Lucas W. Mansberger, CFA®, CAIA®VP, Investment Strategist, Sr Manager Selection Analyst
Jeff T. Pauza, CFA®, CFP®Senior Wealth Management Advisor
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SAVING TAXES, NOT PAPER
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W HO IS GREENLEAF TRUST?
Greenleaf Trust is dedicated exclusively to providing highly customized wealth management and trust administration to individuals, institutions, businesses, and high net worth families. Our pledge is to provide clients a superior level of personalized service, peace of mind and financial security from generation to generation.
Founded in 1998 as one of Michigan’s first independent “trust-only” banks
Headquartered in Kalamazoo, Michigan, with offices in Grand Rapids, Bay Harbor, Traverse City, Birmingham, and our affiliate Greenleaf Trust Delaware
One of the nation’s largest privately held wealth management firms entrusted with over $15 billion in assets from approximately 1,100 client relationships
WEALTH MANAGEMENT PLAN - ROADMAP
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Understanding Tax Alpha
Blending Direct Indexing and Active Management
Purpose Built Wealth Management Plans
Nicholas Juhle*, CFA®
Senior Vice PresidentDirector of Investment Research
Lucas Mansberger, CFA®, CAIA®
VP, Investment StrategistSenior Manager Selection Analyst
Christopher Burns, CFA®, CPA®, CFP®
VP, Investment StrategistSenior Fixed Income Analyst
Investment Committee
Chris Burns*, CFA®, CPA® CFP ®
VP, Investment StrategistSenior Fixed Income Analyst
Seth Kritzman, CFA®
Fixed Income Analyst
Mark Jackson, CFA®
VP, Senior Wealth Management Advisor
Fixed Income Committee
Nicholas Juhle, CFA®
Senior Vice PresidentDirector of Investment Research
Ali Fahs*, CFA®
VP, Senior Equity Portfolio Manager
David Mange, CFA®
VP, Senior Equity Analyst
Equity Committee
Nicholas Juhle, CFA®
Senior Vice PresidentDirector of Investment Research
Michael Storms, CFA®
Senior Equity Analyst
Lucas Mansberger*, CFA®, CAIA®
VP, Investment StrategistSenior Manager Selection Analyst
Jacob BarkerManager Selection Analyst
Manager Selection Committee
Nicholas Juhle, CFA®
Senior Vice PresidentDirector of Investment Research
Performance & Risk Reporting
Tyler HookResearch Associate
Trading
Samuel RiethmanTrader
Mollie FeltTrading Specialist
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INVESTMENT ORGANIZATION
* Committee Chair
Nicholas Juhle, CFA®
SVP, Director of Research• Chair of Investment Committee• BBA, University of Michigan, Ross
School of Business • Former Senior Research Associate at
Robert W. Baird & Company
Chris Burns, CFA®, CPA®, CFP®
VP, Investment StrategistSenior Fixed Income Analyst• Chair of Fixed Income Committee• Macc, Ross School of Business,
University of Michigan• Instructor, Student Investment Fund,
Haworth College of Business• Former Advisor at Bessemer Trust
Lucas Mansberger, CFA®, CAIA®
VP, Investment StrategistSenior Manager Selection Analyst• Chair of Manager Selection Committee• MBA, University of Chicago Booth
School of Business• Former Investment Consultant with
Pavilion Advisory Group
Ali Fahs, CFA®
VP, Senior Equity Portfolio Manager• Chair of Equity Committee• MBA, Babson College, F.W. Olin School of
Business• BA with Distinction, University of
Michigan – Dearborn• Former SVP, Portfolio Manager PREMIS
Capital Partners and VP of Research at Hansberger Global Investors
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INVESTMENT TEAM LEADERSHIP
Investment Philosophy
Portfolios should maximize after-tax, after-fee returns for a given level of risk.
Independence and open architecture allow for unbiased investment decision-making.
Investment decisions should be based on accepted principles and empirical data.
Asset allocation is the primary driver of long-term investment performance.
A long-term perspective and disciplined approach lead to improved outcomes over time.
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GREENLEAF INVESTMENT PHILOSOPHY
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W HICH W OULD YOU PREFER?
Value Fund A 1-Year 3-Year 5-Year 10-Year
Total Return % 1.48 6.21 9.54 10.28
Percentile Rank 59 43 47 40
Value Fund B 1-Year 3-Year 5-Year 10-Year
Total Return % 4.57 6.73 11.63 12.59
Percentile Rank 34 36 14 2
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W HICH W OULD YOU PREFER?
Value Fund A 1-Year 3-Year 5-Year 10-Year
Total Return % 1.48 6.21 9.54 10.28
Percentile Rank 59 43 47 40
Tax Adj. Returns % 0.45 5.38 8.79 9.59
Percentile Rank (tax) 54 31 30 19
Tax Cost Ratio 1.01 0.79 0.69 0.63
Value Fund B 1-Year 3-Year 5-Year 10-Year
Total Return % 4.57 6.73 11.63 12.59
Percentile Rank 34 36 14 2
Tax Adj. Returns % 1.14 2.98 8.64 8.68
Percentile Rank (tax) 48 60 33 38
Tax Cost Ratio 3.28 3.52 2.68 3.47
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W HICH W OULD YOU PREFER?
iShares Russell Top 200
Value ETF 1-Year 3-Year 5-Year 10-Year
Total Return % 1.48 6.21 9.54 10.28
Percentile Rank 59 43 47 40
Tax Adj. Returns % 0.45 5.38 8.79 9.59
Percentile Rank (tax) 54 31 30 19
Tax Cost Ratio 1.01 0.79 0.69 0.63
PIMCO RAE Plus Instl 1-Year 3-Year 5-Year 10-Year
Total Return % 4.57 6.73 11.63 12.59
Percentile Rank 34 36 14 2
Tax Adj. Returns % 1.14 2.98 8.64 8.68
Percentile Rank (tax) 48 60 33 38
Tax Cost Ratio 3.28 3.52 2.68 3.47
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2021 FEDERAL INCOME TAX RATES AND BRACKETS
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2021 CAPITAL GAINS TAX RATES (LONG-TERM) AND BRACKETS
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FUND TAX DRAG DRIVERS
Less Tax Efficient
More Tax Efficient
Funds Invested In:High-Yield Bonds
Taxable BondsTIPS
REITsBalanced Funds
Small Cap (Active)International Stocks (Active)
Large Cap (Active)Stock Index (Passive)
Tax-Exempt Muni Bonds
Tax Category Tax Impact Primary Impact Variables General Guidance?
Income High Level of interest income Higher = Bad
Tax characterization Nonqualified = Bad
Capital Gains - Short-Term High Asset volatility Higher = Bad
Portfolio turnover Higher = Bad
Capital Gains - Long-Term Moderate Asset volatility Higher = Bad
Portfolio turnover Higher = Bad
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FUND TAX DRAG BY CATEGORY
10-Year Trailing Returns (Annualized)
Morningstar Category Average Pre-Tax Tax-Adjusted Difference
Large Blend 12.27% 10.68% -1.59%
Large Growth 15.14% 13.30% -1.84%
Large Value 9.74% 8.07% -1.67%
Mid-Cap Blend 10.30% 8.71% -1.59%
Mid-Cap Growth 13.86% 11.89% -1.97%
Mid-Cap Value 9.18% 7.56% -1.62%
Small Blend 9.81% 8.09% -1.72%
Small Growth 13.69% 11.59% -2.10%
Small Value 7.77% 6.22% -1.55%
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PASSIVE ETF TAX DRAG
SPDR S&P 500 ETF (SPY) 1-Year 3-Year 5-Year 10-Year
Total Return % 18.40 14.10 15.11 13.77
Percentile Rank 36 26 22 15
Tax Adj. Returns % 17.49 13.35 14.25 12.93
Percentile Rank (tax) 31 16 15 11
Tax Cost Ratio 0.76 0.66 0.74 0.74
iShares S&P 500 ETF (IVV) 1-Year 3-Year 5-Year 10-Year
Total Return % 18.37 14.14 15.18 13.83
Percentile Rank 38 24 20 12
Tax Adj. Returns % 17.45 13.46 14.54 13.26
Percentile Rank (tax) 32 16 10 6
Tax Cost Ratio 0.78 0.60 0.55 0.50
Vanguard S&P 500 ETF (VOO) 1-Year 3-Year 5-Year 10-Year
Total Return % (NAV) 18.35 14.14 15.18 13.85
Percentile Rank 38 24 20 12
Tax Adj. Returns % 17.84 13.62 14.65 13.28
Percentile Rank (tax) 29 13 9 5
Tax Cost Ratio 0.43 0.45 0.46 0.50
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W HAT IS DIRECT INDEXING?
Direct indexing: holding all or a subset of the securities in an index via a separately managed account in an attempt to track the returns of the index
Index-Based ETF Direct Index SMA
Receive index returns (pre-tax) Yes Yes
Opportunities for tax loss generation Limited Many
Customization Not available Yes
Expense ratio/Fees 3-50 bps 20-35 bps
Estimated tax alpha vs. ETF (after fees) 0.9 to 1.2%
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VALUE OF TAX LOSS HARVESTING
1st Trade Between Trades 2nd Trade
A hypothetical investor: Assume: The investor then:
Buys $5M of Stock A Stock A goes up $1MSells Stock B for $4M,
then buys $4M of Stock C
Buys $5M of Stock B Stock B goes down $1MRealizes a loss of $1M
for a tax benefit of $408K
Value of Stock A 5,000,000 6,000,000 6,000,000
Value of Stock B 5,000,000 4,000,000
Value of Stock C 4,000,000
Total Portfolio Value 10,000,000 10,000,000 10,000,000
Cost Basis 10,000,000 10,000,000 9,000,000
Losses Harvested 1,000,000
Tax Benefit* 408,000
Tax Benefit as a % of Value 4.08%
*Tax benefit assumes 2018 federal short-term tax rate of 40.8%. Tax benefit would be greater in states with state taxes.
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HARVESTING OPPORTUNITIES
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
S&P 500 Index from 1996 to 2020
Every Year Has Stocks with Negative Returns
Stocks in S&P 500 with Positive Returns Stocks in S&P 500 with Negative Returns S&P 500 Returns
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TRADING W HILE TRACKING INDEX
Creates realized tax loss to offset gains
IBMWalmartPepsiCitigroup…
IBMWalmartCoca-ColaCitigroup…
OPTIMIZATION
Sell Pepsi
Buy Coca-Cola
Starting Portfolio Rebalanced Portfolio
Portfolio Summary vs. BenchmarkDirect Index
Portfolio
S&P 1500
Index
Market Value $1,324,633 NA
Cost Basis $797,833 NA
Number of Securities 363 1,506
Dividend Yield 1.41% 1.49%
Beta vs. Benchmark 1.00 1.00
Standard Deviation 22.14% 22.08%
Market Capitalization (Wtd. Avg., Bil.) $447.2 $422.9
Estimated Tracking Error (Pre-Tax) 0.89% 0.00%
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LIVE PORTFOLIO EXAMPLE
Market Sector Weightings (%)Direct Index
Portfolio
S&P 1500
Index
Communication Services 9.6 10.0
Consumer Discretionary 11.8 12.9
Consumer Staples 7.1 6.3
Energy 2.0 2.2
Financials 12.4 10.9
Health Care 12.4 13.3
Industrials 9.2 9.2
Information Technology 27.0 26.7
Materials 3.2 2.9
Real Estate 2.6 3.0
Utilities 2.7 2.8
Summary Tax Information ($)
Net Realized Gains/Losses Short Term Long Term
3 Months -1,097 -112
Year to Date -178,324 -652
Inception -235,356 -652
Unrealized Gains/Losses Short Term Long Term
Unrealized Gains 302,295 224,640
Unrealized Losses 47 87
Portfolio Performance (%)
1 Month 3 Months Year to Date
Inception
Cumulative
Inception
Annualized
Pre-Tax Returns
Portfolio 3.71 12.63 17.42 31.84 18.20
S&P Composite 1500 4.11 13.24 17.92 33.21 18.94
After-Tax Returns
Portfolio 3.63 12.55 28.74 47.69 26.59
S&P Composite 1500 4.06 13.11 17.31 32.07 18.32
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LIVE PORTFOLIO EXAMPLE
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Understanding Tax Alpha
Blending Direct Indexing and Active Management
Purpose Built Wealth Management Plans
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CONCENTRATED ACTIVE STRATEGY
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BLENDING ACTIVE AND PASSIVE
Characteristics
Intrinsic
Value
Portfolio
Direct Index
Portfolio
Blended
(25% Active /
75% Index) S&P 1500
Position # 29 407 436 1505
Top 10 Holdings 53% 26% 34% 26%
Top 20 Holdings 82% 34% 42% 35%
Dividend Yield 0.8% 1.5% 1.4% 1.6%
Beta 0.86 1.00 0.98 1.00
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Understanding Tax Alpha
Blending Direct Indexing and Active Management
Purpose Built Wealth Management Plans
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ASSET M ANAG EM ENT VS W EALT H M ANAG EM ENT
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HOLISTIC W EALTH MANAGEMENT
Our holistic approach to wealth management always starts with thoughtful preparation of a
completely customized wealth management plan
o Client objectives, unique circumstances, risk tolerance, time horizon, tax considerations, etc.
o Consideration of current holdings and tax implications
o Recommended asset allocation parameters and investment policy statement
o Wealth management strategies, estate flow chart and numerous “what-if ” scenarios
o Asset Sustainability or Probability Analysis used to predict probability of success - Monte Carlo analysis
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Can you lower my taxes?
Will you improve my returns?
How can we give more?
FREQUENTLY ASKED QUESTIONS
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Concern: A client who planned to sell their business in the near future was due to pay substantial capital gains tax from the approaching sale
Expected Capital Gains: $5,000,000
Starting Portfolio: $4,000,000
Solution: Create a tax-efficient portfolio today via direct indexing and aggressively harvest losses to prepare for the future sale
CAN YOU LOW ER MY TAXES?
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Outcome:
Captured market returns
Generated $761,199 in realized losses
Saved $319,008 in taxes
Tax Alpha = 3.6%
51% cumulative after-tax returns
CAN YOU LOW ER MY TAXES?
5/2018 - 12/2020
Cumulative
5/2018 - 12/2020
Annualized
Investment Returns
S&P 1500 Index 39.85% 13.58%
Portfolio (Pre-Tax) 38.65% 13.21%
Portfolio (After-Tax) 50.61% 16.82%
Tax Alpha 12.0% 3.6%
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Concern: A client had a concentrated position that made up 13% of their entire portfolio
Expected Capital Gains: $55,000
Starting Portfolio: $767,000
Solution: Construct a customized portfolio built around the concentration in order to efficiently reduce position, achieve market returns, and lower stock-specific risk.
W ILL YOU IMPROVE MY RETURNS?
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Outcome:
Captured market returns
Concentration reduced to <2% of total portfolio while generating $9,605 in NETrealized losses
Tax Alpha = 0.31%; Investment Outperformance vs. Original Portfolio = 8.5%
53% cumulative after-tax returns
W ILL YOU IMPROVE MY RETURNS?
12/2018 - 12/2020
Cumulative
12/2018 - 12/2020
Annualized
Investment Returns
S&P 1500 Index 49.38% 21.74%
Portfolio (Pre-Tax) 52.26% 22.89%
Portfolio (After-Tax) 53.06% 23.20%
Tax Alpha 0.80% 0.31%
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Concern: A client had a $467,000 position in their company stock accumulated over many years with ultra-low cost basis.
Expected Capital Gains: $355,123
Starting Portfolio: $1,000,000 + $467,000 CRUT
Solution: Construct a customized portfolio to aggressively harvest tax losses and contribute employer stock to a Charitable Remainder Trust to fulfill giving desires.
HOW CAN W E GIVE MORE?
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Outcome:
Captured market returns
Generated $196,613 in realized losses
Avoided tax on $355,123 of capital gains
Tax Alpha = 2.3%
61% Cumulative After-tax Return
HOW CAN W E GIVE MORE?
11/2017 - 12/2020
Cumulative
11/2017 - 12/2020
Annualized
Investment Returns
S&P 1500 Index 49.90% 13.81%
Portfolio (Pre-Tax) 51.19% 14.12%
Portfolio (After-Tax) 60.84% 16.40%
Tax Alpha 9.7% 2.3%
WEALTH MANAGEMENT PLAN - ROADMAP
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SOURCES
Slides 10-12: Morningstar. Data as of December 31, 2020.
Slide 15: Chart adapted from MyMoneyBlog.com, “Tax Efficient Mutual Fund Placement For Maximum Return”, February 15, 2017.
Slides 16: Morningstar, Russell Investments Tax Impact Comparison Tool. Data as of December 31, 2020.
Slide 17: Morningstar. Data as of December 31, 2020.
Slide 18: Estimated tax alpha vs. ETF from Parametric, “Tax-Managed SMAs: Better Than ETFs?”, October 23, 2020.
Slide 19: Aperio Group.
Slide 21: Adapted from Aperio Group.
Slides 22-23: Aperio Group, Greenleaf Trust. Data as of December 31, 2020.
This document is provided for informational purposes only and does not constitute an offer or solicitationto purchase or sell any security or commodity. The information herein is being provided to you on aconfidential basis and is intended only for the anticipated recipient or their authorized agents. Anyopinions expressed herein are subject to change at any time without notice. Information has beenobtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed. Itshould not be construed as legal or tax advice and is not intended to replace the advice of a qualifiedattorney or tax advisor. Past performance is not a guarantee of future results. Any decisions based on thisinformation are made at your own risk.