Monday, January 26, 2015

Alpha Architect : investment start-up focuses on tax efficiency

Erin E. Arvedlund for writes: A Broomall investment start-up has launched two new exchange-traded funds. Underpinning the investment philosophy: tax efficiency.

Tax-aware investing makes a lot of sense now that capital gains taxes are so high - nearly 45 percent on short-term capital gains, when including the new Obamacare tax - and some financial planners consider them more important than estate taxes.

Alpha Architect was founded by Wes Gray and Carl Kanner in 2010. As a start-up, they initially ran money privately for a billion-dollar family in 2011.

Gray moved to Philadelphia as a Drexel professor and recruited Jack Vogel, now an adjunct at Villanova, to help create a vehicle that invests in a tax-efficient manner. They pick stocks and trade them inside exchange-traded funds known as ValueShares International Quantitative Value (symbol: IVAL) and ValueShares US Quantitative Value (QVAL).

Between the two ETFs, they run assets of $33 million. Gray, Vogel, Kanner, Patrick Cleary, David Foulke, Tao Wang, and Yang Xu are portfolio managers for the funds.

All are Wharton, Drexel or Villanova alums. Cleary and Gray both served in the Marine Corps.
"You can buy and sell in a tax-efficient method inside of an ETF" versus a mutual fund, Vogel says. "A lot of investors don't understand the power of this vehicle."

Alpha Architect seeks to take emotion out of the process by using quantitative screens and rebalancing automatically.

ValueShares US and International Quantitative Value ETFs are actively managed, relatively new given that most ETFs simply mimic an index. The funds hold about 50 mid- to large-cap U.S. and developed-market stocks as determined by Alpha Architect's quantitative valuation system, weight the holdings equally, and rebalance the U.S. stocks quarterly and the foreign stocks semi-annually.
"We use a variation on the enterprise multiple as part of our valuation screening technology, and screen a universe of about 1,100 names down to the top 10 percent of cheapest stocks," Gray says. They consider this list of 50 stocks the "bargain bin" of the market.

But investors must keep sight of the importance of taxes, Gray notes.

"What is the real value for a taxable investor in a fund that earns a 10 percent return but only 5 percent after tax? In the ETF, you don't get a surprise on taxes like you do on a mutual fund. Many professionals in the industry have no clue about this."

The management fee for the ETFs total 0.79 percent annually, higher if an investor has a separately managed account. Fees do not include brokerage fees if you pay for trades.


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