|
Actual after-tax returns account for the management
fees and taxes without the assumption that market value equals cost basis.
rAT
= (1 - tI )(rI - mf )+ (1 - TtG ) rG
+ D
rAT
=
actual after-tax total return
tI
=
income tax rate
rI
=
before-tax income return
mf
=
management fee
T
=
turnover
tG
=
capital gains tax rate
rG
=
before-tax capital gains return
D
= return adjustment for selling off market
value with unequal cost basis
The deterministic return adjustment,
D represents turnover and selling off starting market value for expenditures or portfolio
reweighting with unequal market value and cost basis.
In the table to the right the first column has market value equal to cost basis. The second column has an 80% cost
basis so the 50% turnover effects both the Starting Market Value and the Ending
Capital Appreciation. The capital
gains tax rate in the second example is the same for explanatory purposes. Note that decreases in Starting
Market Value for expenditures or portfolio reweighting have similar tax impacts
on actual after-tax returns.
|
|
|
|
MV = CB |
MV
≠ CB |
|
|
Before-Tax Income Return |
2.5% |
2.5% |
|
|
Management Fee |
50 basis points |
50 basis points |
|
|
Income Tax Rate |
35% |
35% |
|
|
Before-Tax Capital Gain Return |
5.0% |
5.0% |
|
|
Turnover
|
50% |
50% |
|
|
Capital Gains Tax Rate |
35% |
35% |
|
|
|
|
|
|
|
Starting Cost Basis |
$1,000,000 |
$800,000 |
|
|
Starting Market Value |
$1,000,000 |
$1,000,000 |
|
|
Ending Capital Appreciation |
$50,000 |
$50,000 |
|
|
Ending Income |
$25,000 |
$25,000 |
|
|
Management Fees |
($5,000) |
($5,000) |
|
|
Income Taxes |
($7,000) |
($7,000) |
|
|
Capital Gains Taxes |
($8,750) |
($43,750) |
|
|
Ending Net |
$1,054,250 |
$1,019,250 |
|
|
Marginal After-Tax Return |
5.4% |
5.4% |
|
|
Actual After-Tax Return |
5.4% |
1.9% |
|
|