Tax Efficient International Equity

Mona

Currently I have SGOVX in a tax deferred account at Schwab and ARTKX in a taxable account at Schwab. I need to make room in my tax deferred account to increase allocation in an existing tax inefficient fund, consequently, I need to sell SGOVX. I also have MACSX and MAPIX in a tax deferred account, but in smaller (supporting if you will) positions than SGOVX and ARTKX.

In turn, I want to pick up that the international allocation either by adding to ARTKX at Schwab, purchasing another tax efficient international fund at Schwab, or at Vanguard, either with a Vanguard international equity fund or one through Vanguard Brokerage.

I have been pleased with ARTKX, but my initial thought is to pair it with an international index fund, which could be Vanguard Total International Stock Index VTIAX. Domestically, I have approximately 50% of my equity allocation in managed funds and 50% in index funds. While I am pleased to have a 50% allocation to index domestically, I'm not certain about the same formula internationally. I have looked at Vanguard International Growth VWILX and while I like the low ER at 0.36% and the fund has historically been fairly tax efficient, it seems if I am going the managed route, there are better funds in this space. Regarding VTIAX, the notion that it will probably remain tax efficient long term, is comforting.

It appears on M* both ARTKX and VTSMX have similar 1,3, and 5 year tax cost ratios. Ironically, Lipper gives ARTKX a 4 for tax efficiency, while Vanguard Total International Stock Market Index a 3. I also see in M* that both have about 21% potential capital gains exposure.

Some thoughts and recommendations would be appreciated.

Mona

andrei

You may take a look at Sextant International, SSIFX, it is very tax efficient and it was doing well in the past (though not recently). This is not a recommendation, just an information. To learn about the manager, you may also compare SSIFX with other funds that he manages, AMAGX, AMANX and AMDWX, look at their long term performance.

Investor

Take a look at FMIJX

BobC

We look at a fund's Tax Cost Ratio. For example, EFA has a tcr of 0.53 and 0.50 over the last 3 and 5 year periods as of January 31. I think that provides a good base to evaluate actively-managed, diversified international larcap funds. In terms of tcr alone, CIGIX, FGFAX, LISOX, QFVOX, OIGAX, DAINX, NILTX, and TIVFX are among the best. But tax-efficiency should not be an overriding concern. For example, DAINX has net expenses of 2.22%, while CIGIX's expenses are only 1.15%. That makes a big impact on annualized total return. In the end, I really want a good manager who is aware of expenses and taxes. You can also compare annual post-tax returns, but that information is harder to coordinate. There are a few out there that have done a reasonably good job.

msf

ARTKX and VTSMX may have similar M* tax cost ratios, but VTSMX (Vanguard Total [Domestic] Stock Market) isn't the fund you're asking about, which is Vanguard Total International Stock Market. (This is one of the many reasons why I appreciate people spelling out the funds they are talking about; thank you Mona for writing clear English.)

VGTSX (Vg Total Int'l) has a 3 year M* tax cost ratio of 0.53%, well above Artisan's 0.31%. This explains the Lipper 3 rating (vs. 4 for Artisan). Over five years, the gap narrows to 0.12%, and Lipper gives both of them a 4 rating. Over ten years, Vanguard takes the lead, 0.51% vs. Artisan's 0.84%; Lipper reflects this by giving Vanguard a 5 rating (vs. Artisan's 4).

Before comparing ratings from two different agencies, one needs to check their methodologies. If they're different, one could be comparing apples and oranges. It turns out that M* and Lipper do appear to use the same (or equivalent) formulas.

M* methodology: http://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/MorningstarTaxCostRatio_Methodology.pdf

Lipper methodology: http://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/MorningstarTaxCostRatio_Methodology.pdf

msf

I'd like to amplify what BobC is saying about expenses. All else being equal, the higher cost fund will have the "better" tax cost efficiency. So it is extremely important to consider ERs when looking at tax costs.

Here's a simple hypothetical to demonstrate: suppose you have two funds that have identical portfolios, but one's ER is 1% higher. Further, suppose the cheaper fund paid out 1% in dividends. The tax cost ratio is obviously higher than zero, because those dividends are taxed. But for the higher ER fund, the management kept that 1% in dividends for itself, and paid out nothing. No dividends, zero taxes, a tax cost ratio of 0.00%. The more expensive fund looks more tax efficient.

Mona

Reply to @msf:

ARTKX and VTSMX may have similar M* tax cost ratios, but VTSMX (Vanguard Total [Domestic] Stock Market) isn't the fund you're asking about, which is Vanguard Total International Stock Market. (This is one of the many reasons why I appreciate people spelling out the funds they are talking about; thank you Mona for writing clear English.)

msf,

Thanks for the correction. I had it right in two places in the prior paragraph, but being dyslexic, couldn't pull it off a third time. Yes, it is for this reason that I spell out the funds name.

Mona

Mona

Here's a simple hypothetical to demonstrate: suppose you have two funds that have identical portfolios, but one's ER is 1% higher. Further, suppose the cheaper fund paid out 1% in dividends. The tax cost ratio is obviously higher than zero, because those dividends are taxed. But for the higher ER fund, the management kept that 1% in dividends for itself, and paid out nothing. No dividends, zero taxes, a tax cost ratio of 0.00%. The more expensive fund looks more tax efficient.

msf,

Isn't that like saying if you get less, than that's more tax efficient?

Actually, you could be even more tax efficient if the higher cost fund lost money, since you could tax-loss harvest and then claim the loss on your tax return.

Mona

msf

Reply to @Mona: Exactly!

STB65

AMDWX has been so tax efficient the past 3 years that it hasn't even sent me a 1099s. Of course, $10K made $400 and change while ARTKX made over $4K. Time to cancel my AIP in AMDWX. Sextant is the same family. This may not be the time for Islamic investment principles. I know they mean well and they do well when the markets decline but $10K in ARTKX is a shade over $40K after 10 years and that would compensate for a lot of tax inefficiency.

Mona

Reply to @STB65:

I know they mean well and they do well when the markets decline but $10K in ARTKX is a shade over $40K after 10 years and that would compensate for a lot of tax inefficiency

.



As mentioned, I too am in Artisan International Value Investor ARTKX and have been pleased. As also mentioned, one option is to add to ARTKX and not purchase another fund.

I agree with you that "$40K after 10 years and that would compensate for a lot of tax inefficiency." Unfortunately, past performance does not predict future performance.

Mona