Taxable Fixed Income

Investors often structure portfolios to minimize taxable income, yet there may be circumstances when taxable fixed-income securities add net value to a well-balanced portfolio. The taxable aspect of fixed income bonds will be challenging to the extent that those bonds are viewed in a vacuum, separate and apart from other portfolio components. Banc Star Financial’s team of bond managers and research analysts coordinate taxable fixed income investments with a view to a client’s complete portfolio. This approach can deliver significant value with taxable elements that can be offset against other portfolio characteristics.

Fixed income bonds react to market conditions differently than equity securities, which shifts an analyst’s focus to interest-rate trends, near- and long-term economic outlooks, policy announcement from the Federal reserve and other national banks, sector and industry valuations, and the financial stability of the bond issuer. Our wealth managers begin their analysis with an in-depth review of these variables, which they then apply to select fixed income investments that show strong current yields, high-quality credit ratings, and potential for capital gains.

They may recommend protection mechanisms such as investing in offsetting put or call options and adjusting portfolio holdings as a function of bond coupon structures or pricing that is significantly at odds with a bond’s face value.

Portfolios that focus on structural analysis of bond holdings generally outperform investments that are based solely on credit analysis. Our wealth advisors use this approach to uncover bond market inefficiencies and to capture the value of those inefficiencies before they are discounted by broader market trends.

Our bond and bond fund recommendations target securities with underlying fundamentals that can reduce total portfolio volatility while simultaneously enhancing yield. After the 2008 bond market meltdown, those fundamentals have taken on greater significance with asset-backed and mortgage-backed bonds and securitized instruments. The best fixed income portfolios achieve the greatest returns when they are characterized by:

  • Sell discipline that rejects emotional moves in favor of objective decision processes;
  • Potential for significant negative changes in credit ratings;
  • A focus on more attractive investment opportunities that are apt to arise at any time;
  • Realization of capital gains without forfeiting income or exposing investors to excessive tax effects;
  • Price and face value matching as a bond nears its maturity date.

Tax Advantaged and Tax Efficient Fixed Income

Investment advisors take many different looks at many different approaches to tax efficient investing principles. Banc Star Financial’s wealth managers know that no single approach serves every investor. Rather than adopting and recommending a generic strategy, we formulate recommendations that match each client’s individual wealth creation goals with strategies that include:

  • Identifying and recommending different tax advantaged products, such as exchange traded funds (ETFs) and mutual funds, comparing tax-free fixed income securities to other debt instruments, and balancing an investor’s desire for tax advantaged cash flow against long-term growth;
  • Timing purchases and sales of fixed income instruments to qualify for lower capital gains, liquidating underperforming fixed income assets before a tax year closes and forces gains or losses that might affect tax advantaged structures, and avoiding holdings with record distribution date that might impose undesirable tax liabilities;
  • Incorporating tax advantaged strategies into traditional or Roth IRA plans;
  • Examining the potential for tax savings through charitable donations, college savings plans, and similar alternatives.

Our recommendations also reflect our philosophy that tax advantaged investing is not a one-time event. We reassess our recommendations in accordance with changing market circumstances and modifications in a client’s wealth management plan. This allows our clients to achieve optimum tax advantaged investment strategies at all phases of the client’s investment span. This philosophy can save a client tens or hundreds of thousands of dollars that might otherwise be lost through capital gains and other taxation.