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How to End The Year with More AUM and Less Distributions for Your Clients

At the end of every calendar year, many fund managers distribute capital gains to shareholders, delivering tax implications that are equally painful for advisors and their clients.

As a wholesaler, you want to build long-lasting and mutually beneficial relationships with your advisor-partners. So how can wholesalers help limit distributions and their associated side effects? 

With YCharts, wholesalers can identify funds that are likely to have large capital gains distributions, then protect their advisor-partners from those distributions by recommending suitable replacement funds. 

(Disclosure: you should always check a fund manager’s website for tax information pertinent to their funds and its investors.)

To learn more, read How Wholesalers can Increase AUM Before, During & After Advisor Meetings.

 

Leveraging Data to Find Replacement Opportunities

Until they are actually distributed, it’s difficult to know the exact value of any long or short-term capital gains that will be passed on to a fund’s investors. That said, data and technology can help you find funds that are likely to have the largest distributions to investors.

We’ll use the metrics below to identify those funds:

Potential Capital Gain an estimated percentage of a fund’s assets that may be distributed as future capital gains; this metric is an estimate and is provided by Morningstar ®
Distribution Yield the percentage of the current share price that an investor received as distributions, including dividends and capital gains, over the past 12 months
Tax Cost Ratio — the amount that a fund’s annualized return is reduced by taxes that investors must pay on distributions (including stock and bond dividends and capital gains distributions); also known as tax efficiency
Turnover Ratio — the percentage of a fund’s holdings that have been replaced over the past twelve-month period

Then, a YCharts Scoring Model is used to combine the four metrics above and rank funds by how likely they are to dole out large distributions.

 

Utilizing the YCharts Fund Screener

The objective of this exercise is to identify funds that are likely to pay out large distributions, note which advisors in your territory are using those funds, then position your own funds, with hopefully lesser capital gains distributions, as suitable alternatives.

Starting in the Fund Screener, add a few filters that will narrow our universe to a more manageable list of funds that are ripe for replacement.

Per the example below, screen for funds in the Large Blend category with over $500 million in total AUM and Potential Capital Gains over 20% of the fund’s NAV. 

Our filters also exclude all index funds because their benchmark-tracking nature means they perpetually carry unrealized gains. Index funds should not be considered as part of this exercise.

Download Visual | Modify in YCharts

When working with a specific advisor-partner, add a filter for Brokerage Availability to limit the Fund Screener results to only those funds that the advisor can access and may already be invested in.

For example, if you are working with an advisor at Morgan Stanley, you could filter to only funds on the Morgan Stanley Select UMA platform.

 

Download Visual | Modify in YCharts

Next, add Potential Capital Gain, Distribution Yield, Turnover Ratio, and Tax Cost Ratios for several durations using the “+ Metrics Columns” button to capture as much historical information as possible. In combination, these metrics paint a complete picture of each fund’s tax efficiency and reduce the need to rely on a single data point for decision-making.

screening for tax efficiency 3
Download Visual | Modify in YCharts

A distinct benefit of using YCharts is the combination of reliable data and powerful tools for analysis. To avoid relying on a single metric when evaluating replacement opportunities, use Scoring Models to combine all of the metrics and create a single, numerical ranking. 

According to the score outlined below, funds that rank at or near number one are the least tax-efficient, and thus the best opportunities for replacement.

The Scoring Model above ranks each metric equally at 10%; however, you can add more or less weight to any metric based on importance. Scoring Models can incorporate any metric at any weight, so long as all weights add up to 100%.

Once the Scoring Model is added to our Fund Screen, sort the results by their scores and dig into the highest-ranking funds, which are the least tax-efficient, for potential replacement opportunities.

 

Digging Deeper Into the Best Opportunities

The goal of this workflow is to hone in on a specific fund and its historical metrics to create an optimized strategy to avoid large distributions.

The Fund Screen and Scoring Model showed that one of the least tax-efficient funds on our list is the JPMorgan US Large Cap Core Plus C fund, ticker JLPCX.

Of note, JLPCX has turned over more than 96% of its assets in the last year, and its distribution yield is 27.25% for the same period.

From the JPMorgan US Large Cap Core Plus C fund quote page, shown below, click on the “Data” tab then type “dividend” in the metric field to see all historical distributions. In December 2020, the fund distributed long-term capital gains of $6.03 per share and brought the fund’s net asset value down from $27.16 to about $20.28 — your advisor partners could have used a tip-off!

JLPCS, JPMorgan US Large Cap Core Plus C Fund, Quote Page, YCharts, Data, Dividend Yield
Download Visual | View in YCharts

Viewing distributions by value and date also provides an opportunity to look for patterns. It appears that JLPCX has issued distributions on December 11th in each of the past two years. For JLPCX, Door Number 3 closes on December 10th.

 

Aligning Interests with Advisor-Partners

At the end of the calendar year, wholesalers and financial advisors can align their interests around tax efficiency.

By leveraging YCharts’ powerful tools and data, wholesalers can make data-driven recommendations that help their advisor-partners avoid distributions and protect their clients’ investments.

Data, and the ability to easily access and analyze data, are vital resources for asset managers who want to position themselves and their funds for success. With YCharts, wholesalers can identify the right funds for the right advisors at the right time, building trust and gathering assets along the way.

Learn more about how you can make better tax-efficient recommendations for your advisors-clients:

 

Connect with YCharts

To learn more, schedule time to meet with an asset management specialist, call us at (773) 231-5986, or email hello@ycharts.com.

Want to add YCharts to your technology stack? Sign up for a 7-Day Free Trial to see YCharts for yourself.

 

Disclaimer

©2021 YCharts, Inc. All Rights Reserved. YCharts, Inc. (“YCharts”) is not registered with the U.S. Securities and Exchange Commission (or with the securities regulatory authority or body of any state or any other jurisdiction) as an investment adviser, broker-dealer, or in any other capacity, and does not purport to provide investment advice or make investment recommendations. This report has been generated through application of the analytical tools and data provided through ycharts.com and is intended solely to assist you or your investment or other adviser(s) in conducting investment research. You should not construe this report as an offer to buy or sell, as a solicitation of an offer to buy or sell, or as a recommendation to buy, sell, hold or trade, any security or other financial instrument. For further information regarding your use of this report, please go to: ycharts.com/about/disclosure

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