33%
–0.85%
5.63%
6.58%
–0.95%
All-Stock Strategy — After Tax
9.48%
9.69%
–0.21%
10.87%
11.17%
–0.29%
5.75%
4.38%
1.36%
6.75%
5.79%
0.96%
Tax Alpha
1.13%
0.88%
2.21%
1.91%
Aggressive Strategy — Pre-tax
7.71%
8.85%
–1.13%
9.56%
10.97%
–1.41%
4.15%
5.38%
–1.22%
5.08%
6.42%
–1.35%
Aggressive Strategy — After Tax
8.12%
6.77%
1.35%
9.19%
10.41%
–1.22%
5.20%
4.71%
0.49%
6.00%
5.85%
0.14%
Tax Alpha
2.49%
0.19%
1.71%
1.49%
Growth Strategy — Pre-tax
6.91%
7.33%
–0.42%
8.36%
9.45%
–1.08%
4.04%
5.10%
–1.06%
4.85%
5.97%
–1.12%
Growth Strategy — After Tax
7.25%
5.63%
1.62%
8.07%
8.99%
–0.92%
4.80%
4.51%
0.29%
5.50%
5.48%
0.01%
Tax Alpha
2.04%
Growth w/ Income Strategy — Pre-tax
6.09%
6.34%
Growth w/ Income Strategy — After Tax
6.33%
4.88%
Tax Alpha
0.16%
1.35%
–0.24%
7.59%
8.56%
–0.97%
4.00%
5.04%
1.45%
7.32%
8.21%
–0.88%
4.63%
4.52%
1.70%
0.09%
1.13%
–1.04%
4.86%
5.87%
–1.01%
0.11%
5.37%
5.44%
–0.07%
1.15%
0.94%
Balanced Strategy — Pre-tax
5.08%
5.33%
–0.25%
6.60%
7.50%
–0.90%
3.72%
4.75%
–1.03%
4.38%
5.41%
–1.03%
Balanced Strategy — After Tax
5.23%
4.02%
1.22%
6.36%
7.22%
–0.86%
4.21%
4.29%
–0.08%
4.80%
5.07%
–0.27%
Tax Alpha
1.46%
0.05%
0.96%
0.76%
Conservative Strategy — Pre-tax
1.25%
2.28%
–1.03%
3.49%
4.13%
–0.64%
2.45%
3.55%
–1.10%
3.22%
3.97%
–0.75%
Conservative Strategy — After Tax
1.15%
1.52%
–0.37%
3.28%
4.07%
–0.80%
2.79%
3.30%
–0.51%
3.38%
3.84%
–0.45%
Tax Alpha
0.66%
–0.16%
0.59%
0.29%
Performance shown represents past performance, which is no guarantee of future results. Investment return and principal value of investments will fluctuate
over time. A client’s underlying investments may differ from those of the composite portfolio. Returns for individual clients may differ significantly from
the composite returns and may be negative. Current performance may be higher or lower than returns shown. Composite and after-tax benchmark returns
are asset weighted because both are based on individual client accounts. Pre-tax benchmarks are not asset weighted, because they are based on market
indexes. Returns include changes in share price and reinvestment of dividends and capital gains. The index performance includes the reinvestment of
dividends and interest income. An investment cannot be made in an index. Securities indexes are not subject to fees and expenses typically associated with
managed accounts or investment funds. The underlying funds in each composite portfolio may not hold all the component securities included in, or in the
same proportion as represented in, its corresponding customized benchmark. Only Fidelity ® Personalized Portfolios that are all stock or include national and
state-specific municipal bond funds are included. Availability of state-specific funds depends on client’s state of residence. Fidelity Personalized Portfolios
(“FPP”) launched July 2010; performance before such date reflects only Fidelity Private Portfolio Service (“PPS”) accounts. See endnote 10 for more
information on how these returns and benchmarks are calculated.
The results in Appendix A represent average annual composite returns (net of fees) for FPP client accounts managed by Strategic Advisers that use an all-stock strategy
or a strategy with municipal bond funds. Non-fee-paying accounts may be included in composites. This may increase the overall composite performance with respect
to the net-of-fees performance. The pre-tax benchmarks consist of market indexes. The after-tax benchmarks consist of mutual funds, because an investable asset with
known tax characteristics is needed to calculate after-tax benchmark returns for comparison.
Composite portfolio excess returns are the difference between composite portfolio returns and their applicable composite portfolio benchmark returns. Both the
pre-tax and after-tax composite portfolio benchmark returns are blended from either representative market indexes (for pre-tax benchmarks) or representative mutual
funds (for after-tax benchmarks) in weightings based on the long-term asset allocation of each strategy. The benchmark returns are calculated monthly based on the
long-term asset allocation of the strategies at that time so the benchmarks reflect historical changes to the asset allocation of each strategy. The benchmark long-term
allocation weightings may vary slightly from individual client accounts due to individual account investments and activity. The tables on the next page detail the current
composition of the benchmarks for each of the investment strategies that are all stock or with a municipal bond fund component mentioned in this paper.
11
APPENDIX B: COMPOSITION OF BENCHMARKS
Pre-tax Benchmark Composition (as of 12/31/2016)
Dow Jones U.S. Total
Stock Market Index
MSCI ACWI ex USA
Index (Net MA Tax)
Bloomberg Barclays
Municipal Bond Index
Lipper Tax-Exempt
Money Market Funds
Index
All Stock
70%
30%
—
—
Aggressive
60%
25%
15%
—
Growth
49%
21%
25%
5%
Growth with Income
42%
18%
35%
5%
Balanced
35%
15%
40%
10%
Conservative
14%
6%
50%
30%
Investment Strategy
All indexes are unmanaged and are not illustrative of any particular investment. Investments cannot be made directly in any index. Performance of the indexes
includes reinvestment of dividends and interest income, unless otherwise noted.
The domestic stock pre-tax benchmark component of all strategies is the Dow Jones U.S. Total Stock Market Index, a float-adjusted market capitalization–
weighted index of all equity securities of U.S.-headquartered companies with readily available price data.
The foreign stock pre-tax benchmark component of all strategies is the Morgan Stanley Capital International All-Country World Index (MSCI ACWI ex USA Index
[net MA tax]), a free-float-adjusted, market capitalization–weighted index designed to measure the equity market performance of developed and emerging
markets. The index returns for periods after 1/1/1997 are adjusted for tax withholding rates applicable to U.S.-based mutual funds organized as Massachusetts
business trusts.
The fixed income pre-tax benchmark component of all strategies with municipal bonds is the Bloomberg Barclays Capital Municipal Bond Index, a market
value–weighted index of investment-grade municipal bonds with maturities of one year or more.
The short-term pre-tax benchmark component of all strategies with municipal bonds is the Lipper Tax-Exempt Money Market Funds Index, an unmanaged index
consisting of the largest (assets) 30 funds within the tax-exempt money market discipline and is equal weighted and adjusted for capital gains and income.
After-Tax Benchmark Composition (as of 12/31/2016)
Spartan® Total Market
Index Fund — Fidelity
Advantage Class
(FSTVX)
Spartan® Global ex U.S.
Index Fund — Fidelity
Advantage Class
(FSGDX)
iShares® National
Municipal Bond ETF
(MUB)
Fidelity Government
Cash Reserves*
(FDRXX)
All Stock
70%
30%
—
—
Aggressive
60%
25%
15%
—
Growth
49%
21%
25%
5%
Growth with Income
42%
18%
35%
5%
Balanced
35%
15%
40%
10%
Conservative
14%
6%
50%
30%
Investment Strategy
The components of the after-tax benchmarks are mutual funds. The after-tax benchmark uses mutual funds as investable alternatives to market indexes in
order to provide a benchmark that takes into account the associated tax consequences of these investable alternatives. Detailed information on these mutual
funds is available on Fidelity.com.
*The after-tax money market component of the benchmark changed to the Fidelity Government Cash Reserves Fund effective March 31, 2016. For
accounts in a muni strategy, the previous fund was the Fidelity Tax-Exempt Treasury Money Market Fund. For accounts not in a muni strategy, the
previous fund was the Fidelity Treasury Only Money Market Fund.
12
FIDELITY INVESTMENTS | Portfolio Advisory Services
ENDNOTES
Fidelity Private Portfolio Service® is no longer available to investors.
Strategic Advisers, Inc. (SAI), applies tax-sensitive investment management techniques in Fidelity® Personalized Portfolios and Fidelity® Personalized Portfolios for Trusts
(including “tax-loss harvesting”) on a limited basis, at its discretion, solely with respect to determining when assets, including tax-exempt assets, in a client’s account
should be bought or sold. As a discretionary investment manager, SAI may elect to sell assets in an account at any time. A client may have a gain or loss when assets are
sold. SAI does not currently invest in tax-deferred products, such as variable insurance products, or in tax-managed funds in Fidelity Personalized Portfolios or Fidelity
Personalized Portfolios for Trusts, but may do so in the future if it deems such to be appropriate for a client. SAI does not actively manage for alternative minimum taxes;
state or local taxes; foreign taxes on non-U.S. investments; or estate, gift, or generation-skipping transfer taxes. SAI relies on information provided by clients in an effort
to provide tax-sensitive management and does not offer tax advice. SAI can make no guarantees as to the effectiveness of the tax-sensitive management techniques
applied in serving to reduce or minimize a client’s overall tax liabilities or as to the tax results that may be generated by a given transaction. Except where Fidelity
Personal Trust Company, FSB, is serving as trustee, Fidelity Personalized Portfolios clients are responsible for all tax liabilities arising from transactions in their accounts,
for the adequacy and accuracy of any positions taken on tax returns, for the actual filing of tax returns, and for the remittance of tax payments to taxing authorities.
2
The tax-sensitive investment management strategies described in this paper apply only to Fidelity Personalized Portfolios accounts. An assumption of this paper is that
investors want to accumulate tax-loss carryforwards through the use of ongoing tax-sensitive investing strategies. Unused tax-loss carryforwards can generally be carried
forward indefinitely to offset future realized capital gains and some ordinary income, but at death they do not carry over or “pass down” to a surviving heir.
3
Taxes can significantly reduce returns data, Morningstar, Inc. 3/1/2014. Federal income tax is calculated using the historical marginal and capital gains tax rates for a single
taxpayer earning $110,000 in 2010 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level
for each year. Income is taxed at the appropriate federal income tax rate as it occurs. When realized, capital gains are calculated assuming the appropriate capital gains
rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while government bonds are held until replaced in the index. No state
income taxes are included. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Generally, among
asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations
than stocks, but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value if held to maturity, but returns are generally only slightly above the
inflation rate. Although bonds generally present less short-term risk and volatility than stocks, bonds do entail interest rate risk (as interest rates rise, bond prices usually
fall, and vice versa), issuer credit risk, and the risk of default, or the risk that an issuer will be unable to make income or principal payments. The effect of interest rate
changes is usually more pronounced for longer-term securities. Additionally, bonds and short-term investments entail greater inflation risk, or the risk that the return of
an investment will not keep up with increases in the prices of goods and services, than stocks.
4
Tax alpha is a measure of value that an investment manager provides in helping improve after-tax returns using tax-sensitive investment management strategies. Tax
alpha is calculated by subtracting the annualized pre-tax benchmark relative return (pre-tax excess return) from the annualized after-tax benchmark relative return (aftertax excess return).
5
After-Tax Excess Return: This number represents the amount the annualized percentage after-tax return for the portfolio or composite is above or below the comparable
annualized after-tax benchmark return. Essentially, it shows by how much the after-tax return beat or trailed its benchmark.
6
Pre-tax Excess Return: This number represents the amount the annualized percentage pre-tax return for the portfolio or composite is above or below the comparable
annualized pre-tax benchmark return. Essentially, it shows by how much the pre-tax return beat or trailed its benchmark.
7 Tax alpha is a measure of value that an investment manager provides in helping improve after-tax returns using tax-sensitive investment management strategies. Tax
alpha is calculated by subtracting the annualized pre-tax benchmark relative return (pre-tax excess return) from the annualized after-tax benchmark relative return
(after-tax excess return).
8
Cumulative Return Added from Tax-Sensitive Investment Management: This number represents the hypothetical value added from tax-sensitive investment
management strategies that would have accrued on a $1 million investment in a composite of client accounts for each strategy during the stated time period.
Essentially, it shows the cumulative tax alpha in terms of percentages.
1
9
The Pre-tax and After-Tax Composite Portfolios for all strategies (except the Moderate and Moderate with Income Strategies) were created on 12/31/2001. The After-Tax
Composite Benchmark for strategies using municipal bond funds and the “All Stock” strategy were also created on 12/31/2001. For comparison purposes, the Pre-tax
Benchmark uses the same creation date as the composites’ returns. This date signifies when a representative number of accounts were being managed to enable the
composite calculation. Returns less than one year are cumulative.
Calculation of Pre-tax Composite Portfolio Returns. Pre-tax Composite Portfolio Returns represent the asset-weighted composite performance of PPS and
Personalized Portfolios client accounts managed to the indicated asset allocation strategy. Personalized Portfolios accounts were launched in July 2010. Performance
prior to that date is only that of the PPS accounts. Composite performance is based on the returns of the following accounts: (1) PPS and PPS Trust client accounts
during the time periods they were active, eligible, and over $50,000 since August 1, 2009 ($100,000 prior to 8/1/2009), and (2) the managed portion of Personalized
Portfolios accounts that were active and eligible and over $5,000 since July 2010. As of May 31, 2012, all existing PPS accounts were converted to Personalized Portfolios.
Performance after this date is based only on the managed portion of Personalized Portfolios accounts active and eligible and over $5,000; assets in the liquidity sleeve of
Personalized Portfolios accounts have been excluded from composite performance. After July 1, 2015, the composite includes all eligible, active Personalized Portfolios
accounts in amounts over $50,000. The liquidity sleeve is established to meet client-directed cash flow instructions, including withdrawals and gradual investment,
and contains short-term positions including money market funds. Accounts must have at least one full calendar month of returns to be included in the composite.
Accounts subject to significant investment restrictions provided by clients are excluded from composites. In limited circumstances, additional accounts with nonstandard
characteristics are excluded from composites. Accounts with a do-not-trade restriction are removed from the composite once the restriction has been on the account for
65 days. Accounts for which clients provided short-term and long-term tax rates of zero are also excluded from the composite.
Client account performance is calculated using time-weighted methodology, which minimizes the effect of cash flows in and out of accounts and related impacts to
account returns during the period. Pre-tax composite portfolio returns are calculated using asset-weighted methodology, which takes into account the differing sizes of
client accounts (e.g., considers larger and smaller accounts proportionately). Performance shown is net of the actual investment management fees paid by each client,
including net of any fee credits applicable to the account, as well as net of any underlying fund expenses. Investors should note that while the gross advisory fees charged
to PPS accounts are generally higher (1.70% of assets under management for the smallest accounts in the program), Fidelity Personalized Portfolios accounts operate
under a different fee structure, which includes additional fees for certain services, including separate fees for investment in separately managed account sleeves offered
within the Fidelity Personalized Portfolios program. Accordingly, the net advisory fees paid by Fidelity Personalized Portfolios customers may be more variable than
those paid by PPS customers, and may be higher or lower than those experienced in past periods for PPS customers. Individual client accounts will vary and are based
on their individual tax and investment situations and, therefore, performance may be better or worse than the performance shown. Returns include changes in share
price and reinvestment of dividends and capital gains, if applicable. Larger accounts may, by percentage, pay lower management fees than smaller accounts. Fees for
each program are fully described in the PPS and Fidelity Personalized Portfolios introductory materials (as applicable) and in individual fund prospectuses utilized by the
program. Please read these materials before investing.
Pre-tax Composite Portfolio Benchmark Returns are hypothetical measures showing how the combination of certain indexes would have performed based on
weightings for the portfolio’s long-term asset allocation, and do not indicate the actual performance results of a managed portfolio of funds, past or future, nor do they
reflect PPS’s and Fidelity ® Personalized Portfolios’ fees or individual fund sales charges or fund expenses. Unlike the Pre-tax and After-Tax Composite Portfolios and the
After-Tax Composite Benchmark, which are asset weighted because they are composed of client-specific data, the Pre-tax Composite Benchmark is not asset weighted
because it does not contain client-specific data. Portfolio benchmarks, whether pre-tax or after-tax, and their underlying indexes may be changed from time to time by
the SAI Investment Management Team.
13
ENDNOTES
Calculation of After-Tax Composite Portfolio Returns. After-tax Composite Portfolio Returns represent the asset-weighted composite performance of PPS and
Personalized Portfolios client accounts managed to the indicated asset allocation strategy. Personalized Portfolios accounts were launched in July 2010. Performance
prior to that date is only that of the PPS accounts. Composite performance is based on the returns of the following accounts: (1) PPS and PPS Trust client accounts
during the time periods they were active, eligible, and over $50,000 since August 1, 2009 ($100,000 prior to 8/1/2009), and (2) the managed portion of Personalized
Portfolios accounts that were active and eligible and over $5,000 since July 2010. As of May 31, 2012, all existing PPS accounts were converted to Personalized
Portfolios. Performance after this date is based only on the managed portion of Personalized Portfolios accounts active and eligible and over $5,000; assets in the
liquidity sleeve of Personalized Portfolios accounts have been excluded from composite performance. After July 1, 2015, the composite includes all eligible, active
Personalized Portfolio accounts in amounts over $50,000. The liquidity sleeve is established to meet client-directed cash flow instructions, including withdrawals and
gradual investment, and contains short-term positions including money market funds. Accounts must have at least one full calendar month of returns to be included in
the composite. Accounts subject to significant investment restrictions provided by clients are excluded from composites. In limited circumstances, additional accounts
with nonstandard characteristics are excluded from composites. Accounts with a do-not-trade restriction are removed from the composite once the restriction has
been on the account for 65 days. Accounts for which clients provided short-term and long-term tax rates of zero are also excluded from the composite.
Client account performance is calculated using time-weighted methodology, which minimizes the effect of cash flows in and out of accounts and related impacts to
account returns during the period. After-tax composite portfolio returns are calculated using asset-weighted methodology, which takes into account the differing
sizes of client accounts (e.g., considers larger and smaller accounts proportionately). Individual client accounts will vary based on their individual tax and investment
situations and, therefore, performance may be better or worse than the performance shown. Performance shown is net of the actual investment management fees paid
by each client, including net of any fee credits applicable to the account, as well as any underlying fund expenses, and reflects reinvestment of any interest, dividends,
and capital gains distributions. These are manually reinvested, but not necessarily into the issuing fund. Investors should note that while the gross advisory fees
charged to PPS accounts are generally higher (1.70% of assets under management for the smallest accounts in the program), Fidelity Personalized Portfolios accounts
operate under a different fee structure, which includes additional fees for certain services, including investment in separately managed account sleeves offered within
the Fidelity Personalized Portfolios program. Accordingly, the net advisory fees paid by Fidelity Personalized Portfolios customers may be more variable than those
paid by PPS customers, and may be higher or lower than those experienced in past periods for PPS customers. Mutual fund redemption fees that would otherwise
apply are currently paid by PPS. Individual client accounts will vary and performance may be more or less than the performance shown. Returns include changes in
share price and reinvestment of dividends and capital gains, if applicable. Larger accounts may, by percentage, pay lower management fees than smaller accounts.
Fees are fully described in the PPS and Fidelity Personalized Portfolios introductory materials (as applicable) and in individual fund prospectuses. Please read these
materials before investing.
Assumptions Underlying After-Tax Composite Portfolio Returns. The following assumptions have been used as part of the After-Tax Composite Portfolio
Returns calculations: All distributions of qualified dividend income are assumed to meet the required holding period. In most cases, specific ID cost-basis
methodology rather than average cost basis is applied when managing client accounts. Performance and rates of return are calculated net of the payment of
the quarterly advisory fee on client accounts. Returns are calculated net of the payment of underlying mutual fund expenses as described in individual fund
prospectuses. Individual share price and returns will vary, and you may have a gain or loss when your shares are sold. Performance, whether reported on a pre-tax
or after-tax basis, includes accrued interest for the following securities: fixed-rate bonds, fixed-rate government bonds, and commercial paper. Other securities are
computed on a cash basis only, so, for example, accrued interest on money market funds, mutual funds, and accrued dividends on equities are not included in the
calculation. For accounts with individual bonds, amortization and accretion for bonds are not included in performance calculations. After-tax composite portfolio
returns are calculated based on a daily valuation time-weighted methodology estimating the impact of federal ordinary income taxes, Medicare surtaxes, and the
alternative minimum tax where customers have indicated this applies. If accounts migrated from PPS, the accounts were calculated in some historical months using
a modified Dietz method or, depending on the relative size of cash flows, a daily valuation method, taking into consideration the impact of federal income taxes,
based on the activity in client accounts. After-Tax Composite Portfolio Returns are calculated by adjusting for actual transactions (sales, dividend earnings, etc.) that
have taken place in the accounts, and by assuming that (i) each category of income is taxed at individual marginal rates in effect for the period in which the taxable
transaction took place and is computed based on long-term capital gains rate and marginal income tax rate information provided by the client, and (ii) cost-basis
and holding period information provided by the client is accurate. Cost-basis information provided in customer communications may not reflect all adjustments
to such information that may be necessary due to events outside the control of, or unknown to, Fidelity (e.g., wash sales resulting from purchases and sales of
securities in other non-managed accounts). Such after-tax returns take into account the effect of federal income taxes only; taxes other than federal income taxes,
including alternative minimum taxes, state and local taxes, foreign taxes on non-U.S. investments, and estate, gift, and generation-skipping transfer taxes, are not
taken into account.
Any realized short-term or long-term capital gain or loss retains its character in the after-tax calculation. The gain/loss for any account is applied in the month
incurred and there is no carry-forward. We assume that losses are used to offset gains realized outside the account in the same month, and we add the imputed
tax benefit of such a net loss to that month’s return. This can inflate the value of the losses to the extent that there are no items outside the account against which
they can be applied. We assume that taxes are paid from outside the account. Taxes are recognized in the month in which they are incurred. This may inflate the
value of some short-term losses if they are offset by long-term gains in subsequent months. Any year-end adjustments for dividends, with respect to classifications
as qualified versus nonqualified, are not taken into account. After-Tax Composite Returns do not take into account the tax consequences associated with income
accrual, deductions with respect to debt obligations held in client accounts, or federal income tax limitations on capital losses. After-Tax Composite Portfolio
Returns may exceed pre-tax returns as a result of an imputed tax benefit received upon realization of tax losses. Withdrawals from client accounts during the
performance period result in adjustments to take into account unrealized capital gains across all securities in such account, as well as the actual capital gains
realized on the securities.
Changes in laws and regulations may have a material impact on pre-tax and/or after-tax investment results. Strategic Advisers, Inc. (SAI), relies on information
provided by clients in an effort to provide tax-sensitive investment management, and does not offer tax advice. SAI can make no guarantees as to the effectiveness
of the tax-sensitive investment management techniques applied in seeking to reduce or minimize a client’s overall tax liabilities or as to the tax results that may be
generated by a given transaction. Consult your tax advisor for additional details.
The After-Tax Composite Portfolio Benchmark Returns represent an asset-weighted composite of clients’ individual after-tax benchmark returns. Each client’s
personal after-tax benchmark is composed of mutual funds (index funds where available) in the same asset class percentages as the client’s investment strategy and
differs from the composition of the pre-tax benchmark presented above, which is composed of a combination of broad market indexes. The after-tax benchmark
uses mutual funds as investable alternatives to market indexes in order to provide a benchmark that takes into account the associated tax consequences of these
investable alternatives. They assume reinvestment of dividends and capital gains, if applicable. The after-tax benchmark also takes into consideration the tax
impact of rebalancing the benchmark portfolio, assuming the same tax rates as are applicable to each client’s account, as well as an adjustment for the level of
unrealized gains in each account. The After-Tax Composite Portfolio Benchmark return is calculated assuming the use of the “average cost basis method” for
calculating the tax basis of mutual fund shares.
All indexes are unmanaged and include reinvestment of interest and/or dividends. Please note that an investor cannot invest directly in an index. The performance
data featured represents past performance, which is no guarantee of future results. Investment return and principal value of an investment will fluctuate. Current
performance may be higher or lower than the performance data quoted.
14
FIDELITY INVESTMENTS | Portfolio Advisory Services
ENDNOTES
Based on strategy composites. (See Appendix A for information on the composites.) These results and Exhibit 3 are hypothetical and do not represent actual value
added to client accounts. Returns for individual clients will vary. Performance shown represents past performance, which is not a guarantee of future results. Investment
returns and principal value will fluctuate, and you may lose money.
11
Tax rates are dependent on each individual investor’s financial situation and also vary over time as tax regulations change. Please visit http://www.irs.gov for the
latest information on current tax rates.
12
Arnott, Robert D., Andrew L. Berkin, Ph.D., and Jia Ye, Ph.D., 2001, “Loss Harvesting: What’s It Worth to the Taxable Investor?” First Quadrant, L.P. According to the
study: “That tax alpha from harvesting of losses is material. Over a 25-year span, assuming modest 8% returns on stocks, we earn an average of almost 1400 basis
points of cumulative alpha just from harvesting the losses. And that’s net of all the taxes that you would face at the end of the period for liquidating the portfolio.
It’s a very important source of after-tax alpha, and it’s a reliable, predictable source of after-tax alpha.” The study consisted of 300 Monte Carlo simulations of
portfolios approximating the S&P 500 Index over a variety of 25-year periods, covering the time of the Great Depression through 2001, compared with a buy-andhold portfolio of similar assets. Simulation assumptions included monthly tax-loss harvesting/reinvestment of tax savings, a 35% marginal tax rate, and exclusion of
all transaction costs.
10
13
For purposes of this performance presentation, tax alpha is calculated as follows: Tax Alpha = (After-Tax Portfolio Return – After-Tax Benchmark Return) – (Pre-tax
Portfolio Return – Pre-tax Benchmark Return).
14
Capital losses may generally be used to offset only capital gains and, in the case of individuals, small amounts of ordinary income. A capital loss that can’t be used
for any year is carried forward.
15
The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities. Municipal
money market funds normally seek to earn income and pay dividends that are expected to be exempt from federal income tax. If a fund investor is resident in the
state of issuance of the bonds held by the fund, interest dividends may also be exempt from state and local income taxes. Income exempt from regular federal
income tax (including distributions from tax-exempt, municipal, and money market funds) may be subject to state, local, or federal alternative minimum tax. Certain
funds normally seek to invest only in municipal securities generating income exempt from both federal income taxes and the federal alternative minimum tax;
however, outcomes cannot be guaranteed, and the funds may sometimes generate income subject to these taxes. For federal tax purposes, a fund’s distributions
of gains attributable to a fund’s sale of municipal or other bonds are generally taxable as either ordinary income or long-term capital gains.
”Taxes in the Mutual Fund Industry — 2010,” a Lipper Research Study. Includes short- and long-term capital gains, as well as income distributions from open-ended
mutual funds, excluding money market funds.
16
Charitable contributions of securities held longer than one year are usually deductible at the fair market value at the time of donation. If held less than one year,
the deduction is usually limited to cost basis. Information relates to charitable deductions at the federal level. Deductions of charitable donations at the state level
varies by state.
17
18
Individuals may deduct up to 30% of AGI for certain securities contributions to qualified public charities.
15
Fidelity ® Personalized Portfolios is a service of Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, and may
be offered through Strategic Advisers, Inc., or Fidelity Personal Trust Company, FSB (“FPTC”), a federal savings bank. Nondeposit investment products
and trust services offered through FPTC and its affiliates are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency, are not obligations of any bank, and are subject to risk, including possible loss of principal. This service provides discretionary
money management for a fee.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax
advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that
the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use,
and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional
regarding your specific situation.
Investment Risks:
In general, the bond and municipal bond markets are volatile. Fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually
fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and
default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused
by price volatility by holding them until maturity is not possible. Lower-quality debt securities involve greater risk of default or price changes due to
potential changes in the credit quality of the issuer. The interest payments of TIPS are variable; they generally rise with inflation and fall with deflation.
The municipal market can be significantly affected by adverse tax, legislative, or political changes and by the financial condition of the issuers of
municipal securities. Some or all of a municipal security’s dividends or interest payments may be subject to federal, state, or local income taxes or may
be subject to the federal alternative minimum tax.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or
economic developments.
Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity
for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Brokerage services provided by Fidelity Brokerage Services LLC. Custody and other services provided by National Financial Services LLC. Both are Fidelity
Investments companies and members of NYSE and SIPC.
Fidelity Brokerage Services LLC, Member NYSE and SIPC, 900 Salem Street, Smithfield, RI 02917
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