EFTA01454214.pdf

Better Predictors Compare tax drag to the tax exemption multiple (TEM) and the called "asset location" strategy. tax deferral multiple (TDM) One asset location strategy that's per- haps the easiest to execute, is simply to Dillerecxe in INIererice in mirror the target taxable allocation in Value Atter Value Atter the private placement portfolio, with 10 Yeas 20 Years minor adjustments to optimize for a (Tai-Itempt iTax-belated tax-free structure. We'll call this the lac DINJ TEM Portiolm) fRi Panora) 'mirror strategy? The results are a tax- Asset Class I 111% 2* 124.6 million I.9! 119./million able portfolio and a private placement portfolio that are nearly identical from Asset Class 2 1.28% 19 39.9 mimics 0,35 33.6 million an asset allocation perspective. This Note Assumes an atlal :doe $10 are captal pats tai meteams oraant 1,4iitomt method offers the advantage of limiting exclude mattegeftent lees the administrative burden that arises when the faster tax deferred growth — Deutsche Asset & Wealth Management (and often higher growth asset classes) in the private placement portfolio cause the asset classes to become out of bal- the most logical choice for use in private placement ance. Because the allocations are near-identical, an portfolios. investor needn't worry about reallocating between Which asset classes could be more powerful in a the private placement and taxable pools but only private placement portfolio? Emerging market equities within each of the pools separately. A disadvantage of have, by far, the most utility. The difference in the value this method is that it inhibits an investor from taking of a dollar invested in that asset class in a private place- advantage of the superior tax deferral benefit of cer- ment (versus taxable) portfolio over 20 years is more than tain asset classes by concentrating them in the private three times the difference of a dollar invested in emerging placement portfolio. "Asset Allocation Advantage, " market bonds, for example. The difference in the value p. x, demonstrates the effect of this disadvantage over of a dollar invested in developed market equities in a time. private placement (versus taxable) portfolio is anywhere The most potent approach is to locate in private from 1.5 to 2.5 times greater than one dollar invested in placement portfolios only the asset classes with the high- emerging market bonds. The combination of expected est TEM. If the client views the assets in both the taxable return, turnover and tax rate makes all the difference. and private placement pools as a single portfolio, this It's important to note that these arc our long-term approach has a distinct disadvantage: the considerable asset class assumptions and are based on index administrative burden of reallocating between the pri- returns. Actual returns might differ depending on the vate placement and taxable pools. This process is a very particular manager. Moreover, they reflect Deutsche manual one and, at times, becomes impossible to fully Asset & Wealth Management's views. With the help of a execute without changing the overall allocation. good advisor, an investor can combine their own views Another approach is to consider the private place- and the characteristics of their selected managers, to cre- ment portfolio as distinct from a broadly diversified ate a custom set of tax deferral metrics. asset allocation. This "tactical" portfolio would con- Once an investor has determined what percentage sist of certain "high conviction' asset classes that are of their overall portfolio they'd like to place in private also best suited to the benefits of private placement. placement. and his advisor has calculated the tax defer- The goal of this pool would be absolute returns rather ral metrics for each available asset class, the investor than risk-adjusted returns. In this way, TEM is an excel- and advisor still need to determine which asset classes lent metric to determine which asset classes from the should be placed in the private placement portfolio and high conviction set offer the greatest benefit from tax which should remain in the taxable portfolio: the so- deferral or tax-exemption. 22 TRUSTS & ESTATES / trustsandestates.com JUNE 2014 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0112197 CONFIDENTIAL SDNY_GM_00258381 EFTA01454214