Trudy R. Turner knows that everyone wants to lower risk and pay less in taxes. Meeting those goals isn’t easy, but Turner, a director at Robertson, Griege & Thoele, a fee-only financial planning and investment management firm, has some intriguing ideas.
Turner specializes in complex tax issues and financial planning. A financial services expert for 15 years, she has a bachelor’s degree in commerce from the University of Virginia and a master’s in accountancy with a specialization in taxation from the University of North Texas. She works in RGT’s Dallas office. Turner says that one of RGT’s goals is to lower client anxiety about domestic and global debt affecting portfolios and to increase investment income without raising tax liability. Because of the 2010 Patient Protection and Affordable Care Act, in 2013 a Medicare tax will apply to taxpayers who have modified adjusted gross incomes exceeding $200,000 (single) or $250,000 (joint). These high-income earners will pay an added 3.8% on net investment income (but not all investment income) and an additional 0.9% on wages and self-employment income. In light of these tax concerns, Turner has selected the funds discussed below: a global bond fund, a blended fund, and a tax-free bond fund.
1) TEMPLETON GLOBAL BOND FUND A (TPINX) Turner sees this fund as a triple play: It offers income, global diversity, and hedge protection. This high-yield fund invests in the sovereign debt of countries that need liability financing. Its holdings are in Korea, Poland, Hungary, and other countries that have admirable balance sheets and even surplus budgets. This world bond fund is best kept in
tax-deferred vehicles such as traditional and Roth IRAs. Turner says the fund “provides attractive current income and also allows investors to hedge their U.S. dollar exposure from possible devaluation.†There is one caveat: The fund is potentially vulnerable to interest rate fluctuations.Total fund assets: $61 billion
Yield: 6.40%
One-year return: -5.70%
Three-year return: 6.76%
Five-year return: 7.99%
Minimum taxable investment: $1,000
Expense ratio: 0.88%’
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2) ROYCE TOTAL RETURN FUND (RYTRX)Turner considers this blended fund a consistent dividend-paying small- and micro-cap performer. Based in New York City, it is held by The Royce Funds. Turner characterizes the fund as a lower risk investment in a category that can often be volatile as it focuses on up-and-coming companies. The $4.79 billion fund has below average expenses for its category. Its
portfolio is built on a foundation of U.S. companies that comprise 85.4% of the total, with an average market capitalization of up to $2.5 billion. Since its 1993 inception, the fund has had an average total return of 10.88% compared with its benchmark, the Russell 2000, with 8.23%. Recently the greatest gains came within the financial, industrials, and consumer discretionary sectors. Among its top 10 stocks held are Ascena Retail Group, Federated Investors, and Erie Indemnity. The Royce Total Return Fund is best kept in taxable accounts where its growth orientation may take advantage of the long-term capital gains preferential tax rates.Total fund assets: $4.79 billion
Yield: 0.93%
One-year return: -5.95%
Three-year return: 14.71%
Five-year return: 0.04%
Minimum taxable investment: $2,000
Expense ratio: 1.12%
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3) VANGUARD INTERMEDIATE-TERM TAX-EXEMPT FUND INVESTOR SHARES
(VWITX) Turner recommends that investors in higher income tax brackets consider this municipal intermediate-term fund as a core holding in the fixed-income portion of their portfolios. It provides federally tax-free and attractive tax equivalent yields for clients who need “greater tax efficiency in their portfolios,†she says. The bond’s yield of 1.91% equals a 2.94% tax equivalent yield at the highest income tax bracket (35% as of May). Top holdings include bonds issued by the California Statewide Communities Development Authority Revenue, New Jersey Economic Development Authority, and the states of Ohio and Massachusetts. This fund has a very low expense relative to its group.Total fund assets: $34.8 billion
Yield: 1.91%
One-year return: 8.86%
Three-year return: 6.30%
Five-year return: 5.47%
Minimum taxable investment: $3,000
Expense ratio: 0.20%