Tax Management
Recognizing that some clients are tax-sensitive while others are tax-exempt, Dimensional offers several tax-managed strategies that target market segments like value stocks and small cap stocks, which have higher expected returns but are otherwise costly or unsuitable for taxable investors. The tax-managed strategies deliver the same consistent risk exposures that Dimensional is known for, but with a special emphasis on maximizing after-tax returns.
| Dividends and Gains Are Costly to Taxable Investors |
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Annual data: 1963-2000 Assumed highest marginal tax rate for capital gains and ordinary income. |
| Data courtesy of Fama/French. |
Like other tax-managed portfolios, Dimensional's strategies offset capital gains and losses, but they don't stop there. Equity portfolios generate dividends that traditional tax management typically ignores—in spite of the fact that taxes from dividends are often higher than taxes from capital gains. This is especially true among small cap and value stocks that distribute more income than larger cap growth stocks. The challenge becomes reducing dividends without diluting exposure to the factors that drive returns. Dimensional's tax-managed strategies simultaneously attempt to minimize taxable gains and dividend yield with specific exposure to the economic factors in returns, without sacrificing precise asset class exposure and solid, broad diversification.