Tax & Estate Planning
Webinar on demand: Year-end portfolio and tax planning

CE credit: 1 hr., CFP and CIMA

60 MIN WEBINAR

 


Will McKenna: Hello, and welcome to the Capital Ideas webinar and podcast series, where our brightest minds answer your biggest questions. I'm your host, Will McKenna. I want to welcome everybody to the call today. Thank you for coming. I also want to wish everybody a happy Thanksgiving. I'm sure you're all looking forward to next week's festivities as I am. I want to give also a special shoutout to our friends in Canada, because as I understand it, of course, you've already celebrated Thanksgiving, which is the second Monday in October. So, happy belated Thanksgiving. And admittedly I didn't really know that until I googled it this morning, but great to have you on the call. Today, we're going to be talking about year-end portfolio and tax planning, which is a very hot topic right now, given the potential for some policy changes coming down the path. And our goal is to do two things: number one, to help you with your asset allocation for the year ahead.

Will McKenna: And Alan Berro is going to focus on that for us. And number two, to give you some ideas you can use in your tax and estate planning. And Leslie Geller is going to be our speaker for that. So, again, two great speakers to help us break it all down. But before I introduce them, let me just cover a couple of quick housekeeping details. CE credit is available for CFP and CIMA. You should see those instructions on your screen. Be sure to check out the additional resources tab, where you're going to find the slides from today's event, the CE quiz, and other good content from Leslie and Alan and others. Also, we love getting your questions. You'll see the Q&A window there. Keep them coming; we'll try to answer as many as we can throughout the event. Also, we'll have a couple of quick polls in there for you to answer. If you do have any tech problems, use that same Q&A window to let us know.

Will McKenna: Now, let me introduce our speakers. Alan Berro is an equity portfolio manager with 35 years of investment experience, 30 with Capital Group. He is a principal investment officer on Washington Mutual Investors Fund. He's also a portfolio manager on American Balanced Fund, as well as on our variable insurance asset allocation strategy. Alan also wears many other hats at Capital beyond his portfolio duties, including serving on our Portfolio Solutions Committee, and that's the group that determines the asset allocation on our fund of funds and model portfolio. So, that's what we'll be talking about today. Earlier in his career as an analyst, Alan covered utilities, capital goods and machinery companies. Alan holds his MBA from Harvard and a bachelor's in economics from UCLA. And as you could see in his picture earlier, he loves fishing in Utah.

Will McKenna: Leslie Geller is a wealth strategist at Capital Group. She has 14 years of industry experience, been with Capital for the past two years. Before joining us, she was a tax and estate lawyer at some prominent LA law firms. And she admits to being a self-proclaimed tax nerd, which you'll see here on the program. She received a master's in taxation from NYU, and her law degree from Boston College Law School, her bachelor's from Washington and Lee. So, Leslie and Alan, great to have you. Thanks for joining us. Alan, I want to start with you. Let's jump right in. Why don't you kick us off with your outlook for 2022? How do you see the markets and economy shaping up in the year ahead?

Alan Berro: Thanks. Well, let me start with the economy. I have been doing this for a little over 35 years, and I don't think I have seen this kind of broad strength in my career. All of the data and statistics are very strong, whether you look at the manufacturing PMI in October, which came in at 60.8. And as most of you probably know, anything over 50 is good, and 60s, you know, being up in the 60s is pretty rare. But new orders are up, production's up, employment's up. We saw another drop in claims this morning. And this isn't just a month; this is 17 straight months of strong data coming off the pandemic lows.

Alan Berro: Inventories are low, prices are up, backlogs are up, border books are full. I could go on and on. But I think you get the gist that things are very good in the production side of the economy. And we're now above pre-COVID levels in terms of production and demand across almost all sectors. And we know what's happened with commodities, and they go up and down, but things are good. Manufacturing is definitely strong. The other thing I look at is the PMI services sector, and that's even stronger. 66.7 was the number in October, again, the 17th straight month above 50. So, whether it's retailing, logistics, services of any sort, things are strong.

Alan Berro: And you can see on this chart here, the market has definitely responded to that strength. And you asked about the Fed and tapering and things like that. To me there is a, you know, we all know there's been a ton of stimulus put in this economy. We’re awash in cash and liquidity. Corporate and private balance sheets are in great shape, the consumer is unbelievably healthy. Those who want jobs can pretty much get jobs. We've seen that in the unemployment rate. But, you know, particularly for people, what I would call the haves, if you will, they've seen their home value go up 20% in the last year or two. They've seen their 401(k) go up, thanks to many of you here today, significantly.

Alan Berro: So the real question is, you know, not when, but ... not if but when the Fed will have to raise, and I'm in the sooner camp. You know, corporate earnings continue to be strong, and so things look really good. And just looking back at this chart, let me just bracket this for you. Year to date, we're up 26% total return. That's on top of 18.4% last year, and 31 and a half percent in 2019. So, I just ran, a few minutes ago, the five-year compound and it's 18.6%, last 10 years 16.8%. And I know that's coming off of the global financial crisis lows. But, you know, these are unprecedented numbers. I mean, things are really good, and both in the economy and in the market. And now, of course, we have the 1.2 trillion (laughs) of stimulus coming in, which I don't know how that's going to work.

Alan Berro: But, you know, to me, it's gasoline on the fire, if you will. Things are tight, and now we're going to, you know, accelerate projects and embark on new ones. As you know, unemployment is already down to 4.6%. We added 531,000 jobs last month. Job openings are historically high as measured by the Jolt survey. The quit rate is also high, which means people are confident they can find a new job. So, we have scarce labor amid strong demand and scarce resources. And so, you know, we are having inflation. The big debate is: Is it transitory, or is it something more? I think, you know, the Fed and the bond market keep sticking to the transitory story as best they can.

Alan Berro: But I'm willing to take the other side that I think this is going to last a few years. So maybe transitory means into 23 or 24. But, you know, the CPI is running up 6.2% over the last 12 months. Energy prices are bad, you know, are up if you've been to the pump. Food prices are up significantly if you've been to the supermarket. Rents are going up. So, there are a lot of inputs to the inflation, the core inflation numbers that are going up a lot. And in our conversations with companies, which is probably what you care about most, they are all raising prices, and they're getting what they asked for. So, and it's not a two or 3% increase. I mean, companies are getting 5%, 7%, 10%. I think Parker Hannifin announced 8% yesterday. So prices are going up; the costs are also going up.

Alan Berro: I just read that John Deere settled last night, 10,000 employees strike that went on for six or seven weeks. The union finally accepted an offer last night: an hourly rate increase of 10%. Let me repeat. 10% for this year, and they got what they call an $8,500 per person ratification bonus, which is basically an $8,500 check up front. They also bumped up pension benefits. So I do see inflation coming. And I think the Fed has to respond at some point. I don't know if it's going to be 25 basis points, 50 basis points, but they are going to have to reestablish their credibility pretty soon if we continue to see this type of inflation in the economy. So, I'm in the, camp of sooner rather than later. We're going to see at least a rate hike or two. Why don't I stop there and turn it back to you?

Will McKenna: Wow, that's a great opening, Alan. I got to say I'm surprised to hear, you know, quite how positive you are. It feels like a nice contrast to what we hear in the news, all the wall of worry about inflation, supply chain, labor bottlenecks, Fed tapering, raising rates. And maybe we'll get into this when we talk about your specific kind of investment themes and portfolio. But are you, you see rates coming sooner than later. Is that causing you any concern, or you feel like that's going to be relatively easy to navigate through as an equity investor?

Alan Berro: (Laughs). I don't know. None of us have seen this in a while. So, you know, we're starting from a fairly high level on the market. So, you know, particularly the hyper-growth stocks could get hit here. I mean, if the discount rate goes up, I tend to traffic, as you know, more in the value sectors. So I'm not quite as worried. In fact, I own some things that I think will be beneficiaries, particularly in the financials-

Will McKenna: Right.

Alan Berro: ... industry — banks and things like that.

Will McKenna: Right. That's great. Well, I was picking up on, I saw somebody in our audience said, “Can you address the gloom crew market-

Leslie Geller: (Laughs).

Will McKenna: ... commentators that are looking at what they consider, you know, all those kinds of walls of worry?” So, that's a good answer there. Leslie, let's bring you into the conversation, maybe an outlook of a different kind. Suffice to say there's a lot going on in Washington these days. Can you bring us up to speed on the latest developments? How do you see it all playing out? Of course, it's a moving target, as we know.

Leslie Geller: It's incredibly fluid. And if you've been following this at all, what we're talking about today is completely different from what we had been talking about as far as expectations, as far as substance, just a couple months ago. So, this is a tremendously moving target. I think just to take a step back and remind everyone what we're dealing with here, because there has been so much fluidity. I think everyone ... it's really easy to get confused about what's happening in DC. So, we have two big legislative packages that have been the talk of the town over the last several months. We have that bipartisan infrastructure bill, $1.2 trillion, highways, roads, bridges. Alan alluded to it. It's about 550 billion in new funding. That passed with bipartisan support in the Senate and the house. It was signed into law earlier this week.

Leslie Geller: The other big legislative package is the Build Back Better package. This is that 1.8-ish trillion dollar social spending bill focused on child care, health care and climate, financed primarily through tax increases on high income individuals and corporations. Bipartisan infrastructure deal, that big package that is done off the table. So we're going to focus on the Build Back Better package: where we are in the legislative process, the dynamics at play, and what to expect over the coming weeks. Right now, we're waiting for that Build Back Better plan to be voted on in the House. Pelosi wants it done tonight, tomorrow at the latest. Maybe it gets pushed into the weekend. But they love Thanksgiving in DC; it is a sacred holiday. They are dying to get out of town. It sounds like the Senate is going to recess today. So it would just be the House left, and they are going to want to get this done. And Pelosi has said that nobody's leaving until this is finished. If and when this Build Back Better plan passes the House, it has to go to the Senate, where they will have their say.

Leslie Geller: And there is likely to be significant amendments there. Then we're not done. It has to go back to the House. So we have a ways to go here. Few variables to watch in both the Senate and the House. First of all, remember Pelosi needs everyone on board here. This is not like the bipartisan infrastructure deal, where she was going to have some Republican defectors and they could rely on those Republican defectors making up for any Democrats that jumped ship. She has a thin majority; she needs everybody on board here — progressive, moderates, Blue Dog Democrats, the entire party. She needs to watch or we need to watch that group of moderate Democratic representatives: Case, Gottheimer, Stephanie Murphy, Kurt Schrader. They are withholding their vote until they see the CBO's spending estimates. As a reminder, the CBO is the Congressional Budget Office. They score the bill and decide or estimate how much revenue will be brought in and how much the bill is going to cost.

Leslie Geller: All of the numbers out there that we've been working with, they're just White House estimates. So, this group of moderate Democratic representatives have said, "We're happy to vote for this, but we want to see the real CBO scores first. And we want to make sure they match up with the White House's estimates." And that's the key question is how far off are the White House's estimates going to be? From what we're hearing, probably by 200 or $300 billion. So they were optimistic to a very extreme degree. We'll see how this group of moderate representatives reacts once these CBO scores come in today, tomorrow potentially. Sounds like though they're going to come in tonight. There is a school of thought that everybody wants to get out of town for Thanksgiving. So, even if the CBO scores come in way off, they're still going to get on board, vote for this, and just punt it to the Senate and make it a Senate's problem.

Leslie Geller: The other variable to watch here is those couple of last minute additions that Pelosi threw in about two weeks ago, primarily immigration and paid family leave. These were not negotiated with Manchin, these were not negotiated with Sinema, she tossed them in at the end. So some of her members, particularly progressives, could be on record for voting for these, but they will get thrown out in the Senate. And so several of these moderate representatives don't want to vote for something that is just going to fall away in the Senate. OK, Senate variables. We just talked about House variables. A few things to watch in the Senate, OK? First of all, the Byrd Bath. That's that process whereby they get rid of all the things that don't belong in a reconciliation package. Reconciliation requires that anything in the bill be part of taxing, spending, debt limits. Immigration is going to get thrown out here. The Byrd Bath takes a while. And Byrd Bath is a reference to the Byrd rule. Senator Byrd — that's where that funny name comes from. And it's B-Y-R-D, not like bird as in the flying bird.

Leslie Geller: The other variable watching the Senate, that state and local tax deduction, we’ll get a little bit more into that, but that has been a really big flashpoint. The moderates in the House have come to an agreement to raise the cap on that SALT deduction from 10,000 to $80,000. Significant raise; it's not going to hold in the Senate. Bernie Sanders, Senator Menendez, they don't like this because it benefits wealthy taxpayers. It doesn't fit within their messaging. So this will not survive the Senate, likely to be a significant negotiating point. And then finally we have the Manchin, Sinema factor. In a 50/50 Senate, every single senator has a veto power here. So watch them to see how they react to the CBO scores if they're off. Right? Maybe the house representatives get on board. They're OK with the CBO scores being off. Manchin and Sinema are not going to be OK with it, which means that in the Senate, the size of the bill is likely to be cut down where they're going to have to look for additional revenue sources. Basically, we have a long way to go here.

Leslie Geller: I think just overall what to expect, reminder, House in the next couple of days, likely will get done before Thanksgiving, goes to Senate post-Thanksgiving. But then in December, they have to deal with government funding, debt limit, the defense funding. Right? All of these regular December things or items that have been punted to December, they are going to have a full plate. So this is going to get done maybe by the end of the year, perhaps they pumped it to January. But once we hit 2022, each week that passes means there's less of a chance of this getting done. So the real, real window for acting is now. We'll see how that plays out. Maybe 2022. But then they're really pressing their luck as far as getting Build Back Better done.

Will McKenna: That's fantastic. Thank you, Leslie. Great views on what's happening in the House and the Senate. A couple things that I learned: Byrd Bath — never heard of that. I don't know, show of hands out there in the audience, who knew what that was? I'm going to try that out at my next cocktail party. And then the fact that, you know, in the House they love Thanksgiving. They're just like us. They want to get home and get that done. But a lot of moving parts over the next few weeks. Maybe when I come back to you, we'll talk about the likelihood of this. When do you see this actually getting done or not? Our next question is one of the more important questions I need to ask during the event today, and that is about Thanksgiving. And what is your favorite Thanksgiving side dish? What I mean by that is your non-turkey side dish. So everybody in the audience, if you wouldn't mind giving us your thoughts. They're ... Leslie, since I was just talking to you, your favorite?

Leslie Geller: Oh, that's easy, sweet potatoes with marshmallows. I really like to focus on the things that you don't have in the normal course.

Will McKenna: OK, I think I'm going to be with you. But let's see what Alan has to say. Alan, what about you?

Alan Berro: I'm all about the stuffing — a good stuffing with mushrooms or something like that in it.

Will McKenna: Stuffing very hard to beat. There you have it: sweet potato pie with marshmallows and stuffing. Others out there ... and let us know. I don't know if the side dishes are different in Canada or not. But I'm very curious to hear about that. And I'll report back in terms of what I'm seeing. I'm seeing a lot of mashed potatoes. I'm seeing cranberries. Let me say this, let me admit this. I grew up in a household where it was all about the canned cranberries.

Alan Berro: (Laughs).

Will McKenna: I'm not proud of that. But I’ve got to say to this day, I still prefer the taste of canned two real. A lot of good stuff in your corn bread, green bean casserole, classic. Of course, mashed potatoes. Very good. Let's keep going. Alan, let's dig in now into some of the specific investment themes. You painted a broad picture of how you're seeing the environment over the next year. I know you've described yourself as kind of an eclectic investor, and you tend to work on those funds that have, call it a conservative or more value-oriented bent to them. Let's talk about the themes that you're focused on these days. How are you positioning your portfolios? Can you share a few examples with the audience?

Alan Berro: Sure. I am eclectic. I do a little bit of everything. I do, most everything I do does have a value tilt and the yield tilt just given where I manage assets on behalf of our shareholders. One thing that I do maybe more than others is, sort of, fallen angel sometimes or unloved, misperceived companies.

Alan Berro: You know, we've talked about these in our literature, and you've heard about Home Depot, and you've heard about Microsoft. Today, one that I really think is still clouded by its past but may have a future is General Motors, GM. First, I would say they make cars today that people want to buy. In fact, people can't get enough of them right now. Second, I think they've gone from sort of being, you know, a sort of lagging manufacturing company to more of an innovation company.

Alan Berro: They're hiring computer and software and AI engineers by the truckload, by the thousands. And they have a division called Cruise that currently loses money, but is probably the number-two player in autonomous vehicles and is a division we're very excited about. And if you looked at the valuation of other similar companies, you could easily get to Cruise being worth $30 billion today or a third of GM's market cap. So you're buying the car company for five- or six-times earnings, which is pretty cheap, and you're not at the top of the cycle. They've been constrained in what they can do.

Alan Berro: And the management team is really not the old GM. I mean, under Mary Barra, this company has really transformed and become, you know, a forward-thinking, doing all the right things. It's really been great to watch. And I mean, there's long lists of people waiting for their new products, whether it's the Hummer electric vehicle truck or the Cadillac Lyriq that's coming out in the next year. So cars are in short supply. And they're making cars that people want to buy. And the valuation is super cheap. Let me just bracket that a little bit. If you look at Tesla, the market cap today is about 1.1 trillion. They produced just under 250,000 cars last quarter. So, let's call it a million annualized rate.

Alan Berro: So as an investor, you are paying one million dollars per vehicle. Now, if I assume their average car is 50,000 bucks, and they get a 20% margin, that means they're making $10,000 per car gross, which is about a 1% return — not really good in my book. At Rivian, which is a company that recently became public, and sported earlier this week $150 billion market cap. Let me repeat that: company, no production, maybe will produce 150,000 cars by ’20-- or trucks by 2024. And they had $150 billion market cap. Maybe a little later, we can talk just about all the speculation in the market, but that just gives you an idea. So they don't have a fleet on the street, but again, you're paying about a million dollars per vehicle, so that's for production three years out.

Alan Berro: Now let's take GM. They have a $90 billion market cap. They produce, you know, they'll produce seven million cars. This year, they could produce probably nine million if they wanted to in a second. So you're paying $13,000 a vehicle. Let's assume they make a couple thousand bucks a car. That's a 15% return per vehicle versus 1% at Tesla, and basically nothing at Rivian. So, those are the kinds of things I like. You know, this is not for the faint of heart, but these are the kinds of opportunities where, you know, we have great analysts doing great research and really digging into these types of situations.

Alan Berro: I also like the financials, you know. I think they'll benefit from a strong economy, low unemployment, credit quality is high. So, you know, I do a little bit of everything down and out. Financials, pharma I like. You know, I think pharma really earned their street credibility in this last year and a half, coming up for the vaccines and the antibody treatments and everything else for COVID. I think they reprove just how valuable they are around the world in terms of curing diseases and doing things.

Alan Berro: And so that's an area that also trades very reasonably. Most of the stocks are in low to mid teens in terms of their PE ratios. Their earnings are growing, you know, high single digits, low double digits, and they all sport, you know, a two to 3% yield. So, another area that I like. Why don't I stop there and turn it back to you Will?

Will McKenna: Love it. And your point about some of the fallen angels, GM obviously topical given Rivian's IPO, breathtaking really, IPO, and your point that, you know, there's quite a bit of innovation happening inside of GM these days with Cruise division and Mary Barra, who has been able to have that kind of visionary management there. And some of the comparisons there with Rivian and Tesla. Great perspective, and I just want to thank the audience and call out some of the more interesting I thought side dishes. And let me share a few of those here before we get to you Leslie and really talk taxes. Here's one close to home: cheese grits. That must be from somebody from-

Alan Berro: (Laughs).

Will McKenna: ... the south. Deviled eggs. Delicious. Oysters too, another classic. Here's one. Somebody asked, “Does pumpkin pie count?” Does pumpkin pie count? Of course-

Alan Berro: (Laughs).

Will McKenna: ... pumpkin pie counts. You should have that to your heart's content. And then, on a slightly different angle, here are a couple, cabernet and bourbon. So, a little bit of something for everyone. Leslie, the title of this is about year-end tax planning. Let's talk taxes. Give us your view on the changes that are likely to come out of DC, and what are the implications for our audience today and for their clients?

Leslie Geller: Yeah, so the tax proposals, the pay-for piece of the Build Back Better legislation that has shifted drastically over the last nine months. Really a big evolution in who is the target of these pay-fors. So the overall target of the tax proposals hasn't changed, always been focused on corporations and wealthy individuals. But how broadly or narrowly those groups are defined, and how the tax increases are specifically, are specifically framed, has really shifted drastically. I won't spend time going through the various iterations we've seen over the last nine months, but I do think it's helpful for some quick reminders of where we've been. So we've had really three big moments as far as tax proposals go.

Leslie Geller: So back in April, we had Biden's American Families plan, which was the basis for the Green Book, the White House budget. Then in September, we had the House Ways and Means proposal. Then in October, we had Kyrsten Sinema come in and flip everything on its head and change the discussion to where we are today. And there's really three defined moments of client panic that I think coincide with those three phases of proposals. First, after the American Families plan, we had everybody worrying about the doubling of capital gains tax and cap gains and dividends at ordinary income rates, the taxation of built-in gains upon death, and the elimination of the step-up and basis. In September, after the House Ways and Means put out their version, everyone was concerned about the reduction to the estate and gift tax exemption amount, as well as the attack on grantor trust and valuation discounts, which are two of the linchpins of wealth transfer planning.

Leslie Geller: And then third, starting in October, when we had that latest proposal come out, the one we're currently working with, it's less of a sense of panic and more just everybody throwing up their hands and not knowing what (laughs) to expect next. The current proposals: Let's walk through some of those big caveats here. These are just the current proposals. As we discussed earlier, there's a long way to go; there's likely to be significant amendments in the Senate. But I do think this is the foundation that we're going to work with. There may be slight tweaks, nothing monumental here, unless they decide they need to find a big additional source of revenue, and they pull something out of their hat that we haven't seen before. So there's three main categories of tax proposals in the current version. There's corporate proposals, individual and then a miscellaneous bucket. On the corporate side, we no longer have a proposal to increase the corporate tax rate from 21%. We've seen various numbers proposed out there — 28, 26.5, 25 — there is no general rate increase proposal right now.

Leslie Geller: So on the corporate side, the big ones are a 15% corporate minimum tax on the largest corporations, basically those corporations earning a billion dollars plus. Very similar to the individual AMT, this is like a corporate AMT. A proposal to impose a 15% global minimum tax for U.S.-based multinationals. This one isn't new, has been in here in some version from the beginning. And then finally, a 1% stock buyback surcharge. And the purpose of that is basically to encourage companies to prioritize long-term investment over increasing their share price. On the individual side, we've gone from seeing the target here, the households with $400,000 plus, to now the target being the very highest earners: 0.02%. The top 0.02% of taxpayers targeted here. And the way they are targeted is with these income tax surcharges.

Leslie Geller: So no longer do we have proposals to increase the ordinary income tax rate, to increase the capital gains rate. We have these surcharges. And so, for people earning $10 million or more, it's a 5% surcharge. If you are in $25 million or more, it's a 3% surcharge on top of that. Those are the individual thresholds to be hit by the surcharge. For trusts and estates, it is drastically lower, about 200,000 and 500,000. So compared to 10 million and 25 million, that is a huge shift. There's also a proposal to expand the types of income to which that 3.8% Medicare surcharge or net investment income tax is applied, so for taxpayers, doctors, dentists who are self-employed, operate through pass-through entities, this is going to be important to them. On the miscellaneous side of things, we have a proposal to fund the IRS so that they can increase enforcement, increase audits, and we also have some retirement proposals.

Leslie Geller: These have been getting a lot of attention, not only because they're a little bit buzzy. Some people think that they were put in here as a response to the news stories around Thiel's five billion dollar (laughs) Roth IRA. So, there are some proposals to limit the benefits attributable to the mega IRAs, so the $10 million plus accounts, by requiring distributions, limiting contributions, but there are also some proposals around limiting Roth conversions for certain higher earners. That's been concerning everybody. I'm not convinced that anything regarding Roth conversions is going to get through here. I think they're far more likely to save those as pay-fors for future retirement legislation, that Secure Act 2.0 that we've been hearing about, kind of, under the radar. So, retirement is an interesting one, a good area to watch here.

Will McKenna: That's great. And Leslie, what do you think are some of the more likely things to come through? I'm seeing some questions come through around things like SALT-

Leslie Geller: Yeah.

Will McKenna: ... deductions, as well as capital gains and dividends. Likelihood on any of that happening?

Leslie Geller: Yes, so the SALT cap is a really interesting issue right now, as I mentioned earlier. It's a big flashpoint and will be in the Senate. As of now, they're proposing increasing the SALT cap, which is currently at 10,000 to $80,000 — a very, very meaningful increase. Prior to this proposal, there were all sorts of versions repealing the SALT cap for two years, repealing it for five years, only bumping it to $30,000. Right? They're stuck on 80,000 right now. That has seemingly been agreed to in the House. As I said earlier, it's not going to fly in the Senate. Sanders, Hernandez, they want income limitations on this increased cap.

Leslie Geller: So they want to say that if you make over $400,000, you do not benefit from this increased cap. Maybe that sort of provision gets through the Senate, but then it gets tossed back to the House where you have to contend with those moderate Democrats from the high tax states, Josh Gottheimer and crew who ran on SALT relief for their constituents, and a lot of those constituents make more than $400,000 per year. So I have no idea how SALT is going to play out. It's a really, really important issue to watch. We're not going to see increased ordinary income tax rates or capital gains for the general public. I think for those to be brought back in at this stage, the chances of that are incredibly, incredibly minimal. These surcharges though, not going anywhere, but they really are targeted at the highest, highest earners, as I said about the top 0.02% of the wealthiest taxpayers.

Will McKenna: OK, good. So maybe some good news for our investors and clients of the folks on the call today. I want to jump ahead now and start to talk about what are the implications for portfolio planning for ‘22 and beyond? And Alan, I want to come to you here and help the audience understand. You know, Alan was one of the founding members of our portfolio oversight committee, starting back in 2004, if I have my dates right Alan? That was the group that originally developed our target date funds at that time. Since then, the group has evolved a lot. And it's now split into two parts.

Will McKenna: One is the Capital Portfolio Solutions Committee, which is what Alan sits on and handles the kind of wealth management solutions there, and the other is the Capital Target Date Solutions Committee. Alan, can you explain to the audience what does the group do and how do we approach portfolio construction at Capital Group? And then we'll get into some of the asset allocation changes in a few minutes for ‘22.

Alan Berro: Sure, Will. Let me take a shot at this. I have been involved in these efforts around target date and fund-of-funds since we started developing multi-asset, multi-fund solutions going back, as you said, back to 2004. Seems like yesterday. Today, we actually have the two solutions committees. You mentioned that we also have two other solution committees: one dedicated to institutional things called the Custom Solutions Committee, and then, and then we also have a Global Solutions Committee for clients outside of the U.S.

Alan Berro: And, you know, but Portfolio Solutions really oversees the portfolio series, retirement income series models, and the like. And those are all objective-based solutions using our funds to address a specific client need, whether it's growth and income, where they want a 65, 35 or whatever it is. We have tailored,  you know, a whole menu of solutions. And as you know, Target Date also, you know, is a solutions committee. They spend a lot of time on the target date glide path and what would be appropriate for a retiree along each step of the accumulation and distribution phase of an investor's life cycle.

Alan Berro: And so around these four solutions committees, you know, the two big ones we talked about, and the two others, we have built a whole set of infrastructure and a whole team under Brad Vogt. And, you know, he has done an incredible job bringing together a group that supports us. So today we have a group of about 16 associates underneath the ones that you see here, the seven pictures that you see on the earlier slide. And basically, we have a research director, we have, eight analysts, we have four portfolio managers, three of whom you see here: Michelle, Samir, and Wesley.

Alan Berro: And, you know, together, when you add this group up, they have 16 master's degree, three PhDs, a lot of them have CFAs. So we are really bringing a lot of muscle to this. And basically what we do is we review and approve any recommendations generated by that group. So every month, the Portfolio Solutions Committee meets. Samir is our, is our leader on that group. And we have, we have a, we do deep dives on each of the different, you know, every month we'll do a deep dive on one of the product areas. This last Tuesday, we did a deep dive on American Funds Retirement Income Series, and I can talk about some of the things we were looking at.

Alan Berro: But just in terms of, in that series, we were looking at the fact that some of our multi-asset funds like CIB, AMBAL and IFA have been at the upper end of their equity ranges when we model these portfolios. So those are the types of issues we get into looking at: Is the fund or is this set of funds that we've chosen to address a specific objective, which you can see all the different objectives here on the slide? We're, we're trying to dig deep and make sure that what we originally intended is still happening. And if it's not, why not? And if we need to adjust, how are we going to adjust?

Will McKenna: OK, great. And I will come back. That's a good overview of the group and sort of the philosophy of portfolio construction that we use. We're going to come back and talk about some of the interesting asset allocation changes that have been happening this year and the committee that we want to leave the audience with, as they think about their client portfolios for, for ‘22. Leslie, I want to come back to you though, for a minute. I'm seeing a ton of comments from the audience. You know, I think you shared so much good information. Here's one that says, “Is a hard copy available of this wealth of information Leslie Geller is talking about here?” (Laughs). So, we do have one of Leslie's articles in the additional resources. We're going to update that on the part of our site called PracticeLab here soon.

Will McKenna: There's questions coming in about the estate tax exemption and essentially a desire to see a bit of a summary of what you think the ultimate outcomes will be. But that might be baked into your next answer, because I think now that we've talked about some of the changes that are, that are coming out of DC, what should advisors, what should our audience be thinking about, helping their clients with and guiding them as they prepare for ‘22 and beyond?

Leslie Geller: Yeah, I think all of the proposals have been driving so many of the planning conversations over the last nine years. I like to go through a list of the things that are not currently in the proposals, right? I often think that's a little bit more helpful than hearing what's in it currently. So as of now, here's what is not in the proposals. So first of all, general rate increases on corporations or individuals, no bump to that top ordinary income tax rate, no bump to capital gains. As I said earlier, it's all about surcharges on the ultra high net worth crowd. There is currently nothing in there about lowering the gift and estate tax exemption amount. That is really key because that's been driving a lot of our planning discussions. It was in the September version, not in this one. Doesn't mean though, that it won't get added back last minute in the Senate. I'm watching that one really closely. I could see them doing it, because it fits with their messaging, right?

Leslie Geller: It fits with the demographic that they're trying to put the burden on here, and neither side really cares very much because it's a drop in the bucket from the revenue perspective. There is nothing about limiting the benefits attributable to grantor trust and valuation discounts that sent everyone to a, into a panic in September, nothing in there around grantor trusts right now. Nothing around limiting basis step up at death, nothing forcing the recognition of capital gains at death, nothing related to carried interest. So, nothing about taxing the carried interest at ordinary income rates instead of CAP gains rates. Nothing around 1031 ex-restrictions, no billionaires tax in any form, nothing about a mark-to-market tax, nothing about a wealth tax. We may hear that come back into the conversation from Senator Wyden specifically once this gets bumped to the Senate, but too fraught of a topic, too many constitutional issues for this to become a really significant part of the conversation this late in the process.

Leslie Geller: The other thing that's not in here right now are the bank reporting provisions that was scaring everybody. Financial institutions (laughs) complained heavily here. There is nothing around the bank reporting provisions right now. So, because none of these things that we've been talking about all year are in these proposals, what we've been talking about with clients has really shifted drastically, just in the last six weeks or so. And I spend my whole day talking to advisors, talking to investors. And I've really noticed a couple of things. There's really two buckets of conversations that we're having with investors right now. So, first bucket is with clients, that mass affluent millionaire next door, not that ultra high net worth, really even that high net worth group, but, you know, mass affluent taxpayers. Most important thing with them is making sure they understand that most of these proposals in their current form are not going to impact them.

Leslie Geller: As we've been discussing, and hearing from the questions, there's been so much confusion rightly. So important to have the facts so that you can communicate to your clients what they actually need to be thinking about right now. Also, for these mass affluent clients, going back to the end-of-year basics, we've all gotten caught up in these proposals, but we can't forget that it's the end of the year. And so doing those things that we always do at the end of the year — annual exclusion gifting, charitable giving, reviewing estate plan documents, updating retirement plan beneficiary designations, anything that is part of that year-end planning in the normal course — should be part of the conversation right now. Then that other bucket of conversations we're seeing right now is with those high net worth and ultra high net worth folks, so a lot of clients who were maybe doing some planning based on the assumption that the capital gains rate could go up, or that the estate tax exemption amount would be significantly reduced next year. There was a lot of people who were planning on that, and we're doing the appropriate planning to address that possibility.

Leslie Geller: If they've already invested time and money in doing these types of strategies, whether it's selling an appreciated asset, right? Or making a large gift to an irrevocable trust for kids or grandkids for the purpose of using up exemption amount, go ahead and push them to get it done. Get it done by the end of the year, right? Even if things don't change next year, there's still a few reasons to do those types of things. First of all, interest rates are low. So those strategies that take advantage of low interest rates, like grants and sales to defective grantor trusts, they work well. We don't know how well that'll work in higher interest rate environments. Also, we talked about the exemption amount going down, right? Maybe not next year, if it doesn't get thrown back in here, but it will go down at the end of 2025. That's part of the natural sunset of the Tax Cuts and Jobs Act. It's also always better to gift now than gift later because you get more future appreciation out of the estate the sooner you make that gift.

Leslie Geller: A couple of other planning conversations: I think that surtax for the really high earners. Remember we talked about for individuals, it's significantly higher than it is for trusts. For trusts, trust only has to have $200,000 of income to get bumped into those surcharge brackets. So I think we're going to see a lot of planning coming, if this passes, that would keep the individual grantor as the tax payer rather than a trust to try to stay in the realm of the individual thresholds as opposed to the trust threshold. So more grantor trusts, partnership trust, structures, trust-like structures, like 529 funding, I think that's going to end up being a really interesting area of creative planning if this passes. And then the last thing I'll mention here, because I think this often gets short shrift, is we've been talking all about federal taxes here. State income tax planning is a huge issue right now, particularly if you have clients in high tax states: California, New York, New Jersey, Massachusetts.

Leslie Geller: We're seeing a lot of planning being done, both income tax planning and wealth transfer planning, to avoid state income taxes, whether that's moving out of state completely, which we've seen a lot of, or simply moving your assets to a trust in no income tax state like Nevada, New Hampshire, Delaware. So a lot to talk about here. I think the most important things with the mass affluent is basic year-end planning reminder that they are not going to be impacted by the vast majority of these proposals, even if they do pass. And then even with the high net worth and ultra high net worth folks, I think it's going back to the gifting basics, going back to the income tax mitigation basics, so not getting caught up in all of the potential things that we could see happen next year.

Will McKenna: That's fantastic. So, let me just do a speed round here. Great point. What's not in the proposals-

Leslie Geller: (Laughs).

Will McKenna: ... is important at this point. And just as you mentioned, no income tax change, nothing in there about changing the gift exemptions, but remember, does sunset at ‘25, grants are still OK, cost basis step up at death still fine, and no 1031 restrictions. And you, and you'd kind of divide it, but then between the mass affluent, where probably a lot of these proposals don't impact them. But then in the high net worth category, your point is, if you're already considering some of these, some of these moves around gifting, around grants, probably go ahead and do it. It's good to gift now versus later for the reasons you mentioned. 529, very interesting creative planning there as well.

Will McKenna: And I hope my colleague Melissa Phipps and others are listening. We’ve got to get this out in an article on PracticeLab,  all this great information for the audience. Really helpful, Leslie. Alan, I want to come back to you now, that's kind of the tax and estate planning side. Let's talk about asset allocation. As I understand it, the committee, the Portfolio Solutions Committee has made some interesting changes so far in ‘21 to prepare for the environment ahead, namely adding dividends to some of the strategies and also adding more small cap to some of the growth strategies. Can you talk about those allocation changes and any others that you'd like to feature?

Alan Berro: Yeah. I think, you know, we did a deep dive in some of the areas and looked at how we were thinking about growth. And I think we concluded, and it was the help of the research team that I mentioned earlier, that we weren't using small cap enough in the growth area, and that we had really tended, for a whole bunch of reasons that I won't go into, to sort of not use small cap as much as we should. And when we looked at the valuations and just, sort of, you know, the objectives of the various portfolios, we felt that we could use more small cap in them, and that would help us achieve the underlying goals that we were trying to address.

Alan Berro: You know, dividends are always sort of a (laughs) an interesting area. You know, we do look at income as sometimes a proxy for risk and for downside protection. We really haven't seen that lately. But you know, we look at the overall characteristics of each fund, we try to look through the portfolios, and we did see some cases where it made more sense to, you know, add one fund, you know, change another fund. But I don't think our view on dividends, and I know we didn't get to it today, but, you know, we try to focus on, you know, the dividend growers and things like that, where we think they'll really help us because we don't want to own what we refer to as yield traps and the underlying funds.

Alan Berro: But it's really, you know, what we spend a lot of time on is looking at the underlying character of the funds, and then how they fit with the objectives we're trying to achieve. And I was referring to even on American Funds Retirement Income Series this past week, and that's fresh in my mind. You know, we saw some funds where, with the appreciation in the equity market they were getting above the ranges where we had modeled, you know, those objectives to be for those, for those types of funds.

Alan Berro: And so, you know, we explored the options to adjust our holdings, not in a major way, but, you know, at the margin, to sort of keep the character of each sleave, you know, whether you're in the conservative, the moderate or the enhanced, where we thought it should be — sort of within its lane. And that's what we spend our time doing on the, on the Solutions Committee.

Will McKenna: That's great. So, growing rising dividends, not necessarily the biggest yielders. And also global small cap might be an underused part of the portfolios for many in our audience. I see somebody asking, “What about more mid caps?” A lot of mid caps included in that. One thing I would encourage you in the audience to do is to contact your Capital Group team, because those of you in the U.S. can get access to a service we have called Portfolio Analysis and Review. This is an absolutely fantastic service. We literally have a team of CFAs and our various sites ready to work with advisors to help them take an x-ray view of their portfolios and provide some ideas and guidance on how they might improve that. And it's in line with a lot of what Alan's talking about here today. Very great service, reach out to your Capital Group team also to learn more about the kind of ideas that Leslie's talking about. Your team can help direct you to some of that more information on PracticeLab and elsewhere.

Will McKenna: I did want to mention a couple of fun questions here from you in the audience. And thank you for all the great, I see 286 questions and comments here, which is amazing. I got two related questions. One is, one was, "Will, who is that musician behind you on the wall?" And number two was, "Will is that you holding the guitar in the picture?" No, sadly it is not (laughs). I wish it were. That is the late, great Tom Petty. By the way, there's a great new documentary about the making of Wildflower, that classic album, if you're interested in looking at that. Let's do this, guys, we're turning the corner toward the end. I'd like to ask each of you just to leave us with two to three key messages you want to share with our audience today. Alan, why don't we start with you and then go to Leslie?

Alan Berro: OK, two to three. The economy is good, the market is not cheap in the low to mid 20s PE for this year and next. There's a lot of speculation out there if it's Bitcoin, meme stocks, cloud companies trading at 50 times revenues. I see Nvidia up another 10% this morning, now sporting an 800 billion market cap, or I guess it's up about 8X in the last two years, and last I looked, chips tend to be somewhat of a cyclical industry.

Alan Berro: So paying 50 times earnings for something three to four years out seems risky. So, you know, I'm going to stick to value and stay out of the, some of the things that don't make sense. And luckily, I'm still finding a lot of good values out there. But you have to watch for the minefields, because there's more and more of them popping up with this type of speculation.

Will McKenna: I love it. Economy's good. Sticking with value, not the high-flying stuff. Leslie, bring us home.

Leslie Geller: Okay. I'm going to go two things. One political, one planning. So on the political side, nobody knows what is going to happen in the midterms. (Laughs). All of this policy discussion has been framed in terms of what could happen in 2022. If we've learned anything over the last couple of years, anything can happen. Polls are not indicative of anything, right? With all the redistricting retirements, counties shifting from red to purple to blue, back to red back to purple, no one knows what's going to happen. It is a total black box. From a planning perspective, I think we've learned another really important lesson here with all of the changes in these tax proposals and how they've driven the planning discussions. Don't plan based on predictions. It's all about having the planning conversations that make sense, irrespective of what could happen next year. And frame those conversations not in terms of we know what's going to happen, but more in terms of we don't know what's going to happen next year.

Leslie Geller: And so, if we're going to take advantage of the current state, we need to do it now. So stay away from predicting the future, and focus on what makes sense now that you can take advantage of, right? Without getting into the realm of uncertainty next year.

Will McKenna: That's great. I think I heard you say on the political side, nobody knows nothing. Planning, let's don't make plans based on predictions. Do what make sense in your normal course of annual planning. Great words of wisdom. Great event. Before we sign off, though, I do want to remind everybody about our next big event, and it is our biggest event of the year. It's our 2022 outlook. We're going to have Rob Lovelace joining us. He's our vice chairman and president of Capital Group, as well as Head of Fixed Income Mike Gitlin. So, Rob and Mike, they're going to get a timely discussion of all that's going on in markets and the economy, plus a detailed look at equity and bond market opportunities in ‘22. That's on Thursday, December 16th, our usual time, please go ahead and mark your calendars.

Will McKenna: And I do want to thank all of you in the audience today. What fun to get all your comments! I hope it was fun for you. Great questions, great comments. Thank you also for making Capital Group the industry's number-one thought leader for the third year in a row. I want to thank our production team behind the scenes here on the Capitol Ideas PracticeLab and events teams and our production partners in DCE. That's all the time we have today. Thanks, Alan and Leslie, for your great insights. We hope everybody in our audience found it helpful. Don't forget to take advantage of the additional resources tab. Thanks again, and enjoy the rest of your day.

Are you ready for 2022?


Get a head start on 2022 with strategic moves to consider now and insights into what’s ahead in the economy and markets. Join our investment and wealth management professionals and get your pens (or keyboards) ready to take notes!


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Who can benefit: U.S.-based financial professionals interested in getting a head start on identifying investment and estate planning opportunities for clients as we head into the new year.



Leslie Geller is a senior wealth strategist at Capital Group. She has 15 years of industry experience and has been with Capital Group since 2019. Prior to joining Capital Group, Leslie was a partner at Elkins Kalt Weintraub Reuben Gartside LLP. She received an LLM in taxation from New York University School of Law, a juris doctor from Boston College Law School and a bachelor’s degree from Washington and Lee University. Leslie is based in Los Angeles. 

Alan Berro is an equity portfolio manager with 38 years of investment experience (as of 12/31/2023) and has been with Capital Group for 33 years. He holds an MBA from Harvard and a bachelor’s degree in economics from the University of California, Los Angeles. He also holds the certified public accountant and Chartered Financial Analyst® designations and is a member of the Los Angeles Society of Financial Analysts.


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Featured Speakers
Leslie Geller
Senior Wealth Strategist
Alan Berro
Equity Portfolio Manager
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