Tailoring return estimates for taxable investors

Traditional return assumptions are typically expressed before taxes, potentially overlooking an important driver of portfolio outcomes. For taxable investors, what matters is not just what a portfolio earns – but what remains after taxes.

That’s even more paramount in today’s environment of structurally higher government bond yields. Higher yields have raised the cost of ignoring taxes, particularly for assets that generate taxable income. Factoring taxes into return assumptions can change how investors assess opportunities across asset classes.

We show how tax-aware capital market assumptions can improve expected portfolio outcomes. In our analysis, they boosted expected after-tax returns by roughly half a percentage point without increasing risk.

The rise in global government bond yields has made the tax drag more meaningful, reducing the income taxable investors ultimately keep. See the chart.

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Investing involves risks, including possible loss of principal. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.

To obtain more information on the fund(s) including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month end, please click on the fund tile. The Morningstar Rating for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure (excluding any applicable sales charges) that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.