Tax havens getting it from all sides

Is there no safe tax haven any more? Apparently not.

As I mentioned yesterday, the IRS is taking advantage of a 38-year-old law to crack down on U.S. income that's being stashed in foreign accounts.

Now from across the pond comes word that the European Union ; is considering taking a tougher stance on tax havens.

The sheltering of income from home country tax collectors has been a hot topic since February, when Germany cracked down on tax evaders in Liechtenstein, blogged about most recently here.

The concern quickly spread worldwide. Australia and New Zealand conducted raids and audits of wealthy residents. In the United States, a former banker for UBS, Switzerland's biggest bank, has been indicted on charges of helping a wealthy American real estate developer evade taxes on $200 million held in bank accounts in Switzerland and Liechtenstein.

And this week, the European Union on Wednesday agreed, at the urging of Germany, to
consider a new clampdown on tax havens. The International Herald Tribune reports:

Speaking at a meeting of EU finance ministers on Wednesday, the EU
commissioner responsible for taxation, Laszlo Kovacs, said he would
propose an extension to the scope of the EU's directive on the taxation
of savings, which applied primarily to bank accounts.

This could be done by expanding the list of products covered,
perhaps to include trusts or foundations, or by applying the law to
legal entities rather than just individuals, Kovacs said.

Just the beginning: Don't expect any resolution here to be quick or easy.

Although EU finance ministers set Sept. 30 deadline for the completion of an interim report on how effectively the current banking and bank secrecy rules have been implemented, that's only the beginning of the process.

Following the first draft, Kovacs said he would "present some concrete amendments on how to amend it."

And, according to the newspaper, the current directive on tax havens "took around 14 years of tortuous negotiation before it came into force in 2005."

Consumer Reports: Top GPS, Laptops and more

This month's Consumer Reports has arrived. I recommend the magazine for those interested in personal finance, frugality and routine consumers of electronic devices and appliances. I've based the majority of my large purchase decisions on the rankings there (often selecting the "Best Buy" and have never gone wrong. Their site is located here (.org, not .com):

http://www.consumerreports.org/cro/index.htm

Top GPS Units:

1) Garmin Nuvi 760, Nuvi 770, Nuvi 780
2) Garmin Nuvi 660
3) TomTom Go 920T
4) Garmin Nuvi 350, 360, 370 as a Best Buy at ~$350

Best Laptops:
15.4 Inch Budget:

1) Lenovo ThinkPad T61

15.4 Inch Workhorse:

1) Apple MacBook Pro

17 Inch Workhorse:

1) Apple MacBook Pro

13.3 Inch slim and light:

1) Sony Vaio VGN-SZ780
2) Apple MacBook Air



Best Desktops:
Budget:

1) Lenovo 3000 J200

Workhorse:

1) HP Pavillion m9100t

High End

1) Dell XPS 420
2) Gateway FX7020 as a Best Buy at ~$1180

In Tech Support, Apple ranks at the top, which matches common lore. HP is at the bottom.

www.everydayfinance.blogspot.com

Tuesday is Tax Day (and 2007 Retirement Account Contribution Deadline); What You Should Do Between Now and Then

With the Tuesday tax filing deadline approaching, hopefully, most of you are awaiting your refund from (or payment to) the IRS. Aside from the tax filing deadline, April 15th each year is also the deadline for maximizing your contributions to the prior year's IRA account. Regardless of whether you have a Traditional or Roth IRA, you have until Tuesday to make your final 2007 contributions.

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Tuesday, April 15th is the deadline for 2007 Investments

If you haven't started an IRA yet, you should strongly consider doing so by Tuesday. You can do so by contacting a mutual fund company (I recommend Vanguard Funds since they are by far the lowest cost family with a full cohort of index funds, which are ideal for long term investing) or if you like invest in individual equities and can't get the mix you're looking for, consider a self-directed IRA with a low cost trading account like E*Trade or Ameritrade (Zecco actually has several free options available with a unique business model). I actually have some assets with Vanguard mutual funds and also invest in high yield stocks in my self-directed IRA account for the tax advantaged capabilities. It's really quite simple to set up either type of account and there's plenty of time to do so between now and midnight Tuesday. If you miss it, now's as good a time as any to start your 2008 contributions.

The maximum for an IRA contribution in 2007 is 100% of earned income or $4,000, whichever is less, for an individual under the age of 50. Individuals aged 50 and older can contribute up to 100% of earned income or $5,000 whichever is less. For 2008, the limits are $5,000 and $6,000 respectively.




Is Your Refund Too Big?

Mine was. If your refund is several thousand dollars in April, you've effectively loaned money to the government interest-free for the past year instead of investing those funds along the way. Some people like the idea of getting a nice, hefty rebate check and using it for vacations, big screen TVs, or whatever their pleasure and as an added bonus, you get to tell your spouse what a big refund you're getting this year. Imagine if you planned it perfectly and had a nominal hundred dollar refund or payment due. You'd have to endure your wife saying, "How come Johnny and Jane got back $5,000 this year and we got nothing!". If you can stomach this conversation with your spouse and have the discipline to invest it in an interest bearing account or putting into your retirement funds, you're really better off having the money along the way.



I had my Dependents set at 2 for my withholding with my employer, have 2 children and took on a decent-sized mortgage a year and a half ago. So, my refund was much bigger than it should have been if I had planned appropriately. Not that it feels all that bad now, I'll be OK, really. But the first thing I need to do is up my exemptions to at least 3!


Sources:


http://en.wikipedia.org/wiki/Individual_Retirement_Account#Funding

www.everydayfinance.blogspot.com

Change your life with one simple question

Whether you're saving for a down payment or wanting to lose weight, the principle is the same. You can change your life with one simple question: Does what I'm about to do line up with my goals?

It's just a matter of priorities. You CAN do the things you want most, but you have to make them a priority. This means not allowing a series of little things (that you don't really care much about in the long run) to derail you.

For example, if you head to the mall to keep a friend company, and see something cool that you'd like, don't tell yourself “Oh, but I can't get that because we're saving for a down payment.” That's just likely to depress you, and put the focus on all the things you “can't” have.

Instead, ask yourself if buying the cool item is in line with your goal of saving for a down payment. The obvious answer (”no”) will pop into your head, and you'll find that you don't really WANT the item when it comes right down to it. You'd rather have the new house. You'll get excited about reaching that goal instead.

You'll make progress (and change your life) one decision at a time. There might be times when you do decide to buy something at the store instead of saving for your larger goal, but that's alright because you'll have thought things through carefully. They won't be fleeting impulses that prevent you from doing what you really want to do. You'll feel good about your decisions AND reach your larger goal with relative ease.

Evidence that "Namesake" Mutual Funds Outperform their Peers

I came across an academic journal article highlighting the fact that Namesake Funds outperform their peers in several aspects. I thought this was interesting and has some concepts you should keep in mind when selecting an actively managed fund for long term investing in the hopes of exceeding market and peer fund returns. I've condensed 20 pages of research and tables to about a page:

This article summarizes the conflicts that could arise and the ensuing performance when comparing namesake funds to generic funds. A namesake fund is one where the fund manager sites on the board and has significant investments in the fund they manage. The “namesake” is derived from the notion that the fund or the company is generally named after such manager. An example of a namesake fund is the Baron Partners Fund (BPTRX), vs. say, AIM Moderate Growth Fund. The results show that the namesake funds are generally more tax efficient and contain a slightly higher level of unsystematic risk, while outperforming their peers.





Fund managers that are employed by the firm tend to have career concerns, whereas more tenured, famous namesake managers do not share the same concerns. For these reasons, younger managers tend to less risk and follow the crowd, whereas namesake fund managers have fewer career concerns and invest accordingly.



Given these differences, there are five main hypotheses tested for these two populations of fund managers:



1) Namesake funds should have higher fees than generic funds since the namesake fund managers exert more influence on the board and possess a large interest in the company.



2) The namesake funds should be more tax efficient because namesake fund managers typically have a larger portion of their own funds invested.



3) Since namesake fund managers have fewer career concerns, there should be a greater degree of unsystemic risk.



4) Because the namesake fund managers have more at stake with respect to their own funds, it is hypothesized that they should outperform generic funds.



5) Given these benefits and the past, more prestigious roles of the namesake fund managers, it is hypothesized that their funds have higher levels of investor cash flows.

The empirical results provide strong support for these hypotheses:



1) Expense ratios are 12-15 basis points higher for namesake funds than generic funds.



2) Namesake funds do tend to enjoy greater tax favorability than their counterparts. An interesting note here is that since fund managers are generally rated on their pre-tax returns, generic managers are not incented to control the timing or size of tax distributions, whereas namesake managers have more skin in the game.



3) The data also supports the risk assumption. Namesake funds have lower momentum beta, suggesting they do not chase returns as much as their counterparts.



4) Adjusted for all relevant factors, the namesake funds tend to outperform their counterparts by 6-9 basis points per month.



5) The namesake funds do indeed attract more investor cash flows and there is evidence that fund investors are more sensitive to the past performance of namesake funds.

There are some other key characteristics of namesake funds worth considering:

• The average tenure for namesake fund managers is 6.6 years, which is 1.8 years longer than their counterparts.


• On average, namesake funds hold 8.4% of assets in cash, whereas generic funds hold 6% in cash.


• The turnover of namesake funds in the same class is much lower at 50% compared to 81%.
  

In summary, while I believe excluding some rather unique investment objective you simply can't find anywhere else, you're best investing in index funds, there may be occasions where investors are driven toward actively managed funds. In this scenario, one is well served by first considering a namesake fund over a generic fund given the preponderance of data highlighting the benefits on an aggregate basis.





Source:


Ferris and Yan (2007) “Agency conflicts in delegated portfolio management: Evidence from namesake funds”

www.everydayfinance.blogspot.com

Gonna be on the tee-vee

So about two weeks ago, I was contacted by a journalist who was looking for someone to be interviewed on camera about the new ING checking account. Apparently, I was the first person to say yes. A camera guy came to my house and filmed me talking about the account, at my computer using it, and then about 15 minutes of footage of me feeding the guinea pigs (including a couple minutes of extreme closeup, where his camera was almost touching the cage and they were eating a piece of celery right in front of the lens.) No idea how this will turn out, but I hope that gets in. :) This story is essentially going to be sold to a bunch of smaller networks, who will have their local news anchor read the copy and dub it over, so hopefully it will start appearing on the Web in late March. I'll post one if I find it.

Vulture Investing with the Pros

In the current market environment, there are myriad investment opportunities that present themselves only once in a blue moon. Separating the gems from the train wrecks can be daunting for the individual investor. That's where the professional vulture investors come in. They both the experience and foresight to wait out the euphoria, allow trends to drive a market sector/market crash, and then pick up the valuable assets out of the rubble. They also have the capital to do so.





One such investment outfit is Leucadia National (LUK), which invests in distressed industries. Some recent investments it engaged in were subprime lender Americredit and financial services company Finova group. It is not solely a financial company though, as its holdings are as diverse as telecom, lumber and carpet padding companies.





The performance has been stellar, returning close to 80% during the past year compared to a loss of close to 8% fpr the S&P500. Shares are also up over 300% in the 5 year period vs. 32% for the S&P500. Given its exposure to some financials, it clearly picked the winners and steered clear of the CDO mess.

Disclosure: The author has no position in LUK.

www.everydayfinance.blogspot.com