Tax Overlay Services:
Additional Tax Solution: Portfolio Diversification
For more information, go to investpmc.com Envestnet | PMC
Envestnet | PMC offers Tax Overlay Services to help investors control or customize realizing
gains within their portfolios, or diversify concentrated portfolios in a tax-efficient manner. PMC
accomplishes these goals by setting thresholds, or tax budgets, on the amount of long- or
short-term gains realized within the account. For advisors working with clients who have tax
budgets that are so restrictive that it makes it difficult to manage the portfolio within our
traditional tracking error guidelines, PMC offers the Portfolio Diversification Solution.
How does tracking error affect portfolio gains?
As with all tax-managed accounts, a trade-off exists between realizing gains and adhering to the manager's model. Tracking error
(TE) measures the difference between how PMC's tax-managed account and the manager's model are managed. PMC seeks to limit
the amount of TE while also balancing the tax implications of each transaction within a client's account. Ultimately, PMC strives to
replicate the manager's model as closely as possible, subject to the client's specific tax situation. For clients with tax situations that
require either eliminating legacy positions over a certain period of time or limiting gains to a certain budget constraint, Tax Overlay
Services offers two different solutions.
Note the trade-off between realizing capital gains and TE: the more capital gains that are realized, the lower the TE of the account to
a more diversified strategy (Target Model). Both solutions have consequences for the TE, and this document describes each solution
and how it affects TE.
8%
68.2%
-2% -12% -22% 18% 28% 38%
95.4%
99.7%
The Potential Impact of Tracking Error
on a Manager's Model
Money Manager's Expected Return = 8%
Tracking Error due to client's required tax budget = 10%
Capital Gains Realizations vs.
Tracking Error
Capital Gains Realization
Tracking
Error
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