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SMArtX Virtual Awards Spotlight – Russell Investments Tax-Managed Solutions

Russell Investments featuring Rob Kuharic, Investment Strategist at Russell Investments Tax-Managed Portfolios

Link to this WEBINAR

In the fifth episode of the SMArtX 2021 Virtual Awards Webinar Series, SMArtX CEO Evan Rapoport sat down with Rob Kuharic, Investment Strategist at Russell Investments, helping to manage their tax-managed solutions, to discuss the best ways to keep more of what you earn.

Evan and Rob discuss why Russell Investments is so focused on tax efficiency, how they achieve their goals, and the effect it is having on client portfolios.

About the Firm

“It’s not about what you make, it’s what you get to keep.”

A lot of people do not realize how much taxes can impact their savings rate, their portfolio growth rate, and the effects of compounding.  By Russell stepping in to manage clients’ tax efficiency through advanced tax harvesting solutions, clients do not have to worry about tax efficiency.  This equates to a client’s net performance being very close to their gross return number.

Russell seeks to provide, on an after-tax basis, high current income and moderate long-term capital appreciation. These portfolios are especially designed for clients sensitive to taxable distributions, these strategies strive to deliver strong returns with reduced capital gains. Tax-exempt, or tax-aware funds are combined with non-tax-aware funds for added diversification and the potential for reducing volatility and/or higher after-tax returns.

Russell Investments’ portfolio construction process is described as:

Design – Translate desired outcomes into a strategic asset allocation

Construct – Create an investable portfolio through a combination of active manager skill and positioning strategies

Manage – Respond to changing market conditions by dynamically adjusting asset classes, managers, factors, sectors, countries and currencies

Each of these dimensions play an important role in the model portfolio construction process, and each is under constant evaluation as we look for ways to improve the process.

What Sets Them Apart

Russell Investments approaches tax efficiency through active management.  It is not just done with low turnover, indexing, investing large cap, or high allocations to municipals.  Rather, Russell uses a combination of understanding the municipal bond landscape at the national level, incorporating high yield fixed income, and diversifying with a significant exposure to equities. On the equity side, this encompasses the entire global landscape with exposure to US and international large cap and mid cap positions, as well as exposure to real estate, natural resources, and infrastructure stocks.

On the next level, the combination of allocations to multiple strategies enables Russell to combine some of the top managers in the industry and analyze their tax opportunities through advanced tax loss harvesting, dividend yield management, and tax lot level trading to maximize these opportunities and without the underlying managers having to worry about tax management.

Russell then takes these positions and uses a combination of active management, allocations to other investment managers, and advanced tax harvesting capabilities to maximize tax opportunities within the portfolio.  Their advanced tax harvesting incorporates the use of tax lot level trading (something SMArtX also provides through its tax harvester for advisor-managed accounts), something that very few firms in the industry do.

How is This Applicable to Advisors?

Hands down the largest fees that clients pay is their tax bill. Tax inefficiency is like a drafty house – you have to see where the leaks are to stop the draft.  It is usually a small amount at a time, but over the year is adds up to several hundred basis points each year, which compounds year after year. Therefore, including this type of strategy management in a client portfolio is critical. Tax management is considered at every level, while avoiding commodities and core bonds as they are heavily taxed.

2020 was one of the best illustrations of the importance of a strategy like Russell Investments’ tax managed solutions being in client portfolios.  The market was down 20%-30% around the end of Q1 2020, but ended the year up.  If you harvested when the market was down, you were able to take advantage of these losses.  If you waited until the end of the year, the opportunities were longer there. Very few firms in the industry do this so Russell maintains their advantage through the level of frequency tax management can be effectuated (typically weekly, but can be done daily) and managing exposures in the mutual fund format gives them broad flexibility across the entire portfolio. This provides them with the ability to do it at scale, insteadaccount by account, giving Russell Investment a large advantage over other firms.

Looking forward, there is concern about tax rates under the new administration, with the general belief that taxes are more likely to go up than down.  In places like California and New York, you could be paying 60%-70% at the top tax level. Tax management is going to be more important than ever as it seems we will see higher taxes will be in 2022.  Given we are in 2021, there is only the remainder of this year to figure out the best way to manage these potential changes.

About Russell Investments

Russell Investments is a leading global investment solutions partner, dedicated to improving people’s financial security. Our investment approach brings the world’s leading managers and strategies together—in a diversified, adaptive and efficient portfolio—aimed at achieving investors’ goals.