New Program Minimizes Tax Bite for Big Investors

TIRED of the tax man's bite? Want to maximize return on your investment? Help is on the way - for some people, at least. If you have an investment portfolio of a mere $5 million or more, J. P. Morgan & Company Inc. will help you chase away the tax-dollar blues.

This month, the global financial firm in New York with more than $35 billion in assets unveiled a program to reduce taxes on portfolio gains for its high-net-worth clients. The plan, ``Tax Aware Equity Management,'' utilizes a mix of high-speed computer technology and an investment strategy designed to maximize financial returns on United States equities, while minimizing the tax bite.

J. P. Morgan is not alone. Several other investment houses are working on their own plans, some of which they expect to introduce within months, as wealthy individuals scramble for ways to slash their taxes against a backdrop of rising federal, state, and local taxes.

While rich investors have always taken taxes into consideration when making investment decisions, taxes by themselves have only occasionally driven the stock market, experts say. But there is now growing anecdotal evidence that taxes are becoming a more important factor in investment decisions for the wealthiest Americans.

A shift in assets

``There's a strong possibility that a lot of the market sell-off we've seen in recent days has come from a shift in assets by well-to-do investors,'' says Raymond Diggle, director of research for the First of Michigan Corporation in Detroit. ``Since the Reagan presidency, the [federal income] tax rate on individuals earning more than $250,000 has steadily risen from 28 percent to 39.5 percent, including a surtax.''

That increase, plus the fact that the rate on capital gains remains high, as well as the drying up of most tax loopholes in the mid-1980s, makes it harder for individuals to maximize earnings in a relatively slow-growth economic environment, Mr. Diggle says. (The maximum rate on capital gains is 28 percent.)

The market sell-off last week, in part, is a result of a shift by investors from equities to intermediate bonds, such as tax-exempt municipal bonds, Diggle says.

J. P. Morgan insists that its new investment program for high-net-worth individuals is the first of its kind. According to Gordon Fowler, managing director of J. P. Morgan's private banking division, the new plan can continually ``reposition'' an investor's equity portfolio to best minimize taxes on capital gains. Thus, the plan represents a clear departure from traditional equity management, which is geared to ensuring financial return, he says. This plan's priority: after-tax returns.

Bigger dollar rewards

The plan is based on three years of study by J. P. Morgan, Mr. Fowler says. Morgan analysts, for example, ``back tested'' equity returns between 1984 and '93. They found that when using the new plan, a $10 million investment would have produced an annualized return of almost 16 percent, growing in value to $43 million; that compares with an annualized return of 13 percent for the Standard & Poor's 500 Index, growing to $34 million in value, and an average return of about 11 percent in a typical mutual fund, growing to $28 million.

Each client's portfolio is treated as unique, Fowler says. Under the J. P. Morgan plan, tax considerations are built right into the selection process for stocks. About 20 equity analysts monitor the stocks; they select companies not for the sector or industry they represent but because of their underlying value and growth prospects.

And using high-speed computer technology, stocks can be added to or eliminated from an individual's portfolio to reduce tax consequences.

``We think that this approach to investing, that is, having a sense of tax awareness, will totally change the way investment management is conducted in the US,'' Fowler says.

Typically, taxes paid on capital gains can offset investment returns, Fowler says. Only 1 in 8 mutual-fund managers, he adds, was able to beat the S & P 500 after the payout of taxes during the past 10 years.

Currently, Fowler says, individuals having a great deal of wealth must balance two contradictory financial approaches: They must follow recommendations of a portfolio or investment manager concerned with maximizing return on investment; but they must also follow advice of a tax accountant or lawyer who seeks to reduce the overall tax load.

Under J. P. Morgan's plan, the two approaches are built into the computer model for each person's investment portfolio.

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.