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Friday, November 03, 2017

Four Reasons Tax Reform Could Make Fundsters Smile

News summary by MFWire's editors

Congressional Republicans finally introduced their 2017 tax reform bill yesterday, and fundsters may have some reasons to celebrate.

#1: If the Market Rises, Asset Managers Rise Faster

The magnified relationship between the market's ups and downs and the fortunes of asset managers is not a new one, but it applies here. If tax reform gets through and stocks rise as a result, that means a bigger asset base for mutual fund firms and other asset managers, which means more asset-based fees without much added costs, which in turn boosts asset managers' valuations. Rising tides over the past eight years have already helped compensate for the rough net flows outlook for many active managers. And yesterday financial stocks overall rose 0.56 percent, faster than any other big sector.

#2: PMs Have Set Funds Up to Benefit From the Changes

Per BofA data, highlighted by Bloomberg, mutual fund PMs currently favor companies that will benefit from lower taxes over companies that might feel the tax reform pain. More specifically, BofA estimates, large cap funds are ten percent overweight stocks that might benefit from reform and nine percent underweight stocks that might suffer.

"The buy-side is ready for major policy change," BofA strategist Savita Subramanian wrote Wednesday. "While the market may not be pricing in a high probability of tax reform, large cap funds are well-positioned for it."

#3: Congress Didn't Grab the Low-Hanging 401(k) Fruit

It's been widely reported that the tax reform bill doesn't include any of the rumored restrictions on either the size or nature (Roth vs traditional) of 401(k) contributions. That, as pointed out by CNBC, is music to the ears of Mister Market when it comes to big asset managers like T. Rowe Price (shares rose 2.23 percent yesterday), BlackRock (up 1.20 percent), and Invesco (up 1.12 percent), all of whom have big DC I-O businesses.

The bill even smiles on a growing 401(k) niche. Our sister publication 401kWire has more details.

#4: If Your Firm Is a Partnership, Now May Be the Time to Convert to a C-Corp

Credit Suisse analyst Craig Siegenthaler and his colleagues, as pointed out by Barron's, even wonder if alternative asset managers might "leverage a hybrid/controlled C-Corp structure that would provide the firms the benefits of being a C-Corp (1. no K-1 filing, 2. broader long-only ownership, 3. index additions), but also allow for related corporate governance and lower taxation for the GP/partners."

Of course, before fundsters get too excited, stressed, or hopeful about tax reform, it's important to keep in mind that nothing's law yet. Credit Suisse's Siegenthaler predicts that there is a 50 to 60 percent probably that Congress will pass some kind of tax reform by the end of Q1 2018. 

Edited by: Neil Anderson, Managing Editor

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