Minimizing Tax Exposure
Fairbanks Capital Management, Inc. utilizes a low turnover investment style that minimizes the taxation of gains in taxable accounts.
Avoiding High Turnover
For the taxable investor located in California, or a state with a similar tax regime, taxation can reduce returns by 25-45%. Take the example of an actively managed equity mutual fund that earns a 15% return in a particular year. If the fund has the high level of turnover common among today’s mutual funds, much of this return will be taxable. If half of the realized gains are short-term, the combined federal and state tax penalty to the fund’s return could exceed 35%. Thus, the rate of return to its investor is reduced, in reality, to about 10% after tax. As an investor who is subject to taxation, the rate of return which one actually keeps is what really counts!
A painful lesson some mutual fund investors have learned is that mutual funds must distribute any net realized gains, whether the fund made or lost money for the year. Yes, a fund that loses money for the year may still sock its investors with a tax bill!
At FCMI, we are long term investors. Our major positions are held for years. Many positions we started building for our more seasoned clients have never been sold, allowing real cases where our basis is in the low single digits on stocks now selling over $50 per share.
Because of our consistent long-term strategy, the returns our investors earn are exposed to minimal taxation. We do not force our investors to share their returns with the government.