Tax-effective investing, according to Natixis

Distinct fund structure tailors distributions to investor needs.

Michael Ryval 26 November, 2015 | 6:00PM
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Investors who are concerned about the tax-effectiveness of their investments can turn to funds held in a corporate-class structure, a vehicle that allows investors to switch between funds on a tax-free basis. But one company in Canada -- Natixis Global Asset Management -- goes a step further. It offers different share classes tailored to individual tax preferences and income needs.

Natixis Canada is part of Natixis SA, which has headquarters in Paris and Boston. Managing more than US$900 billion in assets, the parent company ranks among the top 20 global money managers.

The Natixis organization gained a foothold in Canada a year ago when it acquired NexGen Financial LP, a pioneer in tax-effective investing. The Canadian firm, which has about $1.1 billion in assets under management, was rebranded last August under the Natixis umbrella. (Natixis SA is owned in turn by BPCE, France's second largest banking group.)

"Our objective is to help investors keep more of their returns by reducing the tax costs," says Abe Goenka, the Toronto-based co-CEO for Natixis's Canadian operation. "We want to help them earn more and keep more of what they earn. We allow investors to customize their investments by combining the funds with the preferred tax class to create a unique solution."

Natixis portfolio managers include recently added affiliates such as Boston-based Loomis Sayles & Co., Chicago-based Harris Associates and Cincinnati-based Gateway Investment Advisors. Significantly, these managers focus on building the best possible portfolios and do not consider taxes in their decision-making.

"What we've done is created a unique corporate class. We aggregate all the income -- whether it's dividends or capital gains -- within the corporate class and allow investors to choose how they want to be taxed on their distributions," says Goenka.

Natixis's tax structure offers four choices. The compound growth class, known as CGR, seeks to minimize taxable distributions and therefore compound tax-deferred returns. Canadian-eligible dividend class, known as DTC, seeks to maximize returns from Canadian dividends, and is aimed at individuals seeking a reduced tax rate on monthly income.

Return of capital class, or ROC, seeks to produce tax-deferred monthly cash flow, often for retired individuals. Finally, the capital-gains class, known as CG class, is focused on capital gains. It's sometimes used by individuals who want to offset gains against capital losses.

"These choices apply to each one of our investment strategies," says Goenka. "In effect, it allows investors full control of the investment and the tax outcome."

For instance, investors can participate in Oakmark International Natixis Tax Managed DTC Class and thus have the distributions taxed as Canadian dividends, even though the dividends originated in a different fund. This is achieved through the corporate-class structure which aggregates all the income, and expenses, into one pool and then redistributes them according to each investor's objective.

Natixis offers 14 funds within the corporate-class structure. "The key is that it's all within the same legal entity," says Goenka. "But it's important to keep in mind that these are tax objectives and are not guaranteed."

Taxation of a distribution is based on the tax class that investors choose. Suppose, for instance, an investor puts $100,000 into Oakmark Natixis International Tax Managed DTC Class and it rises by 10%. It is worth $110,000. "Now you can say, 'I'd like a 5% monthly distribution.' At the end of the year you would have $5,000 in eligible dividends and the fund would be worth $105,000."

Alternatively, if an investor's objective was compound growth, then he/she would invest the same $100,000 in the same fund's CGR Class and it also would grow to $110,000. But the $10,000 growth in the fund would be treated as tax-deferred growth.

Other fund firms offer corporate-class structures, and monthly distributions, often through funds designated as T-series. "But the composition of the different types of income would be mixed," observes Goenka. "In our case, clients can actually select what they want."

Goenka notes that the 14 Natixis funds appeal to a broad range of investors and are intended to be parts of a person's portfolio. "They are designed to generate alpha and are not index-replication strategies," says Goenka. "The class structure allows investors to customize the tax impact of their investments."

CGR class, for instance, may appeal to someone in a high tax bracket or who owns a small-business corporation and wants to benefit by being able to defer tax. DTC class may appeal to people with modest income who want to benefit from the low tax rate on Canadian dividends. ROC class appeals to retirees who want cash flow on a tax-free basis. And CG class can be used to offset capital loss carry-forwards. Of the four classes, Goenka notes that CGR is the most popular.

Canadians are becoming more financially knowledgeable and looking for value in the management fees they pay, says Goenka, adding that Natixis's funds are sold through the advisor channel. "Fee transparency is coming. This is an opportunity for advisors to add value, beyond investment returns." Moreover, Goenka believes that his firm will benefit by providing tax and investment solutions that will support more effective ways to transfer wealth to younger generations.

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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