Ever
wonder how well your investments are doing after Uncle Sam puts his thumb on
the scale?
Do you or your clients have a need for calculating
performance after taxes? Price
Performance Measurement Systems, Inc. (PPMS) has developed a software package to
enable exactly this type of computation and comparison against appropriate
after-tax benchmarks.
Take
the complexity out of after-tax performance.
Calculating performance after tax is inherently more
complicated than pre-tax because of the need to separate income according to
taxability -- dividends, corporate interest, Treasury interest, municipal
bonds, short term and long term capital gains -- and apply the correct tax rate
to each segment. PPMS
takes your data and grinds the numbers for you. An on-line portfolio set-up procedure allows
users to set up their own unique tax structure.
Built in defaults cover most of the major tax entities:
High
Net Worth Individuals
Qualified
Nuclear Decommissioning Trusts
Non-Qualified
Nuclear Decommissioning Trusts
Property
& Casualty Insurance Companies
Include
state and local taxes if you like.
State and local taxes are generally deductible for federal
tax purposes. PPMS
takes this relationship into account and includes a default table of
maximum state tax rates for all fifty states plus DC,
Revaluation
at Significant Cash Flows, Adjustment for Non-Discretionary Capital Gains
Although not required, performance is most accurately
computed when portolios are revalued on the dates of significant cash
flows. PPMS software allows any number
of such revaluations during the performance period and automatically
geometrically links the subperiod returns.
Client withdrawals which require security sales and associated capital
gain taxes may be identified for "non-discretionary capital gain
adjustment."
Technical
Aspects
PPMS's software runs on a Microsoft 2000 server under SQL
Server 2000. It can be accessed either
via the web or by installing a stand-alone package on your premises. If via the web, security is enhanced by never
requiring actual client names, tax ID numbers, or even security
identifiers. Data exchanged is simply a
string of numbers in and another string out.
Any performance calculation starts with portfolio valuation
at beginning and end points. The user
provides this data in one of a number of file structures, ranging from Excel
spreadsheets to FIX protocol transmissions or custom formats. The file may contain a single portfolio for
many periods or thousands of portfolios for a single period. Importantly, the valuations must include
amortized interest and OID accretion if the client wishes to use this type of
accounting.
After-tax performance requires a complete stream of
transactions during the month, quarter, or year. The user supplies these in the same file
structure. Dividends, amortized interest,
and other income may either be included separately with appropriate dates and
types or lumped into sums for the period.
Cash flows into or out of the portfolio and trades are more accurately
processed as individual items. Users
must have the ability to link sell transactions to original tax lot cost so
that trades include both proceeds and associated cost and purchase date in the
same record.
PPMS output includes, at the user's option, both printed
reporting and a file containing a summary of income by type and associated
taxes. Both pre-tax and after-tax
performance are calculated and stored for the client so that future reports can
include longer period calculations (monthly, quarterly, YTD, last 12 months,
etc.). File transfer enables the user to
combine multiple portfolios into composites for marketing or analytical
purposes.
AIMR
Performance Presentation Standards
The AIMR After-Tax Committee, chaired by Lee N. Price,
published guidelines for after-tax performance calculation and presentation in
1995. A second committee is currently
revisiting the detailed calculation process.
No software vendor can claim that his product is "in compliance
with AIMR-PPS" because it is really the investment manager's use of the
product that determines whether composites have been ethically and consistently
constructed. However, it is believed
that the PPMS software will enable the calculation of individual portfolio
after-tax performance which is in accordance with these standards.
1-The AIMR-PPS™ after tax guidelines recognize that an
investment manager should not be penalized for taxes related to events out of
his control. The adjustment adds back a
portion of the resulting capital gain taxes based on a ratio of unrealized gains
in the total portfolio at the time.
2- AIMR-PPS™ is a trademark of CFA Institute (formerly AIMR,
Association for Investment Management and Research).
3- PPMS is responsible only for the
processing of data through their software.
Users are ultimately responsible both for the underlying valuations,
transaction data, and resulting investment performance. After-tax investment performance is not
designed as a substitute for accounting documents such as Form 1099s. However, time-weighted, after-tax performance
may provide a useful comparison to unmanaged after-tax benchmarks for purposes
of assessing investment managers.