Assuming no bond issuer defaults, direct ownership of fixed income securities preserves the option of holding bonds to maturity and helps secure a predictable cash flow independent of market returns. Only investors in fixed income separate accounts can choose to collect their interest payments and hold their bonds to maturity – receiving principal repayment in full and earning a predictable return no matter what broader market volatility might ensue. Thus, even in periods of rising rates, we believe fixed income separate accounts can be a more-stabilizing force for investors.

For equity investors, the direct ownership of equities via a separately managed account can allow for benefits when compared to a commingled vehicle that pools assets and shares ownership among investors. In our view, one of the most significant benefits of direct ownership of securities in a separate account involves tax loss harvesting, a technique to help minimize capital gains tax liability through the selective realization of gains and losses in a separate account portfolio.

Breckinridge offers tax loss harvesting in both our equity and fixed income portfolios.¹

In contrast, investors in a fund are completely dependent on the market price (NAV) of their fund and, therefore, are fully exposed to market volatility. Moreover, fund investors have the added disadvantage of other shareholders, who will typically redeem shares in down markets and thus require managers to sell securities at distressed prices. This is a distinct and uncompensated risk for fund investors.² Additionally investors in a fund have less control with respect to the timing and magnitude of events with tax consequences.

With separate accounts, our clients also have significant flexibility to customize portfolio parameters. Breckinridge collaborates extensively to determine how we can aim to achieve our clients’ needs, working with clients and their advisors and consultants to customize portfolios to appropriately align with each client’s objectives, risk tolerances, income objectives, and liquidity requirements.

Breckinridge has built robust systems that allow us to accommodate a wide range of customizations for most of our fixed income strategies. Portfolios in these strategies can be customized by benchmark, duration target, credit quality, sector weightings, tax status, state specification and values-based screens. Customization requests for any of our investment strategies can be submitted to us in writing for review. We remain committed to further enhancing our proprietary technology so that we can continue to offer our clients a high level of service.

 
[1] The effectiveness of a tax loss harvesting strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. To the extent that a client’s custodian uses a different cost basis or tax lot accounting, tax efficiencies may be greater or lower than Breckinridge’s estimates. Tax loss harvesting may generate a higher number of trades in an account due to our attempt to capture losses. This can mean higher overall transaction costs to clients. Further, a client account may repurchase a bond at a higher or lower price than the price at which the original bond was sold.

Cross transactions will be used to facilitate tax loss harvesting in most cases. When using cross transactions for tax loss harvesting, participating client accounts gain exposure to the tax-loss harvested bonds received from other accounts. While Breckinridge generally selects bonds that, in its best judgement, will not change significantly in price, bonds nevertheless are subject to fluctuations in price, and the bonds received may go up or down in value.

Federal and local tax laws and rates can change at any time; changes to tax laws and rates can impact tax consequences for clients. Further, the Internal Revenue Service (IRS) and other taxing authorities have set certain limitations and restrictions on tax loss harvesting. The tax consequences of Breckinridge’s tax loss strategy may be challenged by the Internal Revenue Service. Breckinridge is not a tax advisor and does not provide personal tax advice. Clients should consult with their tax professionals regarding tax loss harvesting strategies and associated consequences.

[2] Some investors may be more suitable for a mutual fund than a separate account. For example, mutual funds tend to have lower investment minimums than separately managed accounts. Investors should speak with their investment professional to determine whether a separately managed account is appropriate for their financial needs and goals.